While regulation was the overarching theme in financial services (FS) over the last few years, there are now other topics taking center stage. I’ve focused here on an overview of five areas that every FS professional should know something about to succeed in the new year. I will explore these in more detail in subsequent articles, but first, here is 20,000-foot executive summary of what matters most:

1. Current Expected Credit Loss (CECL): A new accounting method for potential loan losses

The What: Banks have always needed to hold reserves against potential credit losses. Today, those reserves are based on estimates of incurred losses. With CECL, in addition to incurred losses, reserves will also need to be taken based on expected but not yet incurred losses over the life of the loan. Financial Institutions will need to revise their loan loss procedures as well as their projected loss models to account for the changes required by CECL.

The So-What: A substantial change requiring a large effort to implement and impacting earnings:

• Change Management Challenge: Large change program is required to define new allowance process and governance, data, determine modeling approach and tools, etc.

• Capital Hit: Since potential losses are being recognized earlier, the amount of reserves will increase which will require additional capital and serve to lower the retained earnings component of equity

2. LIBOR Replacement: A new benchmark being defined for short-term interest rates

The What: LIBOR, the published rate that has served as a benchmark for short-term interest rates since the 1980s, will be going away. Recent scandals involving the manipulation of LIBOR as well as the lack of sufficient, observable data to set the rate has led the organizations that oversee LIBOR to look for an alternative.

In the U.S., the Fed has tasked the Alternative Reference Rate Committee (ARRC) to be responsible for the transition. The ARRC has proposed a newly created index called the Broad Treasury Financing Rate (BTFR) as the USD LIBOR replacement.

The So-What: Be aware of current and future LIBOR based obligations at your institution.

While the actual change is still a few years away, preparation for the new benchmark will be massive. Loans and floating rate bonds tied to LIBOR will have to be addressed contractually, and deal-specific covenants may require consents from the owners of these securities. International Swaps and Derivatives Association (ISDA) master agreements will also have to be amended or replaced.

3. Data Curation: Get a museum pass to visit your data

The What: Valuable assets in a museum have a curator responsible for cataloging, describing and managing the piece so others will find it useful. FS organizations have realized that data is actually their most valuable asset and also needs to be cataloged, described and managed. Since we can’t put the data behind a glass with a plaque, we must use software tools instead. Software packages such as Alation and Collibra allow for a business user-friendly way to catalog and manage an organization’s data such that the right data can be sourced with high confidence and in a consistent manner throughout the organization.

The So-What: Get on board your organization’s data program as a data steward, data curator, etc. This is not for techies anymore. First-line business users will own the data they create and being the one who has the key will be a good spot to be in.

4. Blockchain: Feel the Ripple effect

The What: Contrary to the hype, blockchain will not solve world hunger. While the bubble around Bitcoin, Ether and other cryptocurrencies are still swelling, there is one blockchain-based service that is actually being used successfully in the FS arena and is not modeled as a disintermediation effort. Enter Ripple — which is being used by major financial institutions as settlement infrastructure technology — particularly in the areas of payments and foreign exchange.

The So-What: For FS professionals, it would make sense to study Ripple as a model of how banks may work together with blockchain technology and cryptocurrencies and try to develop similar use cases to benefit from blockchain’s momentum.

5. Know Your Customer (KYC) and Robotics: Free the human from the yoke of robotic tasks

The What: If there is one use case screaming for Robotics Process Automation (RPA), it is the KYC process. There are robotic tasks in customer onboarding that we need to rescue humans from doing. (“Type company name into Office of Foreign Assets Control (OFAC) check site. Save results as PDF. Store on share drive. Repeat ad infinitum.”) RPA tools can easily pre-populate KYC fields (like address and date of incorporation) by reading them from documents or websites and OFAC checks can be readily automated using the most basic of RPA functions.

The So-What: If your organization still performs KYC manually, then clamor loudly and firmly for introducing RPA. It is a low-risk and high-reward endeavor, and the humans performing these tasks will thank you for exorcising the robot within them.

Now, you’ve learned enough to impress your colleagues or your boss. In subsequent articles, I will dive a bit deeper and show how you can be the hero who delivers on these areas for your institution in 2018.

SOURCE

Would you believe that striking a healthy work-life balance is one of them?

For many CFOs, the idea of achieving a satisfying work-life balance is something of a fantasy. The hours are long, and the pressure to excel — making certain every big-picture strategy is sound, virtually every detail precisely right — is extreme.

One could point to almost any finance chief at a big company, or a struggling one, or one that’s growing fast or starting up, and say with a fair degree of confidence, “that person is a workaholic.”

But is that a good thing? Not according to someone who should know: Jack McCullough, who has served as finance chief for no fewer than 26 startup companies. “Being a workaholic is a mistake,” he said during a webinar he recently presented. “Workaholics are not the best long-term performers. There are times in all of our careers when we have to work 80 or 90 hours a week and forego other things. But it’s not a wise long-term strategy.”

In McCullough’s view, a good formula for a successful CFO includes a lot of “other things”: family, friends, physical exercise, reading (and not just business books), hobbies, and community service. And “if your boss asks you to skip your vacation, skip your vacation but also start a job search and make it up to your family.”

