The Crossroads of Managing Compliance

Madrid, October 27, 2020.-  In the current difficult circumstances of today and for all companies operating in developed economies around the world, the management of compliance is experiencing a decisive development period which might become critical for their survival. The Covid19 pandemic still lacks a clear horizon of certainties, with no date for its eradication and its coexistence among human beings as just another virus.  Particularly important is becoming the work of the CFOs because the flow of money has been reduced, due to the stagnation of the supply and demand chain last spring, therefore new and extra financing sources must be sought. I have had the opportunity to read some interesting analysis on compliance management and its impact on the evolution of the new CFOs role (CFO 3.0 era), and its impact on the health of Corporate Social Responsibility.

According to a study in ITWeb magazine, the role of the CFO has evolved from managing compliance and accounting activities to providing strategic leadership and driving digital transformation. As finance enters the CFO 3.0 era, CFOs need tools that enable them to deliver on their core competencies, and to be confident in driving the digital agenda throughout their organisation.

CFOs are no longer simply signing off budgets for digital acquisitions at the request of the CEO or the chief information officer (CIO). They have become active participants in the digital strategy of their organisations. CFOs are supporting innovation as they adapt to a fast-changing work environment that relies on technology to provide data and analysis for sustainable growth.

According to Sage research, senior South African financial decision-makers acknowledge that managing a remote workforce and leading a business through lockdown and social distancing has weighed on their minds for most of the year. All the trends that were at play before the pandemic – the move to cloud, managing remote workers, and getting on top of compliance – have been accelerated.

As finance enters the CFO 3.0 era, CFOs need tools that enable them to deliver on their core competencies, and to be confident in driving the digital agenda throughout their organisation.

Demand for strategic decision-making

Finance decision makers are seeing their role transforming from number cruncher to business strategist. As a finance leader, you now have a new mandate: to move beyond the traditional role where you measure past performance to leading your business as a gatekeeper of data and analytics.

The insights this provides will help create a vision for the future of the business, which CFOs can then start to plan and forecast for. The CEO may expect the CFO to guide the business through an uncertain future, to provide strategic direction on digital spending, managing risk, imposing governance and responding to regulatory change.

It is the CFO’s opportunity to take the lead in digital transformation, redefining the finance function to play a more significant role in data governance, data flow, cyber security and other business priorities.

A younger workforce with new priorities

According to Stats SA, the youth (aged 15–24) constitute almost a third of the population (18 million) in South Africa. With millennials taking up more senior roles in enterprises and more members of Generation Z moving into the workforce, new technology priorities are starting to emerge.

There is a divide between senior accountants and new accountants who use technology to automate basic number crunching and admin tasks. Most new breed accountants will have implemented cloud-based technology three to four years ago, while the others will have only acquired cloud-based systems in the past two years.

Finance is becoming increasingly technical and strategic. To strengthen their position as a strategic business leader, CFOs must look at a few ways to make sure their organisation manages and analyses data thoroughly, optimising information flow to ensure KPIs are being hit. They could do this by harnessing the value of a young tech-savvy workforce, that will naturally accept what you’re trying to do.

South African CFOs are embracing technology in the finance function as a lever for improving performance. Some 90% of senior financial decision-makers have adopted emerging technologies in some form. Many report they are hands-on with their companies’ digital transformation strategy – and approve the spend.

The digitalisation of the finance role

Digital technology is pulling finance in exciting new directions as real-time, digitally-fuelled and data-driven competence. Nine out of ten South African CFOs today play a role in their organisation’s digital strategy, with 15% being fully responsible for digital transformation.

With automation, it is now possible to aggregate a vast amount of data to unlock insights. With data-driven insights, CFOs and senior finance professionals are better equipped to be a strategic advisor for their business, focusing on generating value for their organisations.

With just a little over half of the respondents stating most processes are automated in their businesses, this suggests that a massive shift is still coming – especially with over 80% of CFOs believing that financial management technologies can help their businesses to discover new opportunities and better manage risk.

Building a culture of automation can increase your productivity, result in fewer errors and faster processing times. Automation encourages quicker business-wide decision making while improving regulatory compliance and ensuring accurate financial statements.

AI holds no fear for senior financial decision-makers: over two-thirds are not at all concerned about AI, and only one in ten believe AI will impact jobs. In fact, nine out of ten CFOs welcome automation performing more of their day-to-day accounting tasks in future, and 40% believe AI and machine learning will improve forecasting and financial planning even further.

