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BUILDING TRUST IN MANAGEMENT ACCOUNTING

BY MARIO SPANICCIATI
June 1, 2019

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There’s much about today’s business to be admired: rapid

innovation, stimulation of the economy, and the kind of
competition that leads to thought and leadership growth. But
today’s businesses also suffer from a credibility gap—that is, a lack
of trust among the world’s populations.

Mention Enron, WorldCom, or Lehman Brothers, and thousands of people

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—including lawmakers and regulators—recall all too quickly how many lives
can be damaged by the actions of a poorly run organization. It’s no surprise
that business, and particularly big business, has a bad reputation in the eyes of
the general population. Comprehensive new controls were put in place
following the Enron disaster. That and other scandals led to passage of the
Sarbanes-Oxley Act of 2002 and the creation of the Public Company
Accounting Oversight Board (PCAOB).

Yet a 2017 Gallup report shows that since 2002, big business has been scoring
about a 20% confidence rating. And it isn’t unusual to see newspaper opinion
pages bemoaning the lack of honesty among businesses.

AN ECO IN THE NUMBERS FACTORY

Trust in the numbers—the data produced by the invoices, payments, and

expenses of any business—isn’t just an esoteric concept. It’s as real as the extra
costs in dollars, time, and even reputation that can be exacted when that data
goes wrong.

Consider what can happen to an automobile maker when an error in design,

say for a steering gearbox, travels undiscovered through assembly and into
production. The error is finally discovered. The engineering group issues an
engineering change order (ECO). The production line, already under way, must
be stopped. Costs mount as the plant stops production. Time is wasted, and the
company’s reputation may also suffer.

Accountants like to compare the accounting function to a numbers factory.

The numbers (data) make up the disparate parts, and the accounting processes
connect and form the numbers into larger components that go into the final
products. These are the quarterly and year-end financial statements, which

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are reported to the public. If a material error in the numbers is propagated

through to these reports, the resulting misstatement can do at least as much
harm, in the cost of reputation, as the ECO did to the automaker.

For the finance department, and for the enterprise as a whole, a material error
in accounting can also incur some serious penalties. Accounting staff may
have to redirect their efforts to find and correct the error. Ongoing processes
may have to stop and wait for the corrections. Labor costs jump up, other
reporting might be delayed, and the damage to the reputation of the
company’s officers can be significant.

Armanino LLP, one of the world’s largest independent accounting and

consulting firms, published a 2016 study to examine how the CFO can spend
less time on accounting management and more time on strategic value
(bit.ly/2PwDf6n). It shouldn’t be surprising that five out of the six
recommendations directly involve technology and processes:

• Standardize and improve processes.

• Drive improvement with technology.
• Provide effective key performance indicators (KPIs).
• Integrate technology.

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• Provide accurate forecasting.

• Support growth and expansion.

The survey also found that 94% of CFO respondents feel they need better
technology skills and 64% are currently working on upgrading their skills. The
challenge isn’t just finding the time to learn but determining the best approach
in the quest for excellence in the numbers factory.

TRUST IN THE NUMBERS MATTERS

By establishing and maintaining internal and external trust in the numbers,

accounting organizations that can simultaneously deliver real-time and highly

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accurate financials do more than avoid fines and other costly penalties. Those
that prioritize maintaining trust, both internally and externally, gain (and
retain) public confidence. This creates a significant competitive edge and has
the potential to achieve the following three benefits (see “Building Trust
Company-Wide” below for more):

Reduce the likelihood of damage to the organization’s brand and reputation.

The adage that “trust is gained in drops and lost in buckets” has never been
more apt. Organizations with years of steady performance can be damaged by
one (infinitely) shared tweet. Social media, a 24-hour news cycle, and
declining levels of privacy for both people and organizations also mean that
even small errors can quickly become big news.

Organizations can reduce the likelihood of this damage not by increasing

budgets for crisis management and lobbying, but by establishing and
maintaining protocols that prioritize trust. For the accounting organization,
this means improving both tools and processes to facilitate the
trustworthiness, transparency, and accuracy of every balance sheet.

