Keeping an Eye on Finance Transformation

As with any strategic undertaking, the board's job is to make sure that the right questions are being asked and answered, and that no critical task falls through the cracks.

Transformation is never easy. As the term suggests, it requires dramatic upheaval, drastic change, and the road to the other side is paved with plenty of bumps. There likely will be unpleasant surprises, gaps in talent and balls that are dropped while all eyes are on the digital prize.

Of all the business functions that can ill-afford that kind of turbulence, the finance function is definitely at the top of the list. “In financial reporting, [having things fall through the cracks] would be something that you really would not want to have happen,” says Paula Loop, leader of PwC’s Governance Insight Center.

But neither can companies afford to leave their finance departments in the Dark Ages of transactional bean-counting. The push for automation and the demand for real-time, data-backed insights are forcing finance functions to modernize, to become agile and efficient, strategic partners across all aspects of the business.

Paula Loop, leader of PwC’s Governance Insight Center

So what is the board’s role in that finance transformation? As Loop explains in the following interview, audit committee members don’t need to be technologists to provide much-needed oversight during this challenging process. They simply need to do what they’ve always done best: (relentlessly) ask the right questions.

What is some of the expertise the company needs to be able to get through a transformation successfully?

A couple of things. One, you need somebody who can really own this process, who can own thinking about this strategically, laying out a plan, a roadmap to get this accomplished. It’s not going to be easy because the finance function has a lot of day-to-day responsibilities that have to get done, and they have to get done really well. So you can’t compromise the quality of what you’re normally doing to go through a transformation like this. And then when you start to think about the talent within the group, hopefully as you transform the business, you’re going to need fewer people that are doing transactional processing and more people that are capable of doing high-level analysis and pulling out insights. So it’ll be a different skillset and it will probably be a different volume of people. You need to do a strategic analysis of what’s needed from an upskilling perspective, and then you may also need to hire some skills from the outside to supplement what you already have and what you’re upskilling.

That sounds like a big job for the CFO—but what is the board’s role?

So first, just starting the conversation, if that conversation is not already being had. The audit committee chair would want to at least be asking the CFO questions like, are you thinking about the function more strategically? Where are you trying to go with it? Have you given some thought to what a transformation might look like and what the cost associated would be? What’s the timeline, the roadmap?

Second, it would really be important for the audit committee to keep their eye on the internal control processes and the integrity of the financial reporting efforts throughout this process. Because when you’re busy in a transformation and a lot of things are changing, sometimes things fall through the cracks. So the audit committee needs to keep that in mind and maybe engage internal audit and others to give them some insights about how the team is progressing on the transformation and are they really ensuring that nothing is getting off track at the same time.

Lastly, the audit committee also should be focusing on what are the outcomes here? Are you getting new business insights and is the data giving you new information about business drivers, about important metrics or things that might be relevant that the business should be thinking about using to monitor its progress and how it’s doing? And then ultimately might some of this information change some of the reporting we do to investors? What would be the process around that?

Most audit committee chairs don’t have a background in technology and the digital specifics sound like Greek. How can they be sure they know what they don’t know?

I don’t think you really need to be a super technology expert to have this conversation. It’s really about transforming the business, taking advantage of new ways of doing things, so you need to think about it at a higher level and not get bogged down in the technology element. It’s more, this is an evolution and a process and we’re changing the way we’re doing things and making sure that the internal controls stay intact throughout that process. Even somebody who’s a chair of an audit committee and doesn’t have a deep technology background will certainly be able to understand the end game. And frankly, the CFO and others at the company ought to be able to articulate the roadmap in plain English so that anyone, including other members of the finance team and so forth, understand the vision and what they’re trying to do.

So if you’re not hearing it in plain English, you need to ask more pointedly, why?

Exactly. Because when you’re doing a transformation, you have to be able to articulate the roadmap and the vision to everybody as part of the transformation. If it’s steeped in jargon and too complicated for a board of directors to understand, then I suspect it will be challenging for the team that’s trying to transform as well. So I wouldn’t let the technology get in the way of progress.

Is this process more or less challenging depending on the size of the company?

Well, if you think about it, for a large company, just the volume and everything you have to get through would be daunting. But then, too, they probably have more skills in this area, more ability and maybe more history doing transformation. So maybe you would say that might end up making it easier for a small and mid cap and it probably is an easier project to get your arms around—but in many companies, the CFO already has a lot on their plate. This is going to require somebody to be able to take some time to step back and really think about a new strategic vision. That in and of itself takes time. So it’s trying to help the CFO in those environments get the time and the ability to step back and think about this and maybe that needs to be a special area of focus. Either they hire a consultant to help with the project or to help them think about how to lay out a roadmap to leverage some outside support and so forth.

According to PwC’s data, 75% of time in top finance functions was devoted to data analysis last year, up from 47% in 2013. Does that mean that companies are generally moving in the right direction?

Yeah, I think they’re moving in the right direction without really completely shifting the department, if you will. So they’re trying to stay up to speed and doing all those things that are needed, but they probably haven’t taken all the initiative to automate all the transactional processes on their plate. They are probably also not upskilling to the extent that they need to give people the right capabilities to do the right kind of analyses. They are seeing where they need to go, but they’re still trying to get there.

PwC recommends that audit committees should be asking, what controls has the finance function embedded to manage automation tools? What is the underlying issue there?

That question gets to, who is controlling the robot? If you have automation and you’re using bots to actually do some of the transaction work, who is checking the bots to make sure that they’re doing what they’re supposed to be doing? Just because something is automated and it’s done by a bot, that doesn’t mean that it’s going to be consistently done accurately. I think the biggest fear for someone is that they automated a lot of processes and then the bots go crazy in the middle of the night and you have to clean up the mess the next morning.

That also impacts the auditors. When they come in to do the testing, they might have been used to getting pieces of paper and looking for manual signoffs or doing manual testing. Now the auditors themselves are also going to have to test robotic transactions, right? So as the finance function transforms, the way the audit of the finance function happens will also have to transform.

What kinds of signs can you look for as a board member during the process to gauge whether it’s going well?

Once everybody has agreed to the roadmap, that this is what we’re trying to accomplish, then the audit committee should be getting timely updates as to the progress. One of the considerations would be making sure that these transformational tasks are not happening at a time that’s high risk. For example, if you’re a December 31st year-end, you probably don’t want to run around and automate everything and have the first time you do that be in the month of December because you’ve got to get the books closed and get the financial statements filed and you can’t really afford to have a bump in the road. You might want to take on a change like that at a time of year when it’s less hectic.

Once you’ve gone through the transformation, the board’s role is to ensure you’re getting the ROI and the data, the insights and analysis, that you were after?

Exactly. And now you’ve got more information, more data, more insights, what is that telling us? What do we need to be doing differently? Is there different information in there that we might be reporting to investors, as an example? Because we found some good key performance indicators that we previously weren’t able to track—now we can track them. They’re indicative of how our business is doing. Those things might be good to go in front of investors. Then it becomes thinking about the art of the possible. Now that you have all the information and everything, what are you going to do with it?

That sounds like a good problem to have?

Absolutely—a very good problem.