Assessing the aftermath: The impact of a cyclone, as seen by an auditor

The aftermath has created unique challenges and opportunities for auditors and business advisers. This article explores the impact of Cyclone Gabrielle on wider Hawke's Bay businesses from an auditor's viewpoint, exploring the complexities of auditing financial statements in the wake of such a disaster and the need for sound business advice. It also touches on the impacts for wine verifications.

The Auditor's Role in Times of Crisis

Auditors play a crucial role in assessing the health and accuracy of a business's financial statements. In the aftermath of Cyclone Gabrielle, businesses face the challenge of accurately presenting their financial positions, despite the disruptions caused by the disaster. Auditors have been involved to ensure that the financial statements reflect a true and fair view of the condition of businesses, considering both the immediate impacts and long-term consequences of the cyclone.

Assessing Asset Impairment

Cyclone Gabrielle's impact on physical assets was one of the most immediate concerns for businesses. From infrastructure and equipment to inventory, many assets were damaged or rendered unusable. As auditors, evaluating the impairment of these assets has been a key consideration.

We work closely with businesses to assess the extent of asset impairments. This involves considering factors such as the cost of repairs, reduction in value due to damage, and potential insurance reimbursements. Auditors ensure that businesses accurately account for the loss in value of impaired assets in their financial statements, which impacts the overall financial health of the organisation.

Disclosure of Contingencies

In the aftermath of a disaster like Cyclone Gabrielle, businesses often face uncertainties regarding potential losses and liabilities. Auditors collaborate with businesses to identify and disclose these contingencies in the financial statements.

We assess whether the potential impacts of the cyclone, such as insurance claims, legal proceedings or environmental cleanup costs, qualify as a contingent liability that needs to be disclosed to stakeholders. By ensuring transparent and accurate disclosure, auditors help maintain the credibility and reliability of the financial statements.

Evaluating Business Interruption Insurance Claims

Many businesses had business interruption insurance policies to mitigate the financial impact of unforeseen events like Cyclone Gabrielle. These policies provide coverage for lost income, ongoing expenses and other financial losses resulting from disruptions to normal business operations.

Auditors can play a role in evaluating the accuracy of these insurance claims. They examine the documentation related to business operations before and after the cyclone to determine the validity of the claims. This process involves careful scrutiny of financial records, expense reports and supporting evidence to ensure that the claimed losses are well substantiated and consistent with the policy terms.

Impact on Financial Ratios and Covenants

For businesses that have secured financing or entered into contracts with financial covenants, the financial impact of Cyclone Gabrielle could have ripple effects on their compliance with these agreements. Auditors assess the impact of the disaster on key financial ratios and covenants outlined in loan agreements or contracts.

In cases where the cyclone's effects have jeopardised a business's ability to meet these financial requirements, auditors have been working with the businesses to ensure their financial statements adequately disclose the situation.

Long-Term Recovery Planning

The aftermath of Cyclone Gabrielle has prompted businesses to not only address immediate financial challenges but also strategise for long-term recovery. Auditors have been providing valuable insights to businesses in this regard.

By analysing financial data and forecasts, auditors help businesses make informed decisions about resource allocation, investment in recovery efforts, and strategic growth initiatives. This assistance has been crucial in ensuring that businesses can rebuild and thrive in the wake of the disaster.

Grant revenue

Hawke’s Bay businesses and other entities such as business associations and councils have received significant grants, donations and other contributions to help pay for cleanup, recovery and business continuity.

The nature and timing of the funding will determine how it should be recognised in the financial statements. As the cyclone struck in mid-February, funding was being received around March (a common year-end date) and through to June and July. Donations with no strings attached are recognised when they are received, even if the costs they are covering are incurred in the next financial year.

Grants that had to be spent on a specific project or otherwise returned will be carried forward in the balance sheet until that expenditure is incurred. And then there is the middle ground, for example, an expectation to spend the funding on a specific project or item, but no requirement to return the grant if it is not spent on that item – or a requirement in the documentation to return the unspent funding but informal agreement that it can be kept. These situations require judgement to ensure they are treated appropriately.

Wine verifications

Our Hawke’s Bay office undertakes Wine Standards Management Plan verifications through Telarc on behalf of MPI. These verifications are effectively food safety and traceability audits, therefore the fact that vineyards and orchards were severely impacted meant that wineries and cideries also had challenges to deal with. For Hawke’s Bay, this was on top of a terrible growing season. Grapes are at their best if there is dry and heat in January through to March but La Nina causes wet summers on the east coast, culminating in the cyclone and flooding, so the grapes suffered. In all cases, fruit was only brought in for processing if it was safe for consumption. Three of our clients, in particular, were inundated and have been going through significant disruption but have all managed to survive through quick decision-making and thorough resource planning.

Conclusion

Cyclone Gabrielle's impact on Hawke's Bay businesses brought to light the indispensable role of auditors in times of crisis. Beyond our routine tasks of verifying financial statements, auditors have become instrumental in assessing the financial implications of the disaster, guiding businesses through complex financial decisions and maintaining the integrity of financial reporting. As Hawke's Bay businesses continue to recover and rebuild, the collaboration between financial auditors and business stakeholders will remain essential in securing a resilient and prosperous future.

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