Are you measuring everything you need to build trust?

By

Peter Wollmert

EY Global and EY EMEIA Financial Accounting Advisory Leader

Senior Assurance leader. Promoting quality and effectiveness in corporate reporting and the audit. Advocate for the future of the accounting profession. Passionate runner and scuba diver.

7 minute read 1 Mar 2019

Trust in business has been declining. Bringing more nonfinancial data into reporting can help reveal a firm’s value-creating potential.

More than 10 years since the global financial crisis, business continues to face a crisis of confidence.

In the recent EY Global corporate reporting survey, How can the digital transformation of reporting build the bridge between trust and long-term value?, only 58% of finance leaders said they felt that the public has sufficient trust in business.

This marks a growing gap between what corporate reporting provides and what stakeholders want. Too often, corporate reporting fails to capture information on intangible assets, which can make it difficult for stakeholders to understand an organization’s potential for long-term value creation.

If organizations want to achieve sustainable, long-term growth, while remaining accountable to public stakeholders, they should get better at measuring their behavior. Doing so may require new approaches to how they define, measure and analyze business-critical data — not just what is on their balance sheet.

Businesswomen digital tablet data review
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Chapter 1

New approaches to nonfinancial data

Leveraging nonfinancial data will likely require new approaches to technology, talent and culture.

If organizations are to improve transparency — to better anticipate the challenges of the future and to build stronger relationships of trust with the wider public — new and innovative approaches to accounting and reporting are likely needed.

More forward-looking, value-driven reporting

Nonfinancial data can help address this trust gap between current financial reporting and stakeholders’ expectations of reporting. An organization's ability to create long-term value is not always disclosed on balance sheets. Long-term value can grow out of an organization’s culture, intellectual assets, technology or infrastructure — all nonfinancial assets.

If stakeholders don’t have visibility of this value, their ability to make strategic decisions around business plans could be compromised. Likewise, if consumers can’t see how a business is behaving — for good or worse — they may not be inclined to trust it.

To close this gap between value and stakeholder oversight, organizations should get better at using all the data available to them, beyond financial data. This means deciding which nonfinancial data to measure, how to collect it and how to understand it.

Nonfinancial assets can include corporate culture, intellectual property, and key performance indicators (KPIs) of environment, social and governance (ESG). These and others are all potentially valuable nonfinancial assets that should be considered for inclusion in corporate reporting.

The space for smart technology

By its very nature, nonfinancial data is more ill-defined and more difficult to analyze using traditional tools and models, compared with traditional financial data. How do you factor customer loyalty, or corporate diversity, into earnings projections? How do you communicate this information to shareholders?

Forty-nine percent of survey respondents indicated that they actually spent more time gathering and processing data than they did analyzing it. If finance functions are to successfully implement a transformation of their function, to one that can incorporate nonfinancial data in their reporting, then a key part of that process will likely be the judicious application of smart technologies. These could include:

  • Automation: Technologies, such as robotic process automation (RPA), free up human labor for more value-added tasks, such as defining and collecting nonfinancial data, or acting on insights derived by smart systems. Data then becomes a strategic asset rather than a burden that takes human capital away from high-value work. This work itself can involve more on-the-ground collection of nonfinancial KPIs or finding ways to communicate this information to the board.
  • Artificial intelligence (AI): More advanced than RPA, AI can dig deep into complex sets of data and uncover value-driving insights. As data tools improve, they can move onto reading, managing and analyzing complex contracts and data, further liberating human talent. AI-enabled platforms and functions, such as biometrics and natural language processing software, can also help expand an organization’s ability to collect and make use of more diverse sources of nonfinancial data.
  • Blockchain: By helping to secure reporting channels, blockchain can increase data transparency, and improve the speed and efficiency with which information can be communicated between functions and to external stakeholders. While no survey respondents indicated that blockchain was the most important technology in finance and reporting today, 24% of respondents think that it would be the most important technology in their role in the next five years. While blockchain is still considered less important than RPA (32%) and AI (44%), it is likely to become a central part of the reporting landscape.

Overcoming workforce and cultural barriers

Technology has significant potential to help organizations understand and deal with their financial and nonfinancial data. Thus, a more robust framework can be created for stakeholders — both internal and external — to engage with the organization.

Among the financial leaders surveyed, 72% said that AI alone will have a significant impact on how their function produces data-led insights, and 64% said that it had the ability to fundamentally disrupt the way finance and reporting are conducted.

However, there will likely be challenges to implementation of these technologies. As with any kind of digital transformation, security and data integrity will be concerns. Fifty-four percent of those surveyed mentioned concerns around data security as a major obstacle when implementing technology solutions in reporting and finance.

There are workforce and cultural issues as well, including the top-level leadership. Thirty percent of survey respondents cited a lack of buy-in from leadership and the board as an implementation challenge.

However, a larger problem is finding the right talent. In this EY survey, 41% of respondents said that a lack of relevant skills within the finance function was a major challenge.

Finance teams of the future will need the capabilities not just of traditional accountants, but of data scientists, analysts and statisticians. When asked, survey respondents indicated that the most important skill for prospective finance hires in the future is not going to be traditional accounting, which was ranked fifth. Instead, they said that it would be analytic capabilities.

Reporting teams may also altogether change the way they think about acquiring talent. Using third-party managed services may help give finance managers convenient, cost-efficient access to critical technical capabilities. Almost three-quarters of respondents indicated that such services would become a central part of their attempts to meet strategic priorities around the future of reporting.

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Chapter 2

Widening the net

Where should organizations be looking for the nonfinancial data they need?

If an organization has decided to bring more nonfinancial data into the view of stakeholders, auditors and analysts, the question remains: What nonfinancial data should you look at exactly? The Embankment Project for Inclusive Capitalism, which brings together nearly 30 global business leaders to promote sustainable long-term growth has identified four key nonfinancial growth drivers:

  • Talent: The way organizations manage their human capital when it comes to compensation and benefits (recruitment, training and development), diversity and inclusion, wellbeing, and creating a purpose-driven culture of engagement.
  • Innovation: Fulfilling needs and maintaining focus on the end user during the innovation process, and fostering trust in the organization.
  • Society and environment: The impact of contributing to business-relevant social and environmental goals on external stakeholders and communities.
  • Governance: The effectiveness of the board in providing appropriate oversight and governance mechanisms to maintain board quality and independence, as well as the ability of leadership, in conjunction with the board, to develop and assess long-term strategy.

All these aspects of an organization should be factored into reporting issues if companies are to get a holistic understanding of how they operate and where future sources of value — or risk — may be located.

By incorporating these into reporting practices, a wide range of stakeholders — public and private, and internal and external — can have a greater view of an organization’s operations. This transparency then creates the foundation of trust on which organizations can build a growth strategy that truly delivers long-term value for all parties.

Summary

Without access to nonfinancial data, the ability of internal stakeholders to make strategic decisions is more limited, and the trust of external stakeholders could be reduced. Rectifying this will likely involve incorporating leading, smart technology into the reporting process, and changing approaches to talent and culture to accommodate this new approach.

About this article

By

Peter Wollmert

EY Global and EY EMEIA Financial Accounting Advisory Leader

Senior Assurance leader. Promoting quality and effectiveness in corporate reporting and the audit. Advocate for the future of the accounting profession. Passionate runner and scuba diver.