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Corona crisis puts pressure on approval of financial statements

April 28, 2020
The impact of the coronavirus suddenly makes the world look very different. More than seven out of ten companies are financially affected by the pandemic. This development also poses a considerable challenge to accountants: how can they accurately audit the books amidst so much ongoing uncertainty?

The season of auditing financial statements is in full swing. The approval of a certified accountant is often mandatory, with the financial statements having to meet all legal requirements.

But while the focus of such an audit is usually on various 'business as usual' analyses and controls, there is currently unprecedented change and uncertainty.

What can or must the accountant say about events after the balance sheet date and about the continuity of the business? How do the various government regulations affect the figures? And how can the accountant form a good opinion about the continuity if it is so difficult to estimate?

Corona crisis puts pressure on approval of financial statements
Occo van der Hout

This hefty dose of uncertainty that has suddenly been injected into the market presents auditors with a dilemma. To ensure they can give their blessing to the audited financial statements, they will need to gain additional insights based on "coronation-proof" financial forecasts that provide more information on the likely evolution of balance sheet positions, cash flows, revenues and more.

Occo van der Hout, senior advisor corporate finance at JBR, sees how this new situation is already rapidly taking hold in practice. "The (most) accountants will not sign off on the annual accounts in progress without further ado," he indicates. Having spoken to numerous clients and friendly accountancy firms, Van der Hout estimates that a "considerable number of accountants" will ask for further analysis regarding the (possible) consequences of the corona virus.

The need for additional information does not lie solely with the accountant or the companies themselves: "Financiers will want to make an assessment of which company to (continue to) support and which not. And shareholders will want to make an assessment of the chance of continuity and the business strategy to be followed."

Creating a realistic picture

One thing seems certain, says van der Hout. "The world will look very different after the coronavirus than before." Stakeholders will ask questions about all facets of an organization, from its strategic direction and business model to its supply chain, location policy and impact on its workforce.

For companies, this represents a major challenge. If they want to be able to issue their auditor's report or other financial reports on time, they will have to carry out additional analyses in a relatively short period of time. Van der Hout: "Think of the influence of the various tax measures and other government regulations, to what extent and for how long banks are prepared to suspend interest and repayment obligations, an analysis of the liquidity position, and so on."

Because "not everyone is given the opportunity to develop a financial model with insight into the expected future cash flows", Van der Hout says it is "wise to involve an independent party in the discussion with the accountant, the financier and/or other parties involved". While he is of course aware that he is preaching to the converted, he emphasises that not involving a specialist in this case can be a classic example of how cheap is ultimately expensive.

"The entrepreneur must - in these uncertain times - paint as realistic a picture as possible. Certainly not too negative, but also not closing his eyes to the problems that will almost certainly come in the path of the company. This is essential for a clear insight into the financial health of the company", Van der Hout concludes.