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Audit Committee Questions During Pandemic

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As audit committees weigh the practical challenges of accounting, reporting and disclosing the impacts of COVID-19, the following series of questions are designed to assist audit committees in execution of their oversight roles and responsibilities to ensure the performance of high-quality audits and issuance of transparent and reliable financial reporting.

Audit Specific Questions

  • What unintended consequences of COVID-19 may increase incentives or pressures on management that may result in management override of controls?
  • Are there changes in controls over financial reporting that need to be evaluated to ensure management certifications are adequate?
  • Are we able to ensure continued proper segregation of duties and monitoring controls given changing physical work situations?
  • Have any significant risks or material weaknesses been identified as a result of impacts from COVID-19?
  • What changes in risk assessments have auditors determined need to be made and how will that impact the audit strategy?
  • Are there known impediments – either by management or by the auditors – that may delay timely filing of financial statements? (e.g., lack of access or ability to obtain audit evidence or other information)
  • What additional resources or expertise may be needed by management to properly account for judgments or estimates or changes related to circumstances brought on by COVID-19?
  • What additional efforts may be required by the auditor to ensure the performance of a high-quality audit?
  • Does my audit firm have the depth of or access to adequate resources to address complex accounting and auditing questions, including industry-specific matters, as they arise?
  • Do my management teams, as well as my auditors, have the ability to properly supervise and direct the work of their staff and teams?
  • Are there additional challenges in performing auditing procedures due to multi-geographical considerations?
  • Has COVID-19 impacted circumstances that may call into question the company’s ability to continue as a going concern? What are management’s plans to address? How do these impact the auditor’s going concern evaluation?
  • Are there any auditor independence issues that have arisen with respect to COVID-19?

Accounting and Reporting Specific Questions

  • Has management adequately assessed changes in risk factors impacting our business? Are these appropriately reflected in our financial statements?
  • Has management properly identified significant accounting areas where impacts from COVID-19 are likely? Has management further accounted for related income tax effects of these impacts?
  • Have we properly accounted for and disclosed changes in significant estimates and judgments impacting the financial statements?
  • Has management, along with the auditors, identified applicable relief opportunities with respect to the 2020 CARES Act and appropriately factored these into the accounting and reporting, including income tax effects, within the financial statements?
  • Are there accounting or disclosure matters that have required significant consultations outside of the audit engagement team?
  • Have the auditors and management identified significant or industry-specific matters related to the interaction of the CARES Act and GAAP or GAAS impacting our financial statements that need regulatory consultation?
  • Has new information arisen regarding COVID-19 events contained in previously filed financial information that requires updating of current disclosures?

Corporate Governance Specific Questions

  • As an audit committee, how are we maintaining our education with respect to COVID-19 considerations, relief efforts and related risks and opportunities?
  • Are we appropriately engaging with internal and external stakeholders and providing transparent and consistent communications about significant impacts on our business?
  • Are we allocating enough time and making ourselves available to discuss critical issues as they arise with management, the auditors and the board?
  • Are we keeping the full board appropriately updated as to significant challenges with respect to financial accounting and reporting?
  • Are we considering responses to anticipated questions from shareholders during upcoming annual meetings?
  • Is management actively and effectively engaging with lenders, customers and other stakeholders in a timely and productive manner and are the results of those engagements reflected in the financial accounting and reporting?
  • Are we, as a board committee, appropriately considering additional risks that have arisen related to other stated committee responsibilities as described in our Audit Committee Charter – e.g., COVID-19 cybersecurity and data privacy risks?

3 Insurance Strategies To Reclaim Liquidity

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The COVID-19 pandemic has had wide-ranging economic impacts, causing lost revenues and creating liquidity challenges. As organizations weigh tactics to sustain through the current crisis and avoid a cash crunch, it’s important to consider options beyond cutting costs and streamlining processes. Strategically approaching the insurance risk program can be a vital method to unlock liquidity by maximizing potential recovery, recouping premiums and refreshing the insurance risk strategy.
 

