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Statement on the Importance of High-Quality Financial Reporting in Light of the Significant Impacts of COVID-19

April 3, 2020

Introduction[1]

The Office of the Chief Accountant (OCA), along with the Commission and other Divisions and Offices of the SEC, is closely monitoring the impact of issues raised by coronavirus disease 2019 (COVID-19) on investors and global capital markets.[2]  As Chairman Clayton said in his recent statement, we are facing an unprecedented national challenge – a challenge that has significant implications for financial reporting, our markets, and our economy more generally.[3]

As we face these challenging times, investors and other stakeholders need high-quality financial information more than ever.  The proper functioning of our capital markets depends on a regular supply of high-quality financial information that enables investors, lenders, and other stakeholders to make informed decisions.  Although markets and companies face uncertainties, we have a robust and longstanding financial reporting system in place, including the accounting, disclosure, and auditing models that will help us to address recent challenges.  

Where appropriate, the Commission and the staff have been ready to assist market participants with financial reporting issues.  For example, the Commission recently issued an order conditionally extending the temporary 45-day grace period for registrants affected by COVID-19 to file Exchange Act reports to include reports due through July 1, 2020.[4]  The Division of Corporation Finance also provided guidance for companies as they assess COVID-19-related effects and consider their disclosure obligations.[5]

OCA continues to focus on investors’ need for high-quality financial information, and on our mission and priorities as described in our Statement in Connection with the 2019 AICPA Conference on Current SEC and PCAOB Developments.[6]  Importantly, to further high-quality financial information, we are available to help companies, auditors, and others with complex accounting, financial reporting, independence, and auditing issues.  We are taking a proactive approach and have been engaged with stakeholders across the financial reporting ecosystem – e.g., preparers, auditors, audit committee members, investors, standard setters, and other regulators – on issues related to current market developments.  We remain available for consultation and encourage stakeholders to contact our office with questions they encounter as a result of COVID-19.[7]

The following paragraphs address some of OCA’s work and how we have been responding to COVID-19.  We expect that our work in this area will be ongoing for the foreseeable future.

Accounting – Work with FASB; Judgments and Estimates; CARES Act

OCA is actively engaged with the Financial Accounting Standards Board (FASB) and we support their efforts to date to address impacts of COVID-19.  We continue to have a very strong and collaborative relationship with the FASB and we are having constructive dialogue with them on emerging issues.

We recognize that the accounting and financial reporting implications of COVID-19 may require companies to make significant judgments and estimates.  Certain judgments and estimates can be challenging in an environment of uncertainty.  As we have stated for a number of years, OCA has consistently not objected to well-reasoned judgments that entities have made, and we will continue to apply this perspective.[8]  

Some of the many accounting areas that may involve significant judgments and estimates in light of the evolving status of COVID-19 include, but are not limited to:

  • Fair value and impairment considerations;
  • Leases;
  • Debt modifications or restructurings;
  • Hedging;
  • Revenue recognition;
  • Income taxes;
  • Going concern;
  • Subsequent events; and
  • Adoption of new accounting standards (e.g., the new credit losses standard[9]).

We stress the importance of required disclosures of judgments and estimates in these and other areas.

We also are working with market participants regarding the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).  The CARES Act, which was signed into law by the President on March 27, 2020, allows a limited number of entities the option to temporarily defer or suspend the application of two provisions of U.S. Generally Accepted Accounting Principles (GAAP).[10]  OCA has received inquiries from preparers and auditors where the preparer has concluded that election of these narrow and limited options in Sections 4013 and 4014 of the CARES Act would be deemed to be in accordance with GAAP.  For those entities that are eligible for, and elect to apply, either of Sections 4013 or 4014 of the CARES Act, the staff would not object to the conclusion that this is in accordance with GAAP for the periods for which such elections are available.

Auditing – Work with the PCAOB

OCA has also been actively engaged and working collaboratively and constructively with the Public Company Accounting Oversight Board (PCAOB) to address emerging issues relating to COVID-19.  We support the PCAOB’s ongoing work to address these issues and continue to have ongoing, constructive dialogue on these and other matters.

