COVID-19 A&A Frequently Asked Questions



COVID-19 A&A Frequently Asked Questions (Updated April 6, 2020)My firm performs audits and reviews of our clients’ financial statements. Does the current pandemic impact our work on these clients’ December 31, 2019 financial statements?Yes, the pandemic does impact these engagements. Even though the coronavirus didn’t become a pandemic until after December 31, 2019, the pandemic is a “type 2” subsequent event that requires disclosure. CAMICO recommends all December 31, 2019 financial statements (regardless of service) include a subsequent event disclosure mentioning the coronavirus outbreak and its potential impact. There are two types of subsequent events: Those that provide evidence about conditions that existed at the balance sheet date (“type 1”) and those that do not (“type 2”). As a type 2 subsequent event, the carrying value of items on the balance sheet at December 31, 2019, would not be impacted, but the significant subsequent event and its possible implications should be disclosed.My firm provides bookkeeping services and prepares many clients’ financial statements. We are not subject to peer review because the financial statement engagements are AR-C 70 Preparation Engagements under the Statements on Standards for Accounting and Review Services (SSARSs). Virtually all these clients have elected to omit substantially all disclosures. Does the pandemic impact our December 31, 2019 financial statement engagements? Yes, the pandemic does impact these engagements. Even though the coronavirus didn’t become a pandemic until after December 31, 2019, the pandemic is a “type 2” subsequent event which should be disclosed. Client management’s decision to omit substantially all disclosures doesn’t mean that financial statements need not be accompanied by disclosures. CAMICO recommends all December 31, 2019 financial statements regardless of service include a subsequent event disclosure mentioning the coronavirus outbreak and its potential impact. The carrying value of items on the balance sheet at December 31, 2019, would not be impacted, but the significant subsequent event and its possible implications should be disclosed.My firm compiles many clients’ financial statements. Many of these clients have elected to omit substantially all disclosures. Are we required to add a disclosure to address the outbreak and its possible future implications? You should. Professional standards permit supplemental disclosures when substantially all disclosures are omitted. In these circumstances the title “Selected Information — Substantially All Disclosures Required by Generally Accepted Accounting Principles Are Not Included” should be used [when applicable: substitute <Modified Cash Basis/Income Tax Basis>.] Compiled (AR-C 80) financial statements omitting substantially all disclosures are discouraged when users are not knowledgeable about omitted matters. CAMICO encourages accountants to modify their accountant’s reports to include emphasis-of-matter paragraphs discussing the pandemic and referencing the disclosure. Emphasis-of-matter paragraphs are NOT permitted unless the matters being emphasized are disclosed elsewhere in the financial statements (so merely modifying your compilation report isn’t permitted).OK. Is CAMICO’s advice any different for situations where we perform AR-C 70 preparation engagements and the client has elected to omit substantially all disclosures? There is a slight difference. As with compilation engagements in which the client management has elected to omit substantially all disclosures, the title “Selected Information — Substantially All Disclosures Required by Generally Accepted Accounting Principles Are Not Included” should be used as a header for the disclosures [when applicable: substitute <Modified Cash Basis/Income Tax Basis>] should be added, but typically no accountant’s report accompanies preparation engagements. However, to draw attention to such disclosures when no accountant’s report accompanies the financial statements, CAMICO encourages accountants to expand the “legend” indicating “no assurance is provided” to reference the accompanying disclosure(s). [Updated April 6, 2020]Will our firm need to adjust the carrying amounts of items on our clients’ December 31, 2019 balance sheets due to the coronavirus pandemic? Unless it is determined that the entity should be using the liquidation basis of accounting (which may be unlikely), the historical cost model that is the foundation of going concern accounting should continue to be followed.My compilation client was profitable during December 31, 2019 and hadn’t experienced any coronavirus-related effects, but the global response to the coronavirus pandemic has been financially devastating since year end. Does my client’s profitability in 2019 and the pandemic not having occurred until after year end mean that the financial statements and my report need not consider the pandemic’s going concern implications? No. Many practitioners mistakenly ignore the going concern issue because (1) the event(s) that created the doubt about an entity’s ability to continue as a going concern occurred after year end, (2) no assurance is being provided because the practitioner was “only” engaged to