PUBLISHED JULY 10, 2020
Finance Leaders Can Manage Risks
Through a Balance Sheet Focus
By Darshana Sanghavi
Managing Director APAC, B-eye Solutions
The challenges that many businesses are facing currently are varied, with the majority seeing an impact on the revenue streams. Strong leadership from the CFO is the need of the hour.
The primary focus, for most of them of course, is immediate survival actions and the secondary and equally important one, is to address risks better and to stabilize the business. In my earlier post on LinkedIn (link here), I had mentioned about aspects and areas of immediate survival.
In this post, let us talk about the opportunity that finance leaders have, to address business risks better.
Risk management is no longer about reporting on risks from a compliance requirement perspective, just to check off the box. Risk management is important in relation to the safety and financial integrity of an organisation. And risk assessment is a critical part of any organisation’s strategic development.
Finance leaders are expected to provide a reasonable assurance that their organization can achieve the objectives of:
Effectiveness and efficiency of business operations
Accuracy and Reliability of financial reporting
Compliance with applicable regulations
When you certify the financial statements, what is of utmost importance to you? Are you assured that you are aware of all the risks in the numbers? If not, then is there a plan to get there? And what would that entail?
How do we then control the inherent risks either due to complex transactions or due to the high degree of judgement and estimation? How do we ensure that the required set of internal controls are met?
Balance Sheet Integrity
There is significant opportunity to perform a deep diagnostic on the balance sheet and ensure that the balance sheet accounts are clean. Here lies the importance of account reconciliations.
Balance sheet account reconciliation is one of the oldest and most important accounting processes. Yet, in many companies account reconciliation is quite underappreciated as an internal control over financial reporting.
Often, this control exercise is undertaken after the financial reports are published. As a result, this works more as a corrective process; effective only in identifying misstatements for correction. Many organisations are yet to recognize the importance of an accelerated balance sheet account reconciliation as a process of detective controls, whose timely completion is helpful in identifying and correcting errors before filing of financial statements.
The value of the balance sheet reconciliation process lies in ensuring that this is not just another excel file provided to auditors but more of a risk rating of the balance sheet accounts itself. The last thing you want is another avalanche of excel spreadsheets which no one wants to look at again. The emphasis should be on substantiation of the balance and not just a repetition of the general ledger postings.
The layer of risk assessment ensures that account reconciliations is no longer just a process whereby
A (GL balance) = B (substantiation)
It is this B i.e. the substantiation itself which opens the doors to a very effective risk management.
Reviewing impairments of intangibles like goodwill, aging analysis of receivables and payables and so on can ensure the focus on key metrics during uncertain times. The reconciliation process needs to be defined based on the risks involved in each balance sheet account.
If the business is driven more on the basis of customers or on the basis of vendors, then that should be part of the reconciliation process where, for instance, preparers substantiate the balances by customers or vendors as required. Third party balance substantiations coupled with aging buckets provide necessary inputs as regards the quality of the balance and the risks associated with it.
The above is a bird’s eyeview to the vast potential of the less appreciated account reconciliation process.
This approach of intertwining risk assessment as part of the balance sheet reconciliation process provides valuable insights for forecasts and plans as well as for specific strategic decisions.
To achieve that, we need a seamless integration of the GL with the consolidation and close and the FP&A teams. Will try to cover more in my next post.