The current economic environment is anything but run-of-the-mill. Markets are volatile. Uncertainty is ubiquitous. As mutual fund advisors navigate the seas of change, their audit committees should take a deeper look at potential obstacles to upcoming financial reporting cycles and what aspects of their funds’ financial statements could be impacted.

Below are five primary areas the COVID-19 pandemic could affect most. While this list is in no way all-inclusive, as every fund is different, it’s a good starting point for discussion with the rest of your audit committee, as well as your auditors.

1. The New Financial Reporting Process

Most of us have had to adapt to working under social distancing and stay-at-home orders. The “remote office” is a reality and may be for a while as individuals and organizations evaluate the risks of going back to business as usual. Consider the following:

• How equipped is your administrator to handle the financial reporting process from A to Z, including relevant IT infrastructure considerations, security of sharing information and the ability to meet regulatory filing deadlines?
• Determine whether you should add personnel to the disclosure controls and procedures process.
• Have you changed your internal controls surrounding financial reporting being conducted remotely, and do you know the efficacy of those controls?

2. Valuation Considerations

With business slowing or even coming to a screeching halt in many industry segments, even straight-forward equities have seen significant changes in valuation. It goes without saying that the potential swings in valuation for fixed income securities and more complex investments may be even greater as underlying estimates and assumptions become more sensitive to change. Keep the following questions in mind as you approve year-end fair values and corresponding classifications within the Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements hierarchy:

• Do your fund’s policies address how the valuation process should be carried out should there be interruptions in the NYSE or other exchanges?
• Are equity securities still actively trading? Is a Level 2 hierarchy classification warranted?
• What are the significant inputs used in the valuation of your fund’s fixed income securities? How have current economic conditions and various lender or government programs impacted inputs such as estimated future cash flows, prepayment speeds of underlying mortgages, average lives of underlying mortgages, embedded event triggers, the realizability of underlying collateral, etc.?
• How have underlying companies weathered the storm to date? What is their future viability?
• For those funds with Level 3 securities, how will uncertain economic conditions impact required stress testing and related disclosures?
• Have there been significant events or transactions subsequent to year-end that could potentially impact assumptions used in the fund’s valuation methods at year-end?

3. Risk Disclosures

Now is the time for more robust risk disclosures. Consider taking a closer look at the disclosures surrounding risks relating to the following:

• Valuation
• Liquidity
• Foreign markets and currency
• Concentrations
• Counterparties
• Credit risk (investments and brokers/banks/custodians)
• The economic impact that COVID-19 may have on the economy as a whole and your fund’s underlying investments

4. Subsequent Event Evaluations

What impact do events that have occurred since year-end have on potential adjustments to or disclosures in the financial statements, under the requirements of ASC 855, Subsequent Events?

5. Going Concern

If there is substantial doubt about an entity’s ability to continue as a going concern for the 12-month period from the date the financial statements are issued, additional disclosures may be required under ASC 205-40, Presentation of Financial Statements – Going Concern. If conditions exist that present substantial doubt, you as the audit committee must understand management’s plans to mitigate those conditions.

Conditions that might indicate potential doubt include the following:

• Negative financial trends/ratios, poor performance of the fund.
• The advisor is waiving or reimbursing a significant amount of expenses; in such cases, what is the advisor’s ability to continue to do so?
• The fund has experienced significant shareholder redemptions.
• There has been a loss of key investment managers.

As this pandemic continues to impact every aspect of our lives, audit committees must ensure they are taking the right steps to proactively address changes related to financial reporting.

Contact Julie Lowry at jlowry@cohencpa.com or a member of your service team to discuss this topic further.

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Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.