How Covid-19 crisis will force State and firms to rethink accounting, risk

The Covid-19 has brought the globe to standstill with various governments re-channelling their resources to combating the existing or anticipated threat to their nations.

In the developed world, super powers such as the United States and China are battling the pandemic whist also staring at an unprecedented financial crisis last witnessed a decade ago. The 2008 financial crisis was the biggest economic downturn since the Great Depression and some world economies are yet to fully recover from its impact.

Whether the Covid-19 virus will plunge the global financial markets to that level still remains to be seen.

In the macro environment, the government, both at the national and county levels, stare at a decreased revenue collection from taxes and non-tax revenues whose effect will be felt both in the short and medium terms.

In this regard, the government will and is taking measures to mitigate against the effects of the pandemic. Some of the measures that may be taken in the short run include further austerity measures on government spending in the current fiscal year, review of current cash plans to accommodate the demands within the health sector, seek donations and grants to fight the pandemic and renegotiation of current debt repayment timelines, among others. A stimulus package is also needed to cushion the economy from the effects of Covid-19 in the short and long run. This may include an increase in government spending or a reduction in taxes in order to increase the fiscal space.

In his national address on the March 25, 2020, the President gave a directive to the National Treasury to undertake a raft of measures geared towards increasing the disposable income for the Kenyan citizens and organisations.

These measures include 100 per cent tax waiver for individuals earning a gross income of Sh24,000 and below, reduction in personal income tax from 30 per cent to 25 percent, reduction of corporate tax from 30 percent to 25 percent, turnover tax to decrease to one percent from three percent and Value Added Tax (VAT) to decrease from 16 percent to 14 percent. The President further directed cash transfers to the old and vulnerable be increased by Sh10 billion, verified pending bills amounting to Sh13 billion be paid within the next three weeks and the Kenya Revenue Authority (KRA) to pay verified VAT refunds amounting to Sh10 billion be paid within the next three weeks.

Increased disposable income will provide a cushion for households in these hard economic times and offer them more money at their disposal to spend on necessities like food, shelter and water. In addition, companies and small businesses will afford to keep their employees longer following the relief given on the taxes. Although this move will decrease government revenue in form of taxes, the increased consumption arising from an increase in disposable income is expected to mitigate against hard economic times during and after the pandemic.

In adherence to government directives, the public sector in Kenya has scaled down its operations to the core essential services with most of the employees working on a rotational basis. This means that service delivery is and will continue to be compromised. Government projects that were ongoing before the pandemic may not be completed before the end of the government’s fiscal year ending on June 30. The concept of working from home is new for most Kenyans and even stranger for the government and public sector at large. Public sector entities need to devise ways to ensure staff productivity through use of technology. Important deadlines also need to be kept in view to ensure seamless continuity of work flow once the pandemic is tamed and things get back to normal.

Large multinationals, medium- sized companies and small enterprises also continue to face unprecedented outcomes from the effects of the pandemic. These effects include decline in revenue, cash flow challenges, increased risk of default by customers, inability to repay debt and other obligations when they fall due, loss of inventory especially for perishable items and increased cost of doing business. Perhaps the worst effect comes from the uncertainty as to when and whether the pandemic will be contained. This uncertainty decreases the ability of businesses to plan for the future and may result in some entities taking stringent precautions while others may take a more relaxed approach in which case both approaches have their pros and cons based on the time it takes to tame the pandemic.

Nairobi Stock Exchange

Indiscriminate sale of shares by investors at the Nairobi Stock Exchange (NSE) on the first day Covid-19 was reported in Kenya is a clear demonstration of the effect of the virus on the economy.

The total market capitalisation shrunk by Sh120 billion in one of the largest declines in a single day in the history of the bourse.

Kenya Airways estimates that it is losing at least Sh800 million a month, noting that the situation could change more dramatically in coming days as more restrictions in global travel come. Globally, the International Air Transport Association (IATA) estimates that airlines worldwide are set to lose up to Sh11.3 trillion ($113 billion) in passenger revenues if the virus spreads further.

In view of this, business entities need to review their business insurance policies to evaluate whether it makes business sense to have business continuity insurance that may absorb such losses that may arise from temporary business closure.

Households are not spared either. In these uncertain times of Covid-19, households need to refocus and re-prioritise on their day-to-day expenditure.

The decrease in disposable income means that households will only spend on necessities and cut down or totally eliminate on luxuries. Another effect will be increased spending on health care in case the pandemic is untamed.

This therefore means that households need to set aside some emergency funds for any unprecedented outcomes.

One of the greatest challenges for accountants during and after this pandemic will be to provide financial reports that promote transparency, relevance, reliability, comparability and understandability.

This therefore demands that a detailed assessment is conducted on the effects of the pandemic against international accounting standards in order to ensure periodic and annual financial statements communicate objectively to aid in decision-making processes.

The other considerations that require to be made by management of different organisations and the government are related to risk management. Covid-19 pandemic is a black swan of a scale unpreceded in modern history.

The pandemic represents significant systematic risks which require organisations to relook at their business models and lay out contingency plans and activate other risk treatment options to address the threats presented by the pandemic and take advantage of any emerging opportunities.

Going forward, risk management tools should be made more robust to include such pandemics whose effects are unprecedented and should cover the whole business cycle.

The government should consider a fiscal policy that anticipates natural disasters and pandemics and develop tools to deal with the effects.

Business should also consider risks associated with sudden change in business cycles, staff working from home, risks associated with development of new IT tools that enable working off- site, change management for staff and organisations and staff productivity in times of uncertainty and isolation.

The Covid-19 pandemic, once contained, will leave some valuable lessons for all sectors of the economy.

It will have changed the way we view technology, working from home, flexi- working hours, households saving culture, government and institutional risk analysis, government policies that have fiscal space for disasters, curbing corruption, improvement of our health systems, anticipating and embracing change, among others. This are lessons we can take to the next generations as we seek to rebuild our nation once this dust has settled.