Chapter 1
A new reality for reporting
While finance has demonstrated significant resilience today, leaders should do more to think about its long-term future.
Finance and reporting are at the heart of how organizations are responding to the COVID-19 pandemic. Corporate reporting provides leadership teams with the insight they are seeking to navigate the current turbulence. It can also provide the information and confidence key stakeholders — such as investors — are looking for in a time of great uncertainty. However, reporting can only play an important role if finance teams have made a successful transition to the new operating reality demanded by the COVID-19 pandemic and its ongoing implications. The 2020 EY Global FAAS corporate reporting survey suggests most finance leaders are satisfied with how their teams have shifted to a virtual working environment.
Kazuko Kimiwada, Senior Vice President, Head of Accounting Unit at SoftBank Group Corp., said that while day-to-day communication with existing colleagues is largely effective in a virtual environment, building relationships with new colleagues that have been gained as a result of acquisitions or investments can prove more difficult. “Effective communication through a screen can sometimes be more challenging than an in-person meeting, but I don’t see any major communication issues,” she said. “However, if SoftBank Group acquires a new subsidiary, I would see that as more challenging. I would usually aim to build a personal relationship with the people in that subsidiary through a face-to-face meeting, which we currently cannot do.”
Resistance to change
51%of respondents said, “finance team members have sometimes failed to adopt new processes, reverting to traditional ways of doing things.”
While finance teams appear to have demonstrated significant resilience in the current environment, finance leaders should think about what the long-term future could look like, and how they can overcome resistance to bring their people on the transformation journey. In the survey, more than half of the respondents (56%) said, “there has been resistance to some of the changes we have had to introduce.” And, 51% of respondents said, “finance team members have sometimes failed to adopt new processes, reverting to traditional ways of doing things.”
The dangers of reverting to previous ways of working and failing to pay enough attention to the future could be significant. For example, finance teams could become less relevant and agile, impacting their ability to provide the wide-ranging and forward-looking insight stakeholders want. They could also find their operating model too big and cumbersome to provide what is expected by the business with the speed and flexibility necessary.
Chapter 2
Two ways to reframe the role of reporting
Finance should change how it engages with stakeholders and make reporting central to turning long-term value ambitions into reality.
CFOs often have wide-ranging mandates and responsibilities. While they should protect enterprise value, they can also play an important role in optimizing and growing value. Yet corporate reporting – given its focus on backward-looking, financial performance information – has historically been weighted toward just one of those mandates: protecting value. Reporting should look to evolve to fully embrace growing and optimizing value, with a focus on two areas:
1. Meeting the increasing and wide-ranging insight requirements of stakeholders
In times of uncertainty, demand for insight — to seize an element of control in a volatile and fast-changing environment — increases. Survey respondents said finance is bearing the brunt of increased demands for rich and varied information and insight, with demand having “increased” in a range of areas.
While demand for different types of insight may have accelerated as a result of the COVID-19 pandemic, it is unlikely to decline once the COVID-19 pandemic is over. Senior leadership, such as CEOs, are likely to expect increased visibility and the development of advanced dashboards providing dynamic analyses of financial performance, operating performance and changing market conditions.
2. Making corporate reporting central to turning long-term value ambitions into reality
Investors and other stakeholders are looking for organizations to adopt a longer-term perspective and focus on long-term value creation. Many CFOs and financial controllers are embracing this shift, with 69% of respondents saying, “CFOs and senior finance leaders are increasingly seen by key stakeholders as the stewards of long-term value.”
This shift to a long-term value orientation presents a significant challenge. Finance leaders already drive excellence in financial reporting — including IFRS and accounting considerations specific to the COVID-19 pandemic — while responding to increasing demands for credible and trusted nonfinancial reporting, including demand from investors for credible, investor-grade environmental, social and governance (ESG) disclosures. Over recent years, CFOs have had to contend with a wave of regulatory-driven change to financial reporting requirements, often investing significant time and effort into meeting new accounting standards. Now, demand for nonfinancial information, including ESG and sustainability reporting, is growing as investors seek insight into the impact of social and environmental issues on business models.
Stewards of long-term value
69%of respondents said, “CFOs and senior finance leaders are increasingly seen by key stakeholders as the stewards of long-term value.”
