THE Public Accountants and Auditors Board (PAAB) has warned accounting officers against sweeping corporate malpractices under the carpet as companies conveniently use the after-shocks of Covid-19 to cook financial books.
In a communique directed to chief executive officers, chief financial officers and audit committee chairpersons, PAAB secretary Admire Ndurunduru said Covid-19 should not be used by reporting entities to cover up bad news with “kitchen sink” provisions.
“As you will be aware, Covid-19 is having a devastating effect on people’s health, way of life and the economy. Many businesses are suffering from the consequences of the pandemic as it continues to affect their ability to trade, among other effects,” he said.
“Directors will need to consider how to reflect the impact of Covid-19 on not just the numbers but also the disclosures in the financial statements. Also, they should be mindful of the risk that Covid-19 is used as an opportunity by some reporting entities to bury bad news with ‘kitchen sink’ provisions,” Ndurunduru said.
He said the forthcoming financial statements (2020 year-ending reporting) would be published against the backdrop of economic uncertainties resulting from Covid-19 and other Zimbabwe-specific economic and social issues.
The entities, Ndurunduru said, are also dealing with commercial and operational change associated with economic stabilisation and realignment programmes under the Transitional Stabilisation Programme initiated by government a few years ago.
He said public health measures taken in response to Covid-19 seem likely to continue beyond the first quarter of 2021 while remote working and travel restrictions are likely to bring challenges for finance teams and auditors.
“Against this background, we encouraged entities to consider careful whether they should lengthen their reporting timetables for 2020/21, making use of the extensions to reporting deadlines announced by the various sector regulators, which remain in place and/or engage their sector regulators in cases where such extensions have lapsed and are considered necessary,” he said.
He said the Covid-19 pandemic presents businesses with the challenge of providing clear and transparent information that focuses on issues of utmost interest to users.
“I expect entities to have more focus on the disclosure of liquidity risk, going concern and viability among other relevant factors in terms of financial reporting standards promulgated,” he said.
Ndurunduru also said he is expecting preparers to consider the principles contained in International Accounting Standard (IAS) 1 and provide disclosures that allow users to understand the impact of events and conditions on an entity’s financial position and financial performance, even if those disclosures are not explicitly prescribed.
Such disclosures should, where possible, clearly quantify the impact of Covid-19 on a company’s financial performance, financial position, and prospects, he said.
“Where judgements have been involving significant estimation uncertainty, it is expected that increased disclosure of relevant sensitivities or ranges of possible outcomes to help users of the accounts understand the assumptions made and the extent of the changes that might be reasonably possible in the next twelve months,” he said.
In view of the exchange control regulations promulgated during the current reporting period, Ndurunduru said entities are expected to determine whether there was a change in their functional currency. The functional currency of an entity reflects the underlying transactions, events and conditions that are relevant to the entity.
The PAAB also said the restatement of financial statements in accordance with IAS 29 requires the use of a general price index that reflects changes in general purchasing power.
The currency that was assessed and continues to be in hyperinflation is the Zimbabwean dollar. As such, entities whose functional currency continue to be the Zimbabwe dollar are expected to apply the Zimbabwean dollar consumer price index (CPI) and not a blended CPI in their preparation of inflation-adjusted financial statements in terms of the requirements of International Financial Reporting Standards (IFRS).
Recently, Ernst & Young Chartered Accountants (EY) condemned the Reserve Bank of Zimbabwe (RBZ)’s financial results for the year ended 31 December 2019, saying they were misrepresented, mis-stated, and do not accurately reflect its financial performance and health. It, therefore, issued an adverse opinion, condemning the central bank’s results.
Basis of adverse opinion included non-compliance with IAS 21 relating to the effects of changes in foreign exchange rates in prior period, and inappropriate application of IAS 8.
The auditors said the RBZ applied the US dollar as its functional currency for the period 1 January 2018 to 22 February 2019 and the Zimbabwean dollars for the period 23 February 2019 to 31 December 2019.
Ndurunduru said narrative disclosures within the annual report should aim to quantify the historical effect of Covid-19.
However, arbitrary splitting of items is discouraged between Covid-19 and non-Covid-19 financial statement captions.
“Such allocations are likely to be highly subjective and, therefore, unreliable. Entities should also apply existing accounting policies for exceptional and other similar items consistently to Covid-19-related income and expenditure,” he said.
In considering their future prospects, Ndurunduru said it is expected that entities will clearly articulate the impact of Covid-19 on their business models and strategies, and how the changes are compatible with future forecasting assumptions used in other areas of financial statements.
“In particular, it is expected that significant judgements made in determining whether or not there is a material uncertainty in relation to going concern will be disclosed and explained. Preparers are reminded that significant judgements made in deciding whether impairment indicators exist should be disclosed and explained.”
“As required by IFRS, disclosures should describe the approach used to determine key impairment assumptions and explain any significant year-on-year changes, including any changes due to Covid-19,” he said.
Despite the ongoing challenges created by the pandemic, Ndurunduru said preparers and those charged with governance are required to apply and follow the applicable financial reporting standards and auditors remain responsible for conducting audits in accordance with the applicable auditing standards and pronouncements as well as other regulatory and professional standards.