Welcome guidance on the approach to valuations from RICS during Coronavirus pandemic
The Financial Reporting Council (FRC) announced on Thursday in a joint statement that it is taking a series of actions, along with the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), to ensure investor knowledge and the continued operation of the UK’s capital markets.
This blog looks at what those actions are, and also considers the FRC’s bulletin for auditors, “COVID-19 Bulletin March 2020” (‘The FRC bulletin’) which details the factors auditors should consider when conducting audits during the on-going COVID-19 pandemic.
The FCA, FRC and PRA’s joint statement recognises the importance of timely and accurate information to ensure that successful and sustainable business can support our economy and society during the COVID-19 crisis. It acknowledges, however, that there are certain difficulties given the current environment in ensuring timely reporting to ordinary deadlines.
Because of this, the FCA, FRC and PRA have made a series of announcements providing guidance and updating timeframes for certain actions.
Firstly, the FCA announced that it will extend the deadline by which listed companies are to publish their audited annual financial reports by two months. This will give listed companies six months after the end of the current financial year to produce these reports rather than the ordinary four months. The FCA considers that while some companies will maintain the status quo in terms of their reporting, others may find the extension beneficial to ensure “accurate and carefully prepared disclosure.”
Secondly, Guidance from the FRC to companies has been issued explaining how companies should go about preparing their financial statements in such uncertain times. Further, the PRA has issued guidance to banks, building societies and PRA-designated investment firms on the approach to be taken in assessing expected loss provisions under IFRS9.
Finally, the FRC has also published guidance in its FRC Bulletin, discussed in detail below, for audit firms seeking to overcome the challenges in obtaining audit evidence, particularly when, in many cases, companies are not operating from their normal offices with many staff instead working remotely from home.
The bulletin makes clear at the outset that it is driven by two key factors:
1. In order to be able to give an audit opinion that is not subject to a disclaimer or qualification due to a scope limitation, the auditor must always obtain sufficient, appropriate audit evidence; and
2. Even in challenging times, the flow of high quality, independently assured information to support the functioning of capital markets is of fundamental importance. Reporting on audit engagements should be driven by the information needs of users of audited financial statements.”
We summarise below some of the key problems for audit the bulletin identifies together with the FRC’s solutions to best tackle these.
Acceptance and take-on of new audit engagements
the planned audit approach may anticipate obtaining audit evidence about internal controls operating around the year end which the auditor may not be able to obtain due to a lack of audit staff or a lack of access to information or personnel at the audited entity.
The series of actions and FRC Bulletin are a reassuring response to the challenges and uncertainties COVID-19 has brought. The FRC has also confirmed it is considering how it can adjust quality review work to reduce demands on audit firms, whilst maintaining audit standards, which again is welcome news.
David Rule, Executive Director of Supervision at the FRC, has confirmed that the package of measures now introduced will be updated ‘as and when necessary’ and that they will be withdrawn once circumstances return to normal. Whilst COVID-19 lingers on, this novel guidance will at least help auditors weather the storm.
All regulated entities should take heed of the reporting extension and the guidance being issued to support the market during this time. We can likely expect further guidance over the coming weeks, particularly if the Government imposes further measures to flatten the curve and delay the spread of COVID-19.
Charlotte Judd is an Associate in Regulatory department and assists and advises on matters including defending regulated individuals, organisations and corporates; advice for regulators and public bodies and legal services regulation.
Sophie Bolzonello is an Associate, Australian Qualified, in Kingsley Napley’s Regulatory department. Sophie specialises in advising regulated professionals on compliance, in investigations and in respect of enforcement action. She also advises regulators on policy, governance, prosecutions and litigation.
Associate (Foreign Qualified Lawyer)
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