So important is striking a healthy work-life balance that McCullough included it in a list of 10 “Habits of Highly Effective CFOs,” which was the title of the webinar. “If you don’t want to do it for yourself or your family, then do it for your company, because you’ll be better at your job,” he said.

Also on the list was “continuous learning,” and the way McCullough prepared for the presentation offered a perfect example of it.

McCullough is the founder and chief executive of the CFO Leadership Council, a 12-year-old, membership-based educational and networking organization that now has 23 chapters nationwide. In that capacity, he’s gotten to know hundreds of finance chiefs. But with the webinar coming up, he didn’t rely on his past conversations with them, nor on his own long experience as a CFO.

Instead, he painstakingly interviewed dozens of finance chiefs specifically to find out what characteristics they consider to be drivers of their success.

With regard to continuous learning, most of the CFOs he spoke with are “very intellectually curious,” he said. For example, a majority of them have MBA degrees, which finance professionals often obtain after their careers have begun. And all of them are readers.

Many of them highly value mentors, McCullough added. To find a mentor, he noted, speaking with board members is a good strategy, as most of them have a lot of high-level contacts. He advised that CFOs, or those aspiring to the job, seek mentors outside their organizations. It can be awkward, he pointed out, to tell your boss that you need mentoring because you don’t understand some things or need professional polishing.

Most of the effective “habits” on the list are no surprise — for example, “thinking strategically.” Noting that old-school CFOs were known as the people who said “no” to spending on new initiatives, McCullough said, “Be a CF-GO, not a CF-NO. You want to be involved in making it happen, not putting on the breaks.”

Others on the list:

Providing ethical leadership. Overall, the finance chiefs McCullough interviewed identified this as the most important characteristic. “CFOs seldom lie — it’s not in their DNA,” he said. “But there’s more to ethics than that.”

CFOs are expected to be the most ethical person in the company, he noted. They need to “fully and accurately disclose all relevant info to all relevant parties. And [they] always need to be evaluating the needs of all constituents, be they stockholders, investors, customers, employees, suppliers, and every once in a while society as a whole.”

Serving as a trusted adviser. That of course means advising the CFO’s immediate boss, the CEO. But, McCullough stressed, it’s even more important to be a trusted adviser to the board of directors, which represents the interests of shareholders. He offered an anecdote to drive the point home.

At one of his career stops, the company was experiencing revenue-recognition issues. The CEO told him not to tell “Bob,” the audit committee chair, about it. “If he wanted to be 100% sure that I was going to call Bob, that’s the one thing he should have said,” McCullough noted. “He’d now obligated me to call Bob, because my fiduciary duty is to the stockholders. And I told him that’s what I was going to do, and I did it.”

Communicating proactively. Effective CFOs are forthright in their communication style, he said. If there’s bad news, they don’t spin it, hide it, or delay it. Their communications are “timely, clear, brief, truthful, and once in a while they need to be compelling, although the other four are more important.”

Performing cross-functionally. Most of the CFOs McCullough interviewed said they like working outside finance more than within it. “A lot of them told me that they’re the best person in the company at selling, the best recruiter, the best fund-raiser, the best deal-maker. They didn’t say this in a cocky way. A lot of it is the trust factor.”

One CFO in San Francisco told him that while it’s virtually impossible to hire a lead engineer in the area, he was able to do it. “The reason is because he made the effort,” McCullough said. “The CFO gave the guy an hour of his time, and he was flattered. It was about trust: again, there was no spin. It was, this is why we need you and this is the direction we’re going in.”

Master deal-making. The key here is an ability to identify opportunities and risks, not just negotiating deals. Several of the CFOs McCullough interviewed spoke of a mind-shift they experienced at some point in their careers, when they began to focus on creating opportunities rather than simply solving problems.

That’s not to diminish the importance of and skill involved in solving problems, he said, but their “world suddenly changed” when they began thinking of their purpose as creating an opportunity for growth, for example.

Building elite teams. McCullough often heard from the CFOs about the need to “build a team for where you want [the company] to go, not where you are today. Think three to five years ahead.” Team-building skill is especially vital today, he added, given the shortage of talent “in places where the innovation economy dominates” and the proclivity of “20-somethings” to switch jobs every couple of years.

Maintaining financial expertise. McCullough noted that every year recently there have been more financial restatements than the previous year. “Sometimes there is a lack of focus on the financial accuracy part of the job,” he said. “It’s less sexy than all the wonderful strategic, cross-functional, and operational responsibilities. But while ‘GAAP may be crap,’ as a former boss of mine used to say, never forget that the F in CFO is for financial.”

SOURCE

CFOs are now expected to master the art of double-tasking. They are responsible not only for overseeing day-to-day operations and capital structure, but also providing sound advice and leadership to drive the strategy of the entire business as well as individual organizations. Very quickly, CFOs have acquired intimate knowledge of what every stakeholder, executive, partner, and customer is thinking, as well as the ability to predict what’s on the horizon in the economy.

