Hot topics for public company audit committees

The COVID-19 crisis has dramatically altered the business world, creating new risks, uncertainties and, in some cases, opportunities. What are audit committee chairs most concerned about during these unprecedented times?

Ongoing outreach project

Each year, the Public Company Accounting Oversight Committee (PCAOB) actively reaches out to capital market participants to identify critical issues that audit committees are dealing with. In 2019, during PCAOB audit inspections, nearly 400 audit committee chairs of U.S. public companies were interviewed.

In 2020, the COVID-19 pandemic caused some well-known retailers to declare bankruptcy, and many companies reported drastic drops in revenues and profits. So, the focus of the PCAOB’s outreach in 2020 was how COVID-19 is affecting the financial reporting process. On July 31, the PCAOB issued Conversations with Audit Committee Chairs: COVID-19 and the Audit, which summarizes those discussions.

Current hot buttons

The PCAOB report found that, during the pandemic, the most prevalent topic of discussion among audit committee chairs was the risk of teleworking. In an effort to contain COVID-19, states issued stay-at-home orders in the spring. While some social distancing restrictions have been eased, many companies are continuing to allow employees to work from home.

“The transition to an almost entirely remote workforce for both issuer personnel and the external auditors was rapid, but most audit committee chairs stated that the transition was effective,” noted the PCAOB. Several committee chairs said that storing data on the cloud helped simplify the transition to remote work. Many also noted that they were able to manage, maintain or adjust internal control over financial reporting during the transition.

However, many audit committee chairs expressed concerns about cybersecurity risk while employees work remotely. Audit committees look at cybersecurity in the context of 1) identifying and assessing risks of material misstatements to the financial statements, and 2) evaluating controls that mitigate risks.

Other risk-related issues that were identified during the PCAOB’s 2020 outreach include:

  • Employee safety and health,
  • The entity’s ability to stay afloat,
  • Accounting estimates,
  • Impairments,
  • International operations, and
  • Accounting implications of the Coronavirus Aid, Relief and Economic Security (CARES) Act.

The PCAOB reports that the effects of the COVID-19 crisis vary widely across companies and industries. Some audit committee chairs said the impact hasn’t been significant so far. But others said the impact was greater than they initially anticipated.

Auditor communications

As a result of the pandemic, many audit committee chairs reported having more-frequent communications with external auditors — a trend that’s expected to continue as new risks and uncertainties arise. Examples of communications that audit committee chairs have found helpful include:

  • Discussions about trends auditors are seeing across their client base, particularly those pertaining to industry peers, and
  • Presentations on areas of the audit that may warrant increased attention due to the effects of COVID-19, as well as how the auditor plans to approach those areas.

In some cases, external auditors are sharing firm resources and conducting webinars with industry-specific content to help audit committees understand relevant challenges and opportunities.

Survival skills

Regardless of whether your business is public or private, external auditors can be a valuable resource during these challenging times. Before the audit season for fiscal year 2020 begins, contact your trusted Hood & Strong advisor to discuss today’s evolving risk factors and how audit fieldwork will change in the coming months.