This year is likely to prove critical for many companies, with world events conspiring to create an increasingly unpredictable business climate. The GOP's tax changes are set to be implemented, interest rates could rise again, technological advances will continue to disrupt industries in new and unforeseen ways, and the talent to confront these challenges remains as elusive as it has been in recent years, if not more.
Ready and waiting to lead the charge again are finance leaders, with CFOs doing everything they can to ensure their organization's financial stability and even drive growth. We've looked at what they need to be prepared for in 2018, as well as some reasons for cautious optimism.
GDPR Presents Opportunities For Finance
On the 25th May 2018, the EU General Data Protection Regulation (GDPR) comes into full effect after years in the making. The GDPR is the EU's latest rewrite of its data privacy laws. Its impact will be felt by organizations across the globe, applying to everyone regardless of whether data has been captured and analyzed inside or outside of the EU. It is a costly compliance matter that you must get right or face heavy penalties.
The finance function has a key role to play in ensuring organizational governance is up to scratch. This will take a significant amount of work, and they will need to work closely with other teams across the organization to drive the holistic approach necessary for proper compliance. However, smarter CFOs will see GDPR compliance not as a chore, but as an opportunity for growth. Emmanuelle Brun Neckebrock, CFO for SAP France, wrote on our sister site CFO.com, that 'Data is one of your company’s most valued resources, yet one of the most poorly managed. It’s the golden thread that runs through the entire organization, and in most instances, it’s managed casually and inconsistently, depending on individual employees and departments. You wouldn’t let your revenue, products, or equipment assets be handled that way, so data (given its inherent value) shouldn’t be any different. It warrants the same due care and attention.'
'As CFOs, we should be leading from the front,' she continued, 'looking at the best and safest ways to monetize this asset. GDPR legislation is unique in that it allows you - OK, forces you - to transform the way you handle data across the whole organization, managing associated risks and compliance. In doing so, it’s actually strengthening your ability to compete on the digital playing field, making you more agile for long-term success.'
Wait And See Approach To Tax Reform
The GOP-driven tax reform, slashing corporation tax from 35% to 21%, has been greeted with cautious optimism by business, and the finance function in particular. The Duke University/CFO Global Business Outlook Optimism Index increased to 69 on a 100-point scale in the last quarter, spiking to 73% among CFOs who responded to the survey after the Senate passed its version of the tax reform bill - the highest US optimism ever recorded in the history of the survey.
The strategy adopted by most finance leaders to the reforms has, however, largely been to wait-and-see before doing anything dramatic. Alan Graf, FedEx’s executive vice president and CFO, for one said during the company’s earnings call that, 'US GDP could increase materially next year as a result of US tax reform. If this occurs, we would likely increase capital expenditures and hiring to accommodate the additional volumes triggered from this incremental GDP growth.' CFOs will need to work hard to ensure they are ready for the change, though. As Steve Kimble, chairman and CEO of Deloitte Tax LLP, notes, 'This is the biggest change in tax law since 1986. Companies, regulators and lawmakers are just at the beginning of a substantial amount of planning, discussion and assessment of the new rules, which will go on for at least a year or two, and possibly longer.'
Accountants Look To Blockchain
In a recent Deloitte survey of 101 large company CFOs, 39% of respondents said 'technological change' would be the most pressing issue facing organizations in 2018. One of the most important of these is blockchain, which has risen significantly in terms of hype across all industries over the last year and will likely do so again over the course of the next.
Blockchain has the potential to completely revolutionize accounting. It is a decentralized, distributed ledger of transactions in which all participants can log, view, and monitor an identical copy in real-time. This ledger is neither owned nor controlled by one party, rather control of the network is distributed among the network’s users. This means that all changes have to be confirmed by all parties and records can never be altered or destroyed, rendering it far more secure than other systems. The implications of this for both payments and audit trails, and therefore accountants, are profound. According to Deloitte, ‘It can be gradually integrated with typical accounting procedures: starting from securing the integrity of records to completely traceable audit trails. At the end of the road, fully automated audits may be reality.’ Essentially, blockchain accounting could help dramatically slash the cost of accounting, auditing, and compliance by giving visibility to all transactions for approved users - decreasing auditors’ work with sampling and validating transactions and giving them more time to focus on controls and investigating anomalies.
Hywel Ball, UK head of audit at EY, adds that, ’Accountants do a lot of transaction processing, reconciliation and control, and that could change significantly if this technology gets adopted on a widespread basis. The cost savings that the banks are looking at are huge, and most of that saving is people who do the back office, so whether you view those as accountants or ledgers, there’s a degree of challenge to those in the accounting profession who work in finance functions.’
This does, however, come with a number of challenges. Before CFOs dive in, there need to be standards regarding financial accounting and reporting, as well as guidance as to how blockchain transactions should be managed. As Jeanne Boillet, EY’s global assurance innovation leader, noted on our sister site CFO.com, 'From a legal perspective, CFOs will also likely require guidance on how existing laws and regulations would apply to the use of the technology. There would be an increasing need for cyber and software auditing to help ensure blockchain transactions have the necessary security and encryptions. Similarly, the integrity of IT systems, applications, and controls would need to be verified through governance and risk assessment. Third-party providers also would have to be thoroughly vetted and audited to help ensure they are trusted and compliant.' While blockchain is still a nascent technology, perhaps too nascent for widespread adoption this year, CFOs should start to test their readiness.
IFRS 15 Comes Into Force
New accounting standard IFRS 15 is in effect as of 1 January 2018, replacing a number of existing standards and interpretations. These include IAS 18 Revenue, IAS 11 Construction Contracts, SIC 31 Revenue – Barter Transaction Involving Advertising Services, IFRIC 13 Customer Loyalty Programs, IFRIC 15 Agreements for the Construction of Real Estate, and IFRIC 18 Transfer of Assets from Customers. It is based on the core principle that ‘an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to.’ Essentially, as a spokesman of the International Accounting Standards Board further explained, ‘The standard requires a company to recognize revenues once the customer obtains control over a good or a service,’ thus making it harder for firms to accelerate or delay revenues.
IFRS 15 has significantly more guidance on a number of issues that IAS 18 was relatively weak on. It is not just about timing of revenue and profit, it’s about systems and processes, which will likely mean a huge amount of work, not only from accountants but departments across the organization, and they will need to work together to ensure the requirements are met. Much of this should have already been done, but those who have fallen behind will need to ensure that they move quickly and work hard to remain compliant. IFRS 15 has the potential to fundamentally change the profit, forecasts and thus the business model of some companies, particularly those companies involved in delivering complex and long-term projects, so its significance and must not be underestimated.
Skills Gap Widens
The proportion of firms indicating that they are having difficulty hiring and retaining qualified finance employees is at a two-decade high according to the Duke University/CFO Global Business Outlook survey, with 43% of CFOs reporting to them that it is a top concern. In another survey of financial executives by AAFCPAs, one third of CFOs cited human resource (talent) limitations and team bandwidth as the primary challenge preventing them meeting their CEO's expectations.
The demand for financial expertise is high, and while automation will likely alleviate some of the pressure in future, US Department of Labor projections still indicate that employment of accountants and auditors will grow 10% from 2016 to 2026 - faster than the average for all occupations. The profession has fundamentally changed, and the influx of data and new technology has meant that new skillsets are required and many have simply failed to keep up. Universities must adapt their programs quickly and finance leaders must work alongside them to ensure that they are teaching students the right things. Organizations must also provide adequate training to employees that suits the fast-evolving expectations of the role. If they fail to do this, regardless of what challenges should arise over the coming year, organizations will be ill prepared to confront them.