Business leaders will be contending with ongoing economic uncertainty and unknown future regulatory changes, along with accounting and tax changes, that could have an impact on their ability to effectively compete and achieve their financial targets in 2020 and beyond, according to a recent report.
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“When you look at financial reporting and taxation today, ultimately the application of accounting principles and reporting standards and tax requirements all get back to what affects the business,” said Jim DeLoach, a managing director at Protiviti who co-authored the report (pictured second from the right in the photo). “Our findings as they are related to the views of CFOs provide some inroads to draw some assertions from our study as it relates to accounting, auditing and taxation.”
The survey respondents were asked to rate 30 macroeconomic, strategic and operational risks. Of those, the top 10 risks identified were as follows:
1. Regulatory changes and scrutiny may impact operational resilience and production and delivery of products and services.
2. Economic conditions may significantly restrict growth opportunities.
3. Succession challenges and ability to attract and retain top talent may be more difficult.
4. Limited operational resilience of legacy IT infrastructure and digital capabilities may restrict the organization’s ability to compete with “born digital” players.
5. Resistance to change may restrict organizational agility.
6. Preparedness to manage cyber threats may be insufficient.
7. Ensuring privacy/identity management and information security/system protection may be challenging.
8. Company culture may not empower timely identification and escalation of risk issues.
9. Sustaining customer loyalty and retention may be increasingly difficult.
10. Adoption of AI-enabled technologies may require new skills that are either in short supply or require significant upskilling/reskilling of existing employees.
Several of the risks are consistent with findings from previous years on the annual survey, including concerns around regulation, cyber threats, operational resilience, privacy management and information security. But this year’s results indicate an escalation of anxiety related to overall economic issues across domestic and international markets, climbing from number 11 last year to the number two risk concern for 2020.
Among the CFOs polled, the top concern was that economic conditions in the markets their company currently serve could significantly restrict the growth opportunities for their organization. “You can see a significant jump in macroeconomic risk from the prior two years,” said DeLoach. “What do economic concerns mean from an accounting and financial reporting standpoint? It impacts the valuations, the reserves, the contingency estimates, and it makes the whole audit process more difficult. If there are economic uncertainties that potentially impact pricing and other key factors that affect the determination of various reserves on the balance sheet, that’s going to make the auditor’s judgment that much more difficult, which could lead to critical audit matters, CAMs. I was an audit partner for about eight or nine years, and when I see the pendulum swing on the economy, it always makes me sensitive to the issues around how the economy could affect my customers, which can affect my allowance for doubtful accounts, demand for my products, inventory valuations, and the valuations associated with financial instruments.”
The second highest risk cited by CFOs was the potential heightening of regulatory changes and scrutiny. “If you look at the current presidential election, and if the current administration is replaced, you don’t have to be too much of a political forecaster to acknowledge that there will be a cry for increased taxes,” said DeLoach. “That certainly can impact the taxation side of it, and the regulatory side can potentially impact the business model.”
The number 3 risk cited by CFOs was resistance to change, while the fourth was the ability to attract and retain top talent. “We see the finance function as being under stress,” said DeLoach. “There’s just not enough talent walking the streets. It’s hard for the finance function to find the people they need. If the finance function is put under stress like a major accounting deficiency or certain things getting out of whack from a reconciliation perspective, there’s a spike in resource requirements needed. It’s not uncommon. You don’t have enough bodies in the finance function.”
He sees more CFOs gravitating to a labor model where they can contract out some of the tasks to flexible temporary workers in the gig economy to meet spikes in demand for information processing. The fifth highest risk cited by CFOs relates to the ability to manage cyber
threats. “The concerns related to cyber increased over prior years,” said DeLoach.
One risk that didn’t show up prominently on the survey is climate change, but DeLoach believes business leaders see that as more of a long-term risk.
“My experience with clients in the fossil fuel industry is if you ask them to assess risk over the next year, very few will put that at the top if you have a one-year horizon,” he said, “but if you ask them to look out over 10 years, climate risk will go up.”
