Deloitte and its clients adjust to coronavirus accounting and auditing

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Deloitte is helping its corporate clients get ready to prepare their quarterly financial statements in the midst of the novel coronavirus pandemic, as its own employees grow more accustomed to doing remote audits while working from home.

Initially the firm had to scramble to adjust to the new work-from-home environment. “In basically a day, it went from a discussion at the office to everybody basically working from home,” said Jon Raphael, national managing partner of innovation and client service delivery at Deloitte & Touche’s audit and assurance practice.

The firm had long been advising its clients on how to leverage technology for digital transformation, and it was able to put into practice what it had been preaching. “The deployment of it has been happening for many, many years with success, and people have been using the technology, and it's given our clients really fantastic insights,” said Raphael. “And then this happened. And what was incredible was how seamlessly it actually occurred. If you would have asked me years ago, ‘could everybody’s workforce just get to home in a day,’ it would have scared me. After seeing how this actually happened and how the technology stayed true to its mission to establish collaboration, to significantly improve project management, to create transparency and communication amongst our team as well as with our clients, it has been truly amazing to see the type of value that we can continue to provide, even though we can’t necessarily be sitting in the same room.”

There have been some challenges, such as the need to schedule virtual meetings ahead of time and the lack of informal water cooler conversations. It’s also difficult sometimes to separate work life from home time. On the plus side, the commute is much easier.

“The time spent to commute in and commute home is all gone,” said Raphael. “You don't appreciate when you’re in the office, but there's a lot of water cooler or passing in the hallway conversations that just occur in the normal course where a lot of things get done. Now, particularly as it relates to working with clients, there's more scheduling of meetings, getting things a little bit more organized in terms of when and where you're going to talk to folks. One of the challenges that we had was that people were basically in digital conversations using their video all day long. We realized quickly how important it is to make sure we continued to emphasize something we've always discussed. It's about balance. It's about protecting time where you can have your time to think. It's about protecting time when you're going to shut down for the day and focus on your family and just make sure it doesn't turn into a vacuum where you wake up in the morning and until you go to sleep at night you’re trying to manage through a digital environment.”

Meanwhile, Deloitte has been able to continue its training through Deloitte University to help its staff keep up to date with the latest changes in accounting standards and laws like the CARES Act.

“We have training that occurs all throughout the year,” said Raphael. “Every month there are new training programs that are happening at all levels in our organization. And now all of that is happening virtually and digitally as well. We value a lot of the in-person training that we have at Deloitte University where we have our training center. But because of the effectiveness of the technology, we've been able to transition to that and create interactive environments where people can still interact with the trainer, interact with the other students in the environments that we have, so the learning can still occur at a high quality without necessarily having to be in the same room.”

Performing remote audits has been an adjustment as auditors can’t necessarily visit their clients’ offices anymore. “We've found that the ability to access data from our clients has been easier than we thought it would be,” said Jennifer Haskell, chief auditor at Deloitte & Touche. “The challenges are a mixture of the working environment with just the economic uncertainty we have. The manner in which we carry out and gather evidence hasn't changed that much as really thinking through how you're going to effectively audit an estimate when forecasts are so uncertain, or how to best test a control that might be operating a little bit differently than if the client was still onsite.”

The challenges relate to risk assessments, controls and estimates, she noted. “We encourage and remind our teams about the fundamentals of gathering audit evidence, of evaluating it, of documenting judgments well, documenting conversations with the client, and professional skepticism, those foundational principles that exist no matter where and when and how where we're doing the audit,” said Haskell.

Raphael believes it’s important for the audit team to have short virtual meetings at the beginning of the day to share what they’ve done, what they plan to do and what barriers might be in the way. “That simple conversation can set up a very large team to make a lot of progress every single day,” he said. “It just shows that even with all the technology, the benefit of our teams communicating with each other very clearly and effectively, staying on top of that really makes a difference. It’s a difference in terms of their experience, it's a difference in terms of audit quality, and it's a difference in terms of productivity, having those connections and making them happen.”

