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Why businesses will face a new level of investor due diligence in 2020

By Andy Bottrill, VP EMEA, BlackLine 

Clarity over how a company finances its operations has become a crucial part of investment decision-making. With an increased number of accounting and misreporting scandals in recent years, businesses are being forced to change the way they’re managing their accounts, moving towards a more regulated and transparent environment.

In such a competitive market, there are a number of different tactics businesses can use to appear attractive to investors. Financial reports, data and metrics are all processes that can help investors understand company performance, as well as potential risk. However, against a backdrop of misreporting and financial mismanagement scandals, investor trust in finance is not where it should be.

Investors reveal biggest frustrations

A new report from BlackLine, The New Age of Increased Investor Due Diligence, examines investor attitudes towards financial reporting, revealing the need for complete transparency between finance departments and investors.

Creative accounting tactics, whereby companies exploit financial loopholes to present financial data in a favourable, yet misleading light, is one of the biggest irritations investors face. The report, which is based on a survey of over 700 institutional investors in six markets, revealed that eight out of 10 investors believe finance departments often resort to legal yet ‘creative’ accounting tactics to keep them satisfied. The survey further revealed that a quarter of investors singled out evidence of ‘creative’ accounting as the factor that would make them the least likely to invest in a company, suggesting that a lack of visibility is undermining confidence.

Creative accounting wasn’t the only turn off, with a third of investors admitting 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. Another third said they are put off if a company shows no evidence of long term financial planning.

Almost all (99%) of those surveyed indicated they would not invest in a company with poor financial controls unless they could take some form of corrective action first, such as making changes to the company’s management team. This is evidence that bad controls don’t just worry investors, but can directly impact their behaviour, implying that finance departments contribute to business success by simply putting proper processes in place.

What do investors want?

Cases of financial fraud, non-compliance and aggressive or murky accounting tactics have led to investor frustrations, and as a result, they want real-time visibility and complete transparency; they’re demanding a closer, more granular view of companies’ financial data.

Almost half of those surveyed said a company’s financial growth forecasts helped them to make informed decisions, suggesting that many investors are looking forward as well as wanting a clear picture of what’s happening now. 42% of respondents said access to real-time, accurate snapshots of financial data were key to their decision-making process. In truth, 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.

As well as looking forward, investors also want proof that a company has a good track record of accurate financial reporting, with over half (52%) strongly agreeing they need evidence of this in order to make an informed decision.

Financial confidence can be achieved with technology

With over half (58%) of respondents saying they’re increasingly worried by a lack of transparency in their portfolio companies’ financial statements, it’s no surprise that investors are no longer willing to accept numbers at face value. Technological innovation in finance, particularly through automation, means there is no excuse for poor controls or a lack of visibility over the numbers.

Investors were unanimous in their appreciation for effective financial management. However, creating a fundamental business shift such as this can be overwhelming, particularly when many finance professionals still rely on spreadsheets and manual processes. Nevertheless, technology can make this incredibly simple. Machine learning and technology that automates, such as robotic process automation (RPA), are increasingly being introduced into finance and accounting, reshaping the modern accounting 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; this provides the real-time visibility that is so important to investors.

It is important that businesses understand that basic errors and misleading information can result in external issues as well as internal; business goals will be effected and investor confidence will diminish. Today, technology provides a simple solution to investor frustrations, offering visibility, accuracy and control. By embracing technology and automation, businesses can regain trust and financial confidence, leaving no room for blurred financial results.