While the EU and individual countries impose sanctions, European accountants need to step up and address how these, and other consequences of the war, affect their activities. As the situation evolves, professional accountants must continue applying their ethical values and social responsibility.
Below we draw their attention to points of alert on anti-money laundering (AML), cybersecurity, accounting, audit, and reporting to help them ask the right questions. To do the right thing in these difficult times, professionals will have to consider different dimensions from legal questions to ethics, risk management and corporate citizenship. The situation can raise difficult questions that may require seeking further legal advice (which this alert does not provide).
ANTI-MONEY LAUNDERING
Monitor sanctions
Accountants should monitor the national and EU sanctions lists that are constantly updated. Individual countries and the EU have imposed four categories of sanctions on Russia and Belarus:
- sanctions against individuals and entities
- restrictions on business
- diplomatic measures
- restriction on economic cooperation
In accountancy firms and companies, management and the board are responsible for interpreting the sanctions. They may also need to consult with their legal counsel or external lawyer. Accountants and auditors need to apply all their professional skills to make these measures effective, and help companies cope with the disruption they will bring. Strict know your client (KYC) and AML provisions, and risk management will help ensure sanctions are properly considered.
CYBERSECURITY
Nowadays a war can also be carried out virtually through organised cyber-attacks. Many entities have already suffered greatly from such attacks, some of which were directly attributed to the hacker’s arm of the Russian government. Accountancy firms, especially small and medium-sized ones, should be alerted on the real probability of such attacks and take the necessary precautions to analyse their risks, as well as initiate discussion with their clients. Many small and medium-sized enterprises (SMEs) might not have readily available plans to respond to such cyberattacks. It is recommended for these SMEs to check with their own IT personnel or consultant for a comprehensive and personalised response.
ACCOUNTING, REPORTING AND AUDIT
Accounting and reporting implications
The economic effects of the war can have an impact on accounting, reporting and auditing financial statements of the companies or groups concerned, especially of SMEs. This section highlights some of these potential implications. However, the impact on companies will differ. Companies might be particularly affected if they 1) trade with companies in Russia, Belarus or Ukraine, 2) have subsidiaries or assets in Russia, Belarus or Ukraine, or 3) are linked with organisations or individuals under sanctions. This impact should be reviewed regularly as the further development, duration and impact of the war cannot be predicted.
Effects on accounting and reporting for companies as of 31 December 2021
Reporting standards like International Accounting Standard (IAS), International Financial Reporting Standards (IFRS) and relevant national Generally Accepted Accounting Principles (GAAP) should be fully complied with. They can also be used to respond to actual accounting and reporting challenges caused by the war in a sensible and practical way.
Assessment of going concern
Companies need to consider going concern issues if they are adversely affected by the war in Ukraine and sanctions on Russia and Belarus, e.g., commodities- or IT business. They need to consider running several possible sensitivity analyses to determine whether there is any material uncertainty on its ability to continue as a going concern. This can result in additional disclosures especially if there is a material uncertainty.
Non-adjusting post balance sheet events
The general requirement is that the balance sheet reflects the position at the end of the reporting period. Therefore, for companies in Europe with a 31 December 2021 year-end, the emergence of the war is a non-adjusting event since the invasion occurred during February 2022.
The nature of any material non-adjusting event, and an estimate of its financial effect, must be disclosed in the notes to the financial statements. Therefore, companies need to consider the impact on their business, which will depend on their specific circumstances. This includes that the disclosures articulate potential impact in the next reporting period.
Further disclosures in the management report
Companies should also consider whether to refer to the possible impact of the war when they report principal risks and uncertainties in the management report. In principle, they should report this when possible further developments can lead to negative deviations from the company’s forecasts.
Effects on accounting and reporting for companies with year-ends in 2022
As we progress through 2022, the scale and impact of the war will become clearer. There may be a greater degree of judgement required when identifying the conditions at balance sheet dates after 2021, and therefore assessing whether the developments are adjusting or non-adjusting events. The war is ordinarily an adjusting event for any reporting period ending as from 28 February 2022, either for annual or quarterly reporting.
Auditing implications
- Effects on auditing financial statements as of 31 December 2021 and beyond
- The war impacts on an auditor’s risk assessment of a company
- Obtaining audit evidence
- Implications for the auditor’s assessment of going concern
- The impact of the company’s future prospects on the auditor’s report
- Consider the adequacy of management’s disclosures about the war’s impact
- Potential effects on the auditor’s report
- Potential effects on the auditor’s acceptance or continuance of the engagement
More details on each item: here
The particular impact on financial institutions
Financial institutions are expected to be especially impacted by the war in Ukraine and the EU sanctions imposed on Russia and Belarus. A few financial institutions and funds might have direct exposure to these countries, while most will, at least initially, be impacted in a more limited manner. Heavily enforced US sanctions also need to be monitored and abided by. More precise conclusions are expected to be drawn by the end of the first quarter of 2022. There might also be particular concern around the valuation of their collaterals, as war, declared or not, might make their coverage void.
Source: ACCOUNTANCY EUROPE