This Know-How guide from ICAEW’s Audit and Assurance Faculty covers what irregularities are, how the requirements have changed in ISA (UK) 700 (Revised January 2020), what should be reported on in the auditor’s report, and how COVID-19 may impact what is reported.
Brexit-related risk
The effect of Brexit and COVID-19 on imports and exports, the location of staff, increased risks around fraud and estimate and forecast accuracy all affect auditing. Faculty resources are a valuable asset in understanding the problems.
Improving audit and assurance
Sir Donald Brydon has reviewed the quality and effectiveness of audit, recommending a three-year rolling audit and assurance policy, and ICAEW is examining how to implement his ideas. Carolyn Clarke reports on the plans.
John Selwoods question corner
John tackles questions from auditors as they adjust to recent and proposed changes relating to sample sizes, inherent risk, OEPIs and quality management.
The importance of detecting fraud
As standard-setters move forward with initiatives around fraud and going concern, Katharine Bagshaw looks into the concerns and proposed reforms – and shares some ICAEW perspectives on progress.
Mortgage payment holiday set to be extended until October 2020
Homeowners who are struggling to pay their mortgage due to COVID-19 are set to be given a further three-month extension on their mortgage payments.
For those homeowners who have paused their mortgage but now wish to resume payments, they will be given various options to help make these more manageable. One of the proposed options will be to extend the mortgage term so their monthly repayments remain at about the same level as they were prior to their mortgage holiday.
As well as extending the mortgage payment holiday, the application deadline for a mortgage holiday will also be extended until 31st October. This means that eligible homeowners that have not yet had a payment holiday, will be able to request one.
These proposals are included in new draft guidance from the Financial Conduct Authority (FCA), which sets out the expectations for mortgage companies and the options available to homeowners.
The move comes after more than 1.8 million mortgage payment holidays were taken up when the support measure was announced in March and would be coming to an end in June. The draft guidance obliges the lender to contact the homeowner to discuss their options.
John Glen, Economic Secretary to the Treasury said: “We’re doing everything we can to help people with their finances at this difficult time, and that includes making sure people get the support they need with their mortgages. That’s why we’re working with the banks and lenders to extend payment holidays if people need them… Everyone’s circumstances will be different, so when homeowners can pay some or all of their mortgage, they should work with their lender on a plan; but if they are still struggling, I want them to know that help is there.”
UK SMEs face complicated recovery
Research for Accountancy Age highlights disparity between SMEs across the UK as they begin to emerge from lockdown.
Over one-third of small-to-medium sized businesses (SMEs) have been “completely disrupted” by the pandemic, according to new research by FreeAgent.
Overall, 87 percent of surveyed SMEs said their business had suffered due to coronavirus, with further research suggesting that SMEs are all at different stages of recovery as the UK begins to emerge from lockdown.
68 percent of SMEs are deferring their tax payments, although the majority do expect to pay these tax liabilities back within six months.
YouGov research also found that nearly one-fourth of small businesses haven’t seen a change in their expenses, and the majority (57 percent) have seen the number of expenses submitted decrease. However, the cost of office equipment, software and household costs have all risen during lockdown.
The overall change in working practices was ‘easy’ for 68 percent of YouGov-surveyed companies, although small businesses did lag behind the enterprise market ‘substantially.’
Bounce back loans launch for small business
A report has suggested that more than 69,000 bounce back loans for small businesses worth over £2bn have been approved during the first 24 hours of the scheme.
The bounce back loan scheme offering small businesses easy-to-access loans of up to £50,000 officially opened on 4 May, with the cash promised within days.
The seven largest lenders (Barclays, Danske, HSBC, Lloyds, RBS, Santander and Virgin Money) received more than 130,000 Bounce Back Loan Scheme applications on the first day of the scheme.
Thousands of small firms and sole traders are eligible for 100% government-backed bounce back loans of between £2,000 and £50,000 to help them make it through the coronavirus outbreak.
Small business owners can apply to accredited lenders by filling out a simple online form, with just seven questions.
The government has also agreed with lenders that a flat rate of 2.5% interest will be charged on these loans.
The government will provide lenders with a 100% guarantee and cover the cost of any fees and interest for the borrower for the first 12 months. No repayments will be due during this period to enable firms to get back on their feet.
The loans are available through a network of lenders, including the five largest banks.