Enable organizations to realize higher performance and increase access to

business opportunities. Organizations that are considered trustworthy have
better access to business opportunities and partnerships and, according to
research by Trust Across America, “[outperform] the S&P by 1.8 times”
(bit.ly/2ZD7vRJ).

The Trust Across America survey “What Causes Low Trust in Your
Organization?” also shows that organizations that prioritize building and
maintaining trust internally see lower employee turnover, attract higher-
quality employees, increase productivity, drive more innovation, and
experience long-term business success (bit.ly/2UWEGAH).

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Equip leadership to make faster, more data-driven decisions. Rapid, real-

time decision-making capability pays off. Research by Bain & Company over a
10-year period of more than 1,000 companies discovered a “clear correlation
between decision effectiveness and business performance” (bit.ly/2ZB0NLG).

Yet the ability to make effective decisions depends on access to trustworthy

data, be it customer engagement statistics, return percentages, or the day-to-
day balance sheet. Accounting organizations that can deliver highly accurate
financial data in real time can help leadership make more informed, targeted,
and successful decisions.

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FOUR WAYS TO BUILD TRUST

Nearly 70% of global business leaders and finance professionals claim their
organization has made a significant business decision based on inaccurate

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financial data. Almost 22% of C-suite respondents say it takes up to 10 days

per month for their organization to identify errors and make adjustments,
potentially wasting as many as 114 days each year.

These findings are from a global survey commissioned by BlackLine of more

than 1,100 C-suite executives and finance professionals to gauge confidence
levels in financial data and the perceived impact of errors on the business
(bit.ly/2PtpLrW). The results reveal four essential ways that organizations can
build and maintain trust in today’s increasingly unpredictable, rapidly
changing business environment.

1. Deliver Accurate Data

Accountants have always held high levels of accuracy as a core value, but the
rapid pace of business and the demand for real-time financial information
have made it increasingly difficult for accountants to process the
extraordinary amount of data flowing through modern organizations.

A continued reliance on manual or outdated systems means tremendous

amounts of overtime are required to meet the competing demands of closing
the books both accurately and on time. According to the Society for Human
Resource Management (SHRM), overtime itself is a significant factor in poor
performance and increased errors.

To maintain the trust of leadership, stakeholders, and shareholders,

organizations must find ways to reduce and even eliminate the possibility of
human error. How? By streamlining outdated, clunky, manual processes and
giving accounting professionals updated tools that help them maintain high
levels of accuracy, even as the pace of business accelerates.

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2. Centralize Key Functions

It’s difficult to achieve meaningful transparency with legacy accounting

systems because these systems make it difficult to quickly identify mistakes
and discrepancies.

BlackLine’s global study found that 55% of respondents were “not completely
confident” that they could identify financial errors in advance of reporting. Of
those, 26% were concerned “over errors that they know must exist, but of
which they have no visibility.”

Transparency’s value in accounting and finance goes beyond increasing the

visibility of errors and improving the accuracy of statements (see “Building
Trust between Accounting and Finance” for more). Transparency also helps
build trust externally, which, in turn, leads to large-scale business benefits.
Studies show that organizations with increased organizational transparency:

Benefit from a reduced cost of capital. In the Journal of Accounting, Auditing

& Finance, Mary E. Barth and Katherine Schipper state that “increased
reporting transparency provides evidence of an association between
transparency and cost of capital” (bit.ly/2GFPjz4). According to “Cost of
capital and earnings transparency” by Barth, Yaniv Konchitchki, and Wayne R.
Landsman, when an organization provides more transparency within financial
statements, that organization experiences a lower cost of capital, primarily
due to the fact that “uncertainty regarding the value of its equity may be
lower” (bit.ly/2GvD3A2).

Increase sales. In another study cited in a Harvard Business Review article by

Ryan W. Buell, making the costs and processes of various products
transparent, including the amount of markup, led to a dramatic jump in sales.
By providing full operational transparency for one product, a wallet,

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researchers were able to increase sales by 26% (bit.ly/2IFnqtn).