perform a compilation or preparation engagement, or (3) their clients elected to omit substantially all disclosures so they presumed there was no “going concern” reporting requirement and therefore no risk. Following that logic is wrong on all counts.The existence of substantial doubt about an entity’s ability to continue as a going concern is a GAAP (or other financial reporting framework) issue, and NOT addressing it would be a departure from the financial reporting framework. So, YES, you should address the going concern issue in your compilation report, and you should add an emphasis-of-matter paragraph to your report that references a disclosure or disclosures addressing the issue. When the pandemic creates doubt about the client’s ability to continue as a going concern, CAMICO encourages accountants to take the following actions:Add an emphasis-of-matter paragraph referencing a disclosure highlighting the client’s economic difficulties and management’s intentions to address the difficulties.Obtain a representation letter from your clients detailing the matters re: going concern and obtain or insert going concern disclosures in the financial statements’ supplemental disclosures.NOT ignore going concern implications merely because you are engaged to omit substantially all disclosures (professional standards may permit this, but the public [i.e., juries] may hold CPAs responsible for misleading users).This Q&A is no substitute for compliance with the going concern guidance contained within professional standards [see ASU 2014-15,?Presentation of Financial Statements–Going Concern (Subtopic 205-40), AU-C Section 570, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern, and Statement on Standards for Accounting and Review Services No. 24 (SSARS No. 24)].My firm is issuing December 31, 2019 financial statements and we are struggling with developing suitable language to describe the coronavirus subsequent event. Where can I find some sample language? Your report and disclosures should not be “one size fits all.” Locate and modify, as appropriate, language found in publicly traded companies’ financial statements in the industries within which your clients operate or from the resources you may have from your accounting and audit software providers.Below is some generic supplemental illustrative language that may serve as a foundation for language you develop for your clients’ financial statements. As with the publicly traded financial statements, this language will need to be modified to suit specific clients’ situations. Additional Financial Report ParagraphSubsequent EventAs more fully described in Note X to the financial statements, subsequent to <Date of financial statements (e.g., December 31, 2019)> citizens and the economies of the United States and other countries have been significantly impacted by the coronavirus (COVID-19) pandemic. While it is premature to accurately predict how the coronavirus will ultimately affect the <Company/Organization>’s operations because the disease’s severity and duration are uncertain, we expect 2020 financial results too will be significantly impacted and the implications beyond 2020, while unclear, could also be adversely impacted. <Audit: Our opinion is not modified with respect to this matter and no pandemic implications are accounted for in these financial statements. / Review: Our conclusion is not modified with respect to this matter and no pandemic implications are accounted for in these financial statements. / Compilation: No pandemic implications are accounted for in these financial statements.>Subsequent Event Disclosure Related to CoronavirusSubsequent EventOn March 11, 2020, the World Health Organization pronounced the coronavirus (COVID-19) outbreak a pandemic. Citizens and the economies of the United States and other countries have been significantly impacted by the pandemic. The duration and impact are unknown, but so far have been expansive. <Client Name> may face <modify as appropriate: supply chain disruptions; labor shortages; revenue declines; an increase in bad debts; other revenue recognition issues; cash flow disruptions; difficulties meeting loan covenants; increases in valuation allowances for deferred tax assets; inventory, goodwill and other intangible asset impairments; credit difficulties; and other financial implications including an increased likelihood of substantial doubt about the <Company/Organization>’s ability to continue as a going concern.