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This month Latin America reached a grim milestone as it became the new epicenter of the COVID-19 pandemic. Collectively the region surpassed 50,000 deaths, and Brazil became the second-worst affected country in the world. Governments across the region have, for the most part, responded in the same way to the pandemic, explains Donny Donosso, Baker Tilly’s Regional Director for Latin America.
Few would argue that COVID-19 has changed the world. The pandemic has shone the spotlight firmly on the need for businesses to embrace change, to react quickly based on high quality information, explains Chris Danes, Tax Partner at MHA MacIntyre Hudson, the UK member of the Baker Tilly network, and responsible for the Global Tax Solutions team.
When COVID-19 hit Europe, it hit hard. Within weeks, the region overtook China in terms of the number of recorded cases and became the active centre of the pandemic. Three months after measures were introduced to protect lives, Europe is now easing out of lockdown - slowly and cautiously.
Life after lockdown: The view from audit
While digital advances continue to influence how audits are conducted and how evidence is gathered, as well as aspects of the reporting process, the nature of the audit process still focuses on engagement and direct interaction with the audited entity. But risk assessments for 2020 audits will look entirely different to what we are used to, explains Dr Paul Winrow, Director of Professional Standards at Baker Tilly in our latest podcast.
Listen to the next episode in our Great Conversations podcast series in which we look at life after lockdown: the view from audit.
The end of Saly?
“As auditors, we often rely on the concept referred to as Saly – ‘same as last year’. But COVID-19 is forcing us to approach an audit of a company, even if we are the longstanding auditor, as if it was the first time we have performed the audit.
“While historically a lot of time is spent on the detail in risk assessment, I think this year the approach will be to take a step back. To look at the impact of COVID-19 on the entity and think about the things you are required to do in a risk assessment.
“What has been the impact of the pandemic on the client’s industry? What are the regulatory changes and government schemes that have been brought in to deal with the pandemic: how will you deal with government loans, furlough schemes? How have the client’s business operations been impacted, their clients, their supply chains? How is the entity financing itself going forward? Has there been an impact on bank covenants? Has the entity had to take out extra loans?”
And the implications don’t stop there. The objectives and strategy of a company will likely be very different because of the pandemic. Many will have new short-term objectives focused around survival, and a redefined strategy for the next 2-3 years to get back to ‘normality’.
Control environments will also likely have faced a huge shake up, explains Winrow. Not just financial systems controls, but how management overall controls the business, including IT controls.
“For many businesses this is the first time they will have had teams, en-masse, working remotely. For that to work you need appropriate control environments, and those environments will change as the phases of the pandemic change: from pre-lockdown, to lockdown, to post lockdown and, hopefully, a physical return to the office.”
The perfect storm
The risk of fraud increases during times of crisis. This is particularly true in terms of financial reporting as the pressure mounts on businesses to maintain a strong financial performance.
“With unemployment figures around the world going through the roof, it may be easier to rationalise that it’s OK to commit a financial reporting fraud: ‘I’m doing this to protect the company, to secure jobs...’.”
But if you are going to commit a financial reporting fraud, you need the opportunity to do so. And a crisis like COVID-19 presents the perfect storm.
“If ever there was an opportunity to get around controls, or in the case of management to change controls in a way that allows them to commit a financial reporting fraud, it is now.
“COVID-19 has caused upheaval through lockdown and remote working and thrown companies into shock. It has also presented the illusion of greater opportunity to ‘get away’ with fraud: if auditors are working remotely, how will they pick up anomalies? Are tax authorities less focused right now?
“As auditors, we always talk about professional skepticism – and it's never been more important than it is right now. We have to be acutely alert to any possibility that a client may be looking to commit fraud in this way.”
The driving force for change?
“A number of our firms around the network are successfully carrying out remote inventory accounts. The key is careful planning and good audit documentation.”
Partial and total lockdowns are placing limitations on collecting audit evidence, and the pandemic could well be the driving force for change in the audit process.
“Post COVID-19, we won’t be turning up and finding 25 lever arch files for us to review on a table in a dusty room. COVID-19 has forced our hand to do things differently, to accelerate the pace of change, to embrace technology for sharing information.
“We need to be taking advantage of recordable technology – whether that’s as simple as a phone, or a tablet, or even drones to carry out inventories of larger sites. Electronic data sharing, and accepting electronic evidence, is also moving up the agenda when it comes to audits.”
Independent challenge - the role of internal audit
“There is a huge opportunity for internal audit to make a massive difference to a company.”
The pandemic has shone a light on the pivotal role that internal audit has in assessing immediate risks to a business.
Sitting alongside, but not part of, the firm’s crisis response teams and management, internal auditors can provide that independent challenge to what is going on in real time, rather than assessing things retrospectively. Their role is also crucial in terms of longer-term planning and helping management assess what the medium-term might look like and how they’re going to manage associated risks.
It’s certainly an interesting time for a profession that has traditionally done things the ‘old fashioned way and likes to touch a piece of paper’. Auditors are faced with conundrums around digitalisation versus the human element. The moral hazard vs changes in regime. Listen to the full podcast: Life after lockdown: the view from audit.
Meet the expert
|Dr Paul Winrow|
|Director of Professional Standards|