EY Global IFRS Services Leader Leo van der Tas believes companies will likely increasingly see requirements for nonfinancial reporting growing as this domain becomes as demanding and as highly scrutinized as financial reporting. “Nonfinancial reporting has been around for many years, going right back to the Global Reporting Initiative,” he said. “But over the last one or two years, it has become exponentially more important, driven by investors as well as other stakeholders. That has led to a number of initiatives recently that will change the goalposts significantly, including for the finance function. In particular, those involved in sustainability standard-setting have started to cooperate with the IFRS Foundation. This is supported by the securities regulators, as well as investors and groups of preparers, because it is seen to, at least, set a path to a global set of standards that are acceptable not just for capital markets but more broadly.”
This increasing focus by investors and other stakeholders on high-quality nonfinancial information is reinforced by the survey, with 65% of respondents saying, “there is significant value for our organization that is not measured or communicated using traditional financial KPIs, such as brand value and human capital.” However, only 48% of respondents said their organization has made “significant progress” in measuring and communicating human capital.
Measuring the intangibles
65%of respondents said, “There is significant value for our organization that is not measured or communicated using traditional financial KPIs, such as brand value and human capital.”
Finance leaders identified a number of roadblocks that could stand in the way of measuring and communicating long-term value. Almost one-in-five (17%) respondents said that the most important challenge was “the absence of formal reporting frameworks that shows how the connection between tangible and intangible assets contributes to long-term value creation.”
One initiative that could help companies address the requirement for a reporting framework embracing intangible assets is the “Sustainable Value Creation” initiative led by the International Business Council of the World Economic Forum (WEF-IBC). EY contributed to this initiative, which aims to develop a common, core set of metrics and recommended disclosures that corporates can use to report the shared and sustainable value they create. The WEF-IBC report published in September 2020 outlined consistent metrics under four ESG pillars: principles of governance, planet, people and prosperity.1
Chapter 3
Reinventing how finance and reporting are provided
Finance leaders should map out a bold and innovative future for the function and challenge historical ways of working.
To provide a new future for reporting, finance leaders should stop thinking in a linear way about how they go from where they are now to where they are trying to get to. Instead, they should take a “future-back” approach and look beyond the “now” and the “next”. There are three areas to focus on:
1. Building trust into technology and accelerating the deployment of trusted artificial intelligence (AI)
Building trust in AI is difficult in an environment where governance, controls, ethical frameworks and regulations still struggle to keep up with the pace of change in cognitive computing. More than two-thirds of respondents (68%) said, “Governance, controls and ethical frameworks still need to be developed and refined for AI.” At the same time, 47% of respondents said, “The quality of the finance data produced by AI cannot be trusted in the same way as data from our usual finance systems.”
It is clear that a lack of trust in AI outputs is an issue for a number of respondents. However, these reservations could be more of a reflection of the lack of understanding of how these systems work. An alternative view is that AI and machine learning can potentially increase the credibility and accuracy of insights rather than detract from them. This rigor is due to the fact that they arrive at conclusions based on a larger number of data sets, rather than an individual probing a single set of data and potentially introducing their own biases into the equation. It is likely that smart machines could undertake data-driven tasks with greater accuracy, consistency and time efficiency than humans.
2. Transforming the finance and reporting operating model
The survey shows finance leaders anticipate their function looking very different in the future, with a major shift to a smarter, more open finance operating model: 53% of respondents think it is “likely” more than half of the finance and reporting tasks currently performed by people will be performed by bots over the next three years, with 24% of respondents thinking it is “very likely”.
As finance leaders look to reinvent the finance operating model for the future, there are two priorities:
- Defining a partner or managed services strategy to achieve transformational goals:
In the next-generation operating model, many process-driven, regulatory and other reporting activities could potentially not be handled in-house but taken on by subject matter professionals and accredited providers of managed services.
- Taking finance and reporting into the cloud:
When finance leaders were asked to identify their top technology priority in terms of adoption and investment, cloud solutions were the primary focus, with advanced analytics and AI also being major priorities. The overall focus on a triad of cloud solutions, analytics and AI makes sense, as the technologies are closely inter-related. The cloud represents more than just space for high volumes of data. AI involves huge processing capabilities and the cloud is the infrastructure that makes it possible. AI, in turn, then plays an important role in advanced analytics, allowing finance to derive insights by simulating aspects of human intelligence and analyzing vast amounts of data.
