Covid-19 Impact on Financial & Non-Financial Reporting Quality: Greek Listed Entities ()
1. Introduction
In an era of continuous transformation, shareholders, stakeholders, and the government seek financial credibility and higher levels of corporate transparency. The role of Audit Committees on ensuring both financial and non-financial quality is essential, as they are accountable for monitoring and reviewing the internal audit function, as well as assessing its effectiveness (FRC, 2015). An Audit Committee is also the mediator between the audit firm and the management and ensuring good practice and compliance with the reporting frameworks and regulations. It is also in charge of the annual audit plan, and the review of the auditors’ reports, which they have to communicate then, if not “interpret” to firm’s management (ICAEW, 2019a).
In a firm, Audit Committees are part of a mechanism. They need to be in close contact with management to disclose any decisions, observations, or any potential improvements on a corporate level, and contrariwise. Thus, for this required level of communication and mutual understanding, there need to be collective objectives, as well as pragmatic expectations from both sides, as this, according to Haji & Anifowose (2016), ensure high levels of quality and corporate transparency, which cost-effectively impacts the business.
The 2015 FRC Discussion Paper focused on smaller listed companies and showed that their level of compliance with the latest reporting requirements is not as high as it was expected. Thus, guidelines as to the communication between management and Audit Committees were suggested for the improvement of the quality levels of financial reporting.
Since 31 December 2019, material disruptions to businesses all around the globe due to the outbreak of Covid-19 have led to an economic slowdown. However, the unexpected pandemic of Covid-19 has disrupted most professions, including accounting and auditing. When governments around the world imposed strict measures and went on lockdowns to stop the spread of the virus, employees were introduced to a new way of working remotely. This meant that the auditors, Audit Committees, and management of firms were no longer performing their duties on-sight, which created several implications, despite the existing digitalization and communication outlets. The ACCA’s Covid-19 global survey (ACCA, 2020) points out some implications for auditors, such as the inability to meet reporting deadlines, even though governments were a bit more flexible given the circumstances, difficulty in assembling audit evidence, and increased audit risk regarding the valuation of assets, completeness of liabilities, or going concern issues. All these impacted the firms themselves, as processes were delayed, and decisions could not be formed.
Both academic and business research has examined the impact of Audit Committee characteristics, such as 1) size, 2) meeting frequency, 3) member expertise, and 4) independence. Moreover, most research has been conducted on samples comprised of larger companies (Alzeban & Sawan, 2015; Al-Shaer et al., 2017). However, institutions, such as the FRC (2015, 2018), ICAEW (2019b), and Competition & Markets Authority (CMA, 2019), are showing an interest in smaller-listed companies too. To investigate the levels of communication between the Audit Committee and financial management before and after the outbreak of the global pandemic, we use the results on communication levels collected in November 2019 from 36 small-medium sized listed companies on the Athens Exchange Group and compare them to those obtained in June 2020. As no academic research has been published regarding the impact of the global pandemic on the communication levels of Audit Committees, we use corporate bibliography and official institutions’ publications. The results of the present study will be of interest of both the academic and corporate environment, as this matter concerns the firms themselves, the Audit Committees, the audit firms and provides valuable information that adds to the extensive literature while taking into consideration an unexpected global crisis which reshaped the corporate world.
2. Literature Review
Entities’ strategic objectives and perceived risks require both the Audit Committee’s and management’s involvement. However, several factors affect the effectiveness of internal audit, such as the number of Audit Committee members, the number of meetings throughout the year, the expertise of the parties involved, and the committee’s independence.
Extensive academic research has been performed on all the above, but the focus of this paper is on the relationship between the Audit Committees and management regarding their level of communication. The need for decision-useful information and high quality financial and non-financial reporting was the incentive behind the FRC’s 2015 discussion paper, where considerations and guidelines to improve overall audit quality were mentioned, including the planning and resourcing, the production of financial reports, and the compliance with the relevant requirements (FRC, 2018).
