EY teams also identified eight relevant audit needs to meet the current challenges and provide relevant insights to key stakeholders.
With a global economic unbalance due to the COVID-19 outbreak, liquidity and cash management become essential for companies searching for near-term solutions, e.g. cash shortage, credit squeeze, contingency planning and supply chain disruptions. The main identified risk is severely deteriorated liquidity inflows; deterioration in forms of the customers' ability to meet their financial obligations impacting the company’s liquidity inflows and cash management.
Audit needs to assess the company’s financial resilience and highlight the necessity for appropriate treasury and cash management. Achieving visibility and control over cash flows and driving sustainable working capital improvements are the most cost-effective forms of finance for most organizations.
2. Adaptation to market conditions
All sectors are reporting a drop-in demand. Customers oriented to traditional channels are opting for online channels, requiring companies to make immediate adjustments. The risks here are the overall market health and changes in consumer demand impacting turnover. There might be decreased demand due to decline in customer sales, global recession, loss of market share or changed customer behavior.
Audit should assess how decisions are made and what information companies need in order to make decisions for business survival. IA needs to evaluate if the decisions are made according to the company's risk appetite and the information the decisions are based upon.
3. Supply chain resiliency
94% of the Fortune 1000 companies are experiencing disruption to their supply chains as a result of COVID-19. As the pandemic continues to evolve, organizations around the globe are struggling to align supply and demand and are facing numerous issues across the end-to-end supply chain. There is a risk that the interrupted supplier ecosystems will lead to halt in production, increased costs and reduced customer trust. Increased operation costs or liquidity risks might lead to replacing affected suppliers with more expensive substitutes, temporary layoffs and factory closures.
Audit needs to assess the company's supply chain resilience by auditing the area, route to market and channel strategy, integrated sales and operations planning, logistics and distribution, manufacturing and plant operations, procurement and supplier management and crisis management and governance.
4. Compliance with regulatory changes
Disruptive and sudden regulatory changes cause severe business disruption. Governments may take quick disruptive decisions, e.g. new or updated regulations and legislations on how to protect citizens and national interests.
Audit needs to assess the compliance framework and regulatory monitoring process with focus on COVID-19. Also, there is a need to assess whether the process considers actions and guidance from regulators and the government, business strategy and the organization’s crisis response.
5. Business continuity and crisis management
As companies navigate the ongoing pandemic in order to reshape their business plan for recovery, there are several key issues corporate leaders should keep in mind. There is always a risk that companies end up leading insufficient processes and procedures for business continuity and crisis management. Lack of robust, consistent, and agile processes may result in the company not being able to efficiently and adequately manage crises and disruptive changes such as COVID-19.
Audit needs to assess the company’s crisis management and strategy for business continuity. Areas to audit can be short term liquidity, financial and operational risks, alternative supply chain options and the COVID-19 pandemic effect on budget and business plan.
During a crisis, the risk of fraud increases because companies and individuals face more financial pressure. The opportunity for fraud also increases if key internal controls are weak and if people find it easy to rationalize their actions. These three elements – pressure, opportunity and rationalization – are always present in every case of fraud (also known as the Fraud Triangle). COVID-19 offers all three and more. Naturally, there are always increased internal and external fraud risks involved.
Audit needs to assess the implication of the business's continuous activities on controls, systems, governance, and culture as these activities might increase the fraud activities in the short term.
7. Access to funding
The current financial disorder has resulted in tensions in capital and commercial paper markets, with potentially severe implications for the global economy and financial stability. Reduced demand for commercial papers deprives the access to short and mid-term funding through the commercial paper market.
Audit needs to assess the company’s funding strategy, capital market options, and contingency plan.
Security centers in COVID-19 affected areas have been shut down, rendering several companies exposed. Many such companies have been hit by cyberattacks compromising sensitive data. Cyberattacks and breaches cause leakage of sensitive data and fraud. Both increased exposure and degradation of cybersecurity programs lead to higher risk of breaches.
Audit needs to assess the company’s preparedness and defense mechanisms against cyber threats.
How EY can help you
Our teams can support you with a rapid assessment of your organizational maturity around the main categories to help prioritize needs and allocate IA resources. EY’s tool aims to provide a self-assessment questionnaire to evaluate an organization's overall preparedness level for COVID-19, across the broad facets of a business.