>[CAMICO believes that the reports on nearly all entities’ financial statements should be modified to address coronavirus implications. As such, “clean” / “unmodified” financial statement auditors’ and accountants’ reports should be rare. Modifications to consider are scope limitations, other-matter paragraphs, emphasis-of-matter paragraphs addressing subsequent events and going concern implications, and when appropriate, disclaimers of opinion. If you are a CAMICO policyholder, please consider forwarding MS Word versions of your hybrid language to lp@ for comment.]The IRS has relaxed income tax filing requirements, but many clients’ contractual and regulatory commitments are coming due. We and our clients are working remotely. The pandemic has diminished our work forces and caused logistical difficulties that make it difficult to meet deadlines. You and your clients will need to be innovative and flexible in managing this difficult time, but you must follow professional standards. The AICPA and state boards of accounting don’t have separate ethical and professional standards for pandemics or geographic locations. Clients’ financial statements, books and records are your clients’ management’s responsibility. It is your responsibility to report on those results. “Creative accounting” is a term frequently used when describing accounting treatment found to have been inappropriate or fraudulent. Don’t take shortcuts that don’t satisfy professional standards, and don’t fall into the trap of trying to appease clients and allow their financial statements to be misleading — regardless of the service you are engaged to perform.Encourage clients to proactively contact financial institutions, regulators and others to seek an extension or other accommodation. Adjust your firm’s scheduling and planning accordingly and retain defensive documentation of these efforts.Our firm and our clients’ accounting departments are suffering under the dual constraints of coronavirus and the stay-at-home orders triggered by the outbreak. What do you recommend? CAMICO encourages practitioners to advise clients that their organizations’ accounting systems and internal controls were designed to segregate incompatible duties so that critical functions were dispersed so that no one could undermine the integrity of the accounting system. Entities’ internal controls may be detrimentally impacted during the pandemic. Economic challenges resulting from the pandemic may create opportunities, incentives and rationalizations that form the sides of Charles Cressey’s “Fraud Triangle.” Encourage clients to consider the potential fraud implications of any furlough, stay-at-home order or restructure. Obtain and retain defensive documentation of having communicated this advice to your client. If appropriate, consider offering to perform an internal control evaluation (click here for a sample engagement letter).What steps should our firm take now to prepare for our upcoming engagements? CAMICO encourages practitioners to begin planning now so practitioners can readily identify and communicate any changes needed to consider when conducting upcoming engagements (e.g., how to address fair value of receivables, inventory, and intangibles; client representations; confirmations; analytical review and trend analysis; teaming with specialists or partnering with affiliates and colleagues; incorporating technological tools; etc.).Discuss with clients whether they or the intended financial statement users (e.g., lenders or investors) will require the same financial reporting engagement you’ve historically performed. Encourage clients to check with their lenders to find out whether they will relax the terms of their loan covenants.Reinforce the need to maintain and embrace professional skepticism and your firm’s quality control structure. Refamiliarize yourself with the firm’s quality control document, consider whether any modifications are warranted to address the new work paradigm, and encourage and welcome feedback and recommendations from all levels of staff (consider holding a brainstorming session).Recognize and communicate the need to consider going concern issues to your engagement teams and to your clients’ management. When you anticipate the resulting auditor or accountant’s report will be modified, include language in your engagement letter indicating the anticipated report language. [Doing so reduces the likelihood that clients later allege that they wouldn’t have retained you had they known the report would be modified.]Finally, your personnel may be experiencing considerable stress and strain because of the pandemic, the extended “busy season,” constraints resulting from having to work remotely, and added burdens caused by client-imposed constraints. Now is the time for you to demonstrate your leadership and compassion to ensure your successful resolution of the pandemic and to protect the viability of your firm.Please also consider: The AICPA web page Coronavirus (COVID-19) audit and accounting resources [Added April 6, 2020]COVID-19 Financial Reporting Guidance from the AICPA’s Center for Plain English AccountingThis document is not intended to be used, or relied upon, as a substitute for a firm’s compliance with applicable professional standards. CAMICO presents this Q&A guide for reference purposes only. The considerations are not all inclusive; they are instead but a few of the matters that accountants and their clients should be considering in response to the accounting and financial reporting implications of the coronavirus pandemic. Please contact CAMICO’s Loss Prevention Hotline with specific A&A questions, comments or concerns. As always, CAMICO policyholders can call the Loss Prevention department at 800.652.1772 or email lp@ for guidance regarding these matters. We can assist you with navigating the potential issues associated your actual fact pattern. Additional risk management resources are available on CAMICO’s Members-Only Site (). ................
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