The Red Flag Group: Managing compliance through the changes of 2020

At the discretion of The Red Flag Group, the spread of COVID-19 is certainly grounds for updating the risk assessment to account for changes in:

  • supply chains and channel programmes
  • geographies where certain activities can be carried out
  • due diligence requirements
  • resourcing
  • the presence of new or heightened risks.

For example, with supply chains and channel programmes, organisations may need to expand volume and partner types (depending on industry) based on customer demand or changes in the geopolitical environment. The risk assessment should help guide the business on what scopes of diligence are required for these new third parties. The compliance team will also need to provide guidance on the shipment or receipt of goods, services and materials from countries or territories where the business does not normally work or have a presence.

Business leaders should also document how losses in staff (especially within compliance) could affect risk coverage, and what can be done to maintain oversight, including expanding responsibilities of existing resources, training up junior resources, or outsourcing compliance functions to a qualified vendor. Since ‘resourcing and autonomy’ is one of the key areas of the DOJ’s evaluation criteria, organisations should pay close attention to how their teams are staffed despite budget cuts and losses in revenue.

Risk assessments should also be updated to cover new or heightened risks to the organisation. The DOJ Guidance states that ‘prosecutors should consider whether the company has analysed and addressed the varying risks presented’, and sets out a variety of factors that are typically considered. In the current climate, data privacy and information security may become more critical given the large number of employees working from home, widespread job losses, and former employees and vendors that may have access to company systems.

In addition, the current climate has emphasised new topics that merit the attention of compliance professionals, including corporate social responsibility and social justice. Now is the time to partner with key stakeholders in the organisation to help promote the importance of these topics and put them into effect – including building more diversity into the employee base and choosing suppliers that espouse similar values.

CSR, exam today

Olivier Delbard, Professor at ESCP Business School, has published a detailed analysis on the health of Corporate Social Responsibility in the year Covid19, in the year in which we suffered a global pandemic:

Corporate Social Responsibility (CSR) is a concept that originated in the United States in the 1950s and, after arriving in Europe in the 1990s, has eventually conquered the whole world over the last 20 years. However, the concept of CSR lacks legibility because it can take many different forms. In Europe, for example, it is increasingly seen as a strategic vision of sustainability, whereas in other parts of the world, it remains more closely associated with traditional philanthropy, based on the principle of “giving back” – i.e. the redistribution of part of the wealth accumulated in favour of those who need it most.

However, the current pandemic has highlighted the need for effective and sustainable corporate social responsibility more than ever. Philanthropy, which is essentially ad hoc and short-sighted, does not provide a satisfactory response to large-scale social and environmental issues. Our analysis of corporate behaviour at the beginning of the health crisis, particularly during the containment period, has highlighted the range of responses from corporate organisations, both long-term and short-term.

For a large number of companies, traditional CSR (“CSR-as-usual”) was the classic response, of a philanthropic nature, and took the form of providing protective equipment or setting up emergency funds.

Other companies put the stakeholder theory into practice, drawing on the simple but powerful idea put forward by Freeman, the founding father of the theory, that “stakeholders have names, faces and children”. This has led to companies changing their production lines to help the government, extending the scope of social protection for employees, and providing free services to their customers or maintaining payment commitments to their suppliers.

For companies that have moved beyond the philanthropic and compliance approaches of CSR to adopt a long-term strategic vision, this crisis has been a test of their willingness to integrate sustainable development issues into strategy and operations over the medium and long term, addressing questions such as, how can we resist the classic reflexes of focusing solely on short-term economic and financial issues, to the detriment of longer-term societal and environmental issues? With this last type of response, the question of systemic model change arises more than ever; it is indeed the continuation of a holistic and long-term vision that will enable companies to reinvent themselves and adapt to a constantly changing world.

Managers are therefore faced with some fundamental questions related to the many challenges facing companies: in terms of governance and organisation, how can we move from a shareholder governance model to a partnership governance model that includes key stakeholders? Concerning employees, how can jobs be safeguarded throughout the crisis?

Supply chain issues, as the crisis has shown in an acute way, are also key: how to move from a dispersed global chain to a more local and sustainable supply? Finally, of course, there is the central question of the product or service offered: how to make one’s commercial offer more sustainable and responsible while maintaining a satisfactory level of profitability? So, these are some of the fundamental questions that must be asked by companies who now want to stay the course of sustainability while weathering the storm in the short term.