As CFOs grapple with the financial impact of the COVID-19 pandemic on companies, there are five questions they need to ask their audit teams.
Many CFOs are conserving cash and pulling back on planned investments to deal with the financial impact of the COVID-19 pandemic on their companies. But even within an environment of radical uncertainty, the one thing they cannot pull back on is considering what’s next.
CFO roles have expanded, such that in addition to managing costs, controls and compliance, CFOs are expected to partner across the organization to minimize risks and to identify new opportunities for growth and long-term value creation.
Fortunately, finance professionals can find a source of business intelligence they may not have anticipated in the independent audit, which has been transformed by new technologies.
Here are five questions that all CFOs may want to consider asking their audit teams, now more than ever.
1. How can the independent audit help me identify risks, exposures and prospects?
As our audit teams meet with clients to review Q1 and Q2 results, the value of providing insights based on data has never been more evident. This past year, virtually 100% of Ernst & Young LLP (EY) audits of large public companies, as well as many of our audits of smaller private companies, used our suite of data analytics, the EY Helix Analyzers. The advent of the data-driven audit means that rather than sampling and testing, our audit teams are now able to analyze the entirety of general ledger data.
This gives them a keen ability to pinpoint financial risks, which is critically important. But the data-driven audit also allows our teams to deliver a higher-quality view of financial processes and results, generating important business insights as a natural by-product of the audit. When auditors are able to drill down to a single line and to consider key performance indicators (KPIs) for multiple aspects of operations, as well as variances, relationships, patterns and anomalies, they can offer the CFO a new and objective perspective.
In a business-as-usual environment, their observations can help the CFO optimize the company’s operations. For example, working with a fashion business, the audit team noticed that a larger number of SKUs, or individual items, within a collection did not translate to larger revenues for that collection and that led to the client considering rationalizing a number of SKUs. On another audit engagement, while analyzing a client’s working capital flow, the engagement team was able to identify which regions managed cash collections more efficiently. Management was able to share leading practices to its other offices.
In today’s far from business-as-usual environment, the audit can be a crucial source of insight for CFOs, to consider when revising forecasts and planning for financial recovery. Curious and intuitive CFOs recognize the more panoramic outlook their auditors now have and the higher-quality insights they bring.
2. As we address the crisis today and emerge from it over the next year, how can I make sure that my technology investments generate the largest possible returns?
As many sectors strive to reemerge from shutdowns and to rebuild their businesses, it is incumbent upon CFOs to improve efficiency, wherever possible, and that includes maximizing the ROI on the business’s technology investments.
EY can help by leveraging our knowledge from EY technology alliances, as well as our awareness of how other organizations are solving similar problems, to help CFOs strategically leverage technology to automate their own processes and to develop a digital strategy for the business.
For example, as companies grow through mergers and acquisitions, a key challenge is aggregating data from multiple enterprise resource planning (ERP) systems to build a full picture of the business. At EY, we created a new centralized group named the 10x Accelerator to build experience in data capture among our audit teams and to enable the audit with a “single source of truth.” The 10x team’s ability to establish a repeatable process for data capture can serve as a leading practice that CFOs can learn from as they look to tap into the power of data system-wide.
CFOs often ask me about another new technology with exceptional promise for streamlining financial processes: blockchain. As new businesses sprang up around cryptocurrencies over the last decade, we were faced with the challenge of auditing blockchain transactions.
We initially developed the Blockchain Analyzer, part of our analytics suite, for this cryptocurrency sphere, allowing audit teams to analyze 100% of a client’s transactions on the major cryptocurrency blockchains, to reconcile those transactions with the company’s internal financial systems, to perform risk assessments and to red flag questionable transactions.
And our use of artificial intelligence in the digital audit can help inform our clients about the possibilities of intelligent automation for their own processes. For example, a client was substantially impacted by the new lease accounting standard ASC 842. To determine the value of its leases, it had been employing a commercial software package with known logic errors and executing other steps manually, and it engaged another firm to cleanse and aggregate its data and perform calculations as it transitioned to the new standard.
