“If the operations were continuous, you could take a random sample of the entire population, as in many previous periods, and it would give you a reply with regard to the financial statements,” he said. “But you could have had very different activities this year.” Certain industry lines could have begun to operate as they had during 2019 in the first couple of months of 2020, but the pandemic and lockout started a disruption with an end date that is still unknown.
“What you may want to do is stratify your sample so that the period that was abnormal is more intensively sampled,” Graham said. When company gets back to normal late in the year, he said, auditors will want to more intensively sample the middle phase and look together at the start and end of the year.
The severe disruption to the economy from the pandemic threatens plunging many businesses into ruin, and private companies may pose higher risks than public companies.
Graham reported that, traditionally, auditors face the possibility of lawsuits in about 80 percent of bankruptcies because the creditors of the client may accuse them of failure to recognise the degree to which the financial condition of the client declined prior to the bankruptcy. When a customer is purchased, the purchasing company may sue the auditor if the buyer discovers any failure after the sale is closed or considers mistakes in reporting in the newly acquired company that it decides it is significantly overpaid. Since it is all but inevitable that for the rest of 2020 and maybe until 2021, an exceptionally high increase in bankruptcies will mar the corporate climate, Graham predicts that litigation targeting auditors will also rise.
“That’s going to be a dramatic environmental change,” he added. The unusually extreme litigation threats facing the profession, in his opinion, put an increased urgency on carefully mapping the plan for each interaction and being exceptionally diligent in collecting the records and recording the facts reviewed while carrying out simple procedures such as sampling.