Such keen insight brings great responsibility. “If you’re not on the business-winning side and don’t understand how you can drive more value out of your portfolio, you’re not influencing the future [or] the share price,” said Julian Whitehead, CFO of Airbus Defence and Space.

Julian’s observation, as quoted in the Oxford Economics’ report “How Finance Leadership Pays Off,” sponsored by SAP, signifies a heavy burden. Yet CFOs realize that this expectation opens up an opportunity to guide the business towards a higher purpose that goes beyond just making money. In fact, most high-performing finance leaders have been encouraged to take this path after Nielsen reported that 66% of consumers worldwide will pay more for sustainable brands and 62% prefer to buy from brands they trust.

Delivering purpose-driven expectations requires an appreciation of digital capabilities

Considering that CFOs are stepping up their game to become influential strategic leaders, it should come as no surprise that top companies such as Spirit Airlines, Cardinal Health, and Expedia have promoted their top finance leaders to the CEO position. Increasingly, CFOs are expected to understand operational risks and market opportunities, and demonstrate the financial acumen and talent to help their teams turn massive volumes of data into a competitive insight. They can then set the direction that enables their companies to optimize profitability, innovate groundbreaking business models, and guide all operating and administrative departments to support the new road map.

Perhaps more critical is the adoption of emerging technology. Now, this doesn’t mean that CFOs must understand the inner workings of IT systems, algorithms, and high-speed processing. But they still should know how to leverage the technology in a way that improves and accelerates everyday finance and operational processes, business activities, and executive decision-making.

Using digital capabilities to draw conclusions from Big Data, CFOs, and their supporting teams can help the company run more sustainable practices and deliver a level of transparency that earns consumer trust. Consider predictive analytics that leverage machine learning and data residing in a central ERP system with embedded value chain networks. Most functions use only the data that is directly relevant to them; however, the finance area pulls together every piece of financial and non-financial data and analyzes it. This approach allows CFOs to determine how one organization impacts not only the performance of another, but also its potential impact on the environment, social stability, and economic growth.

The use of the technology allows CFOs, for example, to direct HR to hire new salespeople to cover a specific region after reviewing marketing leads, customer service tickets and feedback, social media interactions, sales projections, and production orders in a predicted forecast. Meanwhile, they can make connections between procurement orders, manufacturing quality checks, and returned inventory to investigate areas that could benefit from greater energy efficiency, the removal of suppliers with unethical practices, and environmentally safe product design or formulation.

Digitalization matters because purposeful actions matter

Purpose has emerged as a top business priority that requires tangible action, not lip service. CFOs must understand this new reality and provide consistent leadership and adaptive strategies that will successfully address the needs of a rapidly, ever-changing marketplace while ensuring that revenue generation and purpose always complement each other. Take a look at the leading “integrated report“ that will show that exact correlation between sustainability and performance.

SOURCE

All at once, it seems, corporate treasury departments are embracing the distributed-ledger technology to manage FX more efficiently, among other reasons.

To fully appreciate what blockchain technology can bring to a corporate treasury department, start by setting aside all preconceptions about cryptocurrencies. Although the two technologies share similar trajectories, they are distinct, each with its own risks and rewards.

In the case of blockchain, or distributed-ledger technology (DLT), the potential rewards include enhanced efficiency, collaboration, transparency, and trust. In the case of corporate foreign exchange (FX) programs, blockchain provides a way to leverage those rewards to gain greater visibility into currency exposures and FX-related losses, which cost multinationals billions of dollars each year.

Finance executives initially were slow to warm to the idea of blockchain (just as they have been slow to embrace cryptocurrencies). In fact, less than a year ago, the Association for Financial Professionals (AFP) found that only 1% of survey respondents were using blockchain/distributed ledger technology. Fifty-one percent of respondents said they had no plans to do so.

By January 2018, attitudes had changed dramatically. When AFP surveyed financial executives at the start of the year, 77% of respondents said DLT was “actively being evaluated” within their organizations. In fact, 23% said their companies were already using blockchain to manage risk within the treasury and finance.

(The survey also found that among the smorgasbord of all cutting-edge technologies financial professionals now can consider — AI, robotic process automation and others — distributed ledger/blockchain “has the lowest perceived risk in terms of exposure to any new risks.”)

This transformation should not come as a complete surprise. As has been widely reported, many leading corporations are now taking blockchain seriously. JPMorgan Chase has invested more than $2 billion into building a blockchain platform. Barclays and Bank of America Merrill Lynch made similar investments. So have IBM and Microsoft as well as Toyota Financial Services. And Citigroup and Nasdaq are working together to link Citi’s business payments services directly to Nasdaq’s blockchain framework.

Why the Sudden Embrace of Blockchain?

The very fact that so many corporate heavyweights are investing in blockchain should put to rest any notion that blockchain/distributed ledger is a “bubble.” It’s not; the technology — in its current form as well as its inevitable future permutations — is here to stay. The question CFOs must now ask themselves is how they can best leverage it. To answer that question, it’s important to understand blockchain/distributed ledger and what it can do.