He has written an article for Deloitte’s website about remote auditing during the COVID-19 pandemic.

In the midst of the pandemic, auditors have to deal with changing accounting and auditing standards, although a number of the new standards have been delayed in their effective dates by the Financial Accounting Standards Board, the Governmental Accounting Standards Board, the International Accounting Standards Board and the Public Company Accounting Oversight Board. But one that has come into force is the PCAOB requirement for audit reports to include a discussion of any critical audit matters, or CAMs, that have come up during the course of an audit. The auditors at Deloitte have already been making adjustments.

“I don’t think that working remotely has impacted how we implement standards like the critical audit matters standard,” said Haskell. “I think what we are seeing is that the CAMs, as we call them, will occasionally point to COVID-related items, so it’s how we consider COVID in the carrying out of our audit procedures or whether there was an impact with respect to the disclosures made by management in the financial statements. But really, from an implementation perspective, there hasn't been a noticeable change. We also have new estimates and specialist standards from the PCAOB out and effective this year. We have a lot of great specialists at Deloitte, and they're available for the audit teams at all times. For those standards also, we have not had any noticeable challenges with the remote work arising from those standards.”

Raphael sees more of a focus on material estimates in the financial statements with the economic slowdown, as well as forecasts. “Clearly, from an audit perspective, the things that we're focused on, our clients are focused on as well,” he said. “It’s those key elements in the financial statements: things around valuation and otherwise. Also, a big change with the remote work was controls and the evidence of controls that perhaps were done in an office environment where they may have been on paper. What's happening now is there is a transition. To the extent a company might not have had a digitized control process for a certain part of their business, by its very nature now in this environment, the evidence that the controls were happening and in effect, they almost have to create that digital workflow in the environment today. That's something everybody is going through to evaluate how their controls are operating. Does anything need to change as a result of COVID, and then the evidence that supports that they actually were operating effectively, is something that people are focused on as well.”

Now that many offices are closed, it can be difficult to get access to paper records to support an audit. “It's certainly something that’s challenging,” said Raphael. “The good news is a lot of times, many clients have some degree of evidential matter, whether it's spreadsheets, memos or emails, which can help to bridge the gap. But it's certainly a focus area that people need to be proactive in thinking about because perhaps it hasn't come up yet in terms of this year’s cycle, but it will come up later.”

Travel is another important factor, as it’s more difficult now to visit clients or facilities to do inventory counts. “Travel is a consideration for sure, and that goes for both the trips to do things like inventory observations as well as our group audits where we might have some auditors in different countries who do work for us,” said Haskell. “In terms of inventory observation, we actually have been able to observe inventory in a lot of cases. It's very interesting now as we're still in a remote work environment, but we're starting to see reopening of businesses. As we hit 9/30 and 12/31 year ends, we’ll have to see what the environment will be to enable us to do things like inventory observations. But for the most part we've been able to make it.”

More immediately, accountants are dealing with the June 30 quarter that just ended. Deloitte is also working with clients who are dealing with their financial statements for the second quarter of the year, which bore the full impact of the pandemic in the U.S. after a chaotic first quarter during which the economy suddenly seemed to all but shut down.

“Many of those same conditions that existed last quarter are still a reality for companies as they’re embarking on this financial close,” said Eric Knachel, a senior consultation partner in the Professional Practice Group at Deloitte & Touche LLP. “Companies need to reset, get recentered and for this quarter get prepared. Now is the time to do it. They hopefully are starting to get more organized and avoid the complete fire drill it may have felt like last quarter. While many of the same conditions exist, now is the time to reset and try to get focused. You’ve learned some things from the past, and now companies have a more stable environment compared to last quarter to try to deal with this.”

Knachel recently co-authored an article for Deloitte about accounting for the pandemic in the current quarter. Two of the most important areas for companies to keep in mind as they do their financial reporting for the second quarter are communications with stakeholders. Companies need to convey to investors how they’re able to respond to the current landscape and are able to emerge stronger and better and thrive in future. Forecasting too has been difficult and uncertain. But in the current environment, companies will need to double down on their forecasting efforts by planning for multiple scenarios, monitoring, and deciding what is more realistic and what needs to be refined or removed.

