Three ways boards can drive corporate reporting transformation

As stakeholders increasingly demand nonfinancial insights, corporate reporting must be transformed with key changes in the finance function.

In brief

• Organizations need to transform corporate reporting in response to increasing demand from stakeholders for nonfinancial information.
• Boards can facilitate such transformation by calling for finance teams to lead in shaping the organization’s approach to nonfinancial reporting.
• Building trust in finance and reporting technology and adapting the finance talent strategy to keep up with new technologies are also crucial.

Businesses are increasingly looking to drive broad-based prosperity by creating long-term value for multiple stakeholders: shareholders, customers, employees and the communities in which they operate. Turning this vision into reality demands taking a fresh look at how finance and reporting are delivered.

Stakeholders’ demands for nonfinancial information, including environmental, social and governance (ESG) and sustainability reporting, are growing as they seek insights into the impact of ESG issues on business models. This includes looking at how ESG performance and reporting link to the business strategy and financial outcomes, which means the board and management should be ready to respond to increasing expectations and new levels of reporting transparency.

If an organization fails to drive change in how it reports enterprise value, there may be significant implications. When it does not report on increasingly important intangible assets, investors will develop their own approaches and data sources to assess that value, essentially removing the reporting narrative from the organization’s control. Consequently, it would be difficult for the organization to engage with investors, build transparency over its long-term strategy and meet investors’ expectations in reporting disclosures. To address these issues and transform corporate reporting, boards can advocate a stronger focus on three areas: the central role of finance in nonfinancial reporting, digitization of finance and the future finance talent strategy.

Put finance at the heart of sustainability and ESG reporting

As sustainability and ESG reporting become ever more important to how organizations measure and communicate long-term value creation, stakeholders will require clear and transparent ESG disclosures based on high-quality data and produced using reliable processes. These expectations are growing. Seventy percent of finance leaders in Singapore who responded to the EY Financial Accounting Advisory Services 7th Global Corporate Reporting Survey said that demand for forward-looking financial analyses and forecasts has increased over the last 12 months, while 55% noted that stakeholders are looking for new insights on nonfinancial factors of corporate reporting, such as ESG data.

CFOs and other finance leaders are well-placed to lead in this area. By leveraging their experience in establishing processes, controls and assurance of financial information, they can spearhead the implementation of effective governance practices and assurance of nonfinancial processes, controls and data output. They can also help to instill discipline in nonfinancial reporting processes to build trust in the numbers by creating systems, controls and standards as disciplined as those that characterize financial reporting.

Boards should task finance teams with the central role of shaping the organization’s approach in various nonfinancial reporting areas, from assessing materiality to developing integrated reporting frameworks. Doing this will bring finance into the vanguard of the organizational shift to embrace long-term value creation.

Accelerate the digitization of finance and build trust in technology

The COVID-19-induced move to a virtual operating model has accelerated the digitization of many finance functions and paved the way to a more agile, technology-powered future where digitally savvy people and smart machines provide the reporting insights that stakeholders want.

Available on demand, artificial intelligence (AI) has the potential to play an important role in corporate reporting with an efficiency that far exceeds that of human capability. It also provides the potential for continuous improvement — through machine learning, AI learns and improves upon its tasks. It also saves time by carrying out repetitive and monotonous tasks, freeing up resources to focus on value-added activities that require judgment or experience.

Yet a lack of trust in finance and reporting technology may be holding back the acceleration in the digitization of finance. Sixty-three percent of Singapore respondents in the abovementioned survey said they have concerns about the risks of using AI in finance and reporting, from security threats to regulatory risk, while 78% said that governance, controls and ethical frameworks still need to be developed and refined for AI.

As a starting point, boards should ask for a review of the risks that could emerge in an AI-powered finance function, ranging from whether algorithms reflect any biases that could skew results to legal risks and liabilities. They should expect the management to define a clear approach to governance and ethics — including codifying ethical principles for the transparency of AI, formalizing lines of accountability as well as establishing policies and procedures for regular reviews and ongoing risk assessments. Boards should also assess if finance employees have the resources and training required to use these systems appropriately.

Rethink the future finance talent strategy

The impact of AI could be profound for the organization’s future finance talent strategy. Sixty-five percent of Singapore respondents in the survey said that a wide range of core finance roles — such as financial reporting, accounting and financial control — could be significantly disrupted and changed as a result of advances in automation and AI. This signals a need to rethink the skills required in the finance function. The top challenges include competing for finance talent that combines reporting and finance skills with technology acumen and ensuring that skills and capabilities keep up with fast-evolving technologies.

Boards need to work with the management to address the significant, impending skills gap to help realize corporate reporting transformation. It is important to conduct a gap assessment of existing staff skill sets and consider the effectiveness of existing and new incentives to encourage the finance workforce to learn new skills.

Boards should consider the following questions:

• Is the company taking the same approach to nonfinancial data as for financial data in terms of disclosure processes, controls and obtaining external assurance?
• Does the company have clear governance structures and processes for ESG at the senior executive and board levels? How is this communicated to stakeholders?
• How advanced are the organization’s governance, controls and ethical frameworks relating to the use of AI and other technologies in the finance function?
• What would be the top skill sets needed to enable corporate reporting transformation and what is the skills gap in the current finance workforce?
• To what extent does the firm have a strong digital culture to facilitate the adoption of technology to transform corporate reporting?