The CFO Imperative: How can corporate reporting connect your business to its true value?

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.

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.

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

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.

Finance technology adoption has accelerated

“The finance community has been talking about technology for a long time, but this year it’s really happened. We've accelerated technology development significantly. While we may have talked about near-real-time or constantly updated data before, instead of once a month or once a quarter, now it's actually happening. For example, as a CFO, I now look at sales figures daily, and we very quickly developed the tools to make that possible.”

Niclas Rosenlew, CFO, SKF

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.”

Collaboration and relationship-building skills are critical

“Soft skills, around relationship building and collaboration with teams, will be critical. While finance people have to be experts in their field, they've got to be able to work in a cross-functional team with other experts from other parts of the business to be really effective. You've got to be able to build a connection and rapport with another person — building a trustworthy relationship so that you actually build something better together.”

Marc Rivers, CFO, Fonterra

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.”

Demand for problem-solvers with skills in critical thinking and logic

“There will be major change in skills in terms of transaction-oriented processes in finance operations. We are in the midst of introducing an automated accounts payable processing tool, which means we won't have that many people taking one invoice and then plugging in the numbers. Instead, we will need to have problem-solvers who will have a holistic view of any possible issues that arise. They are not the clerks in this situation: they are the analysts who need skills in critical thinking and logic.”

Christine Rankin, Senior Vice President, Corporate Control, and Principal Accounting Officer – Veoneer