The effects of the coronavirus, aka COVID-19, are evolving rapidly and the long-term economic and business consequences of COVID-19 remain uncertain. In addition to addressing the serious operational impacts this pandemic is causing, not-for-profit organizations should assess how this disruption may affect their internal controls and financial reporting. While there are no one-size fits all solution, and each not-for-profit’s situation is unique, some overall considerations may include:
Not-for-profits will need to evaluate their internal control systems, as well as assess how the crisis affects their processes and procedures. Organizations that operated on a strictly traditional in-person or in-office level will now need to consider how a remote workforce impacts their control structure. In addition, organizations may need to update existing policies and procedures to allow for the enactment of a flexible or work from home environment and give proper guidance to its employees. Thoughtful deliberation and creative thinking can result in effective preventive and/or mitigating controls. In particular, ensuring that the key system of controls surrounding cash receipts/billings (especially for those that receive checks on-site), cash disbursements/payables, and information technology security should be evaluated. Consideration for maintaining segregation of duties in a remote environment and security of any physical property, plant, and equipment should also be contemplated.
Accounting estimates are important and integral part of financial reporting for organizations. It requires that management make prudent judgments regarding anticipated future results. The estimation process is generally simpler when there is little change but becomes complex when an organization is faced with uncertainty and lack of predictability. In particular, accounts and/or grants receivable and their related collectability should be reassessed. Careful consideration and planning now may help minimize adverse changes in these estimates.
Subsequent to December 31, 2019, the local and global investment markets experienced significant declines resulting from uncertainty caused by the pandemic. This financial market disruption has had an impact on investment portfolios, especially those with endowment funds or pension plans. Not-for-profit organizations should closely monitor their investment portfolio and consider their risk tolerance in today’s operating environment.
Completeness of Transactions and Frequency of Reporting:
Many organizations have a regular timetable for the completion of its monthly close and reporting of financial results. An organization needs to consider how a completely remote workforce will affect the flow of information, the completeness of its internal financial statements and the timeliness of its financial data. Timely and accurate financial information is essential, especially during crisis conditions, so that an organization can make rational, informed decisions. Management must ask itself key questions, such as “should we change this timetable” or “is an estimate of an amount just as effective and more timely than the actual results”. Governance and management must communicate and agree on the appropriate level of accuracy and timeliness.
This standard requires management to evaluate whether there’s substantial doubt about a not-for-profit’s ability to continue as a going concern within one year after the date the financial statements are issued. This evaluation should be based on events that are known and reasonably knowable at the date the financial statements are issued. As a result, entities will need to incorporate the effects of COVID-19 on their going concern evaluations prior to issuance, which may cause the need to reassess financial projections and other relevant information utilized in their previous evaluation prior to the pandemic. Management should consider, amongst other factors, items such as reduced contributions or special events revenues, facility or program closures, and the ability to meet debt compliance/covenant requirements.
Organizations need to consider if any of its assets, both tangible or intangible, have been impaired as a result of the disruptions caused by COVID-19. Goodwill, long-lived assets, and inventory are just a few of the areas in which the question of asset impairment should be raised and may result in an unanticipated write-down of assets.
The impact of the outbreak may require entities to include a subsequent event disclosure related to COVID-19. In general, most not-for-profit financial statements probably will not be adjusted for many of the impacts of COVID-19, but disclosures under this standard will likely be necessary. That being said, not-for-profit organizations will need to carefully consider the nature of events that occurred before the issuance of the financial statements to determine whether that information needs to be disclosed or recognized in the financial statements.
Citrin Cooperman remains committed to ensuring we do our part to keep you up-to-date on the latest information available during these difficult times. Please reach out to your dedicated Citrin Cooperman Not-for-Profit Practice team at any time, as we are ready and able to assist you and your organization.