Lessons on financial resilience from the corona crisis
PremiumOur financial frameworks need flexibility and fresh tools to tackle the pandemic’s challenges
Earlier last month, the United Nations raised its forecast for global economic growth in 2021 as governments step up covid vaccination programmes and keep fiscal and monetary stimulus measures in place following the loss of more than a quarter of a billion jobs due to the pandemic. The global economy is likely to grow by 4.7%, after an estimated contraction of 4.3% in 2020, the United Nations Conference on Trade and Development said in its report. The International Labour Organization estimates that the crisis resulted in 255 million jobs lost globally.
All sizes of companies bore the brunt of the pandemic and continue to do so in countries such as India and many parts of Africa where the pandemic still rages. Companies were affected on both the supply and demand sides of the economy, creating a vicious cycle. On the supply side, quarantines and illnesses reduced the labour resources available to enterprises. Supply chains were disrupted, causing shortages of raw materials, parts, and goods needed for production. On the demand side, consumer spending fell, resulting in a sudden and drastic decrease in revenue for these enterprises, hindering their ability to meet financial obligations or qualify for new debt to maintain liquidity.
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The pandemic helped increase the focus on financial resilience, affirming the reality that without it, commercial and operational resilience cannot be maintained. Keeping finances strong requires firms to adapt their financial frameworks to a more volatile environment for access to finance and liquidity. Critical cash flow and risk management decisions must be made daily.
The pandemic’s arrival in early 2020 and new surges in 2021 coincided with the production of annual external financial reports. This drew new attention to the processes that deliver accounting information from corporate entities to external users. Also under watch is the allocation of budgets for technology-based solutions, as virtual collaboration will remain the new normal after the pandemic ends. Many financial reporting teams are working with dated technology that leaves them less agile in responding to constantly changing regulations, standards and economic conditions. This is particularly burdensome for global entities that must meet the requirements of multiple jurisdictions. Technology-based solutions are being reassessed to support professional expertise.
Implementing the right processes can help financial reporting teams meet departmental objectives and establish greater operational resilience. New virtual workspaces and workflow, for example, require cloud-based data and systems. The pandemic has also revealed financial reporting challenges with the potential for technology solutions. These can be categorized into three areas: processing information that relies, at least in part, on expectations and future conditions; implementing internal controls and oversight procedures; and documenting management review and judgement areas.
Estimates of future conditions: The balance sheet or statement of financial position is based, in significant part, on expectations of future conditions such as the collectability of receivables, the market value of investment securities, and the resale value of inventory. Forward-looking assessments also affect changes in earnings forecasts. Covid represents a new era of fast-changing conditions. Responding quickly requires software that can accumulate data from new sources and prepare new types of analyses for the first time. Reporting teams need to reconsider all of the assumptions and processes built into long-used spreadsheets.
Internal control and oversight: As the pandemic conditions accelerated virtual collaboration for accounting teams, emphasis was placed on the planning and execution of controls over financial reporting. Although powerful transaction systems have significant automated control features, the processes around the last steps—gathering data from different streams and spreadsheets—lack the same level of inherent automatic oversight. Cloud-based platforms can help remote teams design well-controlled workflow charts, assign oversight, and monitor these steps for effective report delivery.
Documentation of management review and judgment areas: As teams work remotely, analytical procedures and the supporting documentation of their execution cannot depend on a patchwork of emails and storage in the files of individuals. Solutions are needed that allow quicker access to accurate data, well-documented and timely analyses, and effective control over sophisticated assessments.
Investment in secure and effective technology-based solutions can preserve documentation of compliance around the most sensitive decision-making processes and facilitate the release of financial information to regulators and the market.
Further, technology can allow a corporate team to work collaboratively on overlapping processes of financial, management and statutory reporting, as well as regulatory filings and enterprise risk activities. Working together to assess needs and identify priorities around data and processes can enhance our approach to the fast-changing conditions that will continue to arise even post-pandemic. Technology solutions can free financial reporting professionals from the mundane tasks of accumulating data and allow them to apply their expertise where it is direly needed in a disruptive crisis: conducting insightful analysis to drive accelerated and informed decisions that match the pace of fluctuating conditions. The right balance of tools can support financial resilience.
Doreen Remmen is chief financial officer, Institute of Management Accountants (IMA)
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