Business

Audit watchdog sounds alarm over coronavirus delays

Accountancy regulators have begun sounding alarm bells over the impact of the coronavirus crisis on auditors’ ability to scrutinise corporate balance sheets.

The Financial Reporting Council (FRC) has opened talks with major audit firms about possible delays to signing off clients’ accounts.

The discussions are focused on multinationals which have substantial operations or subsidiaries in China.

Chinese data protection laws require the auditing of companies to be conducted within the country, rather than remotely.

Its government does not allow audit papers to leave China or to be viewed online.

However, restrictions placed on foreign travel to the world’s most populous nation since the outbreak of the coronavirus epidemic mean that overseas-based audit professionals may be prevented from going there for several months.

The FRC has now told firms to identify specific audits that may be at risk of delays beyond the statutory deadline, according to insiders.

Sources said the FRC was likely to make a public statement in the coming days about how audit firms and listed companies should deal with the consequences of coronavirus for their accounting work.

One option could be for companies to appoint a separate auditor for their Chinese subsidiary on a temporary basis.

Mark Babbington, audit director at the FRC, said: “The group auditor has to decide what alternative ways they can get the necessary evidence to complete the audit.”

Watchdogs are also considering whether to oblige relevant companies to include a section in their financial results disclosing the possible impact of the outbreak.

The FRC took a similar approach to disclosing financial risks relating to Brexit ahead of the 2016 EU referendum.

One potential consequence of the coronavirus outbreak may be that auditors are unable to provide a going concern opinion in certain cases because the audit work is unable to be completed on time.

The impact of coronavirus – which has so far killed more than 1600 people and infected 68,000 more – has been reflected prominently in volatile equity markets as investors seek to discern its possible impact on global economic activity.

To date, however, few large UK companies have highlighted specific risks from the contagion.

Last week, JCB, the industrial machinery manufacturer said it would reduce working hours at its UK factories because of the impact of coronavirus on its supply chain.

Burberry, the luxury goods manufacturer, said earlier this month that it had been forced to temporarily close more than a third of its 64 mainland Chinese stores.

“The outbreak of the coronavirus in mainland China is having a material negative effect on luxury demand,” Burberry chief executive Marco Gobbetti said.

He added that the company “cannot currently predict how long this situation will last”.

Last week, Relx, the FTSE-100 exhibitions group, said it had had to postpone more than 20% of the events it is organising in China.

Mobile World Congress, a flagship event in the global telecoms industry’s calendar, was cancelled last week after a string of big corporate participants withdrew, citing their unwillingness to send employees to Barcelona amid the coronavirus crisis.