The coronavirus (COVID-19) outbreak has impacted seemingly every industry in our economy. The financial industry, in particular, has experienced a wave of groundbreaking changes over the course of the past year. In addition to increased levels of volatility, members of the financial and investment community have also faced challenges finding ways to communicate risk effectively, honestly, and transparently to relevant partners.
As one of the leading regulators within the broader financial and investment community, the Securities and Exchange Commission (SEC) has issued new guidelines. Now, companies are finding ways to balance these guidelines with their own internal optimism, helping them create a productive narrative and clearly communicate risk.
Below, we will discuss how the COVID-19 outbreak has (perhaps permanently) the way companies talk about the ongoing exposure to risk.
New Changes and Communication Suggestions from the SEC
Following the initial outbreak of the virus in spring 2020, key regulators decided to allow issuers to delay when they publish financial reports, including standard annual and quarterly reports. In the recent set of new guidelines, the SEC strongly encouraged companies to consider how an extended outbreak could affect all aspects of their operations, both structurally and financially.
The SEC also issued general guidance, suggesting that managers and other relevant decision-makers clearly explain how risk is being evaluated and how disclosure decisions are being made. In general, the guidelines—released by the SEC’s Division of Corporation Finance—encourage all relevant parties to be transparent and take active measures to mitigate risk. While the regulator recognizes that each company’s situation is unique, the need for transparency and active acknowledgment of the virus is universal.
Honestly Evaluating the Impact of COVID-19
The COVID-19 outbreak has yielded intense macro and microeconomic effects. In addition to altering long-term market forces, such as supply and demand curves, the outbreak has also directly influenced how firms of all sorts operate day-to-day.
Before communicating anything related to risk, it is crucial for managers to ask themselves the “big questions” and utilize a comprehensive evaluation.
Some of these questions might include:
- What impact has the COVID-19 outbreak had on your firm’s financial situation? How has it changed your balance sheet, your income statements, and other key financial reports?
- Has the COVID-19 outbreak caused your ability to access additional capital to change? How has your overall liquidity been altered and is your firm in a position to respond to another sudden change?
- Has the COVID-19 outbreak impacted the fair valuation of your assets, as determined by the US Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS)?
- How has the COVID-19 outbreak influenced your supply chain, your employee’s ability to do work, and other key components of your operations?
- What other new challenges has the COVID-19 outbreak introduced for your firm? Can these challenges be resolved and, if yes, when can you expect these challenges to be resolved?
Naturally, these are just a few of the questions issuers and managers might need to consider asking. Depending on a firm’s specific situation, an even deeper evaluation might be needed. Taking the time to answer these questions can help firms improve their communications with all relevant parties.
Other Key Points of COVID-19 Communication Guidance
The outbreak has spurred rapid change across many financial statements, meaning that exact numbers may not always be available. Rather than communicating inaccurate figures (which can create financial or even legal problems), businesses need to consider one of three options. The options include revising already existing communications, withdrawing communications that are inaccurate, and reaffirming information that is verifiably accurate. In some cases, managers might need to consider a combination of all three.
Another way to improve risk communications is to offer sweeping, big picture valuations. Stating not only where the company stands in the status quo, but also how the company will change and how such change will come about can help firms of all sorts create a more accurate illustration. Again, inclusive and transparent messaging is a clear point of emphasis.
The SEC, and other relevant regulators, also encourages clear communications regarding the “new normal.” Some changes are permanent, and others are not. Management should not just mimic its competitors’ communications, but instead offer an honest approach specific to their own situation. If operations or financing have been permanently altered, these permanent alterations need to be recognized. The SEC also recognizes that microcap issuers are in a unique position to demonstrate their “supreme professionalism” via better communications.
Roughly a year after the COVID-19 outbreak has taken the world by storm, the impact of the outbreak is still being felt around the world. Firms in the financial and investment community have experienced intense changes but these firms are still looking forward. The SEC has issued several statements with suggestions about how communication can improve. Honesty, transparency, consistency, and simplicity are all major points of emphasis.