The 2021 audit cycle: Not quite back to normal

October 14, 2021 12:39 PM

As the pandemic emerged in early 2020, few people believed it would still be going a year and a half later. Although vaccination rates are rising, the Delta variant continues to spread in parts of the country, and daily life has not fully returned to normal.

The 2020 audit cycle was unlike any other, with a host of accounting and reporting issues brought to the forefront by shifts to remote work, shuttered businesses and a standstill in deal activity. While some industries recover slowly and many organizations continue to operate remotely, robust capital markets have created a hot job market for accounting and finance professionals. This turn of events has spurred a unique set of challenges, and companies can expect to face seven key pressure points heading into the 2021 audit cycle. Here are some considerations to successfully navigate each hurdle:

Key person risk

The health impacts of COVID-19 plus a hot job market, dubbed “The Great Resignation,” have exposed the risk that exists for accounting and finance departments when a key person resigns or leaves abruptly, perhaps due to illness.

This disruption will likely continue through the 2021 audit cycle. Companies should manage this risk by cross-training employees on key processes or by leveraging technology solutions that make it easier for employees to assume other responsibilities quickly.

Audit coordination

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Many organizations now find themselves short-staffed due to increased employee turnover, continued remote working, and a surge in deal activity requiring additional work from auditors. Due to these increased workloads, audit firms may not have the flexibility in their resource planning to delay fieldwork by a week or two, as they have often done traditionally.

Going into the 2021 audit cycle, companies need to engage with audit teams early on when planning for year-end fieldwork and consider shifting additional audit procedures from year-end to interim. Actions might include earlier reviews of significant transactions, encouraging audit teams to involve their specialists earlier than in prior years, and enhancing audit timeline management, while closely monitoring key milestones.

Deal activity

Zoran Mircetic

Deal activity has been robust throughout 2021 as companies explore acquisitions, divestitures, and other transactions. Many organizations have gone public, via special purpose acquisition companies or traditional initial purchase offerings, which hit record numbers in 2021. The result: Finance teams are stretched thin with diligence-related requests, proforma preparation, IPO readiness efforts, and other items, and much of this workload is incremental to routine financial close.

Each transaction presents a host of complex valuation and accounting issues that companies need to navigate with their valuation services providers and auditors. For example, a business combination requires entities to value goodwill and other assets to perform purchase price allocations. In addition, companies going public often need to value and account for complex financial instruments that may have been previously unrecognized.

Valuation issues associated with business deals require estimates and inputs that will ultimately be scrutinized by auditors and the Securities and Exchange Commission. To ensure success, organizations should engage accounting advisory and valuation services providers early and budget extra time for auditors to work through these areas.

Leases

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While working through the 2021 year-end reporting and audit cycle, private companies should not lose sight of the new lease accounting standard, ASC 842, which private companies must adopt in January 2022. Public companies that have already adopted the standard can offer many lessons learned; notably, organizations can avoid underestimating the complexity and effort required for successful adoption by assessing and planning as early as possible in the process.

Taxes

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Eighteen months after the CARES Act became law, most of the taxpayer-friendly provisions have expired. Companies should review these changes to ensure they are prepared for any 2021 tax provision impacts. Additionally, uncertainty remains on the details and timing of additional changes to U.S. tax law. For now, the federal rate remains at 21%. If the current budget proposal is passed and signed into law in 2021, then companies will have many U.S. federal tax changes to consider regarding year-end financial reporting. The uncertainty and timing of potentially significant tax reforms may require a quick response at year-end, so companies should coordinate proactively with tax teams and advisors to assess the impact of proposed changes.

Internal controls

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The robust capital markets have led many private companies to pursue strategies to become public, often with accelerated timelines. Certain SEC regulations may provide some relief around Sarbanes-Oxley compliance for newly public companies under emerging growth company rules or significant acquisitions during the year, although companies should be strategic about designing a control environment.

Strategies should properly prepare a newly public company for future SOX compliance, while also mitigating the risk of material misstatement in SEC filings. Being intentional and disciplined about internal controls and public company readiness can minimize the challenges of external reporting as a public company.

Going concern assessments

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While some industries and sectors have fully recovered, others continue to struggle. For example, companies in sectors such as restaurants and entertainment are reliant on large group gatherings and face significant headwinds. When providing information to auditors, organizations in these sectors will find it challenging to demonstrate adequate liquidity to finance their operations over the next 12 months. Companies should engage auditors as soon as possible and ensure forecasts are updated in light of the dynamic environment.