What actions should CFO’s take prior to reporting the impact of COVID-19 to the Audit Committee and Board of Directors?
As business continuity challenges soar, companies are facing issues closing the books for the quarter and ensuring key stakeholders – such as investors and board of directors – are kept informed.
CFO’s must keep their boards apprised of how the crisis has affected financial reporting quality, what risks exist, and the action plan for addressing these issues. The CFO must discuss the following at their board meetings:
Impact on workforce - Boards should be acquainted with probable workforce issues, both domestically and internationally, as well as the company’s capacity to meet original or customized deadlines.
Audit controls - Boards will want to ensure that internal and external auditors, and other important third-party service providers, have a plan to continue working virtually.
Impact on profitability – With widespread economic impact on financial performance, companies have already begun modifying their earnings projections. The CFO must be clear in how forecasts are created and communicate the need for flexibility in estimates given the uncertain time frame of economic downturn.
Impairment of receivables, loans and investments — Finance organizations must evaluate these assets for possible impairment. The CFO needs to connect with their auditors to ensure the accounting guidance (e.g., US GAAP, IFRS) for testing for impairment are met and well supported.
Debt modifications and loan covenants — The CFO, in conjunction with the Treasurer, must assess whether additional or bridge financing, restructuring of existing debts, or covenant waivers that address decreased revenues, higher operating costs or cash flow challenges represent debt modifications.
Judgments & estimates - Companies closing their quarter will need to make judgments and estimates related to financial reserves, liquidity and potential impairments. For example, a company’s current financial performance or estimates of future earnings may be significantly affected by the loss of a significant supplier or customer whose own operations are impacted by recent events.
Revenue recognition - The disruption in the supply chain and reduced consumer spending will likely have an impact on revenue recognition. A company may continue to sell products and services to customers impacted by disruptions caused by COVID-19. Not only should companies assess the need for write-offs or provisions on outstanding receivable balances, but revenue recognition. For example, contract modifications, change in estimates due to volume discounts, variable consideration, etc., all may have an impact on timing
Debt - Companies may need to seek additional financing or amend the terms of existing debt agreements due to lost revenue, uninsured losses or losses for which insurance recoveries have not yet been received. In that case, a company may seek to amend the terms of an existing debt agreement with its lenders to temporarily or permanently increase borrowing capacity, change the interest rate or modify other contractual terms. In addition, should a company take advantage of the CARES Act, the CFO should convey the decision-making process in order to demonstrate the necessity of a government backed loan.
Disclosure - Within the financial statements, companies should consider disclosure of risks and uncertainties and whether, how and when events might impact many judgments inherent in their financial reporting. There may be significant events that occurred prior to the issuance of the financial statements. The CFO should determine whether that information needs to be disclosed or recognized in the financial statements as a COVID-19 subsequent event disclosure.
Emergency board and management succession - Numerous individuals in high-profile positions have been COVID-19 positive. It is to be expected that these incidents will not be isolated. The CFO must therefore be prepared to have a plan in the event temporary arrangements are needed in order for senior management to meet.
Overall, CFO’s will be in the spotlight. The need to communicate their decision-making process in a clear and concise manner will have a major impact on their organizations. However, there is an opportunity to position the company to emerge stronger and better prepared for any future crises - a litmus test for high functioning CFOs.
