Reducing the Risk of Failed Financial Judgments

Whether individual or business, making Himalayan blunder financial decisions affects everyone and everything. Gartner’s Study on Business Finance reveals that bad financial decisions by management cost firms more than 3% of their profits. Making a subjective financial decision is pivotal in determining corporate financial performance; nevertheless, C-suite executives face a heightened risk that their companies might generate inappropriate statements. Since today’s businesses are galvanised by digital and business transformations like mergers & acquisitions, more than 55% of business and finance executives indicated that financial decisions impact business profitability to some extent. The accountants and auditors liable for keeping track of these estimates are restricted in their ability to dampen the risk. 

Taking financial reporting into consideration, it is insensibly nexus, comprising estimations of the value of financial instruments, healthcare liabilities, pensions, and impairments of assets like goodwill. Without preparing accurate reports of these estimates, it will jeopardise the business. Regardless of the time or resources to prepare reports for shareholders and regulators, estimates of complex assets and transactions continue to produce errors in the reports. Financial reporting risks are omnipresent in any company and can arise from events or conditions, external and internal factors, and choices made by many within the company. Many companies have also witnessed risk in financial reporting arising from inaction.

Forming accurate and error-free financial decisions is crucial in keeping businesses productive in this ever-evolving realm. It is increasingly important for businesses to let their CFOs ensure that financial decisions made in the company are fruitful and profitable. 

In the fast-paced, ever-changing world, CFOs face heightened risks caused by increasing business models, mergers and acquisitions, globalisation, decentralisation, third-party administration, and evolving accounting and financial reporting requirements. CFOs should redefine the role of their finance business partners to make better financial decisions that do not impact business performance in the future. In light of this matter, Gartner surveyed 469 business decision-makers and 128 senior finance executives globally across different industries. The Research Vice President at Gartner, Randeep Rathindran, revealed that businesses’ current financial model aligns with stakeholders but lacks the expertise required to support the specific decision-making type. 

In addition, CFOs should take time to implement processes and advanced technology to evaluate the financial reporting risk. To keep an eye on financial reporting, the CFOs need to understand various ways in which people and technology collectively contribute to mitigating financial reporting risks. They also focus on determining what changes they can implement to curb those risks in the future. Financial reporting can be classified into three major components: 

  • Multiple people are responsible for extracting, assembling, aggregating, and analysing data
  • The processes and timelines through which the data is obtained and reported 
  • The system that moulds the financial information and converts it into a meaningful form

The features of these financial reporting components can be weaknesses that can increase the financial reporting risk or possible strengths that can also curb the risks. As per Gartner, CFOs should take important things into consideration to secure businesses from financial risks, which include:

  • Reforming support around particular financial decisions and not stakeholders 
  • Check whether financial decisions are being made against the rule 
  • Give better support to financial decision-making managers by redefining their roles 
  • Need to focus more on individual decision types to provide relevant support in the decision-making process 

Furthermore, senior managers and accountants of the company should scrupulously assess their financial reports to determine when they actually need estimating on the grounds of significant judgement. In order to curb financial risks, taking the expertise of C-suite officers and senior executives into account will help companies make relevant financial decisions in the future. Mr. Rathindran suggested that focusing on changing finance business partners’ behaviours is the fastest way to provide the support managers need to make effective financial decisions. 

Companies can start by making small, relevant financial decisions and seeing the positive impact on their business. As per a Harvard Business Review study conducted on finance and investment, companies can minimise risks by trusting actuaries, appraisers, and evaluators who possess relevant skills in deriving the right estimates. It is vital for every company to monitor the factors that closely influence financial reporting risk and contribute to failed financial judgments. In addition, companies should also approach reporting comprehensively, including in-depth disclosure that reveals key assumptions that will help minimise the risk of the wrong financial decision in the future. 

Leave a Reply