With auditors struggling to meet year-end requirements for listed companies, how have audit professionals in Hong Kong responded to business’s needs?
This article was first published in the June 2020 China edition of Accounting and Business magazine.
The fiscal year concluded in March for many companies in Asia, but the Covid-19 pandemic has thrown a wrench into the year-end for many.
‘Listed companies have strict deadlines to meet and they have been working closely with their auditors in exploring solutions to avoid any non-compliance with the listing rules,’ says Louis Lau, a partner at KPMG China’s Capital Markets Advisory Group. Unfortunately, the lockdowns and stay-at-home orders related to the pandemic have caused delays to financial and auditing processes for many entities.
Lau believes that auditors should consider whether alternative audit procedures are acceptable under auditing standards, based on the risk assessments of individual companies as well as the environment under which they operate, without compromising audit quality.
‘One should understand that certain audit and due diligence procedures, such as site visits, inspection of original documents, confirmations and interviews, cannot be substituted in full, and postponement of completion of audit may be inevitable in certain situations. Quality should always top the priority list,’ says Lau.
Others concur. Setting aside the economic and human elements of the crisis, many of the challenges corporates have encountered in completing audits arise from an inability to physically access systems and information as a result of mandatory work-from-home edicts.
Natalie Chan FCCA, an audit and assurance partner at Deloitte, also points to ‘split-team arrangements and restrictions on external visitors, including auditors’ as some of the obstacles.
‘These new working arrangements also present data security challenges and the ability to execute internal controls over financial reporting as initially designed,’ says Chan, who is also an ACCA Council member and immediate past chairman of ACCA Hong Kong.
Chan feels there are many accounting implications companies have to consider, ‘particularly surrounding the broad economic implications to local and global economies, including cashflows and supply-chain disruptions leading to potential liquidity and going concern issues, potential impairment of assets and recognition of additional liabilities; and additional disclosures including material uncertainties and subsequent events’, she says.
For companies that took the time to set up their systems before the pandemic, however, it’s been business as usual. Giles Wilson, CEO and founder of LinSon Business Consulting in Hong Kong, says that the only issue he has faced has been delays in getting documents signed.
‘The availability of directors to sign the audit reports has been a slight issue as a lot of the ones we deal with live outside Hong Kong or are trapped in other countries under quarantine,’ he says.
LinSon’s operations were already mostly digital, so the firm’s only significant cost has been on courier fees to ship documents around the world to be signed. Wilson believes that the Hong Kong Inland Revenue Department (IRD) could learn lessons for the future from the pandemic.
‘I hope this crisis will encourage the IRD to expand its ability for accountants or auditors to be able to file more information digitally – especially audit reports,’ he says.
Wilson is also concerned that some businesses may be using the current chaos as an excuse.
‘Audits are never high on SMEs’ to-do lists, so I’m sure they feel that if they miss any deadlines, they will write to the Inland Revenue Department, plead their case about Covid-19 hindering their ability to complete on time and they will be let off with nothing but a slapped wrist,’ he says.
Slow return to normal
Meanwhile, the gradual return to normality in mainland China is proving slow. To reopen premises, for example, businesses must apply for work resumption permits from relevant authorities. The requirements for getting these permits include disinfection of working premises; provision of sanitary utensils; details of staff travel history; a clear plan for employees to work on shifts; and keeping workers a minimum distance from each other.
Delays in returning to work are also the result of logistical challenges. ‘Some staff were not able to go back to the office because they were stuck in their home towns where they had spent their Chinese New Year holiday,’ says Rosanna Choi FCCA, a partner at CW CPA and chair of ACCA’s Global Forum for SMEs. ‘In addition to making efforts to avoid stress and confusion among their staff, corporates need to spend additional time on administration and to bear the cost of time lost before work resumption.’
Choi cites the issues experienced by a client with headquarters in Beijing. ‘Except for one employee who is a local resident, no other accounting staff were allowed to go back to Beijing,’ she says. ‘The client needed to squeeze the workload into a much narrower window to get the financials done in time.’
With the difficulties companies face in getting back to work, CW CPA has had to spend additional time with clients to ensure that audits and other issues could be resolved seamlessly.
‘For auditors, more issues have come up in relation to expected credit loss of trade and other receivables, net realisable value of inventories and validity of going concern basis,’ Choi says.
Taking a proactive approach with audit clients is vital, says Chan.
‘We proactively discuss with clients the many implications this unprecedented incident can have on year-end financial reporting, including the potential need to make requests for the extension of the timetable,’ she says.
Chan credits her firm’s technology tools, such as Deloitte Connect – a secure online collaboration site that facilities a two-way dialogue between Deloitte teams and clients – for allowing auditors to effectively interface with clients in a secure manner.
Chan is encouraging companies to critically evaluate their contingency planning and internal controls over their financial reporting in the wake of the Covid-19 crisis.
‘With respect to the auditing profession in general, this crisis underscores the benefits of getting as much of the audit done in the interim, in order to avoid last-minute surprises and the need to take advantage of any such relief,’ says Chan.
Wilson’s advice to his clients is to carry on as normal and to work with their accountants to keep the financial records up to date. He also cautions clients to not to be ‘creative’ with staff numbers and turnover figures in order to gain more money from any government financial subsidies that may be available.
‘We are enforcing the idea that firing your accountant is the last thing you need to do during this time. They should be working with them to assist in any way they can,’ he says, adding that, in this, SMEs seem to be taking a sensible approach.
‘I think SMEs realise that the short-term benefit of firing the accountant or auditor will only result in longer term pain when they need to hire them back again.’
David Ho, journalist
"I’m sure some SMEs will plead their case about Covid-19 hindering their ability to complete on time and be let off with a slapped wrist"