The global business and financial landscape is more complex and challenging than ever before, making it increasingly difficult for companies to perform well in competitive markets. This is having an impact on the way businesses present themselves to investors – however, investors are also becoming increasingly wise to the fact that, much of the time, they aren’t being shown the whole picture.
There are a number of different tactics businesses can use to appear attractive to investors, thus increasing their competitiveness. But what many business leaders may not realise is that some of the best ways to do this can actually be found in the finance department. Typically, financial reports, data and metrics have been useful indicators of a company’s financial health and investment potential. However, following a number of high profile accounting and fraud scandals – including Carillon, Patisserie Valerie and Metro Bank, to name but a few – investors are beginning to scrutinise the numbers in more granular detail than ever before.
Investors reveal biggest turn-offs
This desire for better visibility over company financials is revealed in a new report from BlackLine, The New Age of Increased Investor Due Diligence, which examines investor attitudes to financial data, risk and reporting. The findings, which are based on a survey of over 700 institutional investors in six markets, uncover a number of financial red flags that impact decision-making and suggest that current financial practices at large organisations are undermining investor confidence in the numbers.
While financial reports and statements are often a key decision-making tool for investors, the survey found that the vast majority of respondents do not believe that organisations present an accurate view of their accounts through these documents. Interestingly, eight out of 10 investors surveyed believe that finance departments often resort to legal but ‘creative’ accounting tactics in order to satisfy investors or attract new ones.
In fact, creative accounting tactics – where companies exploit financial loopholes to present financial data in a favourable, yet misleading light – were found to be a major turn off for investors. A quarter singled out evidence of creative accounting as the factor that would make them the least likely to invest in a company. This indicates that any evidence to suggest finance professionals are deliberately failing to disclose the full picture could have a detrimental impact on a company’s relationship with its investors.
Creative accounting tactics were not the only red flag for investors – there are a number of concerns, responsibility for which lies with finance. A third of investors said the risk of internal financial fraud or financial non-compliance would make them less likely to invest in a company, whilst over a quarter said that filing an adjustment post reporting or submitting a financial report that contains errors would also make them reconsider an investment opportunity. Clearly investor patience with opaque and error-prone financial processes is coming to an end.
Investors want the full financial picture, in real-time
So, what do investors actually want? When it comes to factors that reassure or encourage investors, a more granular view of financial data and a clear understanding of a company’s real-time performance are top of the list. Close to half (46%) of those surveyed said a company’s financial growth forecasts helped them to make informed decisions, suggesting that many investors are forward looking. However, having a clear picture of what is happening now is also vital. 42% of respondents said access to real-time, accurate snapshots of financial data were key for their decision-making process. In fact, the ability to access a company’s financial data in real-time was seen as more important than global or domestic market trends and current economic outlook.
Additionally, nearly all of those surveyed agreed that evidence of effective financial management was key to their decision making process – 52% said that proof a company has a good track record of accurate financial reporting is absolutely crucial. Why? Because ultimately, investors need reassurance that they can trust the numbers being put in front of them. If they can’t, they are less likely to invest.
Increasing confidence with technology
The findings of the report highlight that concerns over the integrity of financial data stretch far beyond the finance department or the CFO. Investors are no longer willing to accept numbers at face value and need evidence of good financial practices and management. For companies, this means that there must be solid controls and visibility over financial data – preferably in near real-time.
This may seem daunting, particularly when many finance professionals still rely on spreadsheets and manual processes. However, the right technology can make this incredibly straight-forward. Machine learning and technology that automates, such as robotic process automation (RPA), are increasingly being introduced into finance and accounting, reshaping the modern finance department. These tools can process and identify errors in the huge volumes of data that global businesses handle, quicker and far more accurately than humans. Crucially, this provides the real-time visibility that is so important to investors.
Businesses must realise that preventable errors and poor financial controls are not only internal issues; external business goals will be affected, as well as investor confidence. With the role that technology can play in ensuring accuracy, visibility and control, there really is no excuse for murky and unreliable financial practices.
Andy Bottrill is Group Vice President EMEA at BlackLine. Since joining BlackLine in 2013, Andy has held several positions within the company, including Regional Vice President and Vice President, and has been a significant contributor and leader for the UK, Nordic and Netherlands regions.