The campaign for companies to fully report the impact of Covid-19 on their performance continues. A report from the Financial Reporting Council (FRC) published this week sees the regulator “reminding” companies they must go further in providing “more extensive disclosures”.

That even-tempered alert comes after more strident warnings elsewhere that auditors should prepare themselves for companies that may opt to hide the full implications of the pandemic on their finances.

The FRC’s examination of 17 interim and annual statements concludes that though reporting may be “sufficient”, investors want finance departments to deliver more detail.

According to David Rule, the FRC’s executive director of supervision, the review draws attention to a need for companies to get to grips with looking beyond their current predicament.

“The impact of the Covid-19 pandemic on businesses is pervasive but also differs across sectors, geographies and individual companies,” says Rule.

“This review highlights how important it is for company reporting to explain not only how Covid-19 has affected company performance but also how it might affect a company’s future prospects.”

The areas companies should be reporting are detailed and promise a painful level of disclosure. Key among the FRC demands are explanations for “significant judgements and estimates” along with “meaningful” sensitivity analysis for possible outcomes. Regulators also ask for descriptions of the judgments involved in deciding whether there is a “material uncertainty” about prospects for a company to continue as a “going concern”.

There is also a concern that companies may be “arbitrarily” splitting income and expenses between Covid-19 and “non-Covid” financial statements.

Reporting on Covid-19

The FRC raised the issue of financial reporting early in the Covid-19 pandemic, underlining a growing concern about the pressures imposed by the crisis.

In June the FRC issued two reports providing guidance for companies about to make financial disclosures reflecting the impact of Covid-19. The reports underlined the need to produce detailed going concern statements and the importance of risk information.

FRC chief executive, Sir Jon Thompson, highlighted expectations among investors. “These are unprecedented times and investors rightly expect clear and timely disclosures from companies setting out the impact of Covid-19 on their business and long-term prospects,” he said.

Recent research by Board Agenda tapped into some of the frailties experienced by boards coming to terms with risk. A survey in association with Mazars, the professional services firm, and INSEAD, the business school, found only 55% of the board members polled could say they were prepared for a pandemic. Almost 60% say the pandemic had forced them to review their business strategy. Only half could say they received all the information they required to manage the risks faced by their firms. Nine out of ten declared their organisations faced more risks than five years ago.

‘Burying bad news’

There is growing concern about the implications for financial reporting as a result of the lockdown and the huge impact it had on companies. In a recent article Katharine Bagshaw, an audit expert for accountancy body the ICAEW, warns that some companies may be less than scrupulous with their reporting. “Auditors need to be aware of opportunities for burying bad news: Brexit is one, Covid-19 is another,” she says.

Auditing pandemic-hit companies had been a concern for others. So too has the role of audit committees. The International Federation of Accountants (IFAC) says Covid-19 has caused a “strategic shift in their roles, with more on their agendas than ever before”.

At a recently convened summit, audit committee chairs, chief executives and board chairs told IFAC that audit committees face an “expanding range” of issues. These include financial reporting and going concern statements but also risk management, scenario planning and business continuity relevant to the crisis. IFAC also highlights the “heightened risk of fraud due to financial pressures and new operating environments”.

There is some way to go in the pandemic and businesses are still dealing with the consequences. Financial reporting and audit remain looming issues to face.