Potential Recovery

Many organizations face unprecedented disruption to operations because of the pandemic, including stay-at-home orders and the shutdown of non-essential businesses, and there is a lack of muscle memory for dealing with insurance under these unique circumstances. It is critical for organizations to identify the existing and potential insurable losses, document and calculate all losses, and file a claim with their insurance company. Doing so in a timely manner helps protect liquidity by preserving your rights under the policy.

Although many insurers have indicated that COVID-19 does not fall under property insurance or business interruption coverage due to virus-related exclusions in the policy, that may not necessarily be the case. There is active litigation related to the clarity and consistency of policy exclusions for loss due to virus or bacteria, and potential legislative changes could also have widespread implications for insured organizations.

No two insurance claims are alike, because every claim has a unique set of circumstances. That’s why you need to review your coverage in detail—and examine the specific facts associated with the loss—to understand all possible areas of claims recovery that could apply. For example, there may be relevant manuscript policy language crafted specifically for your organization’s coverage. That raises the possibility that certain endorsements, ISO or insurance company-specific, are either absent or worded differently from the standard forms. There could also be other policy provisions that limit the application of the exclusion for loss due to viruses.

Other insurance coverage (e.g., executive risk, commercial general and excess liability, workers’ compensation, et al.) may apply as well.  We are seeing, and expect to see, many more claims against Directors and Officers for mismanagement, bodily injury for illness and death with a claim of negligence, and workers’ injuries due to the virus, to name a few.  These losses are potentially covered in one or more of your other insurance policies and can provide recovery relief for defense and indemnity costs.  Also, in the case of renewals for Claims Made policies, the impact of any COVID-19-specific exclusions should be examined and the implications on present and past coverage understood. 

To maximize your organization’s potential recovery, each policy needs to be scrutinized for specific coverage grants and exclusions to determine coverage under the particular circumstances. Due to the complexity involved, engaging with an experienced specialist can help you analyze both the policy and the set of facts in granular detail.
 

Recouping Premium

Another method for reclaiming liquidity is by recouping part of the insurance premium. Due to efforts to slow the spread of COVID-19, there are far fewer drivers on the roads, which has led some auto insurance companies to give customers refunds on premiums. Why shouldn’t your organization get the same treatment if the exposure to risk has diminished?

Evaluating the underwriting data provided to the insurance markets at the most recent renewal can help identify how to recoup premium. If the pandemic has caused temporary business closure, reduced employee headcount or decreased sales, then the business interruption calculation has changed. This can justify a new assessment of the value for updated premium calculation. Several strategies can facilitate the reclamation of premium, including a mid-term policy negotiation, accelerating policy audits, evaluating loss reserves, revision of go-in exposure estimates or even policy cancellation and rewrite.
 

Key Questions to Ask Yourself:

  1. Have you explored the availability of insurance for COVID-19-related claims?
  2. Have you preserved your rights under your claims made D&O insurance policies?
  3. Have you investigated a premium refund from your insurance company yet?
  4. Do you have a strategy to lower premium cost with your pending renewal?

Future Preparation

A failure to prepare often leads to unfortunate consequences, so it’s crucial to plan for the future now. You can use this crisis as an opportunity to reassess the management of organizational risk going forward. There are numerous options for the insurance risk strategy, including reconsidering deductibles, limit selections and policy purchases.

Your organization can also reevaluate how it presents its risk profile to the insurance market—such as by restructuring, updating and expanding the underwriting exposure data about payroll, revenue, and business interruption values. This can generate competition among insurers on pricing and terms, thereby driving down costs. Another option is the utilization or expansion of alternative risk vehicles (including captive products). By reconsidering the strategy for managing organizational risk at this critical time, you can prepare the organization to reclaim liquidity in the future.
 

