As companies addressed the challenges spawned by COVID-19 — from supply chain disruptions to government-ordered shutdowns and from virtual workforces to the Coronavirus Aid, Relief, and Economic Security Act — they’ve frequently had to think on their feet. Now, as CFOs face the demands of financial reporting and accounting – hopefully in a post-pandemic economy -- they’re pondering and prioritizing which issues need to be front and center for companies to re-open and recover under the “new normal” business environment.
FEI Daily spoke with Eric Knachel, a senior consultation partner in the Professional Practice Network at Deloitte & Touche LLP, after his recent presentation, “Re-Opening and Recovery,” at FEI’s Leadership Summit.
FEI Daily: Ever since COVID became a global pandemic, many companies have acknowledged forecasting to be its most challenging accounting and reporting issue. What about today? Does forecasting remain a significant challenge in the current environment?
Eric Knachel: Unquestionably, forecasting has been the biggest challenge for companies during the pandemic. As evidenced during several presentations we have held within the last year, in response to the question “What is the most challenging issue to your company?” the top answer was consistently “forecasting.” By far.
Not surprisingly, uncertainty was often cited as the single biggest factor involving forecasting. When will the business environment change? What will it look like? Basically, getting to the question “Will operations get back to ‘normal’?” or “Is there going to be a ‘new normal’?”
Many would agree that the economy has fared better than expected and, likewise, company results (in many instances) have been better than what was expected 6-12 months ago. In fact, it could be said that some companies have figured out how to operate successfully in a pandemic. And, in general, many companies are confident in the economic recovery.
As we look at the forecasting process today, there seems to be two common themes emerging during this “new normal” period.
One, is strong revenue growth. A number of companies seem to project that the economic recovery will continue, and companies will see revenues increase. That seems to be the case in many instances whether a company benefited from the pandemic environment, or not.
Question is, will every company be a “winner” in the “new normal?” Or, are some companies going to experience a drop? Maybe a certain technology will not be used as commonly? Or, perhaps the demand for certain products or services will decline as consumer behavior evolves?
The more significant theme, however, (and what some would call a bias) that we are seeing is around cost reductions. While for many companies, revenue is currently down compared to 12 months ago, significant cost reductions have helped some offset that drop in revenue.
Simply stated, many companies have reduced their cost structure. Reduction in salary costs is probably the most common cost reduction, but also reductions in travel and related costs, and real estate or occupancy costs as well.
And the bias we have seen with some companies, is assuming the cost reductions that have occurred this past year will be sustained going forward. Perhaps reflecting a mindset that if a company hasn’t incurred certain costs in the past year, such costs aren’t necessary. For some companies, sustaining the cost reductions that have occurred this past year might be reasonable. Not so much, however, for other companies. Or, maybe a company can sustain a portion of its cost reductions, but not all of it.
Bottom line, forecasting continues to be a challenge for companies due to the uncertainty in revenue projections and the sustainability of cost structures.
FEI Daily: With a significant portion of the workforce working remotely, it has given rise to new or increased concerns around internal controls for many companies. Now that some companies are having all, or a portion of their workforce return to the office, does that present new challenges around internal controls?
Knachel: It can, indeed, and the challenges may vary by company. In many respects, these challenges may depend not only on the way a company’s workforce returns to the office, but also on the types of internal control challenges a company had previously.
Many companies have had to deal with challenges associated with internal controls that were once performed manually or on-site at the company’s place of business, and that needed to be performed remotely.
In addition, a lot of the changes we saw relating to internal controls were driven by changes to workforce headcount and staffing models leaving some controls with new or temporary control owners. In situations like those, it could have been difficult to maintain traditional segregation of duties throughout the control environment.
As companies start to bring people back into the office as well as expand their workforce through new hires, rehires of previous layoffs or returns from furloughs, having an effective onboarding and training process as people join or return to the organization is important. This effort should include educating control performers on the control requirements of their roles. And, the process should embrace learning from the past 12 months. Some companies are establishing a plan for cross-training among control owners so that there is backup plan in place.
For many organizations, physical inventory counts presented challenges in the last 6-12 months leading some companies to pursue statistical sampling or other measures as part of the inventory verification process. Based on the current environment, we would expect a return to more traditional live inventory counts. The caveat, however, is that it’s important for companies to communicate and work with their external auditors as it relates to the appropriateness of procedures around inventory counts.
Last, but perhaps most significant, the IT environment continues to evolve and present ongoing and new challenges, some of which have been exacerbated during the remote work environment caused by the pandemic, such as cybersecurity risks.
FEI Daily: Have you observed an increase in cyber-attacks in the last 12 months? And if so, what are some ways companies are trying to prevent the attacks?
Knachel: The frequency and volume of cyber-attacks are something that will vary by individual companies. However, the pandemic forced many companies to respond quickly to new ways of working. And some companies may not have had the supporting infrastructure or controls to support remote access. In many instances the remote working environment may have provided more opportunity for cyber-attacks.
Companies should continue to re-evaluate their current IT infrastructure and ensure adequate security measures are implemented and functional. More popular security measures or enhancements include the implementation of multifactor authentication (MFA) for remote access technologies. MFA provides an additional level of identity verification and is a method of authentication that requires more than one verification method and adds a critical second layer of security to user sign-ins and transactions.
Other measures that some companies pursue to help secure the IT environment include reducing or eliminating the use of a generic account and a shared password for employees to access systems, as well as adding more automation related to access controls. For example, a change in the organizational hierarchy or an employee leaving or transferring departments automatically triggering the access removal process, rather than relying on a manual process to remove access.
FEI Daily: Stakeholder communications and financial statement disclosures have been a point of emphasis during the past year in the COVID business environment. How have the communications or disclosures evolved at this point?
Knachel: Certain disclosure areas may have received additional attention in the past 12 months, but the need for transparent and robust financial statement disclosures continues to exist.
Related to stakeholder communications, we’ve observed the narrative for a number of companies evolving. Six to 12 months ago, much of the communication focused on how a company was initially responding to the crisis and then adapting to maximize performance during the crisis. Now, a number of companies seem to be focused on communicating to stakeholders how they will evolve their business models and ultimately become better and stronger post crisis.