However, in the course of its independent audit, a multidisciplinary EY team automated the reperformance of lease calculations. Using AI tools able to interpret text-heavy data from large numbers of lease contracts, human errors were identified, which enabled the client to identify weaknesses in its current process.
3. How can I get my team ready for expanding responsibilities and new technologies?
CFOs often tell me that it is a struggle to get their teams to accept change and to build new capabilities. Today, more than ever, they need their people, at every level of the organizational chart, to recognize risks, to make better decisions and to generate new ideas for growth in a landscape altered by COVID-19.
At EY, we have found that data is a great democratizer of insight. One of our early career auditors, for example, volunteered to prepare the work steps for the application of analytics to a client’s sales, accounts receivable, and property, plants and equipment.
The reports generated by the Helix Analyzer helped her to perceive aspects of the client’s business she would not have seen in a traditional testing environment. She was asked to present some of those insights to the client’s credit department, and her work led to a discussion about credit limits and other significant issues.
The early career auditor not only provided useful information but also served as a role model for the open and inquisitive mindset that the CFO was seeking to inspire throughout the finance organization. This is important because as investors increasingly expect more forward-looking reporting on a range of measures, CFOs need to create a team culture based on transparency, objectivity and critical thinking.
At the same time, many CFOs are working to provide investors with reliable insights into the company-wide culture, which is key to long-term value creation — using the organization’s data to identify the KPIs of a healthy corporate culture, as well as controls that allow those measures to be trusted.
4. What about all of the nonfinancial questions that investors are asking today?
One of the challenges CFOs face is that investors increasingly want reliable information outside the audited financial statement — about culture but also about talent, innovation, environmental and social impact, governance and other factors. The COVID-19 pandemic, for example, has put a new spotlight on business continuity planning, supply chain resilience and employee benefits, such as health insurance and sick leave.
Such nonfinancial factors often represent the majority of a business’s value or its greatest risks in the long term, yet they are not always measured and communicated effectively.
On climate change, for example, the Financial Stability Board’s Task Force on Climate-related Disclosures has found that despite increasing reporting in recent years, investors are still being given insufficient information.
And the EY Global Climate Risk Disclosure Barometer has found that the quality of that information is often lacking: the most common disclosures relate to a business’s own emissions and then to the transition risks it faces as the world moves toward lower emissions. The physical risks of climate change — clearly considerable in a time of wildfires, sea level rises, inland flooding and extreme weather events of all kinds — are generally overlooked, both in valuation models and in forward-looking strategic and risk management disclosures.
If businesses intend to reassure investors of their resilience to climate risks, better reporting is required. At EY, we believe that CFOs should be able to convey successes in this and many other areas to their stakeholders, and that it’s time to start a broader conversation about new measures of performance and long-term value creation.
Alongside 31 companies and asset managers representing US$30 trillion of assets under management and almost 2 million employees, EY has helped launch the Embankment Project for Inclusive Capitalism, which is identifying the most important alternative assets that affect business value, as well as potential standard metrics for them that could be used around the world to inform investors and other stakeholders.
5. How can the independent audit unlock value in the next year, and beyond?
Today, the CFOs I speak with are balancing short-term priorities with a need to create value over the long term. As each industry — and each company within it — sets a timeline for recovery and a return to growth, CFOs are not just accountable for strategy and results; they serve as stewards of the organization’s integrity as well.
Of course, the independent audit reveals risks and gaps that can help CFOs develop more effective systems and earn the confidence of the marketplace. That has not changed. But increasingly, the audit process itself offers a valuable example for CFOs — by demonstrating how transformation can be harnessed and embraced, how technology can streamline processes and add quality to the work.
At EY, our audit engagement teams have the most advanced tools at their disposal today and a broad vision for the ways transparency and trust will be assured tomorrow. As CFOs drive long-term value creation in a world reshaped by COVID-19, the independent audit can be a starting point for an objective assessment of risk, improved transparency and data-driven business decisions.