FRC publishes consolidated covid-19 guidance for companies and auditors

14 December 2020

The FRC previously issued guidance in March with subsequent updates in May. The consolidated guidance is delivered as two separates papers – one for companies and one for auditors. Both recognise that there is still considerable uncertainty about the future at a time where a number of companies are preparing annual reports.

The paper addressed to companies is intended to highlight some key areas of focus for boards in maintaining strong corporate governance and provide high-level guidance on some of the most pervasive issues that should be considered when preparing annual reports and other corporate reporting.

With respect to corporate governance the key messages to board are to:

• develop and implement mitigating actions and processes to ensure that they continue to operate an effective control environment, addressing key reporting and other controls on which they have placed reliance historically but which may not prove effective in the current circumstances;
• consider how they will secure reliable and relevant information, on a continuing basis, in order to manage the future operations, including the flow of financial information from significant subsidiary, joint venture and associate entities; and
• pay attention to capital maintenance, ensuring that sufficient reserves are available when the dividend is made, not just proposed; and sufficient resources remain to continue to meet the company’s needs.

The guidance is intended to focus the minds of boards on those areas of reporting that are of most interest to investors and to encourage them to provide clarity on the use of key forward-looking judgements. The guidance covers:

• the need for narrative reporting to provide forward-looking information that is specific to the entity and which provides insights into the board’s assessment of business viability and the methods and assumptions underlying that assessment;
• going concern and any associated material uncertainties, the basis of any significant judgements and the matters to consider when confirming the preparation of the financial statements on a going concern basis;
• the increased importance of providing information on significant judgements applied in the preparation of the financial statements, sources of estimation uncertainty and other assumptions made; and
• judgement required in determining the appropriate reporting response to events after the reporting date and the extent to which qualitative or quantitative disclosures may be appropriate.

More detailed guidance is provided on the following specific areas:

• Corporate governance
• Management information
• Risk management and internal controls systems
• Dividends and capital maintenance
• Corporate reporting
• Strategic Report and Viability Statement
• Financial statements – going concern and material uncertainties, significant judgements and estimation uncertainty, events after the reporting date, exceptional or similar items, alternative performance measurements, leases, and interim reports.
• Other sources of guidance and publications issued by the FRC.

The FRC encourages companies to make use of the extensions to the deadlines for the publication of the annual report and accounts. It notes that the FCA recently confirmed that listed companies with a year end up to and including 31 April 2021 will still have six (rather than four) months to publish their annual report and accounts.

The Bulletin provides guidance to auditors carrying out audit engagements that may be affected by COVID-19. The Bulletin indicates that some companies and auditors are continuing to face practical difficulties in preparing accounts and carrying out audits. It highlights that given possible restrictions on travel, meetings and access to company sites in some jurisdictions, audit firms may need to apply alternative audit procedures to gather sufficient, appropriate audit evidence.

The FRC remains concerned that the pandemic should not undermine the delivery of high quality audits. It highlights that audits should continue to comply fully with required standards and flags that additional time should be taken to complete audits, where necessary, even if this risks a delay in company reporting.

The Bulletin indicates that auditors need to consider the impact of COVID-19 on:

• the auditor’s risk assessment, and whether it needs to be revised;
• how the auditor gathers sufficient, appropriate audit evidence, recognising that the planned audit approach may need to change, and alternative procedures developed, particularly in group audit engagements. The auditor must be able to gather the necessary evidence to be able to report or consider modifying their audit opinion;
• how the group auditor proposes to review the work of component auditors to meet the requirements in standards, including considering whether alternative procedures can be used: for example, where travel is restricted;
• the auditor’s assessment of going concern and the prospects of an audited company, given that uncertainty about the global economy and the immediate outlook for many companies has increased;
• the adequacy of disclosures made by management about the impact on the company of COVID-19, so that users of the financial statements are properly informed, and the company’s prospects and how they might be affected are described, recognising the high degree of uncertainty; and
• the need for the auditor to reassess key aspects of their audit as a result of the fast-changing situation, recognising that this assessment will take place right up to the point of signing the auditor’s report, and may need the provision of further evidence and information by management. Where the current circumstances have had a significant impact on the delivery of the audit, the auditor will need to consider how to explain this in their report, for example, by reporting this as a key audit matter.

The Bulletin also indicates that auditors need to engage with entities they audit to ensure that:

• the auditor sets clear expectations as to the level of disclosure they expect to see in annual reports to communicate the impact and risk of COVID-19 on the company; and
• companies, and in particular their audit committees, understand it is vital that auditors have sufficient time and support to carry out their work to an appropriate standard, including reassessing work done to reflect changed circumstances – in some cases, this may need companies to reconsider their reporting deadlines. Where auditors are unable to obtain sufficient, appropriate audit evidence to support their audit, they will need to consider necessary modifications to their audit opinion.

The Bulletin provides a non-exhaustive list of factors which auditors should be considering when carrying out audit engagements in the current environment, along with guidance on how they might be addressed.

A press release, the guidance for companies and guidance for auditors is available on the FRC website.