Blockchain technology can enhance and secure any collaborative activity, either inside a single organization or across a multitude of companies or entities. It’s an open-source, peer-to-peer database (consisting of “blocks” of data) where all stakeholders — each person or entity with an interest or stake in the transaction, project, or contract — has full, real-time access and full visibility into every interaction (or block) occurring in the chain.

The “distributed” nature of the ledger is what makes it unique. It means the ledger resides across a network of computers. No one individual “owns” a blockchain. Instead, stakeholders control only the blocks of data they affect. But collectively, all stakeholders can monitor all transactions. This facilitates full visibility and eliminates the need for intermediaries and middlemen. Every transaction is timestamped and fully transparent. This infuses the entire ecosystem with trust, efficiency, and compliance.

So, deliveries and receipts within supply chains are recorded as they happen. Financial transactions can be completed immediately, free of the many fees that traditional financial institutions charge (which explains why so many banks and global transaction facilitator SWIFT has taken such a strong interest in blockchain).

What It Means for CFOs and FX

Imagine how this real-time efficiency and transparency could improve the day-to-day functions of a corporate treasury team. Time differences that now hinder global payments would be immaterial. Reconciliation of intercompany accounts would take milliseconds rather than days. Payments would be received and recorded immediately. Cross-border currency exchanges would be instantaneous.

Consider, as well, what these enhancements would mean specifically for treasury managers tasked with staying ahead of global currency volatility. Accounting for $5 trillion in transactions each day, FX represents the world’s biggest market. It is also the most volatile. Corporate treasury managers are expected to manage their company’s massive currency exposures, hedging them against global volatility and ever-changing rate environments.

In fact, most treasury practitioners rely on predominantly manual FX programs to collect data from corporate entities around the globe. According to the “2018 AFP Risk Survey Report,” 97% of financial professionals “report that spreadsheets are currently being used at their companies to manage risk.”

Ironically, only 28% of respondents think that’s efficient. Why the disconnect? AFP concluded that since treasury and finance professionals view spreadsheets as “tried and tested,” they perceive them as less risky than new technologies.

But while they may be “tried and tested,” they’re hardly efficient. Just look at the most recent FX-related losses. In a single quarter, North American and European companies lost $5.27 billion due to ineffective currency management programs and incomplete exposure data.

Finance executives can take steps to curtail those losses, by replacing outmoded legacy programs with the efficient, secure, and transparent technologies such as DLT. The broader visibility enabled by blockchain would empower corporations to quickly see currency risk and hedge accordingly.

FX teams could also quickly leverage interest-rate differentials between one currency and another. Although it’s still in its infancy, blockchain technology offers the potential to help multinationals introduce more efficient bookkeeping.

Blockchain in its current state is far from perfect, but it will continue to evolve. The global economy is notoriously unforgiving when it comes to organizations that fail to recognize the writing on the wall.

As such, successful corporations must evolve as well. New regulations, new technology and changing consumer demand require it. And smart CFOs will be the ones that leverage the latest technologies to better manage their FX programs.

SOURCE

Revenue recognition is one of the accounting topics most examined by investors and regulators.

The core principle of the Financial Accounting Standards Board’s new revenue recognition standard is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to receive in exchange for those goods or services.

The revenue standard applies to all contracts with customers, except contracts within the scope of other standards, such as leases, insurance and financial instruments. Arrangements may also include elements that are partly within the scope of other standards and partly within the scope of the revenue standard. The elements that are accounted for under other standards are separated and accounted for under those standards. This is accomplished by a five-step process, as follows:

Step 1: Identify the Contract(s) with a Customer

Generally, any agreement that creates legally enforceable rights and obligations meets the definition of a contract. A contract creates legally enforceable rights and obligations, and meets all of the following criteria:

• Approval and commitment of the parties and are committed to satisfying their respective obligations.

• Identification of the rights of each party regarding the goods or services to be transferred.

• Identification of the payment terms for the goods and services to be transferred.

• The contract has commercial substance: the risk and timing of the entity’s future cash flows are expected to change as a result of the contract.

• It is probable that the entity will collect the consideration, to which it will be entitled in exchange for the goods or services that will be transferred to the customer. Only the customer’s ability and intention to pay are considered in evaluating whether collectability is probable.

Contracts can be oral, written, or implied by the entity’s customary business practices and written accounting policies. As part of identifying contracts with customers, management must also consider whether more than one contract with a customer should be combined and how to account for any subsequent modifications. If the contract meets the five criteria at inception, the entity will not reassess the existence of a contract unless there is a significant change in the facts.

If a contract does not meet the five criteria at inception, the entity needs to continue to assess whether or not a contract exists. Furthermore, if a contract does not meet the five criteria, but the entity has received consideration, revenue can be recognized when either the entity has no further obligation to transfer goods or services and all or substantially all consideration promised has been paid and is not refundable, or the contract has been terminated and any consideration already received from the customer is nonrefundable.

Step 2: Identify the Separate Performance Obligations in the Contract

Performance obligations are identified as having both of the following characteristics: each distinct item would meet the criteria for being satisfied over time and the same method would be used to measure the progress toward complete satisfaction of the performance obligation.

