28 January 2021: Bob Neate is Head of Audit at Mazars. He says that despite the challenges of sequential lockdowns, auditors are there to protect stakeholders and clients, even when difficult questions must be asked.

“Anxiety levels have increased since the last lockdown,” says Neate. “And there are a number of new issues for auditors and their clients to conjure with as we go back into lockdown.”

First, this is peak season, he reminds us. “January and February are all about deadlines for auditors of public interest entities (PIEs),” says Neate. “The last lockdown was during the closing stages of December year-end audits; that is not the case with the new lockdown.”

Second, there is the fatigue factor. “It takes longer to complete an audit in this remote environment. It is more complex, and our teams are working harder.”

Finally, Neate refers to the perfect storm created by extending the period in which 2019 statutory accounts can be filed. “Normally, December year-ends are tied up by the following September, but the extension means many of those were delayed until December. We and other firms have already been very busy up to Christmas and now we are going into a new reporting season. This has added to the fatigue,” he says.

These three challenges are in addition to the challenges of the first lockdown, which include things like remote stocktakes, group audits and capacity reduction due to infection.

“Throughout the pandemic, we have had to ask ourselves if it is appropriate to send auditors to clients’ premises. There are some alternative procedures we can follow in some circumstances and we have been speaking to the FRC about what is reasonable,” says Neate. “Ultimately it comes down to auditor judgment.”

He continues: “Stock counts deliver the best evidence of existence. Are alternative procedures enough? Determining the answer to this has been a challenge.” Video evidence in certain circumstances can work but, in reality, it is often not sufficient on its own, he says.

“Fortunately, we have managed to perform counts for many clients before lockdown,” says Neate, “but for those not yet attended we are mindful that we are now facing a more virulent version of the virus.”

The group audit challenge has not gone away either. Auditing overseas entities is especially troublesome under pandemic conditions. “If an overseas entity is a significant component of a group audit, as auditors we have to be sure we have done sufficient work to ascertain the audit of that component has been performed properly. We are having to find alternative ways when travel is not possible. It is possible but often less efficient,” he says.

“The piece we are missing is not being able to look in the whites of people’s eyes,” Neate points out. “Auditors develop a nose for quality information and that ability to use your senses does not work as well online.”

And then, apart from the pressure we are all under, the health challenge augments as the virus goes through its paces. “Reports show that many more folks are catching it,” he points out. “This combined with the challenges of homeschooling or caring needs creates a resourcing threat for both company finance teams and auditors. Firms cannot perform audits without people.”

Understandably, some businesses are not prioritising the audit process. This can cause issues around the quality of information available and the speed with which information is transmitted. “Clients are also affected,” he says. “There are healthcare issues, bereavements, childcare and schooling to take into account. It is difficult to manage deadlines, and, for PIE audits, clients do not want those deadlines to slip as they perceive a risk of the share price falling if there is a delay against published timetables.”

Meanwhile, regulators are rightly insisting that auditors take the time to achieve audit quality through robust financial information gathering. Can this be achieved in a COVID world? Somehow it will have to be.

Then there is the thorny issue of evaluating an entity’s going concern status in an environment in which there is no certainty. Furlough? COVID loans and grants? When will they end, and will they have been enough? 

“Businesses have got better at forward-looking forecasts,” he confirms. “But, whilst important, it is another task businesses have to perform when they are at their most stretched. And for auditors it is more work, more judgments and more risk.”

He continues: “Audit is a risk mitigation game. Some judgments are just really difficult to call. This is where disclosure is your friend. Standards require boards to present a fair and balanced picture of their businesses even though no board naturally wants to say they are facing real survival challenges.”

Neate is emphatic that whilst auditors’ responsibility is to shareholders a by-product of a good audit is to protect boards through challenging on whether financial statement disclosures are sufficient to give a fair and balanced view to stakeholders. 

Nevertheless, there is no getting away from the fact that there will be some business casualties. He reminds us that history shows that it is often the case that it is not the year of recession that puts paid to weaker companies but the subsequent years. We are in a prolonged period of change and auditors are at the heart of ensuring quality financial reporting as companies, boards and directors ride out the storm.

Read the full 2020/21 Reporting Season series of articles.