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Accounting for the Coronavirus
The economic shutdown resulting from the responses to the global coronavirus pandemic has disrupted all manner of business relationships governed by contracts. This has brought into sharp focus the critical governance role that accounting numbers play in many business transactions. In particular, they constitute a kind of "scorecard" for compliance with the terms of numerous types of contracts and agreements, such as debt contracts, supplier agreements, operating agreements, incentive compensation agreements, merger earnouts, and sales commission agreements.
Even in the best of times, accounting and financial reporting — which are often erroneously thought of as objective, straightforward exercises in number crunching — involve a considerable amount of subjectivity and judgment. In fact, they are subject to judgmental estimates that go far beyond simply recording the numbers, as well as beyond either voluntary or mandatory changes in the way the accounting numbers are derived.
The economic fallout from the coronavirus pandemic seems likely only to heighten the subjectivity, complexity and risk associated with such judgments while simultaneously creating more challenges for oversight. The business challenges created by the pandemic are largely unprecedented, and in many cases managers will need to make highly subjective judgments without the benefit of past experience. Simultaneously, unique financial and business pressures are likely to exacerbate incentives to strategically employ accounting changes.
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