A good or service is distinct if both of the following criteria are met:

• The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer.

• The vendor’s promise to transfer the good or service is separately identifiable from other promises in the contract.

If there is more than one good or service to be transferred, then the entity should account for each as a separate performance obligation only if the good or service is either:

• A good or service (or a bundle of goods and services) that is distinct.

• A series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer.

A good or service that is not distinct should be combined with other promised goods or services until the entity identifies a bundle of goods or services that is distinct.

Step 3: Determine the Transaction Price

The transaction price includes only those amounts to which the entity has rights under the present contract. Management must take into account consideration that is variable, noncash consideration, and amounts payable to a customer to determine the transaction price. Management also needs to assess whether a significant financing component exists in arrangements with customers.

It is important to note that the transaction price excludes amounts collected on behalf of third parties such as sales taxes. An entity should also consider:

• Variable consideration: The consideration promised may include both fixed and variable components. Variable consideration is common and takes various forms, including (but not limited to) discounts, price concessions, rebates, refunds, credits, incentives, bonuses or penalties, royalties, and consideration an entity will receive that is contingent on a future event occurring or not occurring. The amount of variable consideration included in the transaction price may be constrained in certain situations. An entity should utilize either the expected value method or the most likely value method.

• Constraining estimates of variable consideration: The amount of variable consideration that can be included in the transaction price is limited to only those amounts for which it is probable that a significant reversal of the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variability is resolved.

• Significant financing component: An entity is required to adjust the promised amount of consideration for the effects of the time value of money if the timing of payments agreed to by the parties to the contract (explicitly or implicitly) provides the customer or the entity with a significant benefit of financing the transfer of goods and services to the customer. In those circumstances, the contract contains a significant financing component.

• Noncash consideration: An entity should measure the noncash consideration at fair value. If fair value cannot be reasonably estimated, then the consideration is measured by reference to the standalone selling price of the promised goods and services. The revenue standard specifies that the measurement date for noncash consideration is contract inception.

• Consideration payable to the customer: If an entity pays consideration to a customer (such as cash, credit or some other items that reduce amounts owed to the entity by a customer), the entity should account for the payment as a reduction of the transaction price or as a payment for a distinct good or service, or both.

Step 4: Allocate the Transaction Price to Separate Performance Obligations in the Contract

The transaction price in an arrangement must be allocated to all separate performance obligations in proportion to the relative standalone selling price of the good or service underlying each of those performance obligations at contract inception. The best evidence of a standalone selling price is the price an entity charges for that good or service when the entity sells it separately in similar circumstances to similar customers. If a standalone selling price is not available, the entity will estimate it by maximizing the use of observable inputs consistent with the methods used for similar transactions with similar customers.

Acceptable methods for estimating the standalone selling price of a good or service include, but are not limited to, the following:

• Adjusted market assessment approach: A market assessment approach considers the market in which the good or service is sold and estimates the price that a customer in that market would be willing to pay. That approach also might include referring to prices from the entity’s competitors for similar goods or services and adjusting those prices as necessary to reflect the entity’s costs and margins.

• Expected cost plus a margin approach: This would be an entity’s expected costs plus an entity’s expected margin. Both direct and indirect costs should be considered, but judgment is needed to determine the extent of costs that should be included.

• Residual approach, in limited circumstances: An entity may estimate the standalone selling price in reference to the total transaction price, minus the sum of the observable standalone selling prices of other goods and services promised in the contract.

A combination of methods may be used to estimate the standalone selling prices if two or more of those goods or services have highly variable or uncertain standalone selling prices. Discounts or variable consideration that relates entirely to one performance obligation should be considered and possibly allocated to just that performance obligation, or just to some of the performance obligations instead of all performance obligations in the contract.

Step 5: Recognize Revenue when the Entity Satisfies Each Performance Obligation

Revenue is recognized when or as each performance obligation is satisfied by transferring control of a promised good or service to a customer. Control represents the ability to direct the use of, and receive the benefits from, a good or service. Control either transfers over time or at a point in time, which affects when revenue is recorded. Indicators of obtaining control by the customer include the customer presently is obligated to pay, has legal title, has physical possession, and has the significant risks and rewards of ownership of the asset.

An entity transfers control of a good or service over time if one of the following criteria is met:

• The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs.

• The entity’s performance creates or enhances an asset (e.g., work in process) that the customer controls as the asset is created or enhanced.

• The entity’s performance does not create an asset with an alternative use to the entity, and the entity is entitled to payment for performance completed to date.

The amount of revenue recognized for goods and services satisfied over time should be determined using a consistent method of measuring the progress toward completion.

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A company providing souped-up sentiment analyses for earnings calls and central-bank speeches spots the trend.

The CFO is often thought of as a company’s calm, steady voice of reason amid all the noise generated by industry and market dynamics. And, it turns out, the more visible a finance chief is, the more likely it is that such a reliable presence will be reflected in the company’s stock price.

That’s one interpretation of data provided by Prattle, a small, young company looking to make a big splash in the investment research arena.

