RISK MANAGEMENT FOR ACCOUNTANTS – THE IMPACT OF COVID-19 ON ASSURANCE ENGAGEMENTS
Prepared by Sandra E. Dawe of Shibley Righton LLP, for CPA Professional Liability Plan Inc.
June 1, 2020
"Nothing in life is to be feared, it is only to be understood. Now is the time to understand more,
so that we may fear less." Marie Curie
It is by now trite to say that the COVID-19 pandemic has profoundly affected the economy. This impacts virtually every aspect of how businesses are operated, including infrastructure, employee oversight, technology and security, cash flow and profitability.
It should come as no surprise that it will also influence how accountants are called upon to serve their clients during these 'COVID times'. There will be increased and unique claims risks that will arise over the next months and years.
The following are some areas and issues to consider.1 It is not intended to be exhaustive, and is certainly not a complete guide to conducting assurance engagements during the pandemic.
Know Your Client
Suddenly, 'know your client' has taken on new levels of importance and challenge. Few, if any, businesses are operating the way they did a few months ago. Long-standing clients will have made sudden adjustments in their operations – and not all of those adjustments will be well considered or implemented.
Thus, a first step to any assurance engagement is to re-evaluate the organization. This will likely affect the planning for the entire engagement, and may also change risk assessments for various components of the engagement.
Beware the use of reliance on internal controls. This is not to say that there cannot be reliance, when appropriate. But approach the engagement with the expectation that there will have been changes to the client's internal controls. These changes must be determined and documented, and reliability must be explicitly considered.
Scope of Engagement
Every engagement must have an engagement letter. For engagements now and in the foreseeable future, consider whether the engagement letter used in the past is still appropriate for the work to be performed during the COVID-19 pandemic.
From a risk management perspective, explicitly defining the scope of the engagement and then conducting the engagement within that scope is fundamental to defending a claim. In some instances, a clear engagement letter can avoid a claim or end it at an early stage.
This is not the time to present the client with the engagement letter for signature after the engagement [not that it is ever good practice]. Rather, now is the time to contact the client well in advance of the engagement to have a fresh conversation about the client's circumstances and what services will be required.
Resist the temptation to assist a cash or profit-challenged client by reducing the cost of the engagement through removing required services, or conducting the engagement without adding steps that have become necessary because of changes in the client's operations.
Be particularly careful when a client changes the engagement from an audit to a review engagement. Where a client is permitted to do that, it may be an attractive way for the client to save money. The challenge for the accountant will be to conduct the engagement within the new scope, but be alert for 'red flags' requiring investigation. Because of the prior history of audit, and the knowledge of the client that the accountant will have from the audits, red flags may be more apparent. Failure to investigate them, particularly where there is already the spectre of trying to save costs in the engagement, would present a difficulty in defending any claim.
Meticulous Planning and Documentation
While always important, the documentation of files for assurance engagements being conducted now must be clear, complete and considered. Reference to steps taken or assessments made in prior years will seldom be sufficient, and may be wholly irrelevant given the changes in the client's circumstances.
Client premises may be inaccessible, and the historical methods of collecting evidence may no longer be available. This will require the use of other sources, and enhanced reliance upon both electronic material and individuals outside of the accounting firm. Field work is significantly hampered. Physical steps, such as inventory counts, may be impossible or significantly altered from previous years.2 Whatever the circumstances, they must be reflected in the planning procedures for the engagement, and the implementation of these procedures must be carefully documented.
This will require a new approach to many aspects of the engagement. All must be evaluated for reliability and sufficiency of the evidence, and the use of professional skepticism must be expressly reflected in the file. As well, re-evaluate the level of risk for all steps, and document that process of consideration and the rationale for the level of risk.
There will be some engagements in which certain planned steps cannot be taken and/or sufficient evidence cannot be obtained. In those situations, consider whether it is appropriate to qualify the opinion to explain the circumstances to the readers of the opinion.
Evaluation of Going Concern
At first instance, it is management that assesses whether the business is operating as a going concern for at least the next fiscal year. The accountant's role is to evaluate that assessment, and to determine whether there is material uncertainty regarding the going concern assessment.