For example, the PCAOB has provided PCAOB-registered audit firms up to a 45-day relief period from inspections, with the exception of providing access to audit documentation for certain engagements,[11] and has temporarily suspended international travel, including for non-U.S. firm inspections.[12]  These decisions took into account health and safety considerations as well as practical considerations during this challenging time.  We support the PCAOB’s thoughtful approach on these decisions.  We also broadly support the PCAOB’s efforts to provide timely updates on the status of their operations and reminders to PCAOB-registered audit firms related to the impact of COVID-19 on audits.

OCA also remains actively focused on independence matters in these unprecedented times.  Auditor independence is foundational to the credibility of the financial statements.  As we have consistently noted, auditor independence is a shared responsibility among audit committees, management, and their auditors.[13]  Management and audit committees should be aware of how an auditor independence violation may affect the company’s required SEC filings.  We again note that we are available for consultation as needed, and we are continuing to work on consultations we have received in this area.

International – Interaction with the IASB and Monitoring Group

Our financial markets are global, so international accounting and audit-related standards also are of paramount importance to the strength of the financial reporting system and global capital markets.  OCA is engaged in the activities of a number of international organizations[14] as part of our normal operations as well as relating to the impact of COVID-19. 

The challenges associated with many of the accounting issues listed above in the current environment also, of course, exist internationally.  OCA is actively engaged in discussions with the IASB on the impact of COVID-19, including through our involvement as the vice-chair of IOSCO’s Committee 1 on Issuer Accounting, Audit and Disclosure.[15]  We are also actively engaged with other securities regulators internationally on both COVID-19 issues and as part of our ongoing operations.

Through our leadership role in the Monitoring Group,[16] OCA is also actively engaged in the development of reform recommendations relating to the international audit-related standard-setting system.  The Monitoring Group is a global organization composed of regulators and others dedicated to serving the public interest in areas related to international audit standard setting and audit quality.  The Monitoring Group has been working to propose and subsequently implement important reforms to the international audit-related standard-setting system.  The proposed reforms are aimed at making the standard-setting system more responsive to the public interest by using a multi-stakeholder approach to the development of standards with the expectation that doing so will lead to improvements in audit quality around the world.  We will continue to monitor the impact of COVID-19 as we perform this important work with our international counterparts.      

Stakeholder Engagement – Audit Firms; Focus on Emerging Markets

Engaging with stakeholders and seeking feedback has long been a high priority for OCA.  In an effort to promote high-quality financial reporting, we meet with participants in every phase of the financial reporting system to listen to stakeholder views, understand emerging issues and risks, and promote high-quality financial reporting.

During this time, OCA continues to engage with stakeholders both domestically and internationally.  For example, in late 2019 and early 2020, we conducted separate meetings with representatives from the four largest global accounting firms to discuss each of the firms’ efforts to advance audit quality in emerging markets, including China, the largest emerging market economy.[17]  Just last week, we conducted two additional meetings with two different accounting firms to discuss these matters as well as discuss the impact of COVID-19 on companies and audits.  We expect to continue these very important discussions in 2020.  

Closing

We know that these are unprecedented times and understand the challenges stakeholders are facing as a result of COVID-19.  However, our financial reporting structure is strong, thanks to the collective work of all participants in fulfilling each of our unique roles with integrity and transparency.  We have faced significant challenges in the past, and have always continued to work for investors to provide them with relevant, useful, and timely financial reporting.  We in OCA urge all participants in the financial reporting system to continue to work together to provide investors with the high-quality financial information they need to make decisions amidst uncertainty.  We are proud of the strength that the financial reporting system has demonstrated to date, and are committed to supporting companies, auditors, and others in facing the challenges to come.  

 

[1] This statement represents the views of the staff of the Office of the Chief Accountant.  It is not a rule, regulation, or statement of the Securities and Exchange Commission (SEC or the Commission).  The Commission has neither approved nor disapproved its content.  This statement, like all staff statements, has no legal force or effect: it does not alter or amend applicable law, and it creates no new or additional obligations for any person.

[2] See, e.g., SEC Coronavirus (COVID-19) Response, SEC.gov, https://www.sec.gov/sec-coronavirus-covid-19-response.

[3] Chairman Jay Clayton, The Deep and Essential Connections Among Markets, Businesses, and Workers and the Importance of Maintaining those Connections in our Fight Against COVID-19 (March 24, 2020), available at https://www.sec.gov/news/public-statement/statement-clayton-covid-19-2020-03-24.

