The Audit Committee and the Credit Crunch

Abstract

No one response to the economic situation The impact of the credit crunch will vary dependent on whether or not the company is in the financial services sector, and on its current financial position. External auditors are paying more attention to forecasts and going concern In many companies, audit procedures are the same as in previous years, but there is somewhat more focus on budgets and forecasts, and on the financing position of the business and its banking covenants. The Board and the audit committee are examining treasury and financial policies, as well as the financial statements Many of the issues discussed in this report are being dealt with at Board level as well as, or instead of, by the audit committee. Some of the audit committees already incorporated regular covenant reviews and treasury reviews into their agenda, and so had processes for dealing with this. Others had formally added these items to their workload. Funding is critical Audit committees are examining closely the company's ability to roll over loans when they come to the end of their term. Treasury policies are being inspected in detail in the light of the current economic climate. Bank covenants are being monitored closely, and more stringent stress-testing is being done than previously. Business activities Audit committees are aware of the need to monitor the financial status of major trading partners. For some, this was already part of their agenda. Attention is being paid to the likely impact on revenues, profits and cash flows of an economic slowdown. Financial statements Accounting policies such as mark-to- market are causing difficulties in many companies, resulting in volatile accounting results. Accounting for pensions is leading to problems in valuing both pension assets and liabilities. The Boards of many companies are not clear whether their pension funds are holding sub-prime debt. This is a matter for the audit committee to investigate. Changes to accounting standards on pension funds are unwelcome at this particular point in the economic cycle. Communicating with investors Although the market needs information, there is a nervousness that it might over-react to news. Narrative disclosures and investor presentations should be examined carefully by the whole Board before release.