COVID-19 Insurance Risk Program Checklist

Maximize Potential Recovery

  • Assess the presence of all current and potential COVID-19 claims
    • Property Damage / Business Interruption
    • Pollution Legal Liability
    • Workers’ Compensation / Employers Liability
    • Fiduciary Liability
    • Directors & Officers Liability
    • Employment Practices Liability
  • Preserve insured rights in Claims Made insurance policies
  • Track external litigation and legislation that opens new recovery opportunities for your organization
  • Utilize the government COVID-19 stimulus programs
  • Track claim details potentially related to COVID-19

 
Recoup Premiums

  • Update underwriting exposure data (e.g., business interruption values, payroll, headcount, revenue)
    • Accelerated policy audits
    • Mid-term insurer negotiations
    • Policy cancellation and rewrite
  • Consolidate purchases of excess insurance capacity (e.g., shared limits for D&O, EPL, Crime and Fiduciary; multiple-year and single-limit policies)
  • Re-evaluate coverage limits purchased
  • Actively drive down self-insured and insured claim reserves

 
Prepare Your Insurance Risk Strategy for the Future

  • Restructure, update and expand underwriting exposure data (e.g., business interruption values, payroll, headcount, revenue)
  • Update your insurance risk strategy (e.g., deductible/retention/limit selections, policy purchases)
  • Compete your insurance brokers and insurance markets to drive down cost
  • Consider the use, formation or expansion of a captive insurance company

Strategize to Thrive In the face of disruption and uncertainty, these insurance strategies form a key part of an effective organizational response. They can help to successfully reclaim liquidity in both the near term and long term, which puts an organization in position to thrive once the crisis subsides.

What The SBA Payment Protection Program Means For Natural Resources

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On March 27, President Trump signed the Coronavirus Aid, Relief and Economic Security Act (CARES Act), a $2 trillion stimulus package intended to help mitigate the economic impact felt by businesses and individuals from the novel coronavirus (COVID-19).

The stimulus is good news for natural resources companies, many of which have been struggling with low oil prices, which the pandemic has further exacerbated. The legislation’s Small Business Administration (SBA) Paycheck Protection Program (PPP), which provides loans to small businesses and organizations to assist in retaining employees, make mortgage and/or lease payments and utility payments, could be particularly useful to the industry.

Under the program, $350 billion has been set aside for small businesses, to be administered by SBA-approved lenders. President Trump is currently seeking an additional $250 billion for this program.  Loan amounts for this provision may only be primarily payroll cost including health insurance and other related costs but can also be used on a limited basis for rent, utility payments, and mortgage interest. To qualify for a loan under this program, your company must employ 500 employees  or fewer (both full-time and part-time), or it must meet the industry size standard set forth by the SBA . Many natural resources companies are larger than 500 employees but meet the industry size standard set forth by the SBA. The SBA’s size standard for crude petroleum extraction companies, for example, is 1,250 employees. You can view a full breakdown of size standards by NAICS codes here.  
 
The maximum amount for these loans is 2.5 times the average total monthly payroll costs for the year prior to applying for the loan, or up to $10 million. The interest rate may not exceed 1%. Businesses can also defer payment of the principal, interest and fees for between six months to two years.
 
One of the biggest appeals of the SBA Paycheck Protection Program is that the loans are forgivable, assuming certain conditions are met. If the borrower retains its employees and salary up to a certain level, the SBA can grant forgiveness for payments made during the 8-week period after the loan is taken out for:

  • Payroll costs
  • Mortgage interest
  • Rent payments
  • Utility payments


The Treasury Department anticipates that no more than 25% of the forgiven amount may be for the non-payroll costs.

For organizations that do not maintain payroll because employees were let go, loan forgiveness is prorated—but the CARES Act provides an exemption to the reduction if the eligible entity re-hires employees and/or eliminates the reduction in salaries by June 30, 2020.

Additionally, organizations do not need to report forgiven amounts as taxable income.

To complete the application, available through the Treasury Department’s website or banks that are lending- qualifying organizations will need to complete the PPP loan application with payroll information included and submit it to an approved lender by June 30, 2020.

Small businesses, nonprofits and sole proprietorships were able to apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders starting April 3, 2020. Independent contractors and self-employed individuals can apply as of April 10, 2020