Regarding the size of the committee, Alzeban & Sawan (2015) found that it affects both the internal control quality and audit committee quality; however, this result was not found in isolation, but in combination with the rest of the before-mentioned characteristics. Moreover, significant emphasis is given to the frequency of the meetings by the FRC (2012), as the Audit Committees, the auditors, and the management need to preserve an effective communication mechanism. According to Alzeban & Sawan (2015), the suggested recommendation implementation levels increase following more frequent meetings. Similarly, Haji & Anifowose (2016) observe a positive impact on the integrated reporting practice due to the increased meeting frequency, and Khlif’s (Khlif & Samaha, 2016) remarks an increase in the trust between the Audit Committee and the entity’s management. However, Khlif & Samaha (2016) point out the negative impact of a weak legal system on communication levels and Audit Committee effectiveness.
Concerning the expertise of Audit Committees, Ghafran & O’Sullivan (2017), the fulfilment of the skill set and expertise requirements of Audit Committees depends on current developments in the regulatory system. Nonetheless, a similar level of experience and expertise is required by the company’s finance team, whose primary responsibility is to fulfil the corporate financial requirements and deliver high-quality reporting. ICAEW (2019b) & the FRC (2018) urge the Audit Committees to monitor the CPD requirements to ensure the overall financial quality, while also monitoring the required relevant financial experience of Audit Committee members, which positively impacts the risk management mechanisms of businesses, and limits earnings overestimation (Sultana et al., 2015). The overall audit quality is also found by Ghafran & O’Sullivan (2017) to be affected by expertise levels and associated with the audit fees. In line with this remark, a link between the expertise and the influence of the CFO is observed (Lisic et al., 2016, 2019), positively impacting the information reception, acceptance, and effectiveness of the Audit Committee.
When it comes to the assurance of the Audit Committee’s independence, Klein (2002) observed a decrease and compromise when found across financial opportunities or losses. Moreover, Tepalagul and Lin (2015) note that earnings management is affected by the notion of independence. Lastly, overall financial quality and anti-corruption are associated with the Audit Committee’s independence levels (Lisic et al., 2016; Gorshunov et al., 2019).
Covid-19
In the face of the global pandemic, most businesses faced financial and operational challenges due to the governments’ restrictions, which increased uncertainty in the market (ACCA, 2020; GT, 2020; IFAC, 2020; PwC, 2020) and changed the dynamics of business monitoring (KPMG, 2020). However, reliable and steady-flow of timely, high quality financial and non-financial decision-useful information are needed by investors and capital markets more than ever. Thus, the financial reporting mechanism with all its practitioners (preparers, auditors, Audit Committee members, regulators, and standard setters) needs to continue its active coordination and engagement (SEC, 2020).
Even in global crises, listed companies ought to maintain Disclosure Controls and Procedures and Internal Control over Financial Reporting, which are evaluated concerning their effectiveness by the management. Additional operational controls need to be in place to ensure reliability and minimize the telework output’s risk. The CFO and Finance Team should also need to assess the entity’s ability to meet its obligations as they become due (GT, 2020; SEC, 2020), as well as to evaluate several scenarios around the best estimate considering the cash flow difficulties as a result of Coronavirus, which must be factored into the forecasts (Deloitte, 2020; GT, 2020).
Further assessment by an entity’s management deals with the constant change in terms concerning debt obligations, government assistance (ACCA, 2020), fluctuating exchange rates, and fair value calculations (EY, 2020; GT, 2020). These functions are more effective when there is an increased engagement of the management and the Audit Committees, and two-way communication regarding the oversight of financial reporting in times of heightened uncertainty (SEC, 2019). Audit Committees perceived market developments differently; thus, the engagement with their members needs to be consistent and close to achieve high-quality reporting.
During the Covid-19 pandemic, the “subsequent events period” is often mentioned (CEAOB, 2020), as management must determine how to reflect on the financial statements the year-end developments. However, the global pandemic’s impact is a non-adjusting subsequent event for reporting periods ended on or before 31 December 2019 (GT, 2020), and thus, the recognition and measurement of assets and liabilities are not affected. In the case of year-ends in 2020, reliable audit evidence regarding the necessary adjustments made by management following the applicable financial reporting framework needs to be disclosed for a thorough examination by the auditors and any other changes to the business’s internal control system (ACCA, 2020). All these events and decisions require the collaboration of all parties involved, so communication between employees, internal and external stakeholders is crucial in enabling corporate continuity and minimizing both commercial and financial risk (KPMG, 2020; PwC, 2020).
