The 23rd Audit Committee Forum of The Sri Lanka Institute of Directors in collaboration with KPMG Sri Lanka was held virtually on MS Teams on 7 May to discuss the question ‘Are Audit Committees ready for post- COVID19 challenges?’ and explore the critical role audit committees play in helping companies to meet challenges that arise post-pandemic.
The discussions also addressed specific implications for audit committees and their stakeholders in a post-COVID-19 environment, relating to forecasting used for financial reporting, internal controls operating in a remote environment and effective communication with stakeholders.
The session comprised of a presentation by Department of Professional Practice (DPP) KPMG in Sri Lanka Partner Raditha Alahakoon on the topic ‘Implications from Forecasting’, followed by a panel discussion with Citizens Development Business Finance Chairman Alastair Corera, Laugfs Group Finance Director Dilshan Perera, Printcare Independent Non-Executive Director Anushya Coomaraswamy and Ceylon Biscuits Group of Companies Group Director – Finance Nilam Jayasinghe, to be moderated by KPMG Sri Lanka Partner – Head of Audit Suren Rajakarier.
‘Implications from Forecasting’
To provide effective oversight and help company executives navigate these challenging times, audit committees need to ask relevant questions of management to understand what alternatives will be considered in addressing key issues and to improve integrity of financial reporting.
In his presentation, Raditha mentioned that in the face of the current challenges, audit committees should ensure that forecasts are entity-specific and are an unbiased estimation of the future, by identifying and eliminating any management bias in the forecasting process. In doing so, audit committees should seek clarity by asking direct and targeted questions from the management on the following areas:
1. Data, systems and people: Pay attention to the processes in place for forecasting, the validity of the data used, the management review controls over forecasting and the capability of the employees engaged in forecasting
2. Methods and key assumptions: Question appropriateness of accounting estimates, alternatives and multiple scenarios assessed, and consideration of high-impact, low probability events
3. Estimation uncertainty: Consider the assessment and mitigation of forecasting uncertainty and adequacy of stress testing and sensitivity analysis. Retrospective analysis of actual performance vs what was projected and understanding the reasons for deviations can improve the quality of forecasts
4. Disclosures in financial statements: Accuracy and adequacy of disclosures and how they compare with peers
Further, he went on to say that audit committees should ensure that the forecasting process has the flexibility to generate projections under multiple scenarios and drill down to granular level.
The panelists presented their views on the practicalities of forecasting in challenging times like now and highlighted the importance of conducting a scenario analysis as a standard practice, using a wider data-set rather than the most immediate past and being aware of the inbuilt ‘recency’ bias which gives greater importance to recent events.
The importance of the audit committee obtaining the relevant data and assumptions from the management, which will in turn allow them to raise the correct questions was also highlighted as an important practice.
The discussions focussed on: How to address challenges in physical inventory counts, appropriateness of segregation of duties in light of changes in job responsibilities or personnel, cyber risk controls in the context of a remote workforce and opportunities available to audit committees to improve the entity’s control environment.
The importance of documenting a clear process which ensures segregation of duties, physical controls and effective handing-over of duties were cited as more important under current circumstances. Frequent physical inspection of items of inventory and reporting to the audit committee in order to address risks from remote working like cyclical inventory checks (perpetual counts) and use of digital tools for virtual monitoring were emphasised.
Communication with stakeholders
The final topic of the session covered the appropriateness of disclosure of accounting judgments and estimates for financial reporting resulting from uncertainties and volatility due to COVID-19. Additional disclosures were recommended on the assumptions made relating to impairment and valuations, credit risk management disclosures such as debtor management and exposure to liquidity risk.
It was also noted that investors would like to see companies disclosing more information on market comparisons, although this is a challenge due to management’s view that such disclosures would give competitors an unfair advantage.
As the forum drew to a close, Suren highlighted the audit committee’s role in understanding the requirements of SLFRS’s and business implications of forecasting on accounting judgments – such as potential impairments, recovery of deferred tax assets and going concern considerations which are driven by forecasts. He added that audit committees should ask relevant questions from management to ensure integrity of financial reporting.
KPMG Sri Lanka in collaboration with Sri Lanka Institute of Directors (SLID) facilitates the audit committee forum which seeks to bring together audit committee members to discuss key issues and challenges that face them in order to guide them to perform their roles more effectively.