For many businesses, evaluation of going concern is an ongoing process during COVID-19. Within that framework, extra attention from the accountant to the going concern assessment may not have the sensitivity it often attracted in the pre-COVID world.
As a starting point, the evaluation of the client as a going concern should be deliberately planned and effected by the accountant. Engagements will be conducted now of companies that have thus far maintained function and profitability, but may be vulnerable in 2 months or 10 months from now. The going concern assessment is individual to each client's circumstances, and the level of analysis and the data required will vary considerably.
Bear in mind that for those businesses that do eventually fail, any users of the financial statements will be potential claimants. If the financial statements do not include a Going Concern note, it will beg the question of why – and the answer to that question should be clearly reflected in the planning and conduct of the engagement.
Conversely, the inclusion of a Going Concern note can be the death knell for a business, particularly in these troubled times. In other words, if the client's circumstances do not warrant a Going Concern note, its inclusion [or the refusal to issue an opinion without one] can in itself be exposure to a claim if there is resulting loss to the corporation.
Resignation of Engagement for the Non-Paying Client
The financial pressures of COVID-19 may cause some clients to be unwilling or unable to pay the accountant's fees. At some point, especially if it is an unwillingness and not a temporary inability, the decision may be made to terminate the engagement.3
The guiding principle is that the client's interests are paramount. Uncertainty as to whether the client will be able to pay the invoice is of significantly less importance than the protection of the client's interest.
Therefore, the first consideration is whether the resignation is appropriate.4 This is especially important if the engagement has not been completed. Leaving a client to find a new accountant in current times may jeopardize the client's business, and a delay or even loss of payment to the accountant may be outweighed by the cost and stress to the accountant of a claim arising from a failed business.
If the client can reasonably move the engagement to a new accountant, there will be a request for transfer of the client records. This request must be met;5 there is a positive obligation to cooperate with the successor accountant. The importance of doing this promptly is amplified during the COVID-19 pandemic, when the assumption should be that businesses are experiencing challenges. Now is not the time to delay the transfer of client records and potentially become an arguable factor in a loss to the client.
This article was authored by Sandra E. Dawe of Shibley Righton LLP on behalf of CPA Professional Liability Plan Inc. (CPA PLI) for distribution to members insured in the CPA Professional Liability Insurance Program. This article is being published to alert you to loss prevention/risk management considerations in your accounting practice. Although every reasonable effort has been made to ensure the accuracy of the information contained in this article, no individual or organization involved in either its preparation or distribution accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.
Sandra E. Dawe, LL.B., is the Managing Partner of Shibley Righton LLP. Sandra has provided claims assistance to CPA PLI for over 20 years. Shibley Righton LLP is a full service law firm with offices in Toronto, Windsor and Hamilton, Ontario.
1. For a more detailed discussion, see the Audit & Assurance Alert of CPA Canada - Audit Considerations Related to the COVID-19 Pandemic
2. CPA Ordre Des Comptables Professionnels Agrees Du Quebec has posted a commentary on the topic of physical inventory counts during COVID-19
3. One of the factors to consider if fees are unpaid is independence. See Guidance Note 6 to Rule 204.4 (36) of the CPA Code of Professional Conduct which includes: A self-interest threat may exist if fees due from an assurance client for professional services remain unpaid for a long time, especially if a significant portion is not paid before the assurance report for the following year is issued.
4. See Guidance Note 10 to Rule 201.1 of the CPA Code of Professional Conduct which includes: An auditor should not voluntarily cease to act on behalf of a client after commencement of an audit engagement except for good and sufficient reason. Reasons may include: loss of trust in the client; the fact that the auditor is in a situation where the auditor’s independence or objectivity could reasonably be questioned; or inducement by the client to perform illegal, unjust or fraudulent acts. When an auditor’s appointment is terminated or an auditor is asked to resign or is contemplating resignation, it would be prudent for the auditor to consider obtaining legal advice.
5. See Rules Rule 302 and 303 of the CPA Code of Professional Conduct