What risk does coronavirus pose to Canadian auditors?
Securities regulator issues statement following UK, US audit watchdogs
TORONTO, Feb. 21, 2020 – Canadian auditors are in communication with the Canadian Securities Administrators (CSA) over the impact of the coronavirus outbreak on their audit work. The announcement, provided to Canadian Accountant by the CSA, follows announcements made earlier this week by audit watchdogs in the UK and U.S.
“The CSA has communicated with representatives from some of the large and medium sized audit firms in Canada to ask about any challenges in completing audit work for clients with operations in jurisdictions impacted by the coronavirus. At this time, we believe that Canadian exposure is fairly low,” said a spokesperson for the CSA, an umbrella group of Canada’s 13 provincial and territorial securities regulators.
While the CSA statement did not reference China by name, regulators in the U.K. and U.S. have been explicit in referencing the potential for risk to the auditing of companies that operate in or have close trading relationships with China, due to risks such as the disruption of global supply chains. Further, regulators have noted the potential for delays in the filing of statements, due to access to personnel and documentation in jurisdictions that continue to cause concern.
“Responses obtained to date indicate few concerns about audits not being completed in time for filing deadlines,” said the CSA. “However, we encourage reporting issuers and auditors to contact their local regulator if they identify a potential concern. The CSA continues to monitor this area and will request regular updates from firms.”
UK Audit Watchdog Issues First Warning
On Monday, the Financial Reporting Council (FRC) in the UK began the week by publishing guidance to companies and auditors on coronavirus risk disclosures, and other reporting consequences arising from the emergence and spread of coronavirus. By law, companies in the UK are required to disclose principal risks to their business, and the FRC advised companies that either operate in or have close trading associations with China to “carefully consider” any disclosures they may need to include in their year-end accounts.
“Given the potential for rapid spreading of the virus, required disclosures will likely change over time as more information about the epidemic emerges,” said a spokesperson for the FRC. Examples used by the FRC included consequential staff shortages, production delays and supply chain risk. “Companies will need to monitor developments and ensure they are providing up-to-date and meaningful disclosures to their shareholders when preparing their year-end reports.”
The FRC is also in talks with accounting firms as to whether the virus would affect their ability to review component audits in China, the impact of the virus on audits of UK listed companies with Chinese subsidiaries, and the consequences to delivering timely audit opinions.
US Securities Regulator Issues Second Warning
Two days later, the U.S. Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) issued a joint statement, urging issuers to work with their audit committees and auditors “to ensure that their financial reporting, auditing and review processes are as robust as practicable in light of the circumstances in meeting the applicable requirements.” The SEC and PCAOB reiterated that it had established an ongoing dialogue with the Big Four accounting firms (Deloitte, EY, KPMG, PwC) over their scrutiny of how companies are managing and disclosing risks, including the outbreak of coronavirus.
The Big Four accountants audit roughly 140 Chinese companies listed on American exchanges and the U.S. The joint statement refers to “companies based in the U.S., companies based in China and companies based outside of the U.S. but not based in China,” which might include Canadian companies listed on U.S. exchanges with Chinese operations. The U.S. regulators also complained about the ongoing opacity of Chinese disclosure in general, an issue cited by Canada’s audit watchdog, the Canadian Public Accountability Board (CPAB).
In the joint statement, the regulators held out the potential for “appropriate relief” from filing deadlines as auditors struggle to visit Chinese-based clients during the outbreak. Issuers and their advisors are encouraged to contact SEC staff regarding any need for relief or guidance. As the Wall Street Journal noted, Apple became the first major U.S. company to say it will likely miss revenue forecasts for the current quarter due to coronavirus, which has impacted global supply chains and production of the iPhone.
Canadian Regulators and Coronavirus Risks
While the number of Canadian companies with Chinese operations, or the number of Chinese companies listed on Canadian exchanges, come nowhere near to the numbers and value of Chinese-related American public companies, the business relationships between Canada and China are still significant. The TSX, for example, has long courted Chinese companies to list in Canada, with the number of Chinese companies listed on the TSX and venture exchange increasing, sometimes to the chagrin of investors.
While the regulation of audit firms falls under the jurisdiction of CPAB in Canada, the mandate of the FRC in the UK includes oversight of financial reporting by companies and maintains the corporate governance code. Its coronavirus guidance relates to corporate disclosures of risks that is under the jurisdiction of the securities commissions in Canada.
Canadian Accountant reached out to the Ontario Securities Commission for comment but was directed to the CSA as the umbrella organization for all securities commissions across Canada. In its statement, the CSA advises reporting issuers and auditors to contact their local regulator if they identify a potential concern with reporting related to the coronavirus outbreak.