Treasury Today Country Profiles in association with Citi

Getting it right

Person looking at data on tablet device

A new study has revealed that key financial decision makers have little faith in their financial data. Why is this? And what can be done from here on in to ensure that the data is correct?

Since the turn of the century, there have been a number of high-profile accounting scandals that have hit the headlines. For example, in 2001, commodities firm Enron kept huge debts off the balance sheet, the fallout of which saw the company bankrupted. Another example comes from 2003, when Freddie Mac misstated $5bn in earnings, costing the mortgage provider $124m in fines. In recent weeks, Japanese conglomerate Toshiba has been accused of inflating its operating profit for the five-year period ending in March 2014 by over ¥150bn ($1.21bn). Although this particular scandal is still a moving story, Toshiba has already suffered a sharp decline in market value as a result.

What these examples highlight is the devastating impact that financial scandals can have on a company. It is therefore not a surprise that ensuring the company has, and reports, the correct financial data is a big area of focus for key financial decision makers (FDMs). What is a surprise, though, is that according to a study by financial technology provider BlackLine, only a quarter of UK FDMs completely trust the company’s financial data.

Not only did FDMs admit to having limited trust in their financial data, but 40% also claimed that financial reporting exposes their organisation to the greatest level of risk. So, what makes financial data such a risky business?

A manual process

The study highlights that in many finance departments, repetitive and manual process are being used to complete many complex tasks and this is increasing the risk of human error. “Large companies will be working on hundreds, if not thousands, of spreadsheets a month,” says Mario Spanicciati, Executive Director EMEA, BlackLine. “The sheer volume of these being used opens up the margin for error exponentially.” The risk is increased further as financial teams are having to process greater volumes of data thanks to the rise of digitisation and the data produced from this.

The challenge is not just for smaller companies, who perhaps don’t have the most cutting edge technology, but also for companies who have invested heavily in best-in-class ERP software. In many cases these companies are still at risk because, as Spanicciati explains, not all core finance processes are covered by these systems, leaving corporates little choice other than to fall back on spreadsheets.

Another area of consideration, and one that most treasurers will be familiar with, is that financial teams across the board are being asked to do more with less. “Many companies do not have as many resources as they would like or need,” says Spanicciati. “But boards are expecting finance teams to be quicker and more accurate. There is a clear issue here that needs to be addressed.”

Barriers to change

Technology, is one way that many of these issues can be addressed. Yet, companies are not always willing to adopt new technology readily. Of course, cost is often cited as being a major reason why technology is not adopted, but Spanicciati believes that with the advent of the cloud and software-as-a-service (SaaS) this is no longer the case. “There is a huge return on investment when purchasing the right financial technology, be it accounting software, and ERP or a TMS,” he says.

A greater issue therefore may be little willingness to change from financial professionals. If a finance department has worked with spreadsheets for decades and not had any issues then there really is no driver to change. But as Spanicciati points out, just because there haven’t been any issues doesn’t mean that these won’t occur in the future, especially given the wealth of data that now has to be processed and the extra pressure on finance departments. “It is a chicken and egg scenario, but the danger for organisations is that if something does go wrong, it will be too late.”

A risky game

As the Toshiba, Enron and Freddie Mac examples demonstrate, the financial risks associated with data errors are profound, but there are other dangers. The reputational risk that comes alongside negative headlines, for example, is an area where companies can be impacted. Counterparties may be unsure what else a company is hiding or misreporting and it may even have a potential impact on attracting and retaining talent – as Treasury Today reported last week.

Reputational risk extends beyond the company however, and reaches the FDMs, who have to sign off on the data. “If you are overseeing a company, as CFO for example, and a major financial scandal happens on your watch, what risks might that pose to your career?” says Spanicciati. Even more worrying is the potential legal repercussions that can befall FDMs involved in these scandals. “You need to be sure that what you are signing off on as a FDM is correct because ultimately the buck stops with you.”

Get in shape

With so many potential risks surrounding inaccurate financial data, what can companies do to ensure that it is correct? “Aside from removing manual processes companies need to ensure that they regularly review their policies and processes,” says Spanicciati. “Perhaps even more vital is ensuring that everyone in the financial department understands and follows these. The only way this can be achieved is through in-depth and frequent training.” He also stresses that companies need to standardise, where possible, to reduce the risk of error.