How accountants navigated market unknowns.
COVID-19 marked a watershed moment for the accounting and auditing professions. Markets around the globe became increasingly volatile, creating an unpredictable financial landscape. Faced with unprecedented levels of risk and uncertainty, accountants and auditors had to fulfill a seemingly impossible task: forecasting an unknown future.
“In accounting, we’ve always had to make estimates, such as the probable useful life of a piece of equipment,” said Charles Richard Baker, PhD, professor in the Adelphi University Robert B. Willumstad School of Business. His recent paper, “Making Accounting Estimates Under Conditions of Risk and Uncertainty” (Internal Auditing, July/ August 2022),¹ explores the limits of technical accounting—a practice that “seeks to represent past economic events as they happened in a factual manner”—under COVID-19. “During the pandemic, accountants did the best they could in coming up with probabilities for potential losses, but ultimately followed a familiar path. They concentrated on ‘getting the numbers right’ in a technical sense.”
Under international accounting standards, auditors must use a decision-making framework to highlight items of particular significance, called key audit matters (KAMs). Dr. Baker’s article examines the 2020 financial and audit reports published by Australia and New Zealand Banking Group Limited (ANZ) and its auditor, KPMG. “Once the company and its bank had disclosed certain financial challenges, the auditor had to exercise judgment in identifying KAMs and estimating future credit losses,” he said. “All they could do was follow existing standards, even though no one could actually measure what was to come.”
In the end, Dr. Baker concludes, COVID-19 pressed accountants and auditors to make difficult judgment calls—to “determine when unusual items become usual” and make “forward-looking estimates about highly uncertain future events.”
Biography
Charles Richard Baker, PhD
Charles Richard Baker, PhD
Charles Richard Baker, PhD, is a professor of accounting and law in the Robert B. Willumstad School of Business. His teaching and research is focused on the regulation, disciplinary practices, ethics and legal liability of the public accounting profession. He has published more than 100 articles in academic and professional journals, as well as chapters in various academic books and six books dealing with professional accounting topics.
¹Baker, C. R. (2022). “Making Accounting Estimates Under Conditions of Risk and Uncertainty.” Internal Auditing, July/August 2022, 21–30.