Coronavirus concept Balancing Balls Newtons Cradle

This article was first published in the May 2020 International edition of
Accounting and Business magazine.

The impact of Covid-19 on corporate reporting is unprecedented, and ‘business as usual’ may look very different once the crisis is past. The pandemic prompted swift action from regulators to allow for the practicalities of reporting in a constrained and rapidly changing world, while also maintaining a degree of certainty and oversight.

Broadly, that has meant an increased focus on risk-based and narrative reporting and greater flexibility in presenting metrics that are likely to be more indicative than certain. For example, the Australian Securities and Investments Commission has said it will focus on practices that create risk of significant consumer harm, serious breaches of the law, risks to market integrity and time-critical matters.

Reporting in a pandemic

Many entities are working to manage disrupted reporting processes. Results may be changing materially on an almost daily basis, access to operations for verification is often restricted, and teams are being pulled onto more urgent priorities. This has resulted in many businesses looking for ways to slim down their reporting processes, balancing the need for rigour with the realities of managing in such an uncertain environment.

Regulators have recognised the need for greater flexibility and extended deadlines for reporting. The UK’s Financial Reporting Council has even encouraged entities to take advantage of the extension to achieve better-quality reporting, and has signalled that reporting timetables may be further extended as Covid-19 persists.

From disruption comes opportunity. Entities may use this interruption in the normal relentless churn of the reporting cycle to introduce new, streamlined systems and processes and to question the value of entrenched practices. The rise of digital reporting is also likely to be given a sudden boost as the cost and time required to produce hard-copy reports comes under scrutiny. Continuous disclosure is critical in an environment of such rapid change, and many entities will need to review their approach to ensure it is better integrated into ‘business as usual’ rather than treated as an exceptional activity.

Reassessing metrics

Modified audit opinions are likely to become much more frequent, and carry less stigma. It will be interesting to see whether this has a lasting impact. Investors and regulators have an opportunity to reassess their focus. What metrics are really needed to understand risk and performance? Are the traditional levels of rigour over the traditional metrics still needed? Or are there newer metrics – particularly non-financial measures – over which more rigour is required?

The number of companies moving entirely to digital annual general meetings will increase markedly given the need for social distancing. In the longer term, the AGM may be radically reshaped, as calls grow to abolish practices forged in a slower, pre-digital age. With regulators dropping or soft-pedalling enforcement of AGM requirements, companies (and the market) can reassess the value of annual face-to-face meetings.

Where ‘hard’ metrics of performance are less robust and forward-looking assessments inherently unreliable, trust becomes an even more critical issue. The transparency and credibility of reporting are vital for maintaining that trust.

Many, if not most, entities will need to disclose material uncertainties. In normal circumstances, doing so would run the risk of being interpreted as a failure of management, but in the current market it is more likely to be seen as a useful insight into the risks faced by the business. Investors may even question the hubris of management teams who do not appear to consider themselves subject to material uncertainty in the middle of a pandemic.

More detailed disclosures, particularly on the critical impact of Covid-19, will be required. Investors will look for reassurance on the ability of an entity to survive these shocks by making disclosures about liquidity, access to cash and the ability to reallocate resources quickly. Entities will need to articulate what potential impacts they have considered, and more detail of the scenarios that underpin those impact assessments will be required.

This will be particularly important for the boards of UK entities, which are required to state whether they have a ‘reasonable expectation’ that the company will be able to continue to operate and meet its liabilities. Assumptions, qualifications and the degree of certainty about such reasonable expectation are all more likely to be disclosed.

Narratives that support financial disclosures will also need careful review. Existing disclosure of key judgments and estimates may need to be amended, and disclosures of new assumptions are likely to be introduced as old certainties dissolve. Where the assumptions and data that underpin disclosures vary, the basis and rationale for that variance must be clear.

Amid the uncertainty and change, the importance of telling a clear story in the management report becomes paramount. For years, investors and regulators have urged companies to move away from generic formulations of strategy and risk. Covid-19 may force a welcome step-change.

Regulators and investors want real, forward-looking, entity-specific discussions of the implications of the pandemic, and risk mitigation plans. Entities should focus on the key resources, assets and stakeholders for their ability to survive and rebuild. In particular, discussions of measures to protect and retain employees and the community will be a focus for many readers of the management report.

A new normal?

However profound the pandemic’s impact, it remains a short-term phenomenon. The currently deprioritised longer-term risks and opportunities – climate change, global tax reform, etc – will quickly re-emerge when it has passed. The changes wrought by Covid-19 may set back efforts to tackle the longer-term challenges, but they may also clear space to allow for meaningful change.

Vanessa Richards is a corporate communications and governance consultant in Australia.