Increase stakeholder confidence. Research compiled by Harvard Business

School showed that increasing the levels of operational transparency within
government agencies positively influenced citizen attitudes toward
government. Revealing the “hidden work” increased the self-reported level of
trust by 14% (hbs.me/2WcwMQB).

Accounting organizations can address the need for more transparency by

transitioning from outdated and often manual accounting operations that
hamper visibility to more centralized, modern processes and solutions.
Instead of using and storing spreadsheets on multiple servers (or with multiple
accountants), organizations can create a central location for all close data and
operations. Centralizing key accounting functions—reconciliations, task
assignment and management, journal entries, and analysis—enables a more
holistic approach to the financial close process and ensures immediate, real-
time visibility into all activities.

3. Enable Efficiency and Accuracy

Numerous studies have demonstrated how trust increases efficiency.

Researchers from the International Monetary Fund (IMF) and Duke University
found that employees who trusted each other were more willing to expend
effort and less likely to “monitor” the behavior of others, thus becoming more
efficient in their roles (bit.ly/2PsVSbg).

Lee Caraher, founder and CEO of Double Forte, a national public relations and
digital media agency, also correlates inefficiency with a lack of trust, stating,
“When we don’t trust our colleagues, we develop muscle memory that drives
inefficiency up—preparing for others to drop the ball” (bit.ly/2IVm90A).

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Less has been written about the reverse statement, how efficiency itself
increases trust. From an accounting and finance perspective, efficiency
enables the timely completion of key processes and the delivery of data
crucial to decision making.

Accounting teams that can be more efficient—without compromising

accuracy—can better support the controller, the CFO, the CEO, and external
stakeholders. Efficiency within accounting drives trust because it enables
others to do their jobs and accomplish key tasks on time. But efficiency is hard
to achieve when accounting professionals are dependent on manual
accounting processes and outdated tools.

By streamlining repetitive activities like data entry and increasing the use of
automation, organizations can see improved efficiency and simultaneously
increase trust in accounting teams, processes, and data.

4. Build a Culture of Accountability

According to the U.S. Office of Personnel Management, organizations with a

culture of accountability—an environment where employees take ownership
for results—see improved employee performance, as well as commitment to
work, morale, and satisfaction (bit.ly/2DzUzlV). These organizations also see
greater trust internally, between both individuals and teams. How can
organizations build a culture of accountability within the accounting
function? It requires more than a segregation of duties.

First, leaders must have an engaged view into who is performing what and
when to more quickly identify errors and challenges, rebalance workloads,
and, most critically, offer support, including both constructive feedback and

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praise.

Second, individuals must be able to take real ownership of and have equal
visibility into their tasks and activities as well as performance standards and
timelines for completion.

START WITH EMPOWERING ACCOUNTANTS

In an age when trust in public and private institutions is on the decline,

organizations that can create and maintain trustworthiness have a tremendous
competitive edge. It can be argued that establishing that trust starts with the
numbers.

After all, for both internal and external stakeholders, it’s the numbers—not the
brand, the boilerplate, or the press release—that deliver immediate and
actionable insight. Numbers are the first tangible indicator of success and the
first indicator of challenges to come.

“Unlocking the value of information and financial data is much more

important than routine reporting, and if done well, a key competitive
advantage,” says Tony Klimas, principal and Global Performance Improvement
Finance Leader at EY. “Yet many companies still haven’t implemented
technology to enable this capability, despite the many advances in automation
and cloud-based solutions, which reduce the required investment and time to
implement. It is time for businesses to treat their financial data like an asset
and invest in the technology, tools and people to turn information and data
into strategic insights.”

And if trust starts with the numbers, then organizations must prioritize
improving the processes that enable trustworthy balance sheets. This means

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giving accounting professionals the technology that empowers them to

simultaneously practice the core values of accuracy, efficiency, and
transparency and keep up with the ever-increasing pace of business.

Mario Spanicciati is the chief strategy officer, Strategic Alliances,

at BlackLine.

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