Disclosures tested by coronavirus
The coronavirus is also a regulatory crisis, with the US Securities and Exchange Commission in the lead on relief to companies as appropriate.
Matters concerning the coronavirus were raised in the context of broader concerns about the fact that the PCAOB, which conducts reviews of working papers of audit firms in the United States and elsewhere, is unable to access the Chinese market freely.
In a February 19 statement from officials from both the SEC and PCAOB, concerns were expressed by the regulators about the continuing inability of the US inspection authority to go and examine the operations of global accounting practices in China.
"Collectively, the four largest audit firms through their global networks audit the financial statements of approximately 140 China and China-based, U.S. exchange-listed, public companies, and the China and Hong Kong network firms for these four audit firms participated in 5% or more of the total audit hours in approximately 120 instances related to non-China, U.S. listed companies with operations in China," the regulators' joint statement notes.
"United States investors and our capital markets also have exposure to other foreign-based, U.S. listed companies that have operations in China as well as through investments, directly and indirectly, in non-U.S. listed companies that are based in China or have significant operations in China."
The problem for the regulators in the US is that they cannot go and kick the tyres in China themselves. They are reduced to telling accounting firms the need to "bring appropriate increased attention and resources to their internal and cross-network quality control processes", which they did with the firms in November 2019.
More meetings were held between the regulators and the firms since November 2019 and those discussions touched on operational issues such as acceptance and retention policies related to client engagements, internal and cross-network reviews process in place for quality control, firm training and benchmarking.
The coronavirus was also a key features of discussions given the rate at which it has begun to spread around the globe.
SEC chairman Jay Clayton first flagged his focus on COVID-19 and its impacts in a January 30 public statement. He noted then that he had asked staff to monitor the situation and provide whatever guidance and assistance to affected entities was required in relation to disclosures "related to the current and potential effects of the coronavirus". Clayton did observe that it is difficult to predict or measure the precise impacts of the coronavirus but the way in which the entities plan and reveal the state of their planning could have an impact on investor decisions.
The February 19 public statement discussed above took the discourse about the coronavirus somewhat further because it has been acknowledged that SEC registrants may have large parts of their business operations based in China or other jurisdictions that are particularly exposed to COVID-19.
The SEC's proactivity in its discussions with the major accounting firms is reflected in the way accounting firms themselves have issued publications related to the coronavirus outbreak. EY issued a publication last month to cover off significant areas for people to think about when working through reporting issues. Key areas that may require consideration events after the reporting period, going concern, fair value measurement, expected credit loss assessment and assets impairment.
Various businesses may not survive the outbreak because of the economic impacts and EY provides some guidance on issues related to going concern. EY says entities that have had their operations suspended in some form as a result of the outbreak have a bit to think about.
"[Management] would need to consider a wide range of factors relating to the current adverse situation and expected profitability, debt repayment schedules and potential sources of replacement financing before it can satisfy itself that the going concern basis is appropriate," EY said.