Lastly, high quality and credibility are safeguarded by ensuring auditor independence, which is “shared responsibility among Audit Committees, management, and their auditors” (SEC, 2020). A joint effort and disclosure regarding economic dependence from these accountable groups positively impact compliance, effectiveness, and enhancement of financial and non-financial reporting output (GT, 2020; SEC, 2020).
3. Research Objective, Questions and Hypotheses
The main research question that arises develops from the assumption that the Audit Committee’s efficiency and effectiveness stem from the competence, expertise, and thorough, timely planning of financial reporting. The levels of involvement and collaboration between the parties involved and specific characteristics affect the entity’s reporting outcomes. Thus, the primary research question of this research is:
“The extent to which the Audit Committees of smaller listed companies in Greece communicate with the management, following the FRC’s general guidelines on 1) Planning, 2) Formulating Action for Next Year, 3) Timing & Planning, and 4) Skill-set and Experience, and to assess the impact of Covid-19 on the existing level of communication”.
Considering the size of the company as a determining factor, we examine whether the observations by other studies apply to the Greek context of smaller listed entities, with the following hypotheses:
H1: Smaller listed companies demonstrate lower levels of communication than larger ones.
H2: Smaller listed companies demonstrate higher levels of communication in the post-Covid-19 period.
3.1. Methodology: Research Design
Define examining the communication levels of Audit Committees and Management pre-and-post the Coronavirus global pandemic period, we are conducting a longitudinal questionnaire survey method focusing on smaller listed companies in Greece. Researchers use qualitative research to identify the factors affecting Audit Committees and examine interactions and general communication. However, as extensive research has been conducted on the matter, this study aims to quantify the level of communication on several listed companies under what considered to be “normal” circumstances, to then compare it with a period following a global crisis.
3.2. Methodology: Source of Questionnaires
ICAEW and the FRC’s guide “Smaller Listed and AIM Quoted Companies: A Practical Guide for Audit Committees on Improving Financial Reporting” (ICAEW, 2019b) potential questions destined for the Audit Committees were gathered, resulting to a total of 24 questions, parted in 4 thematic sections: 1) planning, 2) formulate action for next year, 3) timing & planning, and 5) skill-set and experience (Table A1 in Appendix A). It is worth mentioning that the nature of these questions was not compulsory, but rather suggestive.
To the original list, we modified question A8 based on its relevance to the British financial and regulatory system and the fact that the Greek competent authority is not obliged to issue a year-end letter. From the “Skill-set & Experience” thematic section, we excluded a question due to respondents’ bias. Participants were asked to rate the suggested questions on a 5 point Likert-scale (1: Never, 5: Always) in case members of the entity’s Audit Committee have asked, either the CFO or an executive member of the Finance Team, to examine the level of communication from the management’s viewpoint.
3.3. Methodology: Sample Size & Selection
To investigate the levels of communication between Audit Committees and Management of smaller listed companies in Greece and evaluate the adequacy of financial reporting function, we selected a suitable sample through secondary research. With the source being the Athens Exchange Group (ATHEX Group, 2019), all 177 listed companies (excl. financial institutions and insurance companies) were gathered. Information on their size was the parting criteria, which lead to a final sample of 74 listed companies with less than 150 employees, excluding medium and large-sized companies—according to parting criteria in Greece. The reason why revenue was not the determining factor for entity size, was the differentiation of our research using a different business size scale.
The questionnaires were delivered via namely e-mail to either the Financial Management Dept. (CFO or an executive member of the Finance Team—EFT), with a disclaimer ensuring anonymity and confidentiality of the results, and data privacy assurance in November 2019. To ensure validity and reliability of the measures tested, we derived our data set from respondents who are members of either executive or senior management that involve in the financial reporting process of their firm, and it is assumed that they are highly qualified to provide accurate responses regarding the survey. The response rate was 48.6%, which is reasonable comparing to prior studies examining listed companies (Zaman & Sarens, 2013). The final sample of 36 listed firms, with employees up to 150 employees.
The specific characteristics of the sample data set are described in detail in Table 1—“Descriptive Statistics”, broken down in six main variables. In terms of
working experience and retention of current position, as shown, the 77.8% has over 10 years of relative working experience and 55.5% retaining their current position for at least 5 years.
