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The financial consequences of COVID-19 - Risks for accountants and auditors

29 April 2022

Lucy Tolond and Helen Walters consider how the financial ramifications of the COVID-19 crisis could lead to an increase in litigation against accountants and auditors by businesses and other stakeholders.

The publication of the Public Accounts Committee (PAC) Report into the Bounceback Loan Scheme has highlighted the extent to which unscrupulous individuals took advantage of the emergency measures implemented by the government to support businesses through the pandemic. The statistics published by PAC are startling:  latest estimates show that of the £47 billion paid out in bounceback loans, £17 billion is expected to be lost – with £4.9 billion of that lost to fraud.

The Bounceback Loan Scheme was operated by lenders, but effectively underwritten by the government, meaning – thankfully – there ought not to be a wave of lender litigation against businesses and their advisers.  That may not be the end of the story for accountants and auditors though, as the financial ramifications of the Covid-19 crisis lead to a domino effect, with a consequent increase in litigation against accountants and auditors by businesses and other stakeholders.

From the outset of the pandemic, accountants were called upon to give urgent assistance to clients facing an unprecedented financial crisis.  The government implemented a raft of emergency measures to help businesses cope with the Covid-19 crisis, including cash grants, loans, tax relief and the furlough scheme. Financial professionals – who were themselves suddenly working from home, often under immense pressure – had to give urgent advice to clients on implementing that Covid-19 assistance, and to explain to them the terms of the furlough scheme and bounceback loans.

Accountants' advice may now be called into question, particularly where SMEs are unable to repay loans and may become insolvent as a result.  Where multiple or a choice of options was available, did the accountant advise on the correct option?  Were accountants qualified to provide advice on loans, or does that constitute investment advice?  Did accountants make clear to clients what they were and were not advising upon?  In some cases the scope of the advice being given may not have been set out clearly, particularly taking into account the speed at which advice was required and the severe pressure businesses found themselves under, coupled with the fact that their advisers themselves were working from home, away from peers and support networks, and often under immense pressure.

Accountants and auditors may also face claims from insolvency practitioners attempting to claw funds back for creditors. There is likely to be scrutiny of how support measures were treated in company accounts – under both FRS 102 and FRS 105, an entity must not have recognised a government grant in the financial statements unless there was a reasonable assurance that the grant would be received, and that the entity would comply with the conditions attaching to them.  Could accountants be faced with claims if there was no prospect whatsoever of a company complying with the terms of a bounceback loan or other grant? ACCA guidance issued during the pandemic also set out how accountants ought to treat grants made under the Coronavirus Job Retention Scheme (the "CJRS" – commonly referred to as 'furlough').  CJRS grants must have been recognised within income, and must not have been set off against expenditure in profit and loss.

Auditors could find themselves in the spotlight if recently audited businesses, which may have been trading artificially, become insolvent, particularly where there is a suggestion of financial impropriety or fraud.  Even in the absence of such suggestions, risks may also arise from auditors' testing and conclusions on going concern; these assessments should cover at least 12 months from the date of approval of the accounts. Pandemic related mandatory closures created material financial uncertainty which may have necessitated further disclosure in both the management and auditor report.

Many accountants experienced an sharp increase in work from March 2020, assisting clients applying for and processing both CJRS grant applications for furloughed staff and also the Self-Employed Income Support Scheme ("SEISS") for self-employed individuals.  During the pandemic the ICAEW reminded its members of their obligations under the Code of Ethics in particular as regards, "Integrity", "Objectivity" and "Professional Competence and Due Care". However, clients may have taken advantage of the scheme (and their established relationships with accountants) and overstated claims, seeking CJRS for fictitious employees, employees who continued to work or simply by overstating the number of hours on which the claim was based. HMRC's amnesty window for declaring furlough fraud/overstated claims without penalty has now long since passed, with HMRC estimating the amount lost to fraud or error in furlough claims at £5.28bn in 2020/2021, or 8.7% of monies paid out.

Under the rapidly changing guidelines and strict eligibility criteria for CJRS application and calculation, combined with the impact of remote working and pressures facing clients, it is entirely plausible that accountants might find their advice under scrutiny where inflated claims are discovered. There may also be criticism, and potential claims, where accountants and auditors have failed to spot fraud.  Covid-19 fraud was not limited to the Bounceback Loan Scheme – as happens in any crisis, fraudsters took advantage of circumstances to commit 'scams' against individuals and companies, such as the widespread fraud in relation to fake or useless PPE.  Accountants were urged by industry bodies from the outset of the pandemic to be on guard for Covid-19 fraud – and to warn their clients of business scams where necessary.  Businesses that have been defrauded and are seeking avenues to recover those losses may consider making claims against their professional advisers.

Lucy Tolond is a partner in DWF's professional risks team. Helen Walters is a Senior Associate in DWF Forensic, and is a forensic accountant.

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