Article:

Shining a Torch on Boards & Finance Teams

29 October 2020

Aletta Boshoff , Partner
National Leader, IFRS Advisory
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As companies around the world begin to move out of the post-COVID crisis management stage and into recovery plans to get themselves back on track, there is a glaring problem not being addressed.

This is largely due to the fact that it is rarely identified as an issue in the first place. It is the disparity between your board and your finance team. And it is costing companies around the world not only huge sums of money, but commercial success.

Billions at risk

The disparity between boards and finance teams puts at risk billions of dollars of value across balance sheets of corporate Australia. Organisations are grappling with the choice on how they report financial performance, in some cases because they have options. This choice is causing divergence between boards and finance teams, at times with catastrophic consequences.

Boards are thinking bigger picture, longer term – more strategic – and are concerned about their organisation’s reputation and ongoing success. Finance teams are focused on operational expediency. This is an obvious clash.

There is a mismatch in awareness, mainly around how the business should most effectively report its financial performance to the market. The quickest/fastest and simplest application of accounting standards does not necessarily result in the best commercial outcome for the organisation.

Measure divergence accurately

BDO has measured this misalignment and the data suggests a powerful case for change. Based on the work we’ve done advising finance teams and boards across all types of organisations, our intuitive thesis was that they were focusing on different things.

To support our thesis, we surveyed members of boards and finance teams across multiple sectors, asking them three things; to rate which financial reporting risks:

  • Were most relevant to them
  • Were most likely to impact them
  • Would have the biggest impact on them if they eventuated.

With over 1600 data points to work with, the evidence suggested that yes - boards and finance teams think and act differently about this issue.

Leases are a bellwether of the impact of divergence

Our recent work with clients to implement the new lease accounting requirements raised concerns with us on the potential misalignment between boards and finance teams.

One of our clients was staring down the barrel of wiping $600m off its balance sheet – purely as a result of choosing the simplest lease reporting method. With an enterprise value of ~$2b, this was hugely material for this organisation and its stakeholders.

This issue is not unique – we are seeing it time and time again across many clients. This is just one example of one accounting standard. So extrapolated across multiple reporting frameworks, this can very rapidly put at risk  billions of dollars of enterprise value across corporate Australia.

Market forces are growing, not shrinking, divergence

This divergence between boards and finance teams is not the fault of any particular person. Market forces are driving it:

  • COVID has caused cashflow issues
  • Boards are demanding management do more with less
  • The world’s consultants are telling all organisations to reduce (even eliminate) costs
  • Finance teams are shrinking and working harder
  • Many employees are working from home and our stress levels are elevated.

Finance teams are simply responding to external pressures in the most predictable way possible.

Shrinking divergence requires commitment

We believe this issue around growing divergence between boards and finance teams is fixable. Leaders that deliberately commit to driving consistency across their organisations will address this by focusing on:

  • Consistency of measurement
  • Consistency of thinking
  • Consistency of action.

Measurement

  • Focus your time and energy on measuring:
  • Awareness of these issues around financial reporting
  • Diversion of perceptions across different parts of the business
  • Invest in tools to enable this to be a data-driven exercise, which ultimately gives the business more certainty for making important business decisions

Thinking

  • Once an organisation can measure divergence, it can then determine how best to align the thinking around it
  • It’s critical that everyone involved in determining how to manage financial reporting risks has the opportunity to appreciate and evaluate the commercial impact of their decision-making
  • What’s easiest now from a compliance perspective may not have the best commercial impact on the organisation’s enterprise value in the short, medium or long term

Action

  • Once their thinking is aligned, boards and finance teams can then act consistently
  • It’s this decision on how best to proceed (to determine the most appropriate commercial outcome for the organisation) that truly drives enterprise value

From BDO’s experience, it’s situations where we have been able to assist clients to drive alignment – of measurement, thinking and action – that has delivered the biggest impact on an organisation’s bottom line.
If you want to add to the conversation, please complete our risk review at: Understand the differing views between your Finance Team and Board.