April 21, 2020

Covid-19 Crisis: What About ICFR?

The Covid-19 crisis has created a number of challenges for public companies, and one of the potentially most significant is maintaining appropriate internal control over financial reporting. Crisis-related ICFR issues include managing newly remote workforces, the novel and often unfamiliar financial reporting issues created by the crisis, and – for companies receiving government assistance – the need to implement restrictions on executive comp, share repurchases and dividends, among other things.

This Hunton Andrews Kurth memo reviews the legal framework applicable to these issues, and offers insights on how to address them. Here’s an excerpt:

We recommend that companies begin to assess their existing disclosure and internal controls by taking stock of what has changed in the current financial reporting environment. Unique or novel accounting issues should be carefully analyzed, and expert advice sought when internal resources are insufficient.

Potential and actual disruptions to a company’s supply chain, customer base, operations, processes and workforce should be weighed when evaluating the operating effectiveness of legacy controls. As part of this process, companies should also assess any potential deficiencies in review-type internal controls and the ability of individuals to perform control duties in light of shelter-in-place orders and other company specific remote-work protocols.

Based on this assessment, companies should determine whether existing controls are sufficient to prepare financial statements and disclosure documents at the reasonable assurance level. If a legacy control cannot be performed as previously designed, companies should determine what new controls may be necessary to reduce the risk of errors and fraud. In doing so, they should ensure that any changes in design address both the original risks of material misstatement as well as any new risks. We anticipate regular dialogue with counsel, the auditors and audit committees on these topics.

The memo also says that public companies, particularly those receiving government assistance, should expect heightened scrutiny from the “media, putative whistleblowers, agency inspectors general, consumer watchdog groups, members of Congress and other political figures.” In this environment, the best way for companies to protect themselves is by maintaining a robust control environment and responding nimbly to changes in business circumstances that may require adjustments to those controls.

Covid-19 Crisis: Chart of Governmental Actions

If you represent a client with operations in multiple states, Faegre Drinker’s interactive chart of the various federal, state and local government orders associated with the Covid-19 crisis is a really handy resource. If you click on an individual state, you’ll be taken to a page that contains links to that state’s legislative and executive orders relating to Covid-19, as well as to orders issued by major municipalities within that state. It appears to be updated on a daily basis, so you’ll probably want to bookmark it.

Transcript: “The Top Compensation Consultants Speak”

We have posted the transcript for the recent webcast: “The Top Compensation Consultants Speak.”

John Jenkins