As businesses devise innovative action approaches and develop strategic capabilities to manage through volatility, there is a lot of debate and disconnect around various facets of audit – going concern assessment, impairment assessment, additional representations, trust issues, etc. Also, the Finance community is not used to the remote concept of audit.
New audit plan/procedure needs to be collaboratively developed, leveraged and empirically applied in untried and novel ways (by drawing on the expertise and audit skills acquired over all these years) – by harnessing available technology and tools during the Covid-19 times. There is a dire need to break habits and collective psyche, without judging or reacting to them – says Mr. Pankaj Vasani, a seasoned business leader & finance executive in an exclusive interview with the CPO Innovation team.
CPO Innovation: What challenges do you perceive in the ‘covid times’ regarding preparation of financial statement, going concern assessment, disclosure of subsequent events, deferred tax assets, additional management reps & emphasis of matter/qualification?
Pankaj Vasani: Honestly, we are not used to the remote concept of audit. Working out numbers for audit is the new aerobics for Accountants during Covid-19. To answer each issue in your question, seriatim:
- Preparation of financial statements on timely basis: The effects of corona on financial statement preparation/audit are compound and complex. CFOs have not encountered a disorderly event of this degree and magnitude. And therefore, there is plethora of queries from auditors as new and different scenarios are encountered day in and day out.
- Going concern assessment: Given that the pandemic is an enigma at this PoT, CFO/management needs to continuously assess the existing and expected effects of covid19 and: a) conclude whether preparation of the financial statements as a going concern is appropriate. Such evaluation is to be made based on the conditions or events that are known at the time of making that evaluation or based on reasonable nowable as of that date & b) update the auditor on their entity’s ability to operate under the going-concern basis (management lookout for 12 months beyond the date when the financial statements are issued) for their evaluation (intent and ability). This needs to be done until the signed FS is issued. For this assessment, crucial real-time data needs to be at hand for doing the projections. CFOs may add appropriate disclosure in the financial statements about the risks and uncertainties considered, in discussion with the auditor.
- Disclosure of subsequent event i.e. events or transactions that occur after the BS sheet but before the FS statements are issued or are available to be issued. Determining those events that should be reflected (adjusting) vs those that are disclosed (non-adjusting) in the FS may require judgment. It is important for CFOs to be mindful of Ind AS 10 requirements of classification of economic events occurring subsequent to reporting date as adjusting and non-adjusting.
- Deferred tax assets: A DTA is recognized for deductible temporary differences and unused tax losses (tax credits) carried forward, to the extent that it is probable that future taxable profits will be available. Future profitability may be adversely affected requiring attention to revisit the previous assumptions and thereby impacting computation of deferred tax assets.
- Additional management representation: Auditor may insist on additional representations esp re going concern assumption, subsequent events, fraud, etc. Failure to make all representations to the satisfaction of auditor may result in scope limitation and may have a potential effect on their opinion report.
- Emphasis of Matter/qualification/adverse opinion: Auditors may conclude that an event has such a material impact on the organization that it would be appropriate to include an emphasis‐of‐matter (EOM) paragraph in the auditor’s report. This is generally fine. But, In situations where auditor encounters scope limitations or misstatements of the financial statements, they may issue a qualified (material but not pervasive; generally still acceptable to investor, creditors and lenders) report or adverse (material and pervasive; needing to restate and complete another audit of its financial statements) report.
CPO Innovation: So how should the auditors and CXOs tackle these issues?
Pankaj Vasani: Someone once said, when nothing is going right, go left. Auditors and CXOs need to use their collective genius to jointly develop audit approach, specific (not general) action plans, anchorage technology at disposal and also address various kinds of challenges – CMP, DRP, BCP, etc. Despite the vice of repetition, it is important to emphasize that audits need to be performed in accordance with the auditing standards. Also, the underlying situation must not undermine the delivery of a high-quality audit for either side. Any slackness, dilution or non-compliance to standards is absolutely unacceptable.
Specifically, due to the far-reaching impact of these circumstances viz. customer’s inability to pay, default in repayment of loans, unavailability of raw material to inability to ship the products to the customer, etc., it can be safely concluded that largely all financial statement areas will be impacted. Management team will need to work through a range of possibilities and assess the impact on each of the financial statement line items. Guidance surrounding disclosure of assumptions used, dealing with forward-looking statements and transparency in reporting will be very pertinent. Given the situation is still evolving with different levels of impact through different industries and countries, it is important that the disclosure provides insight into how management has estimated the impact and what assumptions have been used – these could be disclosed under the MD&A section of the financial statements.
Key is to remain nimble, as the situation evolves.
Many CXOs and Big4 audit partners I have spoken to in the last few weeks are trying their best to be agile and have succeeded considerably. Also, these times, besides posing challenges, obligations (either party will not be absolved of their responsibilities on account of covid19) and risks, also present (or amplify) opportunities for the industry/organizations which didn’t exist before. Thankfully, ICAI, MCA & other regulatory bodies have also come to the rescue of the accountants.
CPO Innovation: You said ICAI/MCA etc. come to the rescue of accountants. How so?
