Complexities of year-end auditing amid COVID-19
10 November 2020 18:00
The COVID-19 pandemic has accelerated the rate of regulatory change and associated implications for business compliance in 2020, testing the financial, operational, and commercial resilience of all businesses. It is also expected to throw serious curveballs at businesses preparing for their 2020 fiscal year-end audits as they assess the impact of the crisis on their activities, financial situation, and future economic performance.
“Added to the usual process of gathering records related to tax, accounting, auditing and financial management, are unique challenges emanating from COVID-19, including travel restrictions, remote working, limitations of resources and shifting business priorities,” says Greg Chamberlin, General Manager: Compliance at LexisNexis South Africa.
Restrictions on physical proximity mean that auditors have been hindered in terms of their ability to conduct standard audit procedures such as meeting management, visiting sites, interviewing auditees, walking through processes, checking documents, and observing and testing controls.
“However, despite the restrictions of COVID-19 and the lockdown, there is no legislative nullification for postponing audits or the independent review of annual financial statements, even though the Financial Sector Conduct Authority (FSCA) did allow the extension of the submission period for financial statements.”
“The pandemic will only increase the focus on certain areas during the year-end audit, requiring flexibility and decisive action. Failure to follow regulations, act transparently and report in a timely manner will have consequences such as penalties and fines for late submission, unless specific agreements are in place with the various regulators,” says Chamberlin.
Auditors will need to determine whether the qualitative and quantitative impact of COVID-19, as disclosed by the audited entity, is appropriate within the context of the applicable financial reporting framework. Where this is not the case, auditors may need to modify their audit reports and audit opinions accordingly.
For January 2020 and February 2020 year ends, the South African Institute of Chartered Accountants (SAICA) recommends that auditors consider all relevant facts and circumstances in making their assessment whether conditions existed as at 31 January 2020 or 29 February 2020. For financial reporting periods ending on or after 31 March 2020, events after 31 March related to COVID-19 would generally be adjusting events that require the assets and liabilities to be adjusted to take into effect any accounting implications associated with or caused by events related to COVID-19.
Auditors will need to ascertain whether events occurring after the reporting period, but before the financial statements for that period have been issued, require disclosure, or should be highlighted as an irregularity. They will also need to consider whether events or conditions exist that may cast substantial material uncertainty around the entity’s ability to continue as a going concern.
“Successfully navigating from the new normal to the next normal will require executives to focus on improving risk management and their agility to gear up for future unexpected risk. They will need to conduct a re-examination of capacity and capability in order to reshape operations, as well as a radical rethink of ideas, technologies and innovations,” says Chamberlin.
He agrees that in the new post COVID-19 model, firms that are empowered by digital technologies will be better positioned to satisfy year-end reporting requirements and to remain compliant, while meeting the needs and expectations of their customers.
He offers the following guidance to those preparing for the uncharted territory of a financial year-end audit amid COVID-19.
- Review internal controls.
Record the differences in controls set in place for the business before the COVID-19 crisis and after the beginning of the pandemic, in order to expedite the audit process. Pay close attention to any impact relating to financial reporting and risk identification and assessment. For example, new or adapted controls may have been implemented as entities enabled remote workforces and ICT resources, and any breakdowns in internal controls over financial reporting may have presented opportunities for fraudulent financial reporting or misappropriation of assets.
- Enhance digital capabilities.
Technology offers the potential of innovation and the promise of efficiency which, when embraced could enable financial services institutions to streamline some of the processes involved in auditing, reporting, information management as well as risk identification and mitigation.
Technology solutions help to fill compliance gaps, reduce costs, get ahead of requirements and detect enterprise risk. They are a means of simplifying the process of audit compliance for firms, automating procedures that were formerly done manually, and streamlining processes to reduce both business risk and the load on human resources.
The latest Global CEO Survey published by PwC, showed that in financial services, 70% of leaders believed the speed of change in technology was a concern, reflecting the urgent attention needed in this area.
- Embrace the tools and platforms available to support the audit process.
There are numerous collaboration and workshop facilitation tools to help with virtual risk assessments, audit discussions and quality assurance - from remote meeting and video conferencing, to using online knowledge repositories, audit systems and cloud-based file sharing.
- Review cyber-security.
Cyber-security will be one of the top risks facing businesses in 2020 and beyond. The global outbreak of COVID-19 and increased remote working has resulted in weaker cyber security measures and skeleton staff often operating under severe stress and general distraction, with reduced oversight, creating loopholes for cyber-criminals, scammers and fraudsters both internally and externally. Firms now more than ever, need to beef up their cyber defences and educate employees, at all levels, to the emerging risks.
- Leverage data analytics.
With customer data intelligence considered among the most important predictors of revenue growth and profitability, financial services and auditing firms cannot delay investing in more advanced data analytics to better anticipate potential risks and client needs.
- Stay abreast of regulatory change to identify non-compliance with laws and regulations.
Companies must adopt systems to address and manage the raft of new rules put forward by global, regional, and national bodies. COVID-19 and the associated rapid adoption of pandemic-related legislation and regulations can present a heightened risk of inadvertent non-compliance that could materially affect the financial statements.
“Thankfully there are systems such as Lexis GRC and Lexis Assure to provide alerts as to what is happening across industries from a regulatory perspective and how to navigate the regulatory challenges which sometimes accompany a shift to a new way of working,” says Chamberlin.
As businesses begin to prepare for their fiscal year-end audits, keeping these tips in mind can be the difference between a successful audit and a complicated and protracted one.