3. Rethinking leadership roles and finance skills
CFOs and financial controllers recognize their roles are likely to evolve significantly: 67% of respondents said “CFOs will spend less time on traditional finance responsibilities and more time on driving enterprise-wide digital transformation and growth.” And 66% of respondents said, “Financial controllers will increasingly take on more of the CFO’s finance responsibilities, as CFOs focus on new mandates.”
The 2020 EY DNA of the CFO survey found this is likely to require significant changes to the responsibilities and skills of the CFO role for them to succeed. Building strong relationships with fellow C-suite leaders will likely be an important success factor, but the DNA of the CFO study found significant concerns about the current state of these relationships. For example, 52% of respondents reported limited or no collaboration with the chief human resources officer (CHRO).
Finance leaders should also re-examine the skill set within their team. The head of accounting at a multinational supermarket chain said, “Increasingly, we are looking for a mix of deep accounting and digital skills. I have recently hired someone who is an expert in digital processes. You need people who have knowledge of both digital processes and corporate accounting. You need people who understand what is possible with state-of-the-art enterprise resource planning (ERP) systems and what accounting processes can be automated. But what will never change, even in a digital world, is having people in your finance team who are also able to read and understand IFRS statements. No technology will ever be able to tell you what IFRS 9 means.”
Chapter 4
What next?
CFOs should accelerate the digitization of finance, put finance at the heart of ESG reporting, and define a bold talent strategy.
There are three action areas that are likely to be important in providing a new future for finance and corporate reporting:
1. Accelerating the digitization of finance and building trust into AI and other smart technologies
As a starting point, finance leaders should build a clear picture of the new risks that could emerge in an AI-powered finance function, from whether algorithms reflect any biases that could skew results, to legal risks and liabilities. To build trust in AI, finance leaders should define a clear approach to governance and ethics. Ethical principles around the transparency of AI should be codified, lines of accountability should be formalized, and policies and procedures should be put in place for regular reviews and ongoing risk assessments. Ensuring finance employees have the resources and training required to use these systems appropriately will likely be important, as well as consulting with policymakers to understand how emerging ethical principles could influence AI regulatory developments.
2. Putting finance at the heart of sustainability and ESG reporting
The success of nonfinancial reporting, including sustainability and ESG reporting, is likely to depend on how relevant it is to stakeholders, how trusted and credible it is, and how clear the link is between financial and nonfinancial information. This begins with finance engaging with, and understanding, the requirements of stakeholders, particularly investors, and translating that into relevant and material metrics and disclosures. Finance should look to play a central role in instilling discipline into nonfinancial reporting processes and controls to build confidence and trust. Establishing effective governance practices, and seeking independent assurance over nonfinancial processes, controls and data outputs, will likely help to build trust and transparency with stakeholders. CFOs and financial controllers, whose teams have extensive experience in establishing processes, controls and assurance of financial information, can bring their financial leading practices and experience to support sustainability and ESG reporting.
3. Defining a talent strategy that focuses on reskilling employees for a very different future
Finance leaders should take an assertive and innovative approach to reskilling their people, to equip them with the capabilities they are likely to require in the future finance function. In a market where many finance functions could be competing for the same sorts of skills, and where demand will likely outstrip supply, it is increasingly necessary — and even cost-effective — to futureproof core elements of the current finance workforce. Important actions could include undertaking a gap assessment of existing staff skill sets and developing new incentives to encourage the finance workforce to learn new skills. But as well as a leading learning experience, finance leaders should look to develop a culture of continuous learning. This is because, in an environment where skills should keep pace with developments in technology, finance people should look to have the desire and ability to grow and adapt their skills.
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Summary
The COVID-19 pandemic has been a significant challenge for CFOs and finance teams to deliver corporate reporting. While most teams have demonstrated significant resilience in the current environment, finance leaders should be looking ahead and thinking about the long-term future of reporting. Far-sighted finance leaders are likely using the opportunity offered by today’s environment to challenge the traditional role of reporting and maintain its relevance in a post-COVID-19 environment. They are not looking to defend the past; they are looking to conquer the future.
