The business impact of COVID-19

Jun 30, 2020

Yvonne McCafferty, FAE Core Risk Management Lecturer, takes a look at the risk management implications of the external environment and its impact on the company.

At FAE level, you must have a strong awareness of the current business environment in which organisations currently operate. At FAE, you are being examined on your capability to integrate not only the required technical knowledge and skills but also to bring your business acumen and experience to the forefront. I would always encourage students to start reading at least one business newspaper every week to help develop this business awareness. You need to be able to bring real-life examples and business awareness to your exam answers at this level.

The areas examined at FAE Core aim to develop a students' ability to assess the internal and external environments and strategic processes affecting organisations. The current COVID-19 pandemic is probably one of the most significant economic events that many organisations have faced, and we are now hearing daily news stories of businesses in turmoil. In light of the areas examined at FAE Core, some considerations of the business impact that the pandemic is having that might be helpful in the context of your studies are set out below. 

Risk management

We now live in a new normal, and businesses of all sizes are having their business resilience tested. In lectures, we saw how the UK Code of Corporate Governance refers to "emerging risks" and the responsibility of the directors to have procedures in place to identify such risks. The scale of this pandemic and its impact could not have been predicted and has undoubtedly tested the strength of an organisations risk management practices, with the crystallisation of many existing risks and the unfortunate arrival of many new risks. Businesses have had to act fast to weather the storm ultimately. The labour market has been significantly impacted, with unemployment rates predicted to soar amid the oncoming recession that economists believe is yet to arrive.

As we know, many businesses have had to close completely, with the furloughing of employees and, in many cases, widespread redundancies. Fortunately, the government has launched many financial support schemes, all of which have had significant business uptake, like the wage subsidy scheme.

For those businesses who were fortunate enough to be able to operate through a remote working structure, this has not come without challenge. Technology reliance has been an issue for many, coupled with an impact on the company's internal control environment. In a remote setting, it isn't easy to ensure controls continue to operate effectively. The effectiveness of controls over financial reporting, in particular, will be a concern for Boards and company auditors with a heightened risk of fraud presented. Candidates should consider the fraud triangle (pressure, opportunity and rationalisation) in the context of a remote working environment. 

Financial reporting

The pandemic has also presented a myriad of financial reporting issues, and this will likely continue. Going Concern and its appropriateness has been central to this. Directors have had to revisit cash flow forecasts to consider the lasting financial impact of the pandemic, an event as we know that is somewhat impossible to determine. For a 31 December 2019 reporter, COVID-19 has been determined to be a non-adjusting event requiring disclosure only, however, for reporters with year ends after December 2019, there will be an even more significant challenge. Companies will need to assess the impact on the valuation of assets, and we are likely to see an increase in the level of recognised impairments as a result. Accounting for payment breaks in areas such as lease accounting under IFRS 16, recognition of restructuring provisions, government support scheme accounting, are just some of the issues that will arise.

Finally, when we consider corporate strategy, many companies have had to redefine their approach to survive. A strategic choice may be limited now due to financial pressures, yet we still see companies smartly transforming service offerings through online platforms. Companies who have tackled this crisis head-on, showing real leadership in a time of economic uncertainty and have been proactive will inevitably stand apart and recover quicker than those who have not.