To examine the impact of the unexpected global pandemic of Covid-19, we contacted the 36 companies that took part in the first part of this research (after confirming that they were still listed) and requested the completion of the questionnaire, and thankfully got responses from all of them in the first two weeks of June 2020, when corporate life had already returned to its normality.
4. Key Results
This longitudinal study’s objective is first to assess communication levels between the Audit Committees of smaller listed entities in Greece with the management before and after an unexpected global event that shook the corporate world. The four thematic areas that this research focuses on are: 1) planning, 2) formulating action for next year, 3) timing & planning, and 4) skill-set and experience.
Table 2 and Table 3 present the ranges, the means, the standard deviation values, and the frequencies of both studies. Even though the sample consists of 36 participants, we observe a closeness regarding the mean scores across all four
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Table 2. Means, SD and frequencies of communication levels Pre-Covid-19.
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Table 3. Means, SD and frequencies of communication levels Post-Covid-19.
areas, with the highest being “Formulating action for next year,” which has a difference of 0.34 from the next highest “Skill-set & Expertise” in the pre-Covid-19 results. In the post-Covid-19 results we notice the same section being the scored higher (Mean: 4.05), but with the “Planning” coming second (Mean: 3.64), replacing the “skill-set & Expertise” that now is found in the bottom of the four sections (Mean: 3.39). It is also noteworthy the lack or small amount of “Never” responses in the “Formulating Action for Next Year” and “Timing & Planning” in both the pre and post Covid-19 period.
Examining the mean scores of the inter-thematic sections, we also observe the frequently asked questions. In the pre-Covid-19 section these were questions A6 and B1 (Appendix A), with mean scores 4.03 for both, whereas the least asked question was A5 (Mean: 2.61). After the pandemic, the most frequent questions were A6 & A7 (Mean: 4.39), B4 (Mean: 4.33) and B1 (Mean: 4.25%), and the least was A1 (Mean: 2.64).
Independent samples t-tests test whether company size has a significant impact on communication levels on all four thematic areas both for the pre and post-Covid-19 period. The findings (Table 4) indicate no significant differences depending on entity size, except in the “Timing and Planning: section, and between the companies with 50 - 99 and 100 - 150 employees for the pre-Covid-19 period. However, in the post-Covid-19 period (Table 5) all sections and across all business sized entities there is a significance in communication levels, indicating that they have all improved due to the pandemic, as the nature of the new workplace environment has changed.
The KMO for sampling adequacy and Bartlett’s Test for Sphericity generated a 0.396 value for the pre-Covid-19, and a 0.390 for the post-Covid-19 dataset. This value to be factor analyzable needs to be above 0.50 or even 0.40, but for this small sample size, we are accepting this value. Moreover, the inter-item correlation matrix shows both positive and negative correlations. The factor analysis (Appendix B) indicates that all items were surpassing the 60% in terms of commonalities (Table B1), and only one factor was extracted (Table B2) for the pre-Covid-19 period. The post-Covid-19 factor analysis (Table B3 and Table B4) showed that nine values were extracted.
To examine the level of communication between the Audit Committee with the management, a study conducted on CFOs and Executive Finance Team members of smaller listed companies in Greece, based on employee size and not revenue. Evaluating the frequency of the questions, we notice several differences between the thematic areas of the suggested/recommended items of the questionnaire. In the “Planning” pre-Covid-19 section (Mean: 3.29), items A2, A3 & A4 regarding the financial policy, requirements, and reporting changes, there are no (A3 & A4) or very few (A2) “Never” responses. Additionally, item A6 “What are the company’s key financial reporting risks for this year?” has one of the highest mean scores in the whole questionnaire (Mean: 4.03, SD: 0.74), with responses ranging only between 3 - 5 on the 5-point Likert scale. These high-scoring
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Table 4. Paired t-tests: company size and communication levels Pre-Covid-19.
Note: p <0.001, p <0.05.
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Table 5. Paired t-tests: company size and communication levels Post-Covid-19.
