Summary of Audit Committee and Auditor Oversight Update (No. 58 February-March 2020)
by Daniel L. Goelzer – Fellow, G&A Institute
As companies struggle with the uncertainties and disruptions of the COVID-19 pandemic, the Securities & Exchange Commission (SEC) has taken steps to assist public companies in complying with their reporting and disclosure obligations. The SEC has issued orders that extend for 45 days the deadline for most public company filings due between March 1st and July 1st, although companies that wish to take advantage of this relief must comply with certain conditions.
In addition, the Division of Corporation Finance had issued guidance providing staff views on disclosure and other securities law issues arising from COVID-19 and related business and market disruptions.
SEC Exempts More Small Companies from ICFR Audits
On March 12, the SEC adopted amendments to the definitions of the terms “accelerated filer” and “large accelerated filer”.
The effect of these amendments is to exclude certain smaller public companies from accelerated filer status. As a result, these companies will no longer be required to obtain an auditor’s report on the effectiveness of their internal control over financial reporting and will have additional time to file annual and periodic reports with the SEC.
Companies that qualify as smaller reporting companies under the Commission’s rules and have less than $100 million in revenue will move from accelerated filer to nonaccelerated filer status.
Managements and audit committees of companies affected by these amendments should consider whether or not discontinuing the ICFR audit is cost-effective.
Internal Auditors Are Missing Key Risks
The Institute of Internal Auditors (IIA) has released its annual survey of Chief Audit Executives. The 2020 North American Pulse of Internal Audit “reveals serious gaps in internal audit’s coverage, with audit plans deficient in key risk areas.”
For example, the IAA found that almost one-third of respondents did not include cybersecurity/information technology in their audit plans. In addition, more than half did not include governance/culture or third-party relationships, and 90 percent did not include sustainability.
Audit committees should consider whether the internal audit staff’s plans for the coming year match the committee’s view of risk.
What’s on the Audit Committee’s Agenda in 2020?
Part II: COVID-19
During the past month, COVID-19 has radically altered public company priorities and challenges. This Update summarizes the views of three large accounting firms on the financial reporting issues that companies – and therefore audit committees — will face in the new environment.
In Financial Reporting Considerations Related to COVID-19 and an Economic Downturn (March 25, 2020), Deloitte discusses key accounting and financial reporting considerations related to economic conditions that may result from the COVID-19 pandemic.
Deloitte’s comprehensive 64-page analysis includes the following sections:
- Select SEC and PCAOB Announcements Related to COVID-19,
- SEC Reporting and Disclosure Considerations, Broad Financial Reporting and Accounting Considerations, Internal Control Considerations, and
- Financial Reporting Under ASC 852 for Entities in Reorganization Under the Bankruptcy Code.
The Deloitte paper also includes an appendix with industry-specific insights for eleven industry sectors. The executive summary discusses six accounting and reporting issues that “will be the most pervasive and challenging as a result of the pandemic’s impact.”
PwC’s Responding to COVID-19: Considerations for corporate boards (March 20, 2020) states that boards “need to be proactive and agile, and they need to respond with strong leadership.” Accordingly, boards “will want to immediately consider” four broad issues:
- Business (e.g., employee well-being,impact on strategy, share repurchases and dividends,supply chain,and liquidity);
- tax policy and Washington;
- financial reporting (e.g., financial reporting operations, earnings guidance, judgments and estimates, revenue recognition, and internal control testing);
- and governance.
In a second publication — 1 2020 Audit committee newsletter: Helping you prepare for your next meeting — PwC adds some points specifically for audit committees.
In Five Financial Reporting Issues to Consider as a Consequence of COVID-19 (March 23, 2020), EY acknowledges that “the impact on financial reporting may not be the first thing that comes to mind as a consequence of the outbreak.”
Nonetheless, “there is an important and challenging role here for preparers of financial statements, audit committees and auditors.”
EY states that five issues will be priorities: Going concern and liquidity, impairment assessment, contract modifications, fair value measurement, and government assistance and income tax.
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Daniel Goelzer is a retired partner in the law firm of Baker McKenzie. He is a member of the Sustainability Accounting Standards Board and advises a Big Four accounting firm on audit quality issues. From 2002 to 2012, he was a member of the Public Company Accounting Oversight Board and served as Acting PCAOB Chair from August 2009 through January 2011. From 1983 to 1990, he was General Counsel of the Securities and Exchange Commission. Mr. Goelzer is a CPA and a lawyer.
He is a G&A Institute Fellow.