28 May 2020

Coronacrisis: short-term actions for the public sector

Here we state our key takeaways on what the public sector could do on the short- and long-term to counter the impact of the coronacrisis.

Below we explore how governments can best deal with this on the short term in more detail:

Retrospective checks on funds issued

Some of the rapid response programmes for paying social benefits and to support the private sector have required the relaxation of normal control processes. This relaxation of controls is understandable and necessary given the urgent need to support large sections of society.

However, there are already concerns that such schemes are subject to fraud and misuse, such as in the United Kingdom, Ireland and Belgium, where accountants have helped uncover fraud. In the Netherlands, every company drawing on the support programme for amounts in excess of 125 000 € will need a separate audit opinion to confirm that the claims they made with regard to revenue loss and employee costs were correct.

Consequently, once the situation has normalised, we believe that it is necessary that governments implement:

  • a high level of transparency in detailing the amount of support received by beneficiaries
  • a follow-up programme of audits of significant payments, and of other payments on a random basis
  • reviews of internal controls and the effectiveness of internal audit under such times of crisis
  • a performance audit to assess the economy, efficiency and effectiveness of the measures taken

It is also essential that national governments are clear about the financial reporting requirements for recipients of government aid, be they private or public sector. This is to ensure that the recipient is fully transparent on the aid received and the consistent approach to disclosures with support public accountability.  

Relax reporting deadlines and focus on critical information

For many public bodies, meeting deadlines for financial and performance reporting will be challenging – due to social distancing demands and staff being seconded to other departments. We consider that, in certain circumstances, there can be a good case for extending reporting deadlines.

However, citizens’ appetite for relevant information will grow, driven by the tax increases that seems inevitable in many countries. Consequently, we believe that public sector bodies should deploy their depleted resources most efficiently.

The public sector should concentrate on disclosing what truly matters in financial and performance reporting. It is important that they prioritise disclosing material information as promptly and accurately as possible.

Reporting and auditing impacts

The coronavirus crisis’ impacts on public sector financial reporting and auditing are similar to those that the private sector experiences. These are fully explored our publication Coronavirus crisis: implications on reporting and auditing (March 2020).

Broadly speaking, such issues include:

  • potential delays in preparation of financial statements – and the audit thereof – due to staff shortages and social distancing measures
  • increased uncertainty and risk in respect of the going concern of entities
  • uncertainty on how to report and audit post-balance sheet events and contingencies
  • additional disclosures that are required in the management report.

Public sector entities and their auditors will face all these issues directly where the government has a stake in private sector entities. Governments frequently have equity holdings in key industries (for example, airlines) and this will probably increase as governments step in to provide further support. The additional equity holding could be an immediate acquisition of additional equity (through cash injection) or deferred, using convertible loan stock. In both circumstances, there will be significant uncertainty on the valuation of such assets, as well as issues over the going concern of the entities supported.

Additionally, the public sector faces its own specific issues in reporting and auditing. Below we will set out the following: 1) going concern, 2) post balance sheet events and contingencies, and 3) provision of (non-financial) information:

1 – Going concern

In respect of going concern, the level of support from the government to other public sector bodies, and the communication of this support, is of paramount importance.

It is unlikely that governments would permit large government bodies to fail, such as health or finance ministries. However, they may decide that they cannot support other public service organisations, particularly if they are quasi-public sector or public-private organisations. Where guidance is not already provided, it is important that governments clearly state how much ongoing support it will provide to such bodies so that management and auditors can assess their going concern.

The situation is even more complex when looking at going concern for the whole of government accounts. Governments are caught between hugely increased costs (for social benefits and supporting private sector businesses) and dramatically reduced income from taxation. It is conceivable that many governments will face a balance sheet with negative net worth, and it will be very difficult to determine the impact of this on the country’s fiscal sustainability.

We believe that governments should be transparent about the negative balance sheet and clearly indicate how they intend to deal with the situation – such as plans for public sector cuts and / or increasing taxation.

2 – Post balance sheet events and contingencies

Depending on the country’s financial reporting date, some public sector bodies will already be considering what should be reported in respect of non-adjusting post balance sheet events. For many public sector entities, these events will be highly material, potentially affecting their going concern and ability to deliver services in the future.

Additionally, loans or loan guarantees are key elements of many of the government support programmes. Due to the relaxation of lending controls, and the likely global recession, it is probable that there will be a significant level of default. This will be a future cost for governments.

The public sector bodies providing or guaranteeing such loans will likely have experience in financial modelling, but the current crisis has introduced unparalleled uncertainty. Consequently, central economic forecasts must factor in new conditions, such as increased social costs and adjustments to tax receipts, and governments should be transparent about these changes.

In respect of contingencies, there must be a close monitoring of loans and loan guarantees. This will help minimise the risk of default and provide a more accurate assessment of the likelihood of default, for financial reporting purposes.

It is not clear that all governments currently have this information – or the systems to obtain this information – so making the necessary changes to accounting, control and information technology systems as soon as possible is a key priority for governments.

3 – Provision of (non-financial) information in management discussion and analysis

Linked to the point above on post balance sheet events and contingencies, where not already provided, there is an urgent need for guidance from central government on what should be disclosed in the management report of their public sector bodies.

Stakeholders will want to know what increased risks public sector entities are facing and what impact these could have on the future provision of services – such as a reduced level of services or an increase in their cost for the citizen.

Related content

PublicationCoronacrisis: actions for the public sector

28 May 2020

PublicationCoronacrisis: long-term actions for the public sector

28 May 2020

EventPreparing for high-quality sustainability assurance engagements

3 October 2023

NewsThe ISSB should develop more sustainability reporting standards and provide support to enact them

10 August 2023

Consultation responseISSB’s Consultation on agenda priorities

9 August 2023

Consultation responsePCAOB’s proposed amendments to Auditing Standards related to a company’s noncompliance with laws and regulations

28 July 2023

Consultation responseIAASB’s proposed International Standard on Auditing 570 Going Concern

28 July 2023

NewsEurope needs robust sustainability reporting standards that enable a successful implementation

14 July 2023

Consultation responseEC’s draft delegated act on European Sustainability Reporting Standards (ESRS)

7 July 2023

EventCorporate Sustainability Due Diligence Directive

5 July 2023

NewsAccountancy Europe makes EC’s draft DA and EFRAG’s Draft ESRS comparison available

16 June 2023

Consultation responseIIASB’s proposed Global Internal Audit Standards

1 June 2023

Consultation responseIAASB’s consultation on proposed Part 10, Audits of Group Financial Statements of the proposed ISA...

3 May 2023

Consultation responseLetter to the EC on the EFRAG funding for the development of credible and successful...

26 April 2023

NewsAccountancy Europe joins EU Green Week 2023

26 April 2023

Consultation responseIAASB’s consultation on proposed International Standard on Auditing 500 (revised): audit evidence

24 April 2023

Consultation responseLetter to the EC on the rationalisation and simplification of reporting requirements

21 April 2023

Consultation responseIAASB’s consultation on Proposed Strategy and Work Plan for 2024-2027

12 April 2023

EventEquipping the public sector for sustainability action

4 April 2023

NewsTraining Italian accountants to take up the sustainability challenge

20 March 2023

PublicationDynamics influencing auditor choice in the Public interest entity market

17 March 2023

NewsFinnish auditors gearing up for a comprehensive ESG training

3 March 2023

Sign up for our newsletter

* indicates required
Would you like to subscribe to our newsletter?
On which topics would you like to receive news?