Financial reporting in an era of economic volatility: What boards and audit committees must do

At the recent Philippine Institute of Certified Public Accountants  Metro Manila Region (PICPA MMR) International Conference in Toronto, Grant Thornton highlighted how economic volatility is reshaping financial reporting. The message is clear: uncertainty now affects many of the judgments, estimates, and disclosures behind financial statements. Risks, such as inflation, policy changes, geopolitical tension, supply chain disruption, and rapid technological shifts are no longer peripheral. They now influence reported results, disclosure quality, and the confidence of investors and regulators.

While the insights from the presentation are valuable to the conference participants who were mostly made up of audit practitioners and financial and accounting senior executives, from my perspective as independent director, they are even more critical for corporate boards, especially of listed and regulated entities.

As management responds to weaker demand, cash constraints, tariffs, higher costs, and, in some cases, restructuring, accounting consequences arise quickly. Contract changes can affect revenue recognition, lease modifications may require reassessment, higher credit risk can increase expected credit losses, and covenant pressure can change the classification or measurement of liabilities. Assets may need impairment testing, deferred tax assets may no longer be recoverable, and inventory may require write-downs. Boards therefore need early visibility into the areas of greatest exposure and the likely reporting impact before quarter-end and year-end.

The Board response should be practical and continuous. Directors should require clear support for key judgments, use forward-looking information where appropriate, and ensure that decisions are well documented. They should also expect timely, plain-language communication with investors, regulators, lenders, and other stakeholders so that disclosures remain credible and surprises are minimized.

For listed and regulated entities, this means moving beyond a year-end review. The audit committee should stay engaged throughout the year through regular discussions with management on major estimates, emerging risks, and disclosure changes, with clear escalation when assumptions shift materially. This gives the Board time to challenge management early and avoid last-minute surprises.

A first priority is stronger oversight of major judgments and estimates. In volatile periods, management assumptions become more subjective, so directors should ask which assumptions matter most, what external evidence supports them, and what has changed since the last reporting period. This includes assumptions used in expected credit losses, impairment testing, going concern, and tax recoverability. A quarterly dashboard showing key assumptions, movements from the prior quarter, and related external indicators can help the committee focus on the areas that need attention.

Boards should also require scenario analysis rather than rely on a single forecast. Management should present at least a base case, a downside case, and a severe but plausible case, showing the effect of each on cash flow, liquidity, covenants, impairment, expected credit losses, and deferred tax assets. Directors should ask whether assumptions are consistent across these areas and whether liquidity and covenant headroom have been stress-tested. This strengthens the Board’s assessment of going concern and readiness for downside outcomes.

Some areas warrant especially close attention. Revenue recognition becomes more judgmental when contracts change through discounts, incentives, cancellations, or revised terms. Boards should ask whether controls over contract changes are working, whether collectability is reassessed promptly, and whether standalone selling prices remain appropriate. Management should surface unusual transactions and significant contract changes early so the audit committee can address issues before year-end.

Liquidity and financing risks require the same discipline. Boards should require early warning indicators, such as minimum cash thresholds, covenant headroom, debt maturities, and refinancing milestones, supported by regular updates on cash flow forecasts, lender discussions, and funding options. Where there is a risk of breach or refinancing delay, contingency plans and accounting implications should be addressed early.

Impairment reviews and useful life assessments should also be revisited more often in a fast-changing environment. Boards should challenge management on cash flow forecasts, discount rates, growth assumptions, and the reasonableness of useful lives, especially where technology may shorten asset lives. Management should identify triggering events each quarter and explain how these were reflected in impairment testing and depreciation or amortization policies.

Restructuring and discontinued operations require equally careful governance. Boards should ask management to explain the business case, timeline, cost estimates, and expected savings, and to show how these plans affect impairment, provisions, and disclosures. Audit committees should confirm that restructuring provisions meet the applicable standards and that any discontinued operation is supported by evidence that a sale or disposal is highly probable.

All of this requires strong coordination among management, the audit committee, and the external auditors. That coordination should happen throughout the year, not only near audit completion. Periodic deep dives into high-risk areas, early discussions with auditors on emerging issues, and clear timelines for papers, judgments, and disclosures can improve reporting quality and reduce pressure late in the audit cycle.

Effective oversight also depends on management having the right resources. Finance teams need timely input from operations, sales, procurement, treasury, tax, risk, legal, and technology so that reporting judgments reflect what is happening across the business and among customers. Boards should ask whether management has the people, systems, data, and internal reporting needed to monitor customer behavior, supply chain changes, pricing pressure, regulatory developments, and technology shifts. If gaps exist, they should be addressed quickly through clearer accountability, better tools, or added capability.

Boards should also recognize when external advice is needed. In periods of rapid change, management may need support from specialists in valuation, tax, restructuring, treasury, cyber risk, regulation, or sector developments. External advisers can help test assumptions, benchmark practices, and assess complex transactions or unfamiliar conditions. Their role is not to replace management’s judgment, but to strengthen it and improve the quality of analysis and disclosure.

In a period of continued uncertainty, the Board’s role is not only to challenge assumptions and require timely disclosures, but also to ensure that management is equipped with the people, data, systems, and specialist support needed to respond well. Strong oversight, grounded in reliable information and timely action, is essential to protecting the integrity of financial reporting and maintaining stakeholder trust.

Marivic C. Españo is a member of Tax Committee and Education Committee of the Management Association of the Philippines. She is independent board adviser of Alternergy Holdings Corp. (AHC) and former chair of P&A Grant Thornton.

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