Corporate boards of directors are dealing with new problems in financial reporting and accounting, along with governance, amid the novel coronavirus pandemic, according to a recent survey by BDO USA.
BDO’s 2020 Board Pulse Survey found that boards are making communication and transparency of financial reporting and disclosures more of a priority in the midst of the COVID-19 pandemic to convey some of the evolving market conditions and risks faced by their companies. The survey found that 73 percent of the 280 public company board members polled said they have increased their disclosures around new or emerging risks to their business, while 46 percent have significantly increased the time or effort devoted to accounting estimates and forecasts. Meanwhile 42 percent have increased their disclosures around liquidity, and 28 percent indicated they have considered disclosing asset impairments. In addition, 26 percent have added new disclosures for use of government assistance, while 19 percent have considered additional income tax effects in their disclosures. Nearly a quarter of the survey respondents, 22 percent, said restoring and retaining shareholder confidence is one of the more significant governance challenges for the latter half of 2020.
Steven Simpson is the senior director and head of data science at Cornerstone Advisors.
Ryan Strauser is a Principal and Principal for Marketing in the Ares Wealth Management Solutions Group. Prior to joining Ares in 2021, Strauser was a senior vice president at Black Creek Group in the Product Management Group where he focused on product management, positioning and due diligence efforts for the firm’s offerings.
Previously, Strauser was a vice president at Jackson National where he focused on new product development, investment selection and product positioning. Before that, he held similar positions at OppenheimerFunds (now Invesco), Old Mutual Capital and Great-West (now Empower). Strauser holds a bachelor of business administration in marketing from Wartburg College and a master of business administration from the University of Colorado.
Alex Selarnick is an associate at Goodwin who advises insureds, insurers, and insurtechs, as well as their lenders and investors on a broad range of compliance, regulatory and transactional matters. Mr. Selarnick’s practice focuses on the intersection of insurance and technology, and he frequently works with clients on the legal and regulatory challenges associated with the use of technology in the insurance space. Mr. Selarnick also has extensive trade credit insurance experience, and he guides market leading supply chain and trade finance companies on the development and negotiation of international credit insurance programs.
“I think disclosures have a big impact,” said Amy Rojik, national assurance partner and director of BDO’s Center for Corporate Governance and Financial Reporting. “Early on at BDO, we hit the ground running in March working with our clients on disclosures, particularly with all of the capital being infused by the government, what that looked like and how that was being portrayed to the public, so they could better understand the access to capital for many companies, and disclosing those risks and uncertainties. You’re seeing a lot more disclosure by companies around emerging risks, not necessarily just liquidity, but also what happened with supply chain access, what’s happened with safety of employees, and how that’s all being handled. There’s notably increased time and effort related to accounting estimates, particularly forecasts, for many companies that are teetering on whether or not they’re a going concern. That’s something we’ve been spending a lot of time on as a profession in looking at that.”
Rojik sits on the Center for Audit Quality’s Advisory Council, along with colleagues from the Big Four and other firms, where they’re working with the CAQ on understanding issues such as accounting estimates and forecasts.
“That is a significant issue with the standard setters as well,” said Rojik. “We have 46 percent of directors indicating that is an issue. That obviously goes hand and hand with looking at impairment of assets, and the significance of having to record an impairment and what that means from a financial disclosure perspective, and how to disclose that so that your investors and other users of your financial statements understand what that means, particularly in this timeframe.”
Utilization of government assistance programs such as the Paycheck Protection Program and Main Street Lending Program for small and midsize businesses and the Payroll Support Program for airlines is also being disclosed in some cases. “About a quarter of our respondents indicated that is a focus for them,” said Rojik. “Interestingly, the taxes, which I always think get short shrift, this was a little bit lower. I’d say about a fifth, 19 percent, of people say that’s a focus, but certainly the tax impacts of all these things could and should truly be significant for companies, so that’s not an area to shortcut. That’s probably a significant area where boards maybe could focus more of their time on understanding the complexities of the tax implications of the environment we’re in right now.”
Building shareholder confidence at a time like the pandemic is of the utmost importance. “In order to do all this of this properly, you have to be considering the shareholder confidence in your ability to report these accurately, since many of these are based on estimation and forecasting that you may or may not as a company have been asked to do in such a significant and short timeframe,” said Rojik. “You’re still trying to unwind what’s happening as we continue on through the second half of 2020, and what that looks like for year-end reporting for traditional calendar year filers.”
Other areas of concern from a governance perspective include employee safety in the midst of the pandemic. “First and foremost what we saw as the truly biggest priority for nearly everybody, at least in the near term as we’re still in the midst of COVID-19, is truly the safety of stakeholders,” said Rojik. “That’s employees, customers and vendors. Overwhelmingly, 71 percent of directors say that is their key priority right now, and how to ensure that, how to take on the board’s role in that.” Eighty-seven percent of the board members polled said their organizations have implemented new or expanded workplace safety procedures.
Diversity and inclusion have also become greater priorities for corporate boards, particularly in the wake of the Black Lives Matters protests over the past year. “The second thing that rose to the top was building a more diverse board and leadership team,” said Rojik. That ranked as a key priority for 45 percent of the board members surveyed.
Board members are also concerned about how well employees are operating in a remote environment during the pandemic as many of them now work from home.
“Clearly you’re seeing an intent to transition to some longer-term remote work for at least some employees,” said Rojik. “More than half, 51 percent, say they have plans to do that, given how work has progressed in the remote environment currently.”
Many companies have been forced to cut back on employees, with 38 percent of the directors indicating their organizations have laid off or furloughed workers. “That is a big concern,” said Rojik. “Do we have the right level of staffing? What does that look like going forward for companies that are rebuilding, and what does that look like for companies that are having to do layoffs. That is still very much unknown for many companies and obviously is industry dependent.”
The survey found 61 percent of the directors reported high or moderate levels of disruption in staffing, productivity and the remote work transition, while 28 percent plan to reduce their real estate footprint. “In looking toward action steps in trying to figure out what the workforce of the future might look like, it’s having the right size workforce, but also where those employees are going to conduct their work,” said Rojik. “Some of the questions we posed were about the real estate footprint that companies have. I know that as a firm of significant size, we have offices all across the U.S. That is a big question now that we have immersed ourselves in virtual work environments. That’s been going well for professional service firms, but does it make sense to carry large real estate holdings if the virtual environment is working out well? That’s one consideration in trying to contain costs and seeing what makes sense.”
Another major issue is company culture. “How do you maintain culture in a firm and an organization where you now have a workforce that is maybe geographically disbursed and doesn’t have those kinds of water cooler connectivity points?” said Rojik. “How do you get creative in doing that and be very intentional in maintaining the culture of your company? That’s another aspect that could have financial implications going forward because it speaks to the productivity and satisfaction of your workforce. It also speaks to how you’re engaging with your customers, vendors and others. How does that work over the longer term? All of these are very significant questions that were raised in our survey.”
