March 18, 2020
The speed and breadth of the unfolding COVID-19 crisis—dramatically impacting lives and healthcare systems, disrupting business operations and supply chains, slowing markets, and now posing the risk of a global recession—is putting nearly every facet of business to the test. Not since the financial crisis of 2008–2009 have crisis response plans, business continuity and resilience, cash flow, scenario planning, and corporate leadership come under such intense pressure.
Navigating the uncertainty requires a sharp focus on people, liquidity, operational risks, and contingencies while keeping sight of the bigger picture—strategy, risk, and resilience. With information changing daily (even hourly), companies should expect to recalibrate their responses—and potentially reframe their thinking about how the COVID-19 crisis is impacting the business—as conditions change.
To help boards in their oversight of the company’s pandemic response—managing through the immediate crisis as well as addressing vulnerabilities exposed by the outbreak—we highlight five key areas for board focus:
Based on our conversations with directors, KPMG LLP subject matter professionals, and others on the front lines of the crisis, these five areas are critical today and in the medium term.
The initial focus on a company’s people and operations in China, Italy, South Korea, and other COVID-19 hot spots is quickly going global, with Europe, the U.K., and now the U.S. seeing spikes in coronavirus cases. The focus on employee well-being, therefore, should now be proactive, international, and company-wide.
What policies are in place to protect and support employees (e.g., hygiene programs, restrictions on travel and congregation, flexible and remote work policies, healthcare)
Do we communicate these policies—and provide timely updates—clearly and frequently to employees?
In addition to employees, does the company understand how its other key stakeholders are being impacted by the COVID-19 crisis?
Lessons learned from the 2008 financial crisis—marked by turmoil in world markets, shortages of cash and liquidity, tremendous volatility and uncertainty, and the prospect of a prolonged recession—can provide a basis for boards to consider near- and longer-term financial risks posed by the coronavirus crisis. Among the lessons learned:
Given the uncertainty regarding the economic impact of the coronavirus crisis, scenario planning is essential.
Understand the array of financial risks to the business and how management is addressing these risks under different scenarios.
Focus on fair value and possible asset impairments that may pose significant risks for the company.
Supply chain disruption is being felt across most industries, with a majority of Fortune 1000 companies experiencing some level of disruption.2 The problem has quickly become global, and the complexity has made it challenging to model and evaluate the range of impacts and alternatives. Likewise, the impact of the crisis on workers and the workplace—particularly directives for social distancing and the resulting closures of offices, schools, and local businesses—along with the demands on technology systems to support remote working may pose significant operational challenges for the company.
What measures are being taken to stabilize the company’s supply chain?
Is the board confident in the company’s business continuity plans?
Are the company’s technology capabilities able to support a significant increase in remote working and virtual operations?
Given the fast and fluid pace of the crisis, the directors and business leaders we spoke with all emphasized the critical importance of frequent management updates to the board. As directors noted in our recent white paper, the board’s role in a crisis is to stay informed and oversee management’s response, but “without getting in the way. Let management do its job and expect them to keep the board informed. But stay on top of the crisis until you reach the landing point.”3
Understand the scope of the crisis and how management is responding.
Consider the potential impact of the COVID-19 crisis on the board’s operations and effectiveness.
Most companies with fiscal years ending December 31 have filed their 2019 annual reports, but not all. These delayed filers and companies on fiscal years other than December 31 (particularly retailers who typically are on a January 31 fiscal year) are likely to file in the final weeks of the reporting cycle and, therefore, will need to consider the ramifications of the coronavirus in their annual reports.
Those companies fortunate enough to have already filed their 2019 annual reports are nearly through the first quarterly operating periods. As they prepare their quarterly reports over the next few weeks, they will need to assess the financial reporting impacts of the coronavirus crisis in the quarter as well as the need for enhanced disclosures.
The SEC has issued public statements calling on companies to monitor the necessity for disclosures regarding the current and potential effects of coronavirus—e.g., risk factors, MD&A, liquidity, results of operations, and known trends and uncertainties—as well as the adequacy of the company’s disclosure controls and procedures in the reporting of this information. Among the potential areas of business risk disclosures to consider:
Accounting and financial reporting impacts
Companies should consider whether economic uncertainties and market volatility have or will affect accounting conclusions, including:
Subsequent events (ASC 855). Companies should evaluate whether events occurring after the balance sheet date require disclosure or possibly recognition. For December 31, 2019, filings, the financial reporting impacts of the coronavirus in the U.S. were likely limited to nonrecognized subsequent events that were required to be disclosed. For later filings (e.g., March 31, 2020), any accounting impacts will likely be recognized.
ICFR. Companies with significant international operations or business transactions may consider whether there is any effect on internal control over financial reporting. For example, new controls may be implemented and/or modified as companies start to implement emergency procedures, modify IT access to enable remote workforces, or account for unanticipated significant unusual events (e.g., accounting for insurance recoveries related to business interruption). Disclosure of material changes in ICFR would be required.
Regulatory relief. On March 4, the SEC issued an order extending filing deadlines for companies operating or located in regions affected by coronavirus. The relief applies to filing deadlines between March 1 and April 30, and companies relying on the relief are required to furnish Form 8-K (or 6-K) by the later of March 16 or the original reporting deadline, and disclose certain required information. Filing deadlines for any report, schedule, or form are extended 45 days from the original due date.
Financial reporting impacts of coronavirus – KPMG LLP, March 2020
Pandemic Planning as Part of an Overall Resilience Strategy – KPMG LLP, March 2020
Crisis prevention and readiness: Lead director insights – KPMG Board Leadership Center, September 2019
1 David A. Wemer, “Addressing the coronavirus ‘infodemic,’” Atlantic Council, March 16, 2020.
2 Elliot Smith, “Coronavirus could impact 5 million companies worldwide, new research shows,” CNBC.com, February 17, 2020.
3 “Crisis prevention and readiness: Lead director insights,” KPMG Board Leadership Center, September 2019.