The COVID-19 pandemic presents unprecedented financial and operational challenges for companies, on a worldwide scale, across a wide range of industries. The full extent of the impact of the pandemic upon businesses and the global economy is yet to be seen, although comparisons are already being drawn to the 2008 global financial crisis.
Against this backdrop, many companies face an uncertain outlook over the short to medium term, as circumstances continue to evolve and change. This, in turn, presents real issues and practical difficulties insofar as the preparation of financial reports and accounts, and the carrying out of audits, are concerned.
The Financial Reporting Council (FRC) has published guidance on audit issues arising from the COVID-19 pandemic. It is clear from such guidance that, in the midst of the confusion and uncertainty arising from the pandemic, auditors will not be afforded any margin for error. Indeed, the FRC has stated unequivocally that "audits should continue to comply full with required standards".
This means it is vital that auditors take proactive steps to ensure that their ability to undertake audit procedures, on the basis of all necessary audit evidence, is not compromised by ongoing practical difficulties and challenges – and that the risk of significant claims arising from mistakes is managed appropriately.
- Auditors will be faced with having to change their day-to-day working practices.For example, travel restrictions and social distancing mean that face-to-face meetings with company directors, stakeholders, client personnel and colleagues may no longer be possible.Access to company sites may also be limited or impossible, depending upon the jurisdiction.Reliance upon technology, including electronic document management and review platforms and remote working tools, will inevitably become more commonplace.In the light of this, it will be important that auditors map out, in clear written terms, their plan for gathering information and evidence, and undertaking the audit process.
- The auditor will need to work closely with the company's directors to ensure that all required disclosure is collated and obtained efficiently.The auditor will need to keep a careful audit trail of the requests made for documents and information, the reasons for those requests, and the responses received.The auditor should be prepared to justify the approach taken here, by reference to the contemporaneous documentary record, if a dispute arises in the future.Given the uncertain economic outlook, this is more important now than ever.
- Similarly, the auditor should keep a careful record of steps taken to assess the prospects of the audited company as a going concern, and to explain the basis for such assessment.This will require careful thinking not only about the entity but also those on whom the entity is reliant.The auditor's views in this regard will also need to be kept under constant review, liaising closely with the company's directors, in the current uncertain climate as the COVID-19 pandemic and its implications continue to develop on a daily basis.
- If an auditor requires more time to complete the required audit work than might ordinarily be the case, this should be made clear to the company as soon as possible.The FRC guidance specifically provides that "additional time may be required to complete audits and it is important that this is taken, even at the risk of delaying company reporting".Auditors will need to work closely and proactively with company directors to ensure that audit processes are completed properly, with the benefit of such time as may be required.
- As the collation and review of hard copy material becomes increasingly difficult for auditors working remotely, it will be important that audit working papers, documents and relevant electronic correspondence are filed carefully so as to meet audit and firm standards.In the event that a dispute arises, it will be important that all such documentation can easily be accessed, collated and reviewed.Auditors should avoid the use of personal email accounts for business purposes.
In addition to the above, it is also essential that the auditor puts in place an engagement letter which sets out the audit arrangements with the company, and captures in clear terms precisely what the auditor will be doing and what his or her duties are. The terms of this engagement letter also need to be kept under review, and revised as necessary, in the likely event that the steps required to complete the audit process change as matters continue to develop in the wider world.
Finally, given the sharp impact of the COVID-19 pandemic upon the financial stability of companies, it is perhaps inevitable that claims against auditors will arise in the future as businesses struggle to survive and financial statements and reports come under close scrutiny. Auditors should give careful consideration to their contractual terms of engagement, which may assist (for example, where force majeure clauses might come into play). Well-managed audit firm resources, processes and systems will also play a key part in helping to ensure that, as remote working becomes usual practice, evidence of compliance with audit standards and requirements can still be readily brought forward in the face of a claim.