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RODERICK CARMODY: Hi, I'm Roderick Carmody and in this episode, we'll be discussing the financial reporting implications of the coronavirus. I'm joined today by Kati Penney, a Partner in CrossCountry's Accounting Advisory practice - and Kati is a great person to join us for today's topic. Prior to joining CrossCountry, Kati was a partner at Ernst & Young in their audit practice and prior to that, she started her career in the audit practice of Arthur Andersen.
Kati, thanks for joining me today.
KATI PENNEY: I'm glad to be here. Thanks, Roderick.
RODERICK CARMODY: Thanks for your time, and we've come a long way since the two of us were grinding out busy seasons with Arthur Andersen in the late '90s.
KATI PENNEY: And if I recall, we weren't moving around much then, either. So not much has changed.
RODERICK CARMODY: Absolutely. Well Kati, thanks for joining me. The impact of the coronavirus has been felt by every company around the world and I think the initial wave of the press was really focused on things like work from home, some of the government programs like PPP.
But now we're through the first quarter financial reporting cycle and we're in a new normal for financial reporting. So what does this mean for companies in terms of how they should think about financial reporting and what should we expect to see differently?
KATI PENNEY: Well, for most of the calendar year-end companies, the impact of COVID-19 was limited to just a few weeks in the first quarter, so the financial results may not look significantly different. However, the financial reporting exercise was definitely a significant lift and will continue to be in the upcoming quarters.
RODERICK CARMODY: And Kati, what do you mean exactly by the financial reporting exercise?
KATI PENNEY: Yes, when I reference exercise, it's beyond a tremendous effort to close the books on a remote basis, which is really a first for many companies. But it's really looking at accounting standards that, maybe for the first time, or the first in a long time, and many of these standards, they're not easy. They're complex and certainly a lot of judgment.
We're working alongside companies in this area, in areas including impairment around long-lived assets and intangibles, goodwill, lease concessions, loan modifications from a debtor or creditor perspective, accounts receivable, collectability, change in payment terms. For some industry, it's around inventory, obsolescence, and reserves, and certainly, growing concern evaluations seem to be popular these days.
The impact of these standards may result in changes to the financial statements, which might include changes in classification, as well as due financial line items, and certainly the balance of statements, as well.
RODERICK CARMODY: That's great. So aside from the face financials, the numbers on the balance sheet and the P&L, what are some other requirements that are likely to change based upon COVID-19, and what else should we expect to see?
KATI PENNEY: Well, of course there are the financial disclosures and along with the accounting standards that I mentioned are the first for many, or they're dusting off, really, some robust disclosure requirements.
There's also non-gap measures. So non-gap measures, that's not uncommon. That might include items such as non-cash items or non-recurring or one-time type events. And certainly, we'll start to see COVID-19 impact included within these measures.
To date, it would be atypical for a company not to have withdrawn its 2020 guidance and public companies are disclosing in their earnings and their 10-Q an outlook, or a preview of the impact of market conditions, post-quarter close. We're seeing shareholders and lenders, they're certainly focused on this forward-looking information and there has been a dramatic increase in inquiries from analysts, which is really requiring a deeper dive as it relates to companies in their internal reporting.
RODERICK CARMODY: That's great. So we think about financial reporting as the financial statements that we've covered, disclosures that we've also covered. But what about internal controls? Should we expect changes regarding the internal controls over the financial reporting process itself?
KATI PENNEY: That's a great point because we know effective internal controls are critical to accurate financial reporting and there's a high probability for an increase in control deficiencies that we'll see this year. And this will really be driven from changes in control design that are likely unintentional or an inability to effectively operate controls.
And what we're seeing is this is primarily due to a few reasons. Typically, the control design was built assuming the manual process, not the virtual process that we're in today. But times are lean. There have been reductions in workforce and as a result, there may be lack of experience or simply capacity issues to perform controls.
Also, as I mentioned, some of the new accounting standards that are relevant for companies, along with that come new controls, specifically, around these standards. And also just a reflection of existing controls and are they robust enough to address the current market conditions? We're working with companies to reflect on the financial reporting implications, as well as the alignment or, for some, misalignment, as it relates to processing controls and making adjustments accordingly.
RODERICK CARMODY: That's great. Thanks, Kati. So as you can see, COVID-19 has not only had an exhaustive impact on the accounting teams themselves, but also the financial statements, disclosures, as well as in the internal control considerations.
Kati, thank you so much for your time today. I really appreciate it and thanks to everyone for tuning in.