“When we talk about forecasts, it’s important to realize that forecasts are extremely challenging in this environment,” said Knachel. “The forecasts play such an important role and they’re pervasive in many aspects of financial reporting.”

Other important considerations for the quarterly forecast include asset impairment, deferred tax assets and going concern considerations. “The three biggest areas that are driven off of the forecast are impairment, realizability of deferred tax assets, and going concern,” said Knachel. “Basically what the guidance requires in this COVID-19 environment is that companies are expected to contemplate the effects of COVID-19 on the impairment of their assets. They look at broad economic indicators, and at specific facts and circumstances. What are the actions that are going to be taken, trying to assess if they have an impairment or not. On the one hand, the guidance is not new here, but it’s an area that requires a lot of judgment when you’re trying to figure out impairment. The use of that judgment is amplified right now given all of the uncertainty with forecasts.”

Companies also need to focus on their internal controls and keep adjusting their forecasts in this fast-changing environment. “You have to keep doing it,” said Knachel. “You can’t just think your analysis is static. With the realizability of deferred tax assets, the company has to pay close attention to the expectation of forecasted future losses and not just wait until the end of the year to say you’ve had a loss.”

Going concern considerations also relate to forecasts. “In this environment in particular, going concern comes into the mix,” said Knachel. “A company has to consider things such as the forecasts as well as potential liquidity issues or their ability to access capital. What are their contractual obligations and so forth. All of those are driven off of forecasts. The key point here is that forecasts are critical to a lot of areas of accounting.”

Deloitte polled a group of financial statement preparers, users of financial statements and auditors during a recent webcast and asked them about forecasting during the pandemic. It found that 59.5% of them said forecasting was more difficult now compared with March 31, 2020, while 21% said it was about the same, and 4.8% found it to be less difficult.

“About 60% of them believe that forecasting now, in the second quarter, was more difficult than the first quarter,” said Knachel. “Likewise, we also had a question about what’s the financial reporting challenge that your company is having the hardest time with, and again the number one answer by far was forecasting. Similarly when we asked the audit committee which financial reporting topic is of most concern to your company, they said forecasts.”

Stakeholder communications such as with audit committees and investors are also taking on more importance this quarter, especially when it comes to any non-GAAP measures. “In this environment, when companies communicate with investors, they like to feel comfortable in their communication,” said Knachel. ‘They don’t like uncertainty. I think there’s a general tendency to communicate when there’s more certainty, and a tendency to communicate less [when there’s less certainty]. But I think that would be a mistake. Given the rapid change, companies should communicate more frequently, not less, because stakeholders want to understand what is the risk and what does this mean to you. It’s important to recognize that in the first quarter there were only about two weeks of impact in the U.S. as it relates to COVID-19, so there wasn’t that much in the way of non-GAAP. Now you have a full quarter of COVID-19 impact, so we expect to see a lot of companies that will have non-GAAP communication. The rules around non-GAAP have changed. You have to determine what you want to communicate and what you want to pull out.”

He believes companies will need to communicate their “COVID-19 story” to investors. “When I talk about the COVID-19 story, I would put three subcategories under that: respond, recover and thrive,” Knachel added. “How does a company ensure it will survive post-crisis? What is their response? How does the company adapt and maximize its performance during this pandemic? This is a period where companies need to evolve their business models. Ultimately, how is the company going to become better and stronger post crisis? Each company may be in a different place as it relates to its journey during the pandemic, but companies want to provide stakeholders with a clear understanding of the risks that the company is facing, and how they plan to respond, recover and hopefully thrive in this environment.”

Deloitte has been trying to get through the uncertainties of the pandemic alongside its clients and employees. “What helped us in our transition to go remote so quickly is that people have an understanding of the importance of their role,” said Haskell. “That has really helped us make the transition along with the technology. The people and their spirit are at the heart of it.”

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