Note: p <0.001, p <0.05.
questions assess the external influence, which explains the Audit Committee’s increased attention to the management. The post-Covid-19 results show that items A6, A7 (Mean: 4.39) and A8 (Mean: 4) score higher, and deal with the reporting risks, and other financial matters that may arise.
In section B, “Formulating Action for Next Year”, the management scored all four matters (B1: investors, B2: reporting quality, B3: compliance, and B4: reporting requirements) highly evaluated, implying that the future strategy is prioritized, and communicated in both the pre and post-Covid-19 period. In the “Timing & Planning”, the third most frequently asked section before and after the pandemic (Mean: 3.32 and 3.46 respectively), the focus is on the time component and the changing regulations. The post-pandemic results show a steady increase in all items, except C6. Lastly, the “Skill-set & Experience” section is the second high-scored section on the pre-Covid-19 part of the research, but the last on the post-pandemic part. In the pre-Covid-19 study, question D4, on CPD requirements and whether they are used as a KPI, was scored the lowest. Still, in the post-pandemic period, D5 regarding the knowledge gaps and training needs was scored the lowest (Mean: 2.69). This indicates that entities are more interested in enhancing their external performance, rather than identifying internal KPIs, and that after the pandemic companies were focusing on other matters that had to do with planning their actions following the global crisis rather than the skill-set assessment and training.
Moreover, results should be interpreted with caution due to potential bias, as this section was completed by parties involved (i.e., the management) and involves their professional expertise. When adding the size aspect into the equation (number of employees), we observe that there is a pattern in the “Planning” section, where larger entities exhibit higher communication levels, a similar trend also observed in the “Skill-set & Experience” section. Contrariwise, in “Formulating action for next year” is higher in entities of 1-49 employees, whereas in “Timing & Planning” larger listed companies scored higher.
5. Conclusion
“Audit Committees have responsibility for overseeing the integrity, compliance, and quality of the financial statements and disclosures prepared by management.” (ICAEW, 2019b). Thus, it is of paramount importance to ensure high- quality reporting. Audit Committees and management should be involved and be more aware of their responsibilities and expectations from the corporate world. Communication and interaction levels of Audit Committees has been on the microscope for quite some time with a lot of academic and professional research, as they examine the impact on the overall reporting quality. However, unexpected global crises may disrupt normality, and this explains the nature of this longitudinal pre and post-Covid-19 research. The present study is using the FRC’s guidelines and recommendations regarding communication in four crucial aspects of auditing, where Audit Committees are involved. Examining communication levels through the frequency of the questions asked, we provide evidence of their focus in each of the two periods studied.
5.1. Implications
The aim is to assess communication levels of Audit Committees with the management from the management’s perspective; however, the focus of previous research if on the frequency of meetings, which was altered due to the present post-Covid-19 circumstances. Moreover, company size was determined by the number of employees, instead of the annual revenue. Audit Committees, managers of listed, and unlisted companies, CFOs, executives, and other members of the finance team benefit from this study as it gives information for both “normal” and “under crisis” periods, while also considering the suggestions of ICAEW (2019a) and the FRC (2018) to improve reporting quality and ensure compliance with the changing requirements.
5.2. Limitations and Future Research
Limitations included the small sample size (48.6%). Larger companies could have been used in order to have a broader sample selection. Moreover, in our effort to keep the questionnaire relatively short, we did not include other factors, for example, the number of official and meetings with management/finance team/other teams, number of other informal interactions, the annual revenue of the company, size of the finance team and board size. Future research should consider and examine the above-mentioned limitations to share more insight into the level of the two-way communication between Audit Committees and management, on a bigger sample, even from other countries, for a more insightful cross-country analysis. Also, the communication levels could be examined later throughout time, to examine the effects of Covid-19 in the beginning and during the several lockdowns.
Acknowledgements
The publication of this article was financially supported by the Special Accounts for Research Grants, University of West Attica.
Appendices
Appendix A
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Table A1. List of questions for the audit committee to consider.
Appendix B
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Table B1. Factor analysis of communication levels pre-Covid-19.
Extraction Method: Maximum Likelihood.
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Table B2. Total variance explained (pre-Covid-19).
Extraction Method: Maximum Likelihood.
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Table B3. Factor analysis of communication levels post-Covid-19.
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Table B4. Total variance explained (post-Covid-19).