2020 has been an extraordinary year. For most audit committees, the issues that have dominated their agendas are far different from those that were anticipated in January. See, e.g., CAQ Releases Key COVID-19 Auditor and Audit Committee Considerations and PwC Has COVID-19 Guidance for Audit Committees, April-May 2020 Update and What’s on the Audit Committee’s Agenda in 2020? Part II: COVID-19, February-March 2020 Update.
Two reports from major accounting firms shed further light on the challenges facing audit committees in the COVID-19 environment. KPMG has published the results of a “pulse survey” that describes the major issues that audit committees have addressed because of the pandemic. Deloitte has released an updated audit committee agenda listing some of the overarching topics of which audit committees should currently be aware. These papers are summarized below.
KPMG Pulse Survey
The KPMG Audit Committee Institute surveyed over 100 U.S. audit committee members to understand how COVID-19 is affecting audit committee oversight and operations. The survey results appear in Challenges Presented by COVID-19: 2020 audit committee pulse survey report (October 5, 2020). Six key findings were:
The uncertain trajectory of COVID-19 and the economy--coupled with the extensive use of forward-looking information in financial statements and SEC filings--have made disclosures regarding the current and potential effects of COVID-19 a top area of focus. Seventy-nine percent of respondents reported discussion in company disclosures of the current and potential effects of COVID-19, including in risk factors, MD&A, liquidity, results of operations, and known trends and uncertainties. Other frequently discussed disclosure issues were Preparation of forward-looking statements (49 percent) and Impairment of nonfinancial assets (43 percent).
Companies are reassessing, enhancing, or establishing new internal controls due to COVID-19-related disruption to business operations. The top areas on which companies were reported to have focused regarding internal controls were Return-to-work plans (73 percent); IT systems access and authentication to enable remote/virtual workforce (69 percent); and Cybersecurity (56 percent).
Internal auditors are adjusting their audit plans and activities. Many respondents reported that the company’s internal audit function had changed its focus due to the pandemic. The issues to which internal audit had shifted its attention included: Identifying emerging risks posed by COVID-19 (58 percent); Reviewing management’s assessment of COVID-19 risks (5 percent); Assessing incremental fraud risks posed by COVID-19 (40 percent); and Assessing return-to-workplan and related risks (39 percent).
Audit committee members expect some environmental, social, and governance (ESG) issues to get significantly more attention from the board as a result of COVID-19 and recent protests against systemic racism. The survey asked which aspects of ESG will receive significant board attention because of COVID-19 and protests against systemic racism. The five most-frequently cited topics were: Employee/workforce health, safety, and well-being (85 percent); Diversity within the company, including the boardroom (56 percent); Supply chain resilience, including health, safety, and well-being (53 percent); Corporate reputation among key stakeholders (39 percent); and Customer health and safety (36 percent).
COVID-19 has prompted many audit committees to reassess the scope of their workload/agendas and risk oversight responsibilities. Audit committee members were asked which COVID-19 related risks their committee was responsible for (in addition to responsibility for financial reporting and control risks). The most common areas cited were: Financial risks (83 percent); Legal/regulatory risks (70 percent); Cybersecurity (62 percent); Data privacy (42 percent); and COVID-related government programs/regulatory relief (27 percent). In addition, 37 percent of respondents said that COVID-19 had caused their audit committee to reassess the scope of its workload/agenda “to a great extent”, while another 58 percent said their committee had reassessed workload “to some extent.”
Audit committee members say the remote work environment necessitated by COVID-19 has had little impact on the efficiency and effectiveness of their interactions with management and auditors. Over 70 percent of respondents said that the remote work environment had no noticeable impact on their interactions with the CEO, CFO, business unit leaders, internal audit function, and the external auditor. Thirty-nine percent said there had been a moderate increase in the frequency of their communications with the external auditor, while 57 percent said there was no change.
Deloitte’s Audit Committee’s Agenda
In On the audit committee’s agenda: Audit committee challenges and priorities in the upcoming quarter and beyond, the Deloitte Center for Board Effectiveness urges audit committees to be aware of issues that are “top of mind, trending, and ongoing” in the current environment, as well as the “tension points, challenges, and alternative solutions associated with those issues.” Below are Deloitte’s descriptions of these issue categories, along with an example of the questions audit committees should be asking regarding each.
Top of Mind Issues
Forecasting: Deloitte characterizes forecasting as “the single most challenging area for most companies in the COVID-19 environment.” Forecasts have both business implications and impact on significant accounting judgments, such as impairments and going concern determinations. Sample audit committee question: “Is data from the 2008 financial crisis being used to benchmark the timing and pattern of recovery from the current pandemic? Has management carefully considered the differences between the two economic periods?”
Communication with stakeholders: Effective communication with stakeholders has increased importance in the current environment. “The call for enhanced transparency has come from both investors and the SEC, which is encouraging disclosures that help investors understand how management and the board are analyzing the current and expected impact of COVID-19 on the company’s operations and financial condition.” Sample audit committee question: “In considering the use of non-GAAP measures, has the company considered what costs might be part of the ‘new normal’ and how certain non-GAAP adjustments may impact comparability in the future?”
Internal controls: The pandemic has changed the environment in which controls operate. The statutory requirement for effective internal control over financial reporting (ICFR) is, however, unchanged and regulators have emphasized the importance of ICFR. Sample audit committee question: “How is the company planning to address physical inventory counts? Has management considered the views of its regulators and coordinated its approach with the company’s auditors?”
Trending Issues
The pandemic has created new issues for many companies, such as revisiting stock compensation plans, evaluating the company’s real estate footprint, considering modification of financial instruments, and assessing eligibility for the Employee Retention Credit. Sample audit committee question: “Is the company considering abandoning property? Has the company evaluated the accounting consequences if subleasing the property in the future remains a possibility?”
Ongoing Issues
Ongoing issues may also be significant or pervasive. Sample audit committee question: “Has the company modified any significant contracts, particularly contracts with customers and leases?”
Comment: Each company’s situation is unique, and issues that are critical for one company may not be significant for another. Audit committees may nonetheless find it useful to review the issues that their peers see as the most challenging and important in the current environment (as reflected in the KPMG survey), and to consider the issues and questions for management on which Deloitte focuses in its agenda paper. Virtually all audit committees are likely to be dealing, in some form, with most of these topics. These two papers can serve as checklists to help audit committees in planning their agendas.