In late 2016, Prattle launched its first product, an advanced, quantified sentiment analysis of speeches and other communications by the U.S. Federal Reserve Bank and 19 other central banks worldwide. Its clients — asset managers, hedge funds, investment banks — use the data to help guide their investment decisions.

The algorithms that calculate positive or negative scores for each speech, in terms of their predicted impact on subsequent short-term market movements of various asset classes, are based on speech patterns. The analysis looks at words, sentences, phrases, and the relationships between them to generate a score indicating the speech’s relative dovish or hawkish quality.

That’s not all. Using machine learning and natural language processing, Prattle analyzes how the language patterns in a speech differ from those the speaker used in previous addresses. The analysis tracks how markets moved after the earlier speeches and, if language patterns are different in the new speech, adjusts the expected market movements accordingly. (The analyses are typically available within minutes after a speech.)

In this way, with each new speech the algorithms grow more accurate, according to Brian Peterson, Prattle’s chief operating officer and de facto finance chief.

A convenient example of a language subtlety that Prattle takes into account involves usage of the words “moderate” and “modest.” The company’s founders discovered that it makes a huge difference in financial markets how people use those words, says Peterson.

“In a straight-up sentiment analysis, they could both be positive and they’d have the same weighting,” he says. “But in financial market settings, they can have significantly different meanings. And then, factoring in how individual people use those words in the context of all their speeches can further differentiate whether the words are positive and at what level.”

Prattle upped its game considerably last September, when it began selling access to sentiment analyses for the earnings calls of 3,000 publicly traded U.S. companies. The database includes only companies that have been public for four years, allowing a history of earnings calls to be established.

A clear trend Prattle noticed is that when a company’s CFO speaks for a larger percentage of the call, compared with the CEO, there is less short-term volatility in the company stock price (see the graph below).

The trend holds true for both positive and negative volatility. So, while a relatively verbose CFO is associated with a more predictable stock price, there is no association with the direction of price movement.

Prattle doesn’t point to any clear cause for the trend. However, one may surmise that investors simply react with more volatility to CEOs’ comments, no matter what they are, than to the comments of finance chiefs.

More specific scenarios underscore the point. For example, some companies that typically experience relatively high stock-price volatility may naturally allocate more air time to the CEO, giving greater weight to any explanations for the volatility.

Also, it’s fairly common for CFOs to spend much of their air time on earnings calls simply reciting the newly published financial results, which may not be expected to trigger investor behavior.

Meanwhile, how is Prattle’s methodology working out? A third-party research firm, Lucena Quantitative Analytics, performed portfolio backtests using Prattle data to guide trading strategies. The backtests, which factored in realistic trading conditions such as transaction costs, involved “buying” stocks of companies that Prattle scored as positive and holding them for one month before “selling.”

Applying that strategy to stocks included in the Dow Jones Industrial Average from the beginning of 2013 through mid-September 2017 resulted in a 112% return premium over the Dow’s actual performance. The same strategy, applied to the Russell 1000 stocks from the beginning of 2012 through mid-September 2017, scored a 44% return premium.

The Sharpe ratios for the two portfolios, representing risk-adjusted return, were 1.33 and 1.46 ­— “huge returns over the benchmarks,” says Peterson.

“At its core, the typical sentiment analysis takes all the positive and negative words in a communication, and the net difference is the score,” Peterson says. “Our version is much more mature.”

Prattle may not need many clients to profit from its groundbreaking products. The company’s main asset is the algorithms, and they are developed and refined by a small number of people. Total headcount is just 18. Startup funds were negligible, although last year the company landed $3.3 million in seed funding for its expansion into equities.

The company is currently working toward expanding its analyses to company press releases and stocks listed internationally.

SOURCE

We’ve just begun to scratch the surface of the impact of machine learning on the enterprise. Organizations are applying machine learning algorithms to business processes to automate manual tasks and identify patterns in transactional data to drive strategic decisions. Many applications are focused on efficiency and automation, but that trend is shifting. More and more businesses are using machine learning to develop disruptive new business models.

What does this mean for your organization? Plenty, according to two experts during a recent Deloitte and ASUG Webinar, Guide to the Machine Learning Galaxy: How Your ERP Knowledge Enables Value-Driven Intelligent Processes. Leading the Webinar from Deloitte Consulting LLP were Darwin Deano, principal and chief officer for SAP Leonardo and Denise McGuigan, senior manager and Deloitte reimagine platform leader for Lights Out Finance. Darwin and Denise explained emerging trends, why enterprise resource planning (ERP) software is a hotbed for machine learning, and the potential impact on the workforce.

Making room for your digital twin

Machine learning unleashes the greatest possibilities for the enterprise by amplifying the best of human capabilities. It’s not about replacing humans; it’s about coexistence. In the future, there will be greater opportunities for people who can work with machines, take the information that’s produced, and do something meaningful with it.

Consider the concept of a digital twin. The digital twin is essentially the replication of a process system. In finance, payables transactions and record-to-report tasks require a copious number of journal entries that take a lot of time to input. Those tasks could all be reduced or even eliminated by a machine learning bot.

