Financial Considerations During the Pandemic
July 30, 2020
In the second episode of the Remote Workforce Challenges podcast series, Brian Ferrara and Nina Kelleher, senior managers specializing in Process, Risk and Technology Solutions, discuss the difficulties organizations are facing surrounding financial reporting and liquidity management as a result of COVID-19.
NK: In the previous podcast, in this series, you joined me to explore remote workforce challenges around enterprise controls. Today, I was hoping to catch up with you on some of the risks and challenges around financial controls that have emerged from a virtual workforce. What are some of the high-level financial control issues that are prevalent when the workforce is remote?
BF: A couple of things come to mind. One, changes to processes and controls because of being remote and then documenting those updates. Some of those may be temporary, some may be permanent. Second thing is really what we'll call management review controls and the detailed execution and review over controls. MRCs are the reviews conducted by management of estimates and other kinds of information for reasonableness. They really require a significant judgment knowledge and experience. As an auditor we really place a lot of reliance on these controls and as part of our testing, we essentially re- perform those.
Another hot topic, segregation of duties. People are just built a little bit differently now. Organizations are built a little bit differently. There's been some furloughs, people have moved around. So we see some challenges there. Certainly disclosure considerations, anything around revenue, liabilities, impairment, goodwill, going concern. What I would recommend is really evaluating both internal and external audit needs, having plans in place with both audit teams to ensure appropriate audit and control requirements can be met. We'll kind of go back to the theme of technology as we spoke last time. And what we see here is those firms who are a little bit more advanced in their technology are getting through these issues a little bit better than those who are processing manually.
NK:Have organization's ability to meet regulatory and reporting requirements been materially impacted ?
BF: Without question, a firm's abilities to meet regulatory reporting requirements have been impacted. The SEC is closely monitoring the impact of coronavirus on organizations, investors, and capital markets. Public companies are dealing with a variety of financial reporting difficulties in the face of the pandemic. Some examples, preparation of forward looking cash flow estimates, recoverability, and impairment of assets, accounting for financial assets disclosures, and again going concerns. If a company anticipates reporting or filing delays due to the outbreak, they should certainly contact their local regulatory body, discuss the details. A failure to follow regulations and timely reporting may have consequences.
NK:You mentioned that organizations need to evaluate their financial disclosures. Can you expand on that a bit?
BF: SEC filers really need to consider the broader impact on public disclosures. Organizations will need to continue to evaluate how the coronavirus pandemic impacts their business and the relevancy of disclosure for SEC filing purposes. As a rule of thumb, SEC filers should evaluate the need to disclose the related impact of COVID-19 if it's required to keep the financial statements from being misleading to its users. Consideration needs to be given around the disclosures within the financial statements, but also within other areas of the filing, the 10-Q filings, such as risk factors or management's discussion and analysis. Disclosures should be specific to the organization's individual circumstances and avoid using general language. The more descriptive they are, the better they'll be.
NK:In our last discussion. You spoke about supply chain risk and vendor solvency. Can we discuss cash flows and liquidity?
BF: Absolutely. Yeah. What I'll start with, "cash is king" regardless of COVID or not so I think it's really important to understand your cash and your working capital needs. This is a continuous process, simulating your cash flows, understand how that interacts with your short term liquidity needs. Of course, managing your working capital. Determining business requirements is the first step in deciding on the best way to fund working capital. Some of the things we're seeing is procurement and inventory, right? Excess of stock inventory can burden cash resources. Timely payment of vendors, use, take advantage of vendor discounts and your vendors are going to be happy to be paid a little bit early. Evaluate your KPIs. Two key KPIs I would look at is days payable outstanding, day sales outstanding. Certainly work to improve your accounts receivable process and seems very basic there, but it's surprising how many times we come across an inefficient or redundant AR process.
If you have GET, communicate with your lenders. Transparency and open lines of communication are crucial. What I'll say here overall, cost control is key. Review your costs carefully, determine what costs you actually need to effectively manage your business. Don't cut costs at the risk of sacrificing revenue or quality, but evaluate areas to determine what costs are necessary. Certainly have a strategic plan in place. Again, leveraging tech, some great cost savings ideas, cloud computing, CRM. Customer relationship management software allows businesses to manage clients, contacts, customer data, marketing, and reduce some of those what I'll call ancillary systems and the licenses associated with those systems. B2B integration, other businesses want to integrate with you and it's going to make you more efficient, optimize your process, save you money.
NK:You mentioned about improving the accounts receivable process. Can you talk about why that's so important?
BF: Sure. No different than when we talked about evaluating your vendors, right? This is the first thing you'd really want to do is kind of conduct that risk assessment, right? Who are my key customers and have I evaluated their credit worthiness? Some organizations, large organizations have teams doing this continuously. Not many do anymore, but certainly now in this time you want to look at credit worthiness, evaluate payment trends to identify delays, missed payments, or even partial payments. That's your first indicator. Closely monitor that AR aging. Your customers are faced with the same challenges you are. Have these communications, you should be having them frequently, stay informed, ask the right questions, address key issues, certainly talk money. Again, going back to setting clear expectations and I think your customers will appreciate that as well. Overall, the AR process, to improve the AR process, again, using technology, using automation, to help deliver invoices, speed up billing and collections, and ultimately shorten the cash conversion cycle.
Some of these yield tech offerings, they allow you to set up, not some, all allow you to set up automated invoicing and reminders and collection emails at user defined intervals. Helps not only standardize the AR process, but your collection strategy as well. Data is more accurate, more timely and allows for better visibility analytics over AR cash collections and allows for informed decision making. What I will say here is, you can't take a bad process and fix it with tech. We see this more times than not. That's only going to give you further headaches. You really need to optimize your process and we do this for a lot of our clients. We clean up a process and put it into an automation workflow and they really reap the benefits of the tech solutions.
NK:How have you seen organizations encourage employees to adhere by financial rules and regulations when they're not in the office? How are organizations encouraging collaboration and openness?
BF: Sure. As we talked about it at the enterprise level, firms are doing a great job keeping close to their employees, using tech, enabling technology to accommodate the remote workforce while ensuring they're adhering to financial rules and regulations. What we're actually seeing now, some companies are actually creating a remote workforce policy for that very reason as part of control compliance, increased check-in with management, video chats. Really performing reviews of controls and documenting and evidencing those reviews. The collaboration effort here is key and keeping everyone on the same page.
NK: Any last words for today?
BF: Be proactive, continuous conversations and transparency throughout the organization is key. With being proactive be agile, continuously risk assessing, monitoring. Monitoring is ongoing. And of course, when you can leverage tech to help you with this, the more we work in this environment, the better we will get with technology and we will see the benefits of that technology.
NK: Brian, thank you for this valuable information and thank you for listening to the EisnerAmper podcast series. For more information on this and a host of other topics, visit eisneramper.com/PRTS and join us for our next podcast on fraud risks.