While companies operating in Ukraine are facing firsthand disruption from the war, many others are affected indirectly by various factors, such as interruption of the flow of goods through supply chains, restrictions stemming from sanctions on Russia, and other unplanned circumstances. Consequently, preparers and auditors must consider if and how the war needs to be incorporated into financial reports.
For a reporting period ended before the Russian invasion on February 24, 2022, adjustments would not be applied to financial reports as a result of the war, but disclosures in such reports issued after the start of the war are required to reflect the extent of material impacts. For reporting periods after the initial invasion, adjustments may be required depending on materiality and timing. Even where specific limitations are not present, changes in the global economy and financial system may cause concerns that need to be considered.
Some of the issues that warrant scrutiny are:
- Access to information needed to make determinations and calculations
- Supply chain interruption or stoppage
- Transportation disturbances of goods and staff
- Impairment of assets overall and specifically by production changes preventing usage of inventory
- Financing problems
- Foreign currency fluctuations
- Inflation of prices
- Loss of goodwill
- Potential for cyber attacks
- Going concern
Early on, a company should do an analysis to ascertain potential catastrophic aspects that could impede the very survival of the entity and take appropriate steps to maintain viability. Then the other factors can be dealt with.
For the auditor, along with standard audit procedures, special consideration must be given to how the war environment can impact the client. Risk assessment will change. Will the company be able to survive? Will audit evidence be accessible or will alternate procedures be necessary? Are the company’s controls, measures and disclosures adequate and effective in light of the conditions? The Public Company Accounting Oversight Board (PCAOB) in March 2022 issued a Spotlight document, Auditing Considerations Related to the Invasion of Ukraine, that provides helpful guidance.
The SEC has notified companies of the importance of disclosures in filings with the SEC, issuing an illustrative sample letter that indicates the types of comments that may require a response from a company. In the notification, the SEC further elaborated, noting that the SEC “believes that companies should provide detailed disclosure, to the extent material or otherwise required, regarding (1) direct or indirect exposure to Russia, Belarus, or Ukraine through their operations, employee base, investments in Russia, Belarus, or Ukraine, securities traded in Russia, sanctions against Russian or Belarusian individuals or entities, or legal or regulatory uncertainty associated with operating in or exiting Russia or Belarus, (2) direct or indirect reliance on goods or services sourced in Russia or Ukraine or, in some cases, in countries supportive of Russia, (3) actual or potential disruptions in the company’s supply chain, or (4) business relationships, connections to, or assets in, Russia, Belarus, or Ukraine. The financial statements may also need to reflect and disclose the impairment of assets, changes in inventory valuation, deferred tax asset valuation allowance, disposal or exiting of a business, de-consolidation, changes in exchange rates, and changes in contracts with customers or the ability to collect contract considerations. In addition, since Russia’s invasion of Ukraine, many companies have experienced heightened cybersecurity risks, increased or ongoing supply chain challenges, and volatility related to the trading prices of commodities regardless of whether they have operations in Russia, Belarus, or Ukraine that warrant disclosure. Companies also should consider how these matters affect management’s evaluation of disclosure controls and procedures, management’s assessment of the effectiveness of internal control over financial reporting, and the role of the board of directors in risk oversight of any action or inaction related to Russia’s invasion of Ukraine, including consideration of whether to continue or to halt operations or investments in Russia and/or Belarus.”
On the AICPA website, an article, Navigating the Ukraine conflict, provides a variety of resources to assist with various aspects of the situation. For example, on the Dun & Bradstreet website that is referenced, a table highlights a list of potential alternate suppliers for products normally obtained from Ukraine or Russia.
Another helpful source for audit as well as financial reporting guidance directly relating to the Ukraine war is The Institute of Chartered Accountants in England and Wales (ICAEW), whose website contains a wealth of articles and guidance: Ukraine crisis: central resource hub.
Integra International members have been uniquely positioned to both assist and benefit from the Ukrainian conflict. Helen Volska is an Integra Global Board member and Managing Partner of Integra member firm, EBS, which is based in Kiev, Ukraine. Though facing disruption from the war, EBS has displayed what Integra is all about, by promoting cooperation with fellow Integra members from around the world. As fellow Integra member, Steve Austin, from Swenson Advisors in San Diego states:
“Firms in the U.S have successfully contracted with professionals in the Integra firm in Kiev since February…their Managing Partner Helen Volska and her staff have been quite helpful in providing talented auditors for Swenson for the last 6 months. Their knowledge of US GAAP and IFRS is outstanding…and their English writing skills are well above average…this has been a win win for her firm and the US firm who needs talent.”.
Further details can be found at Dynamics resellers join forces to aid Ukrainian teams.
