COVID-19: Adopting the Right Risk Mitigation Strategy
As the coronavirus disease (COVID-19) continues to spread to communities around the world, companies are feeling the impact on many aspects of their businesses. Although certain industries—such as aviation, travel, and retail—have been most acutely affected to date, companies across all industries are urgently working to understand the short-term implications of the virus and develop contingency plans. Given the fluid situation as new cases are confirmed each day, the long-term impact of the disease remains unknown. What is clear, however, is the coronavirus disease is having widespread implications on the global economy and the way companies are doing business.
Riveron experts are closely monitoring the evolving situation, examining all aspects of the business lifecycle from financial reporting to supply chain to tax and more. Here are our perspectives on how COVID-19 has already begun to impact key work functions and how companies can prepare with the right risk mitigation strategy.
At its core, COVID-19 is a global health crisis that has already had a devastating effect on individuals and communities around the world. With that in mind, companies must prioritize the health and safety of their people, which may mean instituting travel restrictions, alternative work policies, and guidance on whether attendance at large-scale conferences will be allowed. Companies should also work with healthcare providers to assess whether any updates need to be made to benefits packages (i.e., medical insurance and sick leave) and with IT to determine whether the current infrastructure can support wide-scale remote work. Frequent communication with employees throughout this process is imperative to ease fears and concerns.
Global supply chains are being disrupted, a reality intensified by the extensive reliance of many companies on low-cost suppliers from East Asia. While some companies chose to diversify their supply bases following recent global crises (e.g., the SARS epidemic, the Japanese tsunami, and the Icelandic volcanic eruption), most have not invested in building the right supply chain infrastructure to withstand major global events. To be resilient as the outbreak continues to spread, companies must adopt both a short- and long-term strategy. In the short term, companies should develop contingency plans that include:
- Working with Asian suppliers to find alternatives to raw materials
- Working with freight forwarders to develop alternative shipping routes
- Planning for variations in inventory as supplies continues to shrink
- Developing leasing arrangements with third party-logistics (3PLs) to manage the surge of supply once the crisis subsides
- Utilizing manufacturing capacity to produce inventory for high-turnover products that do not rely on Chinese raw material supply
Long term, companies should begin to invest in a geographically diverse supply base and carry adequate stocks for key raw materials. Companies should also consider installing IoT-based warning systems to detect supply and demand swings; develop alternative inbound transportation routes; and utilize emerging technologies to automate manufacturing and warehousing operations.
As airlines continue to cancel flights to high-risk areas and more companies restrict employee travel, M&A timelines will likely lengthen due to the inability to conduct diligence. In order to maintain deal volume in this shifting environment, companies should identify and document any assumptions about their targets, which can later be verified once travel restrictions ease. Overall, however, companies should anticipate prolonged diligence timelines while the coronavirus spreads and work with their consultants and any third-party advisors to develop the right strategy.
Financial reporting and tax
Any major macroeconomic event is an impairment trigger for many assets, including goodwill, intangibles, and inventory and can impact a company’s financial statements. If companies shift their guidance and forecasts to account for potential impacts to their business, numerous estimates may be affected, which will likely impact the valuation of certain assets.
The US Securities and Exchange Commission (SEC) recently issued guidance that provides conditional relief for up to 45 days for certain publicly traded company filing obligations. This relief also suggests that many companies may encounter circumstances beyond their control that would delay accurate financial reporting, such as the inability to obtain updated financial information amid office closures in high-risk areas. Companies, both public and private, should be proactive when communicating with impacted parties, such as lenders or other key stakeholders and work with audit committees and auditors to ensure robust accounting and financial reporting processes.
In addition to the SEC deferment on filing obligations for affected public companies, the United States is also considering implementing tax relief for industries, such as travel and tourism, which have been hit the hardest by the spreading virus. Some countries have already begun to provide tax credits and extensions for affected companies. In addition to potential tax relief, the US administration is considering payroll tax cuts and tariff waivers for Chinese products and materials.