Coronavirus Update: Tax appeal deadlines extended
HMRC has extended the period available for taxpayers to appeal a tax decision by an additional three months, in light of the current pandemic.
Under normal circumstances, HMRC writes to tell individuals if they can appeal, and they usually have 30 days in which to do so.
Updated guidance now states that if an individual or their business have been affected by coronavirus), HMRC will give them an extra three months to appeal any decision dated February 2020 or later.
Taxpayers should send their appeal as soon as they can, and explain the delay is because of the impact of Covid-19.
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Under normal circumstances, HMRC writes to tell individuals if they can appeal, and they usually have 30 days in which to do so.
Updated guidance now states that if an individual or their business have been affected by coronavirus), HMRC will give them an extra three months to appeal any decision dated February 2020 or later.
Taxpayers should send their appeal as soon as they can, and explain the delay is because of the impact of Covid-19.
Anyone who wants to appeal a decision about ‘indirect tax’ (for example VAT, excise duty, customs duty) can request a review by HMRC or appeal straight to the tax tribunal.
Following an appeal, taxpayers can accept HMRC’s offer of a review, or request one, if it is for direct tax.
A review will be carried out by someone who was not involved in the original decision. This usually takes 45 days. Anyone who disagrees with HMRC’s review can ask the tax tribunal to hear their appeal.
This should usually be done within 30 days of the review decision, but because of coronavirus, HMRC will not object if someone asks the tribunal to hear their appeal after 30 days, if two conditions both apply.
These are that their review decision is dated February 2020 or later, and that they ask within three months of the normal deadline. The same extension applies to appeals against penalty assessments, and to the provision of ‘reasonable excuse’.
HMRC is looking to help people most acutely affected by Covid-19, for example those bereaved, but also taxpayers impacted by the challenges the lockdown presents. For example, some businesses and accountants haven’t been able to collect their post and will miss deadlines where HMRC only correspond by post.
More than 500,000 UK Companies in Significant Financial Distress
509,000 UK companies are in significant financial distress—the highest number ever measured.
The coronavirus lockdown has seen the largest quarterly increase in the number of businesses in significant distress since the end of 2017, growing by 15,000 companies.
This figure is expected to increase throughout Q2 as COVID-19 restrictions continue.
The number of critically distressed businesses increased by 10% in the last quarter alone.
During Q1 2020, the number of UK companies experiencing significant financial distress exceeded the half a million mark for the first time since our research began.
Latest figures show a 3% quarterly increase in the number of companies that are unable to meet their debts—that’s 15,000 businesses, representing the largest increase since the end of 2017.
The leading cause of this is the coronavirus restrictions and our data shows that SMEs have been worst hit, representing over 99% of all businesses in distress.
Companies with less than 250 employees are particularly vulnerable at this time as many have struggled to access government support schemes.
Even more concerning is that our data shows a 10% jump in the number of businesses in critical distress in the last quarter—this is usually a precursor to insolvency.
A recent survey from redflaghalert has suggest that there has been a significant increase in businesses experiencing critical distress; 2,289 companies are now in this category. Between Q4 2019 and Q1 2020, the increases in certain sectors have been dramatic:
- Bars and restaurants: +37%
- Real estate and property: +21%
- Construction: +11%
- Retail: +8%
- Manufacturing: +8%
The sectors that have been hardest hit by significant financial distress in the last quarter are:
- Real estate and property: +6%
- Hotels and accommodation: +5%
- Construction: +4%
- Health and education: +4%
Since 2014, several sectors have had huge increases in the number of businesses in distress. These sectors include:
- Utilities: +132%
- Real estate and property services: +104%
- Sport and health clubs: +86%
Year-on-year, all but one (printing and packaging) of the 22 sectors monitored by Red Flag Alert have seen increases in the number of companies in significant distress over the past 12 months, with the worst affected being:
- Real estate and property: +17%
- Sport and health: +8%
- Food and beverage: +7%
Many businesses are currently not failing immediately because the government support schemes. The suspension of court action has stopped many businesses from also going under. However, this will only be a short-term solution and once things start to normalise again the figures may increase.
Typically, it would be expected that 4.3% of these companies will fail each year not because of coronavirus restrictions, but because they were already at high risk of failure from any short-term drop in revenue and cash flow. However, the impact of COVID-19 will see this figure double and leave the UK economy with insolvent debts totalling £8.6bn this year.