As a digital twin takes on transactional processes, individuals who performed those tasks are then able to focus their efforts on activities that make better use of their human skills by driving actionable insights. They would need to work alongside the digital twin and activate the resulting insight and analytics.

Unleashing data-driven ERP power

Before we give too much credit to the enabling power of machine learning, keep in mind that it all starts and ends with data. Machine learning is only as good as the algorithm, the algorithm is only as good as the data, and nobody knows the data about your core business better than the people who understand your ERP. Therefore, your people play key roles in identifying opportunities and driving the value of machine learning in your enterprise.

There are emerging roles across business and IT that will be critical to the success of not only designing and implementing, but operating, sustaining, and continuously improving investments in machine learning. Two of these roles are orchestrators and guardians.

Identifying orchestrators and guardians – the new stars

Before the advent of machine learning, organizations valued individual skills with a lot of emphasis on specialization. With machine learning, that emphasis shifts to the people who can put it all together – the orchestrators. Orchestrators help realize the value of machine learning. For example, a finance manager is a classic orchestrator. Finance managers know how order-to-cash flows into the central finance operation and how each individual department interacts with finance. For any machine learning scenario in finance, this manager would help put it all together.

The guardians monitor the effectiveness of machine learning to validate that your model works and to address any uncertainty about machine-driven actions. They’ll safeguard the audit trail, assess the evolution of data, and determine what adjustments need to be made. A supply chain director is a very good guardian who can filter out extraneous noise and verify the merits of machine learning scenarios. These roles and constructs will be increasingly important going forward.

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The recent Q1 Hiring Forecast from Brilliant, a Chicago-based search, staffing, and management resources firm specializing in accounting, finance, and information technology, indicates an increase in open accounting, finance, and information technology (IT) positions heading into the first quarter of 2018.

The Q1 Hiring Forecast, published last month, also indicates businesses are planning to increase their overall hiring plans in the next 12 months, especially in IT.

The Brilliant Q1 2018 Hiring Forecast, produced in partnership with Dr. Richard Curtin, Director of Consumer Surveys at the University of Michigan, Ann Arbor, MI, studies the hiring trends and business factors affecting accounting, finance, and information technology professionals for the greater Chicago and south Florida labor markets.

Brilliant President Jeff Mariola says, “Our study brings important insight into the future of the accounting, finance, and information technology professions, and the overall health of the labor market. We remain optimistic that consistent and elevated numbers of open positions and plans to hire indicate continued growth at least in the near term.”

The study found 40 percent of businesses are reporting unfilled jobs in accounting and finance, and 28 percent are reporting openings in IT. These numbers have increased from last quarter, especially for IT, which marked the highest percentage of openings reported in the past year.

Last quarter, the study found 38 percent of businesses with accounting and finance openings, and 19 percent with IT vacancies.

“Four-in-10 human resources professionals and hiring managers reported unfilled jobs in accounting and finance, and nearly 1-in-3 reported openings for IT,” Curtain explains. “While the overall number of open accounting and finance jobs exceeded IT positions, the change during the past year was dominated by a sharp rise in the number of available IT positions.”

The greatest number of openings in the accounting and finance professions, according to the forecast, were found in corporate accounting roles, where financial analysts, tax and general accountants, and internal auditors are in greatest demand.

Mariola says he believes these trends from the Chicago and Florida markets will reflect national hiring trends for all of these professions during the first quarter of 2018.

“Recent national surveys and forecasts from companies like CareerBuilder and Indeed support our forecast that hiring for professionals will see continued demand. Furthermore, the Big 4 firms are actively hiring new graduates and experienced professionals which puts a strain on supply,” Mariola said.

Mariola believes demand is increasing in the accounting profession due to overall growth of the economy. “As companies continue to grow their businesses, the need for talented accounting professionals increases. More and more companies understand the value of having good talent in their accounting team,” Mariola says.

Increased openings in the accounting profession may sound like a mixed blessing for accounting firm leaders who are still struggling to fill open position due to the profession’s ongoing talent shortage, but, Mariola says, there are indicators relief may be on the horizon for those hoping to fill accounting positions.

“Accounting graduate numbers have finally begun to improve over the last few years,” Mariola says. In the past, Mariola says, the CPA 150 hour requirement did adversely impact the number of students pursuing a degree in accounting, as many students chose finance, computer science, and engineering over an accounting major due to the increased educational requirements.

“Now, however, with such strong demand for new accounting graduates and CPAs,” Mariola says, “we are seeing some level of growth among accounting graduates.”

The Brilliant Q1 2018 Hiring Forecast survey was conducted between October 24, 2017, and November 6, 2017. Close to 300 human resources professionals and hiring managers responsible for hiring accounting, finance and/or information technology professionals within industries such as manufacturing, distribution, health care, consumer products, financial services, professional services, retail, real estate, insurance, technology, media, software, nonprofit organizations and other industries participated in the study.

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When I think of what’s top of mind for me as a CFO in 2018, one word comes to mind—change. I see more change happening than ever before in my 30+ years in finance across the political, economic, and regulatory landscape. Now more than ever CFOs and their teams must be able to quickly adapt and respond to change as it happens.

