The invasion of Ukraine has devastating impacts. We condemn the Russian government’s attacks on Ukraine and are concerned about all people affected by these acts of war. While the EU and individual countries impose sanctions, European accountants need to step up and address how these, and other consequences of the war, affect their activities. As the situation evolves, professional accountants must continue applying their ethical values and social responsibility. Below we draw their attention to points of alert on anti-money laundering (AML), cybersecurity, accounting, audit, and reporting to help them ask the right questions. To do the right thing in these difficult times, professionals will have to consider different dimensions from legal questions to ethics, risk management and corporate citizenship. The situation can raise difficult questions that may require seeking further legal advice (which this alert does not provide).
Check here the overview of responses from our members, national accountancy bodies, so far.
Accountants should monitor the national and EU sanctions lists that are constantly updated. Individual countries and the EU have imposed four categories of sanctions on Russia and Belarus:
- sanctions against individuals and entities
- restrictions on business
- diplomatic measures
- restriction on economic cooperation
In accountancy firms and companies, management and the board are responsible for interpreting the sanctions. They may also need to consult with their legal counsel or external lawyer. Accountants and auditors need to apply all their professional skills to make these measures effective, and help companies cope with the disruption they will bring. Strict know your client (KYC) and AML provisions, and risk management will help ensure sanctions are properly considered.
Assess exposure to sanctions
Below we provide considerations for accountants and auditors to assess the exposure of their firm and clients to the sanctions regimes:
- Identify if the most recent sanctions lists expose risks for firms and clients
- Check the latest national sanctions lists and guidance
- Identify if your firm and its clients should abide by EU, US, UK and other countries’ sanctions on top of national regulations.
- Check the latest EU sanctions against Russia and against Belarus
- Identify and map out the direct exposure to Belarus, Russia-based and Russian third parties, which could be through suppliers, clients, agents, distributors, and financial institutions in other countries.
- Sweep customer databases to identify all clients physically based in Russia and Belarus or connected to sanctioned individuals and entities.
- Understand clients’ or suppliers’ beneficial ownership structures and identify direct or indirect ties with sanctioned politically exposed persons (PEPs) or entities. This is important as Russian or Belarusian ownership can be hidden.
- Consider potential trade restrictions/prohibitions issued (import ban/export ban)
- In case of a business relationship with sanctioned individuals or entities, each firm and its clients should freeze those individuals’ assets and consider stopping any kind of services provision to the listed entities and individuals.
- Fill out a suspicious activity report (SAR) if there are ties between the firm or its clients and sanctioned individuals or entities. Closely cooperate with the compliance department and money laundering reporting officer (MLRO) in this case.
Nowadays a war can also be carried out virtually through organised cyber-attacks. Many entities have already suffered greatly from such attacks, some of which were directly attributed to the hacker’s arm of the Russian government. Accountancy firms, especially small and medium-sized ones, should be alerted on the real probability of such attacks and take the necessary precautions to analyse their risks, as well as initiate discussion with their clients. Many small and medium-sized enterprises (SMEs) might not have readily available plans to respond to such cyberattacks. It is recommended for these SMEs to check with their own IT personnel or consultant for a comprehensive and personalised response.
Accounting, reporting and audit
Accounting and reporting implications
The economic effects of the war can have an impact on accounting, reporting and auditing financial statements of the companies or groups concerned, especially of SMEs. This section highlights some of these potential implications. However, the impact on companies will differ. Companies might be particularly affected if they 1) trade with companies in Russia, Belarus or Ukraine, 2) have subsidiaries or assets in Russia, Belarus or Ukraine, or 3) are linked with organisations or individuals under sanctions. This impact should be reviewed regularly as the further development, duration and impact of the war cannot be predicted.
Effects on accounting and reporting for companies as of 31 December 2021
Reporting standards like International Accounting Standard (IAS), International Financial Reporting Standards (IFRS) and relevant national Generally Accepted Accounting Principles (GAAP) should be fully complied with. They can also be used to respond to actual accounting and reporting challenges caused by the war in a sensible and practical way.
Assessment of going concern
Companies need to consider going concern issues if they are adversely affected by the war in Ukraine and sanctions on Russia and Belarus, e.g. commodities- or IT business. They need to consider running several possible sensitivity analyses to determine whether there is any material uncertainty on its ability to continue as a going concern. This can result in additional disclosures especially if there is a material uncertainty.
In some circumstances it may be necessary to consider whether it is appropriate to prepare the accounts on a going concern basis. For this, the company should consider all available information about the impact on future trading.
Regarding the time frame, one needs to consider at least the first twelve months after the balance sheet date, or after the date the financial statements will be signed. But a longer time frame is advisable. This going concern assessment should be continuously updated to the date the financial statements are approved.
Non-adjusting post balance sheet events
The general requirement is that the balance sheet reflects the position at the end of the reporting period. Therefore, for companies in Europe with a 31 December 2021 year-end, the emergence of the war is a non-adjusting event since the invasion occurred during February 2022.
