Advocating for transparency in corporate financial reporting responses to coronavirus

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Editor's note: This blog also had contributions from Suraiya Zannath and John Hodge.

No transparency, no trust; no trust, no credit; no credit, no investment; no investment, no growth! So there is a simple logic: financial reporting is an essential building block for financial intermediation, foreign investment, and sustainable economic development.  - Martin Gruell, Raiffeisen Bank International (2008)

In times of crisis such as what we are going through with the COVID-19 pandemic, the quality of corporate financial reporting and governance, which are essential elements for a well-functioning global economy, as well as the checks and balances in place to prepare and communicate this information to various stakeholders including shareholders, is critical.

Trust in financial information -- from listed companies that communicate with their shareholders and creditors, and SMEs seeking finance from banks and markets -- needs to keep up with good accounting practices.   

Companies need to communicate transparently on how Covid-19 is impacting their business, in terms of liquidity and business continuity, financial position, internal controls, and risks. 

To date, the financial crisis response mechanisms that were put in place since the 2008 crisis seem to work well. The coordination of international regulators, standard-setters and bodies across the globe, has been efficient. Within a 10-day period, all financial actors have coordinated their responses and communicated that to the markets thanks to the coordination of the Financial Stability Board

The regulatory response was made amidst growing concerns, including from banks, that the application of some accounting standards could lead to a downward spiral of companies’ balance-sheets through impairment mechanisms and the application of fair-value. The application of IFRS 9-Financial instruments has been questioned by users and regulators are being lobbied by the banks. 

Regulators and Standards Setters are reminding regulated entities to exercise their professional judgement and use all the tools that already exist in accounting standards. They are also asking banks to reverse the buffers that they have built up for crisis time. 

Banks are well-placed to contribute to the resilience of the financial systems thanks to the capital and liquidity buffers they have been building up since the last crisis.  Accounting standards and auditing standards are designed to be efficient in terms of providing useful information about the crisis. 

The current health crisis is also testing the effectiveness of technology, using videoconferencing, electronic payments, operational and accounting software and cloud-based storage systems. We will certainly witness an evolution in the way technology is used and the way people and institutions function.

 A set of guiding principles can help corporate governance and financial reporting actors to prepare, communicate and regulate better during this crisis.  

  • Government and National Regulators should coordinate their response with what has been demonstrated at the international levels. International guidance has to trickle down to national levels. Banking regulators that have put in place stringent counter-cyclical capital liquidity requirements for banks should release them.  Securities and government should not enforce strict deadlines on obtaining financial information as long as the companies are communicating on delays and their impact. 
  • Governance actions to have in place during the crisis include: (a) forming cross-functional crisis management teams lead by CEOs  to focus on mainly (but not limited to) identifying the critical functions and roles of employees, financial stress-testing and business contingency plan, supply-chain monitoring, demand-supply mismatch, and disruption in inventory management; (b) Documenting critical functions and processes in cases of absences or quarantines of team members; (c) Quantifying losses effectively, ensuring simplified accounting/reporting; (d) Preparing a strategy for transportation, communication and bureaucratic delays; (e) Preparing readiness filter for bailout or business incentive packages
  • Companies should continue providing their financial reporting, high-quality and relevant business continuity plans, the impact of Covid-19 on operations and internal controls, their financial position and future performance, and the risks they face and how they plan to mitigate those risks. 
  • Auditors need to perform quality audits utilizing technology to address potential constraints such as unavailability of relevant counterparts in the audited companies and inability of auditors to travel. 
  • Companies should hold their annual meetings virtually and consider getting votes on resolutions by phone or similar modes of communication in the absence of face-to-face meetings.
  • Accountants, being the closest advisors to SMEs should stand ready to help, by (i) advising on relief mechanisms put in place by government, assisting businesses in managing cash flows when revenue is drastically reduced. Professional Accountancy Organization could lead and provide initiatives to offer diagnostic assistance for assessing the financial position and performance of SMEs.

For information on responses from the G20, international and regional standards setters and regulators, and professional accountancy organizations please click here.

Authors

Pascal Frerejacque

Senior Operations Officer, CFRR, The World Bank

Join the Conversation

Bernard Paris
April 30, 2020

I fully concur about your guiding principle related to the use of technology to address potential constraints : unavailability of relevant counterparts and inability of auditors to travel.
Auditors should select proper auditing software which include easy cooperation/exchange between their audit file and the accounting files of their client on specific areas.
Kind regards
Bernard