I have recently been doing some remote work with an overseas client looking at their annual financial statements and various improvements they had been aiming to make in their preparation compared to earlier years. Things appeared to be going well. There was a discernible increase in quality and the draft statements had been prepared in line with the timetable which was a marked uptick from previous years. Then I asked what the plan for auditing was and was met with a slightly subdued silence. There isn't a plan – the auditors have been stood down pending the country getting on top of the pandemic. Some context is needed; this is a client in a developing country and remote communications along the lines of what accountants and auditors in developed countries are used to is a fairly remote pipedream; and the auditors were already behind in previous pre-pandemic years. But the onset of Covid has made the situation a whole lot worse. Simply put, there is a fear that by moving around from one audit site to another the auditors may unwittingly spread the virus and also be exposed to it themselves.
That is one practical aspect of the effect of the pandemic on the audit process but there are others too, regardless of whether or not a country is in the developed or developing category. For one thing, there is the vexed question of whether companies are going concerns or not. Clearly the pandemic has created a great deal of uncertainty about such issues and the prospects for a number of previously solid, reliable entities with a seemingly safe and secure future have been badly affected. Businesses that once seemed to be here for the duration are suddenly a big risk. Auditors need to be on their guard for emerging risks and ensure that the accounts have been prepared on an appropriate basis. The increased danger of corporate failure may increase the risk of some 'gaming' going on with the numbers unreasonably skewed for example by taking inflated views of revenues, the inappropriate capitalisation of costs, the ignoring of potential provisions and other measures. There is a long list of potential opportunities to 'rose tint' the figures and anyone who thinks that accounting is an exact science with clearly evidenced and unarguable numbers involved has been luckier than I have been in my career.
The risks were highlighted this week by Kevin Ellis, responsible for PwC's operations in the UK and the Middle East since 2016. Although he was speaking primarily in a UK context, his words have wide global application. After saying that PwC had had a dry run on running audits in the age of Covid earlier in the year, now with a new lockdown in the UK they are faced with a whole new challenge. He remarked that 'it will be far more challenging after Christmas, given the volume of year ends', noting also that in many cases 'auditors can't be on site' adding that 'auditing becomes much harder down a Zoom lens'. Indeed it does: whilst I think I have adapted to 'Zoom world' reasonably OK, you can't fail to notice sometimes how stilted conversations are, and it's much harder to interpret that all important body language when you are speaking to somebody in a room a hundred miles away or more.
It is going to be a challenge for the audit profession which has not had a great time with public relations in recent years. Collectively auditors came in for a good deal of flak after the financial crisis of 2008 which some critics have suggested came about in part because of an all too cosy relationship between auditor and auditee. Recent accounting scandals such as that involving Wirecard, the German payments processor, will not have helped as it has already increased contemporary scrutiny of auditors. That will not be helped by having to rely on remote methods to verify key accounting data such as stock check results. There is also a heightened risk of fraud as remote working raises issues around effective supervision and possibly IT manipulation. The old argument about auditor responsibility for identifying fraud may rear its head again. Whilst case law might argue that audit responsibility for issues like this is limited – 'the auditor is a watchdog, not a bloodhound' – an already sceptical public may take some convincing that this is not an attempt to wriggle off the hook. Add to that, company boards will not take kindly to auditors raising questions in their audit reports and opinions about the viability of an entity's going concern prospects. It will indeed be a challenging audit season which will start to reach fever pitch early in the New Year as many companies close their books on 31 December. The audit profession needs to bring its 'A Game' to the party, otherwise it could be in a difficult position in more ways than one.
Wayne Bartlett is an author for accountingcpd. To see his courses, click here.
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