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Taking advantage of risk and regulatory complexity

A series of articles looking at everyday challenges CFOs are facing and how finance functions can embrace the change and transform the business. The articles are written in collaboration with PwC, the ACCA and Jens Madrian - CFO, Reactive Technologies.

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CFO imperatives

Across the breadth of the risk and regulatory agenda within their organisations, CFOs and their finance teams need to:

recognise the benefits of becoming involved in the management of complex, strategic risks across the organisation – and not limit themselves to managing only financial reporting risk;

work collaboratively with others across the organisation to understand and manage risk (for example, with strategy teams, operations and customer-centric teams);

drive the use of data and analytics to assist in identifying and managing risks across the organisation, embracing new tools and technologies to do so; and

assess risks to both manage potential downside impacts and identify and capitalise on opportunities to drive commercial advantage for the organisation.

In today’s fast-changing business and regulatory environment, it’s all too easy to focus on compliance and managing downside risks. But disruption, risk and volatility also bring opportunity. By aligning enterprise performance and risk management, CFOs have an opportunity to reappraise the risk agenda and the role that they can play in shaping it. 

The pivotal role of the CFO and the finance team

Enterprise risk management is the responsibility of the board as a whole[1], but CFOs have a significant role to play. This stems from their traditional perspective as stewards, and from their role as strategic risk leaders within the organisation focused on business performance, growth and the quality of earnings. Forward thinking CFOs make a strong link between performance and risk management, aligning these with business strategy.

The biggest risks facing organisations today have direct CFO relevance. PwC’s 21st CEO survey[2] found cyber risks topping the list of global business risks (just ahead of the availability of key skills and the amount of technological innovation). Cyber risks affect financial reporting and data integrity. Finance teams need to work with others across their organisation to measure potential losses (financial or reputational) from a cyber-attack and understand the investment spend required to mitigate risks[3].

The digital era creates opportunities for CFOs to reposition themselves as central to leading enterprise performance, and for them to influence the risk agenda to drive business outcomes. Those who are willing to push the traditional boundaries of their remit can play a pivotal role in risk management across the organisation, as explored in our article ‘The Ascent of Digital – What does this mean for the CFO?’[4].

CFOs have a unique perspective of end-to-end processes across the organisation and, arguably, look through a broader lens than functions such as human resources, marketing and technology. They therefore have an unparalleled view of the business, the drivers of performance and the challenges and opportunities the business faces. Finance teams should be at the centre of assessing opportunities for new products, pricing and growth decisions and analysing existing and emerging threats to the organisation. Through their skill sets[5] they have a detailed business understanding, an enquiring mind-set and the analytical abilities to enable them to think broadly across the organisation and understand the impact of changes in the internal and external environment across the business. Progressive CFOs give their teams the mandate to do this and are able to free up time for them to execute against this. Thereby driving the operational efficiency and technology agenda to free up individuals time from managing data to analysing and interpreting it.

Increased risk and regulatory complexity

The CFO’s broad perspective is increasingly important because of the increasing regulatory complexity and heightened external scrutiny over their operations. Combined with this, the desire to produce data and analysis more quickly and to publish these insights through non-traditional sources such as social media only serve to raise the bar for finance.

The decisions that drive profitability increasingly need to be viewed in respect of their societal impact and this is true for both large and seemingly small business decisions. For example, external parties are increasingly interested in the impact of decisions on infrastructure, employment, tax contribution and climate change.

It is important to develop a framework which allows you to analyse and compare the direct, indirect and induced impacts of each of these elements as part of the risk and regulatory assessments[6]. PwC’s Total Impact Measurement and Management (“TIMM”) methodology allows organisations to do just this.

In PwC’s 21st CEO survey, 60% of respondents thought organisations were under increasing pressure to deliver business results in shorter timeframes. One response is to use technology to improve the speed of reporting, but innovation brings challenges as well as opportunities. For example, the move to cloud technologies and the rise of social media affect how companies report results, and present new technology and reputational risks that need to be understood and managed.

The speed of change in today’s environment means that longer-term strategy and risk appraisals can become quickly outdated. According to PwC research[7], 45% of the total economic gains achieved in the UK by 2030 will be driven by technology-enabled product enhancements, which will in turn drive customer demand due to greater variety, personalisation and affordability. Organisations therefore need to develop strategies for adopting artificial intelligence and data-driven customer-centric approaches – to reduce the risk of business failure as well as identifying growth opportunities and the risk associated with a reduction in their competitive position due to market shifts, new entrants or technology changes.

Holistic communications based on insight

Given the complex risk landscape, CFOs need to present a holistic view of the organisation’s (strategic) risk exposure in communications with C-suite colleagues. They need to show a clear understanding of key emerging risks, their relationship to the achievement of core business goals, and the processes in place to track and report on risks and business performance. Classic risk management techniques need to evolve into a more progressive approach – one that becomes less reactive and has a stronger focus on planning for a positive future outcome.

Achieving this type of proactive risk management depends on the effective use of data and analytics. As outlined in our article ‘Delivering a platform for profitable growth – The role of finance’[8], data analytics can help organisations identify trends more quickly and improve understanding of the drivers behind events. Including artificial intelligence tools in strategic processes can make risk management processes even more effective.  

It is important to ensure that there is effective data management within an organisation and a need to break down data silos. Making data (financial and non-financial) widely available is a key step in breaking down barriers and enabling organisations to broaden the range of insights they obtain.

CFOs are uniquely positioned to be at the centre of the data and analytics agenda within the organisation. The finance function has a responsibility for data governance, giving the organisation one shared and consistent view of data for decision making. Many of the individuals with the skills necessary for performing data analysis and developing insights are found within the finance team.  

The finance team needs to ensure that it has a sufficiently broad skill set to undertake these activities. This is one that is broader than the established skills related to stewardship and reporting. It is a dynamic future for finance.

Openness of mind

CFOs and other board members need to keep an open mind when assessing risks so that they can assess potential upsides as well as negative impacts. They need to lead from the top in establishing an intelligent risk culture throughout their organisation, ensuring that culture is embedded and adapts to changes in the business landscape.

By aligning risk management with strategic performance, CFOs and their finance teams can reinforce the importance of the CFO role. CFOs and their finance teams need to be at the heart of the redefinition of enterprise risk and performance management within the organisation, adding business context around risk management and creating opportunities for growth.

[1] Risk and the strategic role of leadership, ACCA 2018
[2] 21st CEO Survey - UK findings, PwC 2018
[3] The race for relevance, ACCA 2017
[4] The Ascent of Digital – What does this mean for the CFO?, PwC, ACCA, Reactive Technologies 2017
[5] ACCA’s report Drivers of change and future skills (ACCA 2016) considers the skill requirements of professional accountants and identifies seven quotients which include these attributes.

[6] PwC’s Total Impact Measurement and Management (“TIMM”)methodology provides a structured approach to this important area.
[7] The Economic Impact of Artificial Intelligence on the UK economy, PwC 2017

[8] Delivering a platform for profitable growth – The role of finance, PwC, ACCA, Reactive Technologies 2017

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Brian J Furness

Brian J Furness

Global Consulting Finance Leader, Partner, PwC United Kingdom

Tel: +44 (0)20 7212 3917

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