The staff of the SEC’s Division of Corporation Finance has issued Sample Letter to Companies Regarding Disclosures Pertaining to Russia’s Invasion of Ukraine and Related Supply Chain Issues. The letter illustrates the types of questions the staff may ask regarding the impact of Russia’s invasion of Ukraine in reviewing a company’s filings. In releasing the sample letter, the Corp. Fin. staff stated that it believes companies should “provide detailed disclosure, to the extent material or otherwise required,” regarding (1) direct or indirect exposure to Russia, Belarus, or Ukraine, (2) direct or indirect reliance on goods or services sourced in Russia, Belarus, or Ukraine, (3) actual or potential disruptions in the company’s supply chain, and (4) business relationships, connections to, or assets in, Russia, Belarus, or Ukraine. The staff also notes that the conflict may impact financial statements in such areas as impairment of assets, changes in inventory valuation or deferred tax asset valuation allowances, disposal a business, or changes in customer contracts or the collectability of contractual obligations.
The SEC staff’s sample letter contains eleven potential disclosure questions under six headings. The “General” heading includes, among other things, a request for a description of the extent and nature of the role of the board of directors in overseeing risks related to the invasion. The other topic headings in the sample letter are Risks Related to Cybersecurity, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Non-GAAP Measures, Disclosure Controls and Procedures, and Internal Control Over Financial Reporting (ICFR). (For additional perspective concerning disclosure issues arising from the Ukraine war, see The War in Ukraine Raises Accounting and Disclosure Challenges, March 2022 Update.)
The PCAOB has also released Ukraine war guidance. In Spotlight: Auditing Considerations Related to the Invasion of Ukraine, the PCAOB staff highlights important considerations for auditors as they plan and conduct audits. The Spotlight addresses a range of audit-related matters, including Identifying and assessing risks (including fraud risks and cybersecurity risks); planning and performing audit procedures (including materiality, ICFR, specific audit areas, use of other auditors, and communications with audit committees); possible illegal acts; reviews of interim financial information; and acceptance and continuance of clients and engagements. With respect to audit committee communications, the Spotlight observes:
“The rapidly changing environment may necessitate more frequent communications between auditors and audit committees. For example, management may make changes to certain accounting policies, practices, or estimates as a result of the current environment. These changes in turn may affect the planned audit strategy. In addition to the required communications to the audit committee, auditors are also reminded of their responsibilities of obtaining information relevant to the audit from the audit committee. For example, auditors should inquire of the audit committee’s knowledge of risks of material misstatement, including fraud risks.”
The Spotlight also discusses issues that may arise as a result of the Ukraine conflict in audits nearing completion and reminds auditors of their responsibilities with respect to (1) events that occur subsequent to the balance sheet date, (2) other information in documents containing the financial statements, and (3) auditor reporting, including critical audit matters and scope limitations.