FRC warning on coronavirus risk to audits in China

The Financial Reporting Council (FRC) has contacted the Big Four firms to ask what contingency plans they have in place to handle audits for clients with offices in China, while ACCA postpones March exams in China

The regulator has warned that audit firms could face problems with how they complete audits of global audit clients with offices in China due to travel restrictions due to coronavirus.

Data cannot be removed from the country in any format, according to Chinese legislation, which means that auditors have to attend company sites in person to complete audits.

This could put ongoing audits at risk as audit partners and teams would be unable to visit offices in mainland China to complete essential audit work.

The FRC is conducting a preliminary review to find out how exposed Big Four firms are to the risk of coronavirus and what steps they are taking to deal with the issue.

‘Firms cannot take data out of China and we want to know whether it is of any significant risk to firms. We are not aware of any other country where you cannot take data out of the country,’ said Sir John Thompson, chief executive of the FRC.’

The FRC has issued an advisory note for companies and audit firms with brief guidance on how to deal with disclosures and other reporting consequences as a result of the impact of the coronavirus.

The letter states: ‘The extent of the risk and the degree to which it might crystallise depends on companies’ specific business circumstances. These could include, for example, extensive operations or manufacturing in China, with consequential staff shortages and production delays.

‘Other entities might not have a presence in the country but might have significant trading links or global supply chains that are dependent on Chinese-manufactured goods being exported to the UK or elsewhere.’

As the development of the coronavirus – COVID-19 – is fast-moving, the risk situation needs to be closely watched.

In terms of accounting and reporting issues, FRC warned that ‘the carrying value of assets and liabilities might also be affected with a need to perform additional impairment tests and to assess whether leases have become onerous.

‘For December year-end reporters these events would be likely to represent non-adjusting post balance sheet events as at 31 December 2019, given that, at that date, few cases had been confirmed and the virus only just identified. However, for companies with later reporting dates, year-end balances might be affected’.

A spokesperson for the FRC said: ‘Given the potential for rapid spreading of the virus, required disclosures will likely change over time as more information about the epidemic emerges.

‘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.’

Audit firms are monitoring the situation and are following Foreign Office advice on travel restrictions to China.

A spokesperson from Deloitte said: ‘The health and safety of our professionals is our highest priority and we are monitoring the situation closely. Like many multinational companies, we have provided guidance that non-essential travel to China be deferred for the time being.

‘We continue to monitor the situation and are working closely with the FRC, audited entities and our global network. We will adjust our guidance as the situation evolves.’

The impact has also been felt by trainee accountants with the announcement that ACCA has cancelled its March exams in mainland China, Hong Kong SAR and Macau SAR.

In a statement ACCA said: ‘These decisions are firmly based on guidance from the Chinese government which is working hard to contain the virus, and other stakeholders such as the British Council.

‘In other countries, we’re currently planning to run the March exams as scheduled, but of course, we’re keeping this under review too.

‘Our global crisis management team is assessing the situation, checking official advice from the World Health Organisation (WHO) and feedback from our partners.

‘We advise students to check their own government’s advice about the situation and look out for any additional updates from ACCA via email or our website, should there be any further developments.’

 

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