Monday, April 06. 2020
SEC’s Office of the Chief Accountant Issues Statement on the Importance of High-Quality Financial Reporting in Light of COVID-19
Given that challenge, investors and other stakeholders require high-quality financial information now more than ever in order to make informed investment decisions and ensure proper functioning of financial markets. Where appropriate, the SEC and its staff have assisted market participants with financial reporting issues. For example, the SEC recently issued an order conditionally extending the temporary 45-day grace period for registrants affected by COVID-19 to file Exchange Act reports. This extension now includes reports due through July 1, 2020. The Division of Corporation Finance also provided guidance for companies in assessing COVID-19-related impacts and in considering disclosure obligations.
OCA continues to focus on investors’ need for high-quality financial information and on its mission and priorities. Importantly, the office is taking a proactive approach to the COVID-19 situation and is thus available to help companies, auditors, and others with complex accounting, financial reporting, auditor independence, and other auditing issues. The office has also been engaged with stakeholders across the financial reporting ecosystem, including preparers, auditors, audit committee members, investors, standard setters, and other regulators, on issues related to current market developments.
Accounting: Work with FASB, Judgments and Estimates, and the CARES Act
OCA remains actively engaged with the Financial Accounting Standards Board (FASB) and supports their efforts to date to address impacts of COVID-19. The office also recognizes that the accounting and financial reporting implications of COVID-19 may require companies to make significant judgments and estimates. Certain judgments and estimates can be challenging in an uncertain environment. OCA has consistently not objected to well-reasoned judgments that entities have made, and this perspective will continue to guide its approach.
Despite the difficult situation, OCA stresses the importance of required disclosures of judgments and estimates in these and other areas. Some of the many accounting areas that may involve significant judgments and estimates include but are not limited to:
- Fair value and impairment considerations
- Debt modifications or restructurings
- Revenue recognition
- Income taxes
- Going concern
- Subsequent events
- Adoption of new accounting standards
In addition, OCA is working with market participants regarding the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act, which was signed into law by the President on March 27, 2020, allows a limited number of entities the option to temporarily defer or suspend the application of two provisions of U.S. Generally Accepted Accounting Principles (GAAP). OCA has received inquiries from preparers and auditors where it has been concluded that election of these narrow and limited options in Sections 4013 and 4014 of the CARES Act would be deemed to be in accordance with GAAP. For those entities that are eligible for and elect to apply either of Sections 4013 or 4014 of the CARES Act, OCA staff would not object to the conclusion that this is in accordance with GAAP for the periods for which such elections are available.
Auditing: Work with the PCAOB
OCA has also been actively engaged with the Public Company Accounting Oversight Board (PCAOB) to address emerging issues relating to COVID-19. The PCAOB has provided registered audit firms up to a 45-day relief period from inspections, with the exception of providing access to audit documentation for certain engagements. It has also temporarily suspended international travel, including for non-US firm inspections. These decisions take into account health and safety considerations as well as practical considerations during this challenging time. OCA supports the PCAOB’s thoughtful approach on these decisions, as well as the PCAOB’s efforts to provide timely updates on the status of their operations and reminders to registered audit firms related to the impact of COVID-19 on audits.
OCA also remains actively focused on auditor independence in these unprecedented times. Independence is crucial to the credibility of the financial statements. Management and audit committees should be aware of how an auditor independence violation may affect the company’s required SEC filings. OCA again reminds that it is available for consultation as needed.
International: Interaction with the IASB and Monitoring Group
International accounting and audit-related standards are of paramount importance to the strength of the financial reporting system and global capital markets. OCA is engaged in the activities of a number of international organizations as part of its normal operations as well as relating to the impact of COVID-19.
The challenges associated with many of the accounting issues listed previously in the United States also affect international markets. OCA is actively engaged in discussions with the IASB on the impact of COVID-19, including through its involvement as the vice-chair of IOSCO’s Committee 1 on Issuer Accounting, Audit and Disclosure. The office is also actively engaged with other securities regulators internationally on both COVID-19 issues and as part of its ongoing operations. Finally, OCA is participating in the development of reform recommendations relating to the international audit-related standard-setting system. It will continue to monitor the impact of COVID-19 as it performs this important work with its international counterparts.
Stakeholder Engagement: Audit Firms and Focusing on Emerging Markets
Engaging with stakeholders and seeking feedback has continuously been a high priority for OCA. The office meets with participants in every phase of the financial reporting system. It listens to stakeholder views, strives to understand emerging issues and risks, and promotes high-quality financial reporting as much as possible. During this time, OCA continues to engage with stakeholders both domestically and internationally. In late 2019 and early 2020, the office conducted separate meetings with representatives from some of the largest global accounting firms to discuss each of the firms’ efforts to advance audit quality in emerging markets, including China. The office also recently conducted two additional meetings with two different accounting firms to discuss those matters as well as discuss the impact of COVID-19 on companies and audits. These outreach and engagement activities will continue throughout this year.
Contacting the Office of the Chief Accountant
The office appreciates that these are unprecedented times and understands the challenges stakeholders are facing as a result of COVID-19. The office continues to urge all participants in the financial reporting system to work together to provide investors with the high-quality financial information they need to make decisions amidst uncertainty. The office’s staff remains available for consultation. Its staff can be contacted by calling (202) 551-5300 or through email at firstname.lastname@example.org.