The UKs Financial Conduct Authority, the Financial Reporting Council and the Prudential Regulation Authority have issued a joint statement outlining a series of steps they are taking to address the significant challenges firms are facing in preparing and auditing financial information in this time of crisis.
The steps taken include:
- A statement today by the FCA allowing listed companies an extra two months to publish their audited annual financial reports.
- Guidance from the FRC for companies preparing financial statements in the current uncertain environment. This is complemented by guidance from the PRA regarding the approach that should be taken by banks, building societies and PRA-designated investment firms in assessing expected loss provisions under IFRS9.
- Guidance from the FRC for audit firms seeking to overcome challenges in obtaining audit evidence.
The regulators note that in the current environment, market practices relating to the timing and content of financial information and the audit work that is done will need to change. These changes are likely to include:
- Modified audit opinions where auditors have been unable to gather the necessary audit evidence to complete the audit in full: for example, by limiting the scope of the audit opinion.
- More audited financial statements that include disclosures that management is aware of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern.
- Changes to timetables for publication of financial information that had been set before the full implications of coronavirus were clear.
The regulators strongly encourage users of financial statements to take into account the unique set of circumstances arising from Covid-19 which might result in uncertainty in companies’ financial positions, potential delays in the provision of financial information, the need for auditors to undertake additional work to support their audit opinions and the increased use of modified audit opinions, including qualifications arising from scope limitations.
The regulators note that the UK banking authorities have sought to reduce pressure on banks to restrict the provision of financial services, including the supply of credit and support for market functioning. Accordingly, they strongly encourage lenders and other parties to take into account these circumstances in responding to potential breaches of covenants arising directly from the coronavirus pandemic and its consequences.
It is apparent the regulators are striving to support firms, investors and the financial system at this time of crisis and the measures being taken and recommended are positive.
The question remains whether these steps will be sufficient to ensure that the financial system will be strong enough to support the economy and what further steps may still be needed.
Capital markets rely on timely, accurate information. Investors and other stakeholders rely on financial reporting – backed by high-quality auditing. However, companies and their auditors currently face unprecedented challenges in preparing and auditing financial information.