The urgency over coronavirus is ramping up. The Bank of England, the Treasury, regulators and professional bodies have all either issued reassurances about their response to Covid-19, or warnings about what might happen. It may be people who catch the coronavirus, but business and the economy are just as vulnerable to a widespread outbreak.
This week the Bank of England said it was examining what the “aggregate demand consequences” might be as a result of supply disruption and said it was looking at how it might address constraints on financing for UK business and households. The contingency plans of banks, insurers and financial markets structure are being assessed by the Prudential Regulation Committee.
The US Federal Reserve has even cut rates. The UK chancellor, Rishi Sunak, has reportedly re-written his budget for 11 March to take into account the implications of the virus.
But perhaps the first sign of consequences for business came last week when the Financial Reporting Council (FRC) warned companies and auditors they should begin dealing with Covid-19 as a material risk and report it as such. The FRC’s statement said it was “particularly relevant” for companies operating in or with supply chains linked to China.
“We encourage companies to consider carefully what disclosures they might need to include in their year-end account relating to these events,” the statement said.
However, Covid-19 is not just a disclosure issue—it is also an operational concern. According to Michael Taylor, chief economist with accountancy institute ACCA: “An extended and significant slowdown in the Chinese economy caused by the coronavirus would reduce world GDP growth and put the recent stabilisation in global trade volumes into sharp reverse.”
His advice is that coronavirus will have only short-term effects, with economic activity back to trend growth rates by the second half of this year. That said, it could be painful for many businesses getting there.
Though a short-term shock, the figures show why the crisis in China will have such an impact. Statistics from data provider Euromonitor show China accounts for 54% of the world’s textiles and apparel output, 46% of high-tech goods, 42% of chemical products, 29% of pharmaceuticals and medical goods. According to World Health Organisation figures, China has so far seen 80,304 diagnosed cases and suffered 2,946 deaths from Covid-19. Globally there are 90,870 cases and 3,112 fatalities in 72 countries. Confirmed cases in the UK jumped from 51 to 85 after tests on 16,659 people (as of Wedmesday, 4 March).
Since the FRC’s warning, Italy and South Korea have also been hit, prompting more concerns for global supply chains.
Covid-19 and trade
Professional bodies and advisers have been poring over the impact of coronavirus on trade.
Consultants Alvarez & Marsal have issued their own review of the virus’s likely impact. They warn of cost implications from using alternative suppliers and the effect on profitability, adding that rebuilding stock after Covid-19 has passed could have an impact on the need for working capital.
They suggest management teams review contingency plans, the liquidity needed to wait out disruption, alternative suppliers and just-in-time supply lines. Businesses are also urged to plan ahead to understand their risks in relation to business continuity.
“Furthermore, businesses should be considering to what extent they need to be taking a front-footed approach with stakeholders on any repercussions for the business (notably lenders, shareholders and other market counterparties),” states the review.
Nick Allan, chief executive at risk consultancy Control Risks, said information will be the key.
“To understand how Covid-19 might affect their people, customers, business operations and supply chains, boards need an accurate source of information and to understand that the impact on them will come both from the virus itself and how governments respond to the virus in terms of mobility restrictions.
“This will affect their own people and operations but also their supply chain and their customers.”
Allan says customer demand may fall and invoices may take longer to be paid, which may affect cashflow. “The people impact may be direct to staff but companies also need to consider that their people may need time off to care for family members who become ill,” he said.
Boards, he added, will need to closely examine the effects on people, either in quarantine or for illness. They will have to consider whether they will pay for quarantine time in addition to sick leave, and whether to hold on to staff, despite the business impact. Recruitment plans may need to be reconsidered, as will travel plans.
A whole-business approach
According to Maggie McGhee, ACCA executive director, the crisis demands that board and audit committees take a significant role.
However, she added that involvement in managing the crisis needs be across the business: the finance team, communications, HR, facilities, the executive and the board.
“Nowadays, disruption is to be expected—it’s the level and severity that is hard to predict,” said McGhee. “That’s why a risk strategy and business continuity plan need to consider all eventualities. Some organisations also have pandemic plans which look at the long-term risks.”
Crisis management teams can be critical to tackling supply chain issues. “They can then put into action necessary plans to deal with the disruption. They’ll also form a link between executive and board to ensure major decisions are agreed and signed off.”
Audit committee chairs should be aware of the impact on the audit process. Group audits may require a site visit, but travel restrictions may rule this out. Data sharing via cloud-based servers and online conversations may be the only realistic way forward.
If information or evidence is still hard to come by, auditors may have to modify their opinions, according to Michelle Cardwell, audit technical manager at accountancy institute ICAEW. Auditors should also be speaking to company managers to understand the impact of the virus on business.
“Auditors need to be thinking ahead. While many will be focusing on December year-end audits, March 2020 year-end audits are on the horizon and it’s important to identify which might be impacted,” said Cardwell.
It may be that the crisis has some way to run, despite assessments that the impact may only be short-term.
For Nick Allan, the implications can be assessed. “The role of the board is to make sure the executive have considered all of the above issues,” he said.
“The potential impact is foreseeable, and a well-governed company will be prepared.”