By Anwesha Ganguly
The current fiscal year is coming to an unconventional close due to the outbreak of the novel coronavirus (Covid-19) in India. With state-imposed lockdowns, many companies are forced to work remotely, at a time when employees are typically busy with book closures. Companies including Godrej Consumer Products and Colgate Palmolive (India) said the financial impact of the lockdowns cannot be immediately assessed. In these extraordinary circumstances, accountants and auditors are finding it difficult to complete book closures. On Tuesday, the government relaxed certain auditing rules, and extended compliance timeline. Last week, the capital markets regulator granted listed companies more time to file financial results. However, industry participants said an extension of the financial year is the need of the hour.
Corporates are unable to conduct necessary physical processes for book closures during the lockdown. They are also struggling to assess the financial impact of the disruptions caused by the virus. "The business of the company has been significantly affected over the last few weeks and will continue to be materially impacted due to the current crisis. The uncertainty around the situation makes it difficult to ascertain the exact impact at this point of time," Aditya Birla Fashion and Retail said on Tuesday.
The uncertainty poses a huge problem for auditors. "The bigger challenge from an audit perspective is the uncertainty, and how it impacts companies, their business models, and their valuation. From a year-end perspective, auditors and accountants have to assess impairment of tangible and intangible assets and recoverability of advances," said Khazat Kotwal, Partner, Deloitte India. He added that recoverability assessment would especially be a challenge for financial services firms. Some crucial year-end procedures require physical presence and coordination. "Companies and auditors are likely to face challenges in stock verification, fixed assets verification, testing of year-end controls, and balance confirmations," said Sanjeev Singhal, Partner, SR Batliboi and Co, an affiliate of global accounting firm EY. There are no solutions yet to circumvent the physical counting of cash and external dependencies like independent verification of transactions by banks either. Companies, which have foreign arms in geographies severely impacted by the novel coronavirus, will face the additional difficulty of consolidating financials, Singhal said.
The government on Tuesday deferred the applicability of the newer and more stringent audit rules under the Companies' (Auditor Report) Order, 2020, (CARO 2020) to the next financial year. "From a financial reporting perspective, deferral of CARO 2020 by a year will definitely bring some relief, and I am sure the finance ministry will also consider extending the financial year end considering the current developments," Kotwal said.
Concerns remain on how accounting continuity will be maintained during the period when businesses are shut. There is a need for clarity on how to treat profit or loss, and expenses incurred during the period, said Sushrut Chitale, Partner, Mukund M Chitale & Co. "The impact that Covid-19 will have on current and ongoing operations of the business and on profits, how it will be treated on the books, needs clarification from the Institute of Chartered Accountants of India," Chitale said.
The government on Tuesday also relaxed regulatory filing requirements under the Companies Act, as well as board meeting attendance norms. Earlier this month, the Securities and Exchanges Board of India (Sebi) granted listed companies time till June 30 to file their quarterly earnings update, among other relaxations, to help cope with the pandemic-related disruptions. As corporates shift to working from home, security concerns remain regarding dealing with sensitive financial data. While the bigger accounting firms like Deloitte may have the adequate safeguards and infrastructure to remotely handle confidential company information, smaller firms may be at a disadvantage. "Among listed companies, many are technology savvy. Lot of the work gets done electronically, some still needs physical facetime with the client, but they are better prepared. There are issues of confidentiality and access, many of them are being worked out," Kotwal said. For firms which are not adequately prepared to remotely handle accounting work, only time will tell whether the current relaxations are enough.