Simon Mason and Mark Chapman of international law firm DWF consider what challenges await auditors and accountants in the 'new normal' and offer some practical solutions.
A problem shared
Even prior to the COVID-19 pandemic there appeared to be a growing disconnect between company expectations of auditors and auditors' roles. The recent collapse of a number of high-profile listed companies – following poor financial results and/or detection of fraud – has led to an increased scrutiny of auditors' work.
Recessions are known to increase the average number of fee disputes, complaints and negligence claims and with this new recessionary phase, with more company failures and difficulties, we are likely to see a resurgence in claims being made against auditors and accountants.
Concerns going forward
As lockdown restrictions begin to ease there will be a backlog of delayed and extended audits to complete. Operational challenges associated with remote working are likely to hamper the usual level of attendance at a client's premises to gather information, conduct stock-takes and undertake face to face meetings to question and challenge company personnel and management. There is often no good substitute for being physically present at a company's premises. Where more extensive attendance at premises would usually be required and is not possible, the FRC has recommended that suitable caveats are included in the auditor's report.
A key concern for auditors, and the one which they will come under pressure from management to make, is whether or not the audit client is a going concern. Several months prior to the emergence of the pandemic (and in direct response to those high profile corporate failures where auditors had failed to identify that companies were on the brink of collapse) the FRC revised its going concern standard, ISA UK 570. The revised standard requires a more robust challenge to an audit client's management about their key assumptions, additional stress testing and disclosures in the financial statements and audit team members regularly updating their supervisors as to progress. This is a significant area of risk and one where auditors must be able to demonstrate they have sufficient, appropriate audit evidence when testing management’s assumptions and forecasts. Hence, additional scrutiny and stress-testing of balance sheets, cash-flow and profit/loss accounts will be vital, with allowance for areas of potential financial drain, such as unfulfillable contracts, rent and loss of opportunity for growth.
Times of economic and social instability, where professionals and businesses are under considerable financial pressure, may lead to an increase in fraud related claims, where parties could be induced into taking illegal actions to address either their own or their companies' needs. Simultaneously, company oversight and checks may have become diluted. Auditors' responsibilities in relation to fraud are another contested area and, now more than ever, any concerns regarding potential fraud should be brought to management attention.
More generally, we are likely to see an increase in Covid-19 related claims against accountants in relation to tax and insolvency advice. Included in this we anticipate claims arising out of issues related to the Coronavirus Job Retention Scheme's tax reliefs (CJRS), grants and VAT deferrals by businesses as HMRC looks to claw back payments to which recipients were not entitled or have over-claimed. Much of the accountants' advice to businesses during this time may have been given very quickly in response to rapid changes in legislation and in some cases perhaps by practitioners transferred from other teams to help pick up the increased business/tax/insolvency workload caused by the pandemic.
Where clients have become insolvent, liquidators may also look to scrutinise advice which may have added to the companies' problems or advice regarding financial viability provided by accountants / insolvency practitioners.
Bowing to pressure from audit clients may, in some circumstances, not be negligent but it could still be unethical. The ICAEW, ACCA and FRC have been reminding accountants including auditors to maintain their integrity, objectivity and professionalism in these trying times.
Whilst it remains to be seen whether regulators or the Courts will allow any latitude in the wake of the crisis, we would hope that where audit planning and execution are conducted logically and methodically (and this is well documented) and where accountancy advice is well thought out and recorded, scope for criticism will be limited.
This article was originally posted on dwfgroup.com.