This article originally appeared in Strategic Finance Magazine and is Part 1 of this blog series.
There’s much about today’s business to be admired: rapid innovation, stimulation of the economy, and the kind of competition that leads to thought and leadership growth. But today’s businesses also suffer from a credibility gap—that is, a lack of trust among the world’s populations.
Mention Enron, WorldCom, or Lehman Brothers, and thousands of people—including lawmakers and regulators—recall all too quickly how many lives can be damaged by the actions of a badly run organization.
It’s no surprise that business, and particularly big business, has a bad reputation in the eyes of the general population. Comprehensive new controls were put in place following the Enron disaster. That and other scandals led to the passage of the Sarbanes-Oxley Act in 2002 and the creation of the Public Company Accounting Oversight Board (PCAOB).
Yet a 2017 Gallup report shows that since 2002, big business has been scoring about a 20% confidence rating. And it isn’t unusual to see newspaper opinion pages bemoaning the lack of honesty among businesses.
An ECO in the Numbers Factory
Trust in the numbers—the data produced by the invoices, payments, and expenses of any business—isn’t just an esoteric concept. It’s as real as the extra costs in dollars, time, and even reputation that can be exacted when that data goes wrong.
Consider what can happen to an automobile maker when an error in design, say for a steering gearbox, travels undiscovered through assembly and into production. The error is finally discovered. The engineering group issues an engineering change order (ECO). The production line, already underway, must be stopped. Costs mount as the plant stops production. Time is wasted, and the company’s reputation may also suffer.
Accountants like to compare the accounting function to a numbers factory. The numbers (data) make up the disparate parts, and the accounting processes connect and form the numbers into larger components that go into the final products. These are the quarterly and year-end financial statements, which are reported to the public. If a material error in the numbers is propagated through to these reports, the resulting misstatement can do at least as much harm, in the cost of reputation, as the ECO did to the automaker.
For the finance department, and for the enterprise as a whole, a material error in accounting can also incur some serious penalties. Accounting staff may have to redirect their efforts to find and correct the error. Ongoing processes may have to stop and wait for the corrections. Labor costs jump up, other reporting might be delayed, and the damage to the reputation of the company’s officers can be significant.
Armanino LLP, one of the world’s largest independent accounting and consulting firms, published a 2016 study to examine how the CFO can spend less time on accounting management and more time on strategic value. It shouldn’t be surprising that five out of the six recommendations directly involve technology and processes:
Standardize and improve processes
Drive improvement with technology
Provide effective key performance indicators (KPIs)
Integrate technology
Provide accurate forecasting
Support growth and expansion
The survey also found that 94% of CFO respondents feel they need better technical skills, and 64% are currently working on upgrading their skills. The challenge isn’t just finding the time to learn, but determining the best approach in the quest for excellence in the numbers factory.
Trust in the Numbers Matters
By establishing and maintaining internal and external trust in the numbers, accounting organizations that can simultaneously deliver real-time and highly accurate financials do more than avoid fines and other costly penalties. Those that prioritize maintaining trust, both internally and externally, gain (and retain) public confidence. This creates a significant competitive edge and has the potential to achieve the following three benefits.
Reduce the Likelihood of Damage to the Organization’s Brand & Reputation
The adage that “trust is gained in drops and lost in buckets” has never been more apt. Organizations with years of steady performance can be damaged by one (infinitely) shared tweet. Social media, a 24-hour news cycle, and declining levels of privacy for both people and organizations also mean that even small errors can quickly become big news.
Organizations can reduce the likelihood of this damage not by increasing budgets for crisis management and lobbying, but by establishing and maintaining protocols that prioritize trust. For the accounting organization, this means improving both tools and processes to facilitate the trustworthiness, transparency, and accuracy of every balance sheet.
Enable Organizations to Realize Higher Performance & Increase Access to Business Opportunities
Organizations that are considered trustworthy have better access to business opportunities and partnerships and, according to research by Trust Across America, “[outperform] the S&P by 1.8 times”.
The Trust Across America survey What Causes Low Trust in Your Organization? also shows that organizations that prioritize building and maintaining trust internally see lower employee turnover, attract higher-quality employees, increase productivity, drive more innovation, and experience long-term business success.
Equip Leadership to Make Faster, More Data-Driven Decisions
Rapid, real-time decision-making capability pays off. Research by Bain & Company over a 10-year period of more than 1,000 companies discovered a “clear correlation between decision effectiveness and business performance”.
Yet the ability to make effective decisions depends on access to trustworthy data, be it customer engagement statistics, return percentages, or the day-to-day balance sheet. Accounting organizations that can deliver highly accurate financial data in real time can help leadership make more informed, targeted, and successful decisions.
Read this blog to discover what a global survey of 1,100 C-suite executives and finance professionals revealed about the global scale of financial data inaccuracies.