Finance & Strategy Professional, Non-Executive Director; Independent Trustee & Mentor; AICPA Thought Leadership & Business Ethics Committee

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The increasing complexity and interconnectedness of the business world is placing a greater burden on managers and decision makers to achieve success, and the Covid-19 pandemic has intensified that pressure.

Companies will need to tighten up their procedures and practices to survive — and ideally thrive — and finance professionals have a critical role to play to assist firms in successfully navigating the complexity and addressing the leadership challenges faced.

The finance professional’s role has evolved to include stewardship and acting as trusted advisors to various stakeholders in an organization from operations to compliance to strategy. In many cases, this involves challenging the status quo and existing best practices to ensure they remain fit for purpose.

Boardroom Role

Finance professionals have the responsibility to provide stakeholders with a meaningful and accurate representation of the financial and non-financial performance and position of the company. Technology has enabled a move away from merely reporting on numbers toward interpretation, planning and active management in an evolving role related to strategy and strategic finance. It is here where financial professionals must display professionalism and leadership. Serving in this role requires professional skepticism and may also require courage, as it may involve challenging the status quo.

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By exploring a few examples and challenges faced by firms in recent times, I will put forward how finance professionals can provide the required insight and guidance.

Cash Flow Planning

Cash flow planning and forecasting are complex and key functions of the profession. However, in some organizations, these processes take on a repetitive tone and are merely part of short-term cash flow management and variance reporting. The pandemic has revealed that companies of all sizes pay the price for this by not having updated and dynamic information at hand to help them respond to disruption. Updated, comprehensive information must form an integral part of strategic management tools and sources of business intelligence.

Independent Thinkers

It is the responsibility of finance professionals to question and challenge generic and “copy/paste” disclosures. This requires courageous leadership within the finance function, the internal audit department and the audit committee. This is why independence is so important in relation to the board and the composition of the audit committee.

From a board point of view, independence brings new perspective and encourages challenges to the status quo. Within an audit committee, independence ensures that the oversight provided and work done by external auditors is not influenced by insiders or other conflicting interests.

Finance departments must display professionalism and leadership, and apply sufficient scrutiny to ensure accuracy and that what is reported is free of material bias. This requires the application of skills and experience using a questioning mindset, along with a deep understanding of the company enterprise and its value chain.

Going Beyond “Comply And Explain”

Corporate governance provides a framework for considering the interests of stakeholders in a systematic and transparent manner and ensuring the sustainability of the enterprise. Within corporate governance, most global markets follow a principle of “comply and explain,” but there remain differences in its application and interpretation of its meaning.

The market is full of generic reports that add no value to stakeholders and give little insight into the company beyond its basic financials. For firms that do not illustrate and discuss non-compliance, the subject becomes easier to hide or avoid. This poses a significant risk.

South Africa-based Steinhoff was a global business selling household goods in more than 32 countries. At its high point in 2016, Steinhoff posted revenues of $10.2 billion (8.645 billion euros), yet it collapsed in late 2017 as a result of the CEO admitting to accounting irregularities totaling $7.4 billion (6.5 billion euros). This was preceded by years of suspicions being raised by German and Dutch regulators, various internal investigations and even litigation. The Steinhoff case demonstrates the importance of conducting a thorough review process to address any self-identified issues.

Finance professionals must question generic reporting and challenge management, if required from the board, on what is being done to address specific issues. This requires applying independent thought, diligence and skepticism. This will not only enhance the quality of the report and detail of disclosures to the market and investors but also ensure that risk items are identified early and dealt with.

Tackling Fraud

These steps may go a long way in ensuring better risk management, but they cannot be effective when applied in isolation. While mismanagement is rarely malicious or perpetrated with intent, fraud is deliberate. As with mismanagement, it may thrive due to failures in leadership and lack of governance and oversight, but merely ticking boxes and implementing systems may not be enough to address fraudulent actions. Deliberate counter actions are required.

For example, in the collapse of payment processing company Wirecard in June 2020, an over $2.2 billion (1.9 billion euros) black hole was revealed in the company’s accounts. Rumors and reports had been circulating for years warning the market of possible suspicious dealings, yet EY signed off on the accounts for 10 years. It would appear that applying the basic audit principle of the independent verification of the financial statements would have exposed the fraud much sooner.

Wirecard and Steinhoff both had highly experienced boards providing oversight and monitoring, yet they still failed.

Boards have a responsibility to create and nurture a culture that entrenches ethical behavior and encourages open and honest debate. This will ensure that good and bad information is able to flow through the organization and be integrated and addressed at every level of the company. Finance professionals have an increasingly important role to play in this process going forward to help prevent their companies from becoming the next case study of corporate failure.

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