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Blog | The paradigm shift in Finance that CFOs really need to address now

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Author: Peter Engel, founder & CEO of Actuals

Among CFOs the awareness that Finance can be done more efficient and better is growing. Many struggle with a lack of time and lack of human resources.

When he was building his first cars, Ford asked people what they would like if they could trade their horse for something better. ‘A faster horse’, was the answer, not ‘a car’. Parallels can be drawn between Ford’s question and the state of Finance nowadays. The short term solution is to solve them with expanding the human workforce instead of to rethink the whole approach to finance and control.

Just looking back at the haystack: the control-testing idea

Currently, most organizations follow classic first and second line of defense thinking. In the first line of defense, management control and internal control measures are mostly designed by relying on logical and physical access security, segregation of duties and system settings. Then you have the second line of defense: the controllers and risk & compliance who double-check everything afterwards by testing the effectiveness of these controls.

In practice, more than often (IT) controls fail. There are a lot of exemptions within testing the effectiveness of controls and above all, the biggest shortage of the control-testing approach is that it is extremely difficult to alter or change when something went wrong. This makes it very time consuming to find the needle or needles in the haystack.

Besides that, Finance, Control, Risk & Compliance are considered to be a cost- rather than a profit center, which makes it non-rewarding to do things differently. We, Finance professionals, must turn this around. Knowing that the financial data is correct, complete and reliable has an extremely high value. If you are continuously in control, Finance and Control don’t only have to play defense, but can act as a strategic business partner who allows the rest of the business to actively act on it. It provides you with the insights on where to do business, against which prices, where to invest, where to get tax benefits and so on. With this knowledge, you’ll be ready for the future and ready to grow faster.

Does the control-testing approach sustain in a world with a shortage of finance professionals?

There has been a serious shortage of finance professionals and accountants for years. The workload is high and auditing standards and processes are old-fashioned. This causes people to get stuck easily and eventually drop out. Smart, well paid people are occupied with repetitive tasks, such as making repetitive data dumps and performing manual actions in Excel forced by the control-testing approach. 

To me this is such a waste, because adding a more substantive approach will make life of an outnumbered first- and second-line defense much easier. Why? Because you can exactly lay your finger on what when wrong yesterday, find out why it went wrong instead of only knowing something went wrong and change a procedure or a system setting today. 

So don’t get me wrong: controls are important and form the foundation that enables the organization to set rules and operate as much as possible within standard procedures. I’m advocating for a healthy mix in control testing and substantive testingbecause to only focus on control testing from a second line of defense on control reliance is like chasing a dog’s tail. And we see that every day 

You need to enable your smart workforce with smart tooling and by doing so, create a situation in which a large volume of your transactions is being processed automatically rather than have your people process and check them manually. Therefore, it should always be a matter of adding more substantive testing to the Control Framework to support the control reliance strategy. 

What you need to focus on as a CFO now

Hiring more people, at least not with respect to this topic, doesn’t offer a sustainable solution for either rapid or sustained growth if you are only focused on looking back on high level and testing the effectiveness of controls. The data volume within organizations is becoming so vast that they no longer fit into Excel, especially not in combination with adding more hands (and interpretations) to the process, which subsequently tend to lead to the  creating different truths and definitions of revenue instead of working towards a single source of truth.  

Matching transactions across systems and applications should not be monitored by people. You need to facilitate and rethink these checks & balances in a different way. A way that allows for continuous processing and that has been based on a solid control concept and mix of control testing and substantive testing from the start, rather than having to repair afterwards by adding more time of smart people that are educated to solve  more complex problems than the ones covered here. 

We experience that in many fast-growing organizations control is now lagging, instead of it being a strong focal point from the get-go. Controllers and internal auditors must adopt a different role in order to support the first line of defense and the first line of defense need to rethink their set of controls and re-assess their business risks. CFOs must invest in smart tooling that will support the whole organization in making better decisions at a faster pace 

Up-to-date insights into your financial data and knowing all of it is correct, is worth its weight in gold.

Feel free to contact me.

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