[4] Order under Section 36 of the Securities Exchange Act of 1934 Modifying Exemptions from the Reporting and Proxy Delivery Requirements for Public Companies, Release No. 34-88465 (March 25, 2020), available at https://www.sec.gov/rules/exorders/2020/34-88465.pdf.

[5] Division of Corporation Finance, CF Disclosure Guidance: Topic No. 9 (March 25, 2020), available at https://www.sec.gov/corpfin/coronavirus-covid-19

[6] Chief Accountant Sagar Teotia, Statement in Connection with the 2019 AICPA Conference on Current SEC and PCAOB Developments (December 9, 2019), available at https://www.sec.gov/news/speech/teotia-speech-2019-aicpa-conference.

[7] More information about how to initiate a dialogue with OCA and what to expect from the consultation process is available on our website, Communicating with OCA, SEC.gov, https://www.sec.gov/page/communicating-oca.

[8] See, e.g., Chief Accountant Sagar Teotia, Remarks before the AICPA National Conference on Banks & Savings Institutions (September 9, 2019), available at https://www.sec.gov/news/speech/teotia-remarks-aicpa-national-conference-banks-savings-institutions.

[9] FASB Accounting Standards Codification Topic 326, Financial Instruments – Credit Losses

[10] Section 4014 of the CARES Act provides that no insured depository institution, bank holding company, or any affiliate thereof shall be required to comply with FASB Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”) during the period beginning on March 27, 2020 until the earlier of (1) the date on which the national emergency concerning the COVID-19 outbreak declared by the President on March 13, 2020 under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates; or (2) December 31, 2020.  Section 4013 of the CARES Act provides that a financial institution may elect to suspend troubled debt restructuring (“TDR”) accounting under GAAP (see FASB Accounting Standards Codification Subtopic 310-40, Receivables-Troubled Debt Restructurings by Creditors) in certain circumstances, during the period beginning March 1, 2020 and ending on the earlier of December 31, 2020, or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President on March 13, 2020 under the National Emergencies Act terminates.

[11] See PCAOB, In Light of COVID-19, PCAOB Provides Audit Firms with Opportunity for Relief from Inspections (March 23, 2020), available at https://pcaobus.org/News/Releases/Pages/In-Light-of-COVID-19-PCAOB-Provides-Audit-Firms-with-Opportunity-for-Relief-from-Inspections.aspx.

[12] See PCAOB, PCAOB Update on Operations In Light of COVID-19 (March 18, 2020), available at https://pcaobus.org/News/Releases/Pages/PCAOB-Update-on-Operations-In-Light-of-COVID-19.aspx.

[13] See, e.g., Vassilios Karapanos, Associate Chief Accountant, Office of the Chief Accountant, Remarks before the 2019 AICPA Conference on Current SEC and PCAOB Developments (December 9, 2019), available at https://www.sec.gov/news/speech/karapanos-speech-2019-aicpa-conference.

[14] These organizations include the International Accounting Standards Board (IASB), the IFRS Foundation Monitoring Board, the International Organization of Securities Commissions (IOSCO), and the Monitoring Group, among others. 

[15] See Committee on Issuer Accounting, Audit and Disclosure (Committee 1), IOSCO.org, https://www.iosco.org/about/?subsection=display_committee&cmtid=12 (last visited April 3, 2020).

[16] I have the honor of serving as the co-chair of The Monitoring Group, along with Ana María Martínez-Pina Garcia, Vice-Chairperson of the Spanish securities regulatory body, the Comisión Nacional del Mercado de Valores.

[17] See Press Release, SEC Chairman Clayton, PCAOB Chairman Duhnke, and Members of SEC Staff Meet With Auditing Firm Representatives to Discuss Audit Quality in Emerging Economies and Markets (Nov. 4, 2019), available at https://www.sec.gov/news/press-release/2019-228, and see SEC Chairman Jay Clayton, SEC Division of Corporation Finance Director Bill Hinman, SEC Chief Accountant Sagar Teotia, and PCAOB Chairman William D. Duhnke III, Statement on Continued Dialogue with Audit Firm Representatives on Audit Quality in China and Other Emerging Markets; Coronavirus — Reporting Considerations and Potential Relief (Feb. 19, 2020), available at https://www.sec.gov/news/public-statement/statement-audit-quality-china-2020-02-19.

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