By Steven G. Blum, CPA, CFE

As I’m writing this blog, we’ve had the first few confirmed cases of COVID-19 in Pennsylvania; as you read it, I’m sure the number will have grown. Business disruptions on a global scale (80-plus countries) have begun as a result of COVID-19 (also known as the coronavirus), ranging from supply chain issues, to business travel halts, to reductions in consumer demand. People are fearful. There is uncertainty. In this chaotic environment, organizations and their CPA advisers must be alert to all the potential fallout, including the following:

• Securities and Exchange Commission (SEC) disclosure and filing obligations
• General financial reporting considerations
• Diligence against enhanced cybersecurity and fraud risk

This is not an exhaustive list, and each organization will face unique challenges across their respective operations. But as the world responds to the immediate crisis, these three areas are critical topics on which CPAs should focus their attention.

SEC Reporting

The SEC recognizes the dynamic and disruptive nature of this issue, and it has granted some regulatory relief for publicly traded companies. On March 4, 2020, the SEC issued a press release providing publicly traded companies an additional 45 days to file certain disclosure reports that would have otherwise been due between March 1 and April 30. This is a limited form of relief, and I encourage you to review the specific SEC press release.

The SEC’s granted relief changes the timing of a disclosure, but not the required content. SEC-reporting companies should consider their respective disclosure requirements as obligations and events unfold. This requires continued oversight by practitioners, senior management, audit committees, compliance, and financial reporting. Organizations should focus on COVID-19’s impact and consider these issues:

• Assessment of risk factors – including public health, natural disasters, or uncertainty – over global economic conditions impacting the business.
• General MD&A implications, such as operational impacts and new trends and uncertainties, as a result of the coronavirus.
• Subsequent event disclosures as a result of rapidly changing circumstances.
• The impact of business disruptions on internal controls. Significant disruption to operations – such as the closure of offices, remote working arrangements, etc. – could impact internal controls. For example, fraud risk may increase due to the implementation of an emergency stopgap process due to business disruptions.
• Revisions to prior disclosures updated for the new conditions as a result of the virus’s impact.
• General financial reporting considerations (discussed in greater detail below) relevant to all private and public companies.

General Financial Reporting Considerations

In the COVID-19 environment, public and private companies may need to reconsider financial reporting related to areas that had been previously well established. Here are a few examples:

• Asset impairments – such as inventory, goodwill, uncollectable accounts from severely impacted customers, and other balance sheet assets – both financial and nonfinancial, may require reassessment.
• Contractual covenant breaches arising from existing loans and lending agreements may require recognition. There may be implications arising from other financial and commercial contracts requiring some form of recognition or disclosure.
• Changes to revenue recognition assumptions related to new shipping terms or multiple element revenue arrangements could impact an organization’s revenue recognition.
• General credit risk of an organization’s customer base may require a re-measurement of bad debt estimates.
• Expected insurance recoveries may require recognition.
• Valuation of financial instruments in a highly volatile market may require renewed focus.

The point here is that the tentacles of the coronavirus can be extensive and pervasive, and not necessarily obvious or immediate. CPAs should consider all the ways in which an organization’s financial reporting may be affected now and in the future.

Cybersecurity and Fraud Risks

Unsurprisingly, we are beginning to see a rise in fraud as a result of the public concerns that arise during a widespread outbreak. The SEC has specifically warned companies to look out for coronavirus-related investor scams. Its Office of Investor Education and Advocacy has warned investors of frauds attempting to capitalize on COVID-19 by pushing false claims about certain products (such as the fiction that drinking bleach cures the virus). These fraudsters are attempting to use this false information to drive up a company’s share price in a classic “pump and dump” scheme. These efforts typically focus on smaller  public companies and can open them up to crippling liability. Practitioners should help their organizations stay diligent against these kinds of marketplace lies.

The coronavirus could also open the door to other types of fraud. For example, COVID-19 business disruptions may necessitate changes to controls and processes, providing an opportunity for fraudsters to deploy phishing and other scams. A particular concern that practitioner must remain diligent against are “emergency funding” wire transfer requests. Instances of these scams are increasing, and they can be very convincing. Bad actors often prepare for these “campaigns” by patiently collecting personal and corporate information over an extended period. When the opportunity presents itself, such as now, these criminals use the previously gathered information to launch convincing, companywide wire transfer requests. CPAs often find themselves on the front lines facing these bad actors, so they need to help ensure that their clients and employers also remain diligent and exercise extreme caution when responding to requests for funding.

CPAs within the compliance function in global organizations must stay focused on the virus’s impact on anti-corruption regulations. For example, as the virus causes increasing numbers of interactions with global health organizations, government regulators, and other foreign government officials, more opportunities for fraud and corruption arise. Practitioners within the compliance function must stay attuned to the enhanced risks of violating of both U.S. and foreign corruption regulations.

Where to Begin

CPAs should assess their respective clients and employers to better understand the unique issues that they are facing. Start the conversations and align with stakeholders as impacts of this virus begin to reverberate around the world. The immediate impacts of the virus may recede, but the fallout will remain for quite some time.

Steven G. Blum, CPA, CFE, is a principal with Control Risks Group in Washington, D.C. He is a member of the Pennsylvania CPA Journal Editorial Board, and can be reached at steven.blum@controlrisks.com.

Sign up for weekly professional and technical updates in PICPA's blogs, podcasts, and discussion board topics by completing this form.