Pankaj Vasani: Every professional institution across the globe is working to analyze the impact of this pandemic on businesses and issuing appropriate guidance. ICAI has also analyzed the accounting and auditing aspects and issued relevant advisory highlighting important areas which require particular attention and needs to be considered by the preparer of F.S. & auditors in discharging their professional responsibilities.
All regulators (including SEBI & MCA) have already provided temporary relaxations in regulatory compliance requirements to companies… inter alia extending timeline of various filings with the stock exchange, clarifying and extending eligibility of CSR funds for COVID-19, revising BoD/audit committee meeting norms, etc. FM has also announcement relief measures viz. postponement of applicability of CARO 2020 from AY 2020-21 & 2021-22. ICAI has made some more representations to FM, RBI, MoF, etc. These should be taken into consideration and actioned soon.
CPO Innovation: Under these circumstances, the risk of fraud being committed is increased. How the auditors should approach this?
Pankaj Vasani: Absolutely, these chaotic times and disconcerting circumstances may present more opportunities (or fertile ground) to commit innovative and creative frauds. As business declines, the risk of fraud increases. There are many pressure points like all hands on deck for operations only (and compliance, etc. takes a back seat); working for regulatory approvals (pressure to bring products immediately to point of sale – whatever it takes); risk of onboarding un-vetted or disrepute third party, supplier, agent, intermediary, contractor, or even a customer; inherent risk due to issue of pink slips to unaffordable staff, asset (cash/raw material/ finished goods/confidential data) misappropriation, etc.
The auditing standards or advisory do not set specific requirements regarding how auditors will obtain the assurance of no fraud being committed. An auditor needs to be extra diligent, agile and perform inquiries around oversight, key controls being in place, stay alert to quality of audit evidence and scrutinize unusual items. For fraud inquiries, video conferencing should be preferred over audio calls. As and when required, basis professional judgment, a robust dialogue with the leadership team needs to take place if certain oddities are observed and unusual transactions are noticed. If for any reason, auditors are unable to complete the procedures to their satisfaction, they need to consider a scope limitation.
CPO Innovation: Trust may be an issue at such times between auditor and CXO. How can it be resolved?
Pankaj Vasani: Under such testing times, it is extremely critical to have credibility, trust and ensure real-time/open/proactive/periodic dialogue. Both sides are accountants first and have common goals – fiduciary duty to bring out a ‘true and fair’ view, deliver financial statements accurately & demonstrate ethical standards at the core of their culture. While both have the same goal (aligned, but different PoV), neither side is expected to buckle under pressure. Lastly, whilst we are at home working through our handhelds, let’s not forget that we all are part of a great chapter in history – whether we make it a story of success or a story of failure… is in our hands.
CPO Innovation: AI/technology and audit procedures post-Covid – your take on it?
Pankaj Vasani: In my view, companies which lagged behind in adoption of AI should use this opportunity to look at their processes and identify opportunities to make that shift. Auditors as well need to re-look at some of the traditional audit procedures and how it needs to change when the client is using AI.
Let me give you a simple example – typical audit procedure of checking bank reconciliation would mean comparing the balances to source data by comparing it with books and bank confirmation, checking the reconciliation items on sample basis and matching the same to the source document and identifying the accounting impact of those reconciling items. In a scenario, a reconciliation is prepared by a BoT – the audit procedures will be very different – i.e. understanding the manner in which the BoT is programmed, access available to the BoT to view bank statements and financial information, ability of someone tampering the reconciliation prepared by the BoT, ability of the BoT to post adjustments directly into the system, etc.
Using these technology tools is likely to provide operational and governance advantages to the company and at the same time enable auditors to gain greater level of assurance. However, performing these audit procedures would need enhanced technology skills along with auditing skills and an ability to re-assess risks and I believe there lies an opportunity.
As far as the post-Covid19 situation is concerned, I would really believe, if we go back to our old ways – it would mean a huge opportunity loss. Companies could use the learning during these times to improve their processes and control by making it more automated or look at using technology tools to carry out procedures like reconciliations/confirmations. From an auditor’s point of view – it would mean how to continue to enable remote working – whereby being able to utilize talent which otherwise not available or innovate the audit procedures to gain greater comfort using technology tools. To me, the possibilities are limitless and very exciting.
About Mr. Pankaj Vasani
Mr. Pankaj Vasani is a business leader and finance expert with over two decades of experience in senior executive roles and as a board & audit committee member. Over the years, he has donned various hats – Group CFO, Finance Head, CEO, Tax/Legal/Compliance Head and member of Board of Directors. He specialises in operations, finance, legal, tax, treasury, and business strategy with demonstrated experience ranging in many geographies and multiple sectors from advertising/media/PR/entertainment to automotive, beverage, software, telecom & service industry. He has held leadership roles with Publicis Groupe, Vodafone, Coca-Cola Cola, & Subros.
By education, he’s a Chartered Accountant (England & Wales), Certified Public Accountant (Australia), Chartered Accountant (India) & Lawyer (Gold medallist; Delhi Univ., India). He has also completed his B Com (Hons) from Delhi Univ., EEP from IIM- Bangalore and EP (Intl. Tax) from Leiden University, Netherlands.