UK Audit Regulator Asks Companies for More Details on Covid-19 Impact

From WSJ: The Financial Reporting Council says firms should go beyond just fulfilling mandatory reporting requirements when talking about the pandemic.

The U.K. regulator for audit and accounting is urging companies to provide extensive disclosures on the impact of the coronavirus pandemic on their finances.

The Financial Reporting Council said Tuesday that British companies overall released sufficient information related to the effects of Covid-19 on their operations, following a limited review of 17 interim and annual financial statements for the period ended March 31.

The FRC wants companies to go beyond fulfilling mandatory reporting requirements so that investors and regulators can understand how the economic downturn will shape current and future earnings. The regulator’s suggestions include adding explanations on judgments and estimates made in financial reports, especially if there are worries about a company’s financial health and its ability to remain a going concern.

The regulator said companies should apply existing accounting rules for exceptional items related to the pandemic, and do so in a consistent manner. And, it asks companies to avoid splitting impairment charges and allocating them to different parts of the financial statement.

“Overall, the best disclosures were those that were specific to the company and which provided additional information that clearly explained how Covid-19 had impacted the company’s reported position and performance and how it may affect future prospects,” the FRC said in its review.

The U.K. regulator is echoing the position of the U.S. Securities and Exchange Commission. SEC Chairman Jay Clayton back in April asked companies to provide as much information as possible on how the coronavirus crisis is affecting their operations and future outlook. Mr. Clayton said looking into the future is likely much more important to investors, even though it has become more challenging for companies.

Ernst & Young said it is working closely with the FRC to make sure the companies it audits provide appropriate information.

“Clear disclosures about all key judgments and estimates are vital to ensure there is a full view of a company’s financial health provided during these uncertain times,” said Stephen Griggs, managing partner for audit and assurance at Deloitte U.K.

KPMG and PricewaterhouseCoopers didn’t immediately respond to a request for comment on the FRC’s review.

Last week, the FRC said it conducted 216 reviews of company reports filed as of March 31, but noted the number fell short of its target. It didn’t disclose the target. The regulator conducted 207 reviews in the comparable period in 2019, but hired additional employees, increasing its staff to 243 people as of March 31 compared with 210 a year ago.

The watchdog handed out £11.3 million ($14.4 million) in fines during the year ended March 31, down from £32 million in the previous year, during which the FRC closed a number of legacy cases, the spokesman said.

The FRC is reversing its strategy on rule-making, and is no longer waiting for new legislation before it embarks on an overhaul of the U.K. audit sector.

The regulator earlier this month asked the Big Four professional services firms Deloitte, EY, KPMG and PwC to separate their audit businesses from the rest of their operations, but on a voluntary basis. “This is a good example of what we can do without new legislation,” the spokesman said.

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