The nature of any material non-adjusting event, and an estimate of its financial effect, must be disclosed in the notes to the financial statements. Therefore, companies need to consider the impact on their business, which will depend on their specific circumstances. This includes that the disclosures articulate potential impact in the next reporting period.
Further disclosures in the management report
Companies should also consider whether to refer to the possible impact of the war when they report principal risks and uncertainties in the management report. In principle, they should report this when possible further developments can lead to negative deviations from the company’s forecasts.
Effects on accounting and reporting for companies with year-ends in 2022
As we progress through 2022, the scale and impact of the war will become clearer. There may be a greater degree of judgement required when identifying the conditions at balance sheet dates after 2021, and therefore assessing whether the developments are adjusting or non-adjusting events. The war is ordinarily an adjusting event for any reporting period ending as from 28 February 2022, either for annual or quarterly reporting.
Companies will need to review, in addition to going concern, all areas of the accounts that are subject to judgement and estimation uncertainty, including:
- accounting estimates
- fair value measurements
- assets impairment
- expected credit loss assessments
- hedge accounting
- other financial statement disclosure requirements
- the impact of breaches of covenants and onerous contracts provisions also deserve consideration.
Effects on auditing financial statements as of 31 December 2021 and beyond
Compliance with International Standards in Auditing (ISAs) should continue in full, even under pressure of a combination of uncertainties and challenging timelines. In addition, auditors should step back and consider looking further to respond to the particular auditing challenges that the war causes for companies and their reporting.
The war impacts on an auditor’s risk assessment of a company
Depending on the circumstances and business of the company, the auditor’s risk assessment might need to be revised because of the threat of new significant risks, for instance related to the company’s liquidity. As the current situation is very fluid, it will need to be constantly reconsidered during the audit. Further guidance can be found in ISA 315 Identifying and assessing the risks of material misstatement.
Obtaining audit evidence
Auditors should consider how to gather sufficient appropriate audit evidence. In this, auditors may need to change the audit approach and develop alternative procedures. This may particularly be the case in group audit engagements with subsidiaries to which access is restricted, and result in a potential scope limitation in group reporting. This continues to be required to be able to report or consider modifying the audit opinion. ISA 500 Audit Evidence provides further details.
Implications for the auditor’s assessment of going concern
Going concern will undoubtedly be a key focus of many current and forthcoming audits. Especially as uncertainty about the global economy and the immediate outlook has increased for many companies with direct exposure to Ukraine or to Russia and Belarus. ISA 570 Going Concern remains applicable.
For example, management’s assessment of going concern may need to include:
- updating forecasts and sensitiveness as considered appropriate, considering risk factors identified and different possible outcomes
- reviewing of projected covenant compliance in different scenarios
- changing management’s plans for future actions
- expanding disclosures
- management’s assessment also need to be documented in its representation letter to the auditor.
The impact of the company’s future prospects on the auditor’s report
The auditor should consider management difficulties to prepare future projections, recognise the highly uncertain and fluid situation. Indeed, such projections could change significantly in a short space of time. It is essential for auditors to use professional judgement and scepticism. They need to exercise care to ensure that any projections reflect the situation as, and when, an audit report is to be signed. See ISA 560 Subsequent events for further details.
Consider the adequacy of management’s disclosures about the war’s impact
The auditor should ensure that management’s disclosures appropriately describe the company’s prospects and how financial statements’ users might be affected. This all while recognising the current high degree of uncertainty. Auditors need to also consider their responsibilities in relation to other information presented by management with the financial statements. This is covered in ISA 720 The auditor’s responsibilities related to other information.
Potential effects on the auditor’s report
The implications for the auditor’s report may include:
- for public interest entities, a key audit matter (KAM) related to additional audit work needed because of the war. For instance, to describe the approach for group audit, explain there is no material uncertainty or no going concern uncertainty
- an ‘emphasis of matter’ paragraph, for example to highlight a significant subsequent event disclosed in the financial statements, or a significant uncertainty arising from the war
- a material uncertainty in relation to a going concern paragraph
- a qualification, or adverse opinion, for example in respect of inadequate disclosures, or unrealistic going concern assumptions, in the financial statements
- a qualified opinion, or a disclaimer of opinion, because of scope limitation when unable to obtain sufficient appropriate audit evidence. For instance, when stocktakes could not be attended in person.
Potential effects on the auditor’s acceptance or continuance of the engagement
If the auditor becomes aware that his audited entity is linked to individuals or entities listed by the EU restrictive measures, the continuance or the acceptance of the audit engagement must be reassessed.
The particular impact on financial institutions
Financial institutions are expected to be especially impacted by the war in Ukraine and the EU sanctions imposed on Russia and Belarus. A few financial institutions and funds might have direct exposure to these countries, while most will, at least initially, be impacted in a more limited manner. Heavily enforced US sanctions also need to be monitored and abided by. More precise conclusions are expected to be drawn by the end of the first quarter of 2022. There might also be particular concern around the valuation of their collaterals, as war, declared or not, might make their coverage void.