This year could bring significant legislative policy changes driven by the current administration related to immigration and healthcare, and of course, we will also see the impact of the recent passage of the tax reform bill.

At the same time, companies face some of the most significant financial regulatory changes in decades. The new revenue recognition standards—ASC 606/IFRS 15—take effect for most public companies this year, and could have broad implications, including potentially impacting financial statements. Also coming down the pike are new lease accounting standards, set to take effect for public companies in 2019. Adopting these changes requires a great deal of preparation and work, and will be a top priority for finance organizations.

CFOs are often in a position to not just embrace but also drive change because of the unique business and financial perspectives we bring to the table.

CFOs and their teams must be able to help their organizations navigate all of the broad-sweeping changes on the horizon. So how do we do that? The key is both organizational and individual agility.

I define agility in several different ways. First, it’s about having a flexible and open mindset. Leadership must be willing to adjust and readjust, and this is especially true for CFOs. We’re often in a position to not just embrace but also drive change because of the unique business and financial perspectives we bring to the table. For example, our teams should take a leading role when our companies are assessing potential business changes, by modeling out those changes, determining the impact to the company, and talking to investors about our vision and the potential impact. Furthermore, finance leaders must actively encourage and nurture this open mindset on their teams, not only through intentional hiring and open discussion about what is expected but most importantly through leading by example.

One area where agility is especially critical is in the budgeting and forecasting process. The business environment is constantly changing, and traditional planning approaches such as static annual budgets no longer make sense. Planning must reflect the pace of business today, and be a continuous and collaborative process that gives organizations the flexibility to react to changes and scale up and down in areas based on business outcomes. This can make a big difference when it comes to reducing risks and taking advantage of new opportunities.

But for continuous planning to work, it must be embraced by the entire organization, not just finance. All areas of the business must be prepared to quickly change direction mid-stream and adjust hiring plans and spend levels as required.

Finally, having agile technology and systems play a big part in being able to adapt to change—whether it’s modifying business processes to support regulatory changes, setting up new entities for expansion, or getting the data and insights you need to adjust plans. Without these capabilities, too much time is spent on manual efforts and administrative tasks that make it difficult to move quickly and be strategic.

While constant change can be daunting and difficult, it can also be an opportunity to improve, grow, and evolve into something better. Having the ability to adapt and respond—whether it’s your mindset, the way you plan, or the technology you use—will help ready you and your organization for the road ahead, wherever it may lead.

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Now that we’ve closed out 2017 and are looking forward to a brand-new year, it’s helpful to take stock of where we’ve been and what we’d like to accomplish, and in doing so, be mindful of what changes may lie ahead. While it’s easier to foresee incremental changes and improvements in the short term, it’s difficult to pinpoint when the world of payables will reach a tipping point.

With that in mind, and with a nod to the New Year’s Eve just passed, here is my list of the top 6 payables changes and trends to expect in 2018:

1. Payables finds a strategic purpose

We’ve been talking for years, if not decades, about payables becoming a strategic function. I would argue that we’ve met that challenge, as the rise of discounting and supply chain finance have helped to highlight the vast working-capital opportunity from a quickly approved invoice. Those initiatives, when combined with intelligent payment terms management, have dramatically improved a buying organization’s financial health. But what comes next?

I believe that 2018 will be the year that more companies look at the potential for payables to positively impact the other side of trading relationships: supplier health. Supply chain finance will play a major role, offering capital to suppliers at rates far superior to what they can likely obtain from loans, lines of credit, or factoring programs. As buyers’ financial health improves, the natural question is “where do we invest our cash?” As they look at long-term sustainability of their business and supply chains, one answer is to invest in their supply base, bolstering relationships and lowering fulfillment risk. It’s remarkable to think of what’s possible when you can process invoices in a timely manner.

2. Standardization picks up steam

Different systems store and communicate information differently. This simple fact explains the complexity of systems integration and the resulting solution deployment delays. We’ve seen advances in this area in the past, with the advent of common data formats like eXtensible Business Reporting Language (XBRL). We’re also seeing progress in the European Union (EU) with the continued development of PEPPOL. With the backing of the EU General Assembly, this initiative could really make a standard document language a reality. if it makes substantial progress in the EU, I would expect this initiative to spread across other geographies as well.

3. Due diligence gets its due

We live in a complex and complicated world in which companies must pay close attention to identifying and certifying the recipients of payments. Know Your Customer (KYC), Office of Foreign Asset Control (OFAC), Anti-Money Laundering (AML), and related checks are vital, though not always executed with the diligence that they require. Unlike other items on this list, this isn’t a technology-driven change – though technology plays a major role in supporting an enterprise’s ability to meet its obligations. I expect 2018 to see increased governmental vigilance to ensure compliance with these checks, as regulators keep their focus on the sources and destinations of funds in both domestic and international commerce.

4. Automation continues, and AI begins

There may be no payables topic written about more often, or for a longer time, than automation of the invoice receipt and reconciliation process. Improving the speed with which invoices are received and their data entered into financial systems will continue for the foreseeable future. I expect to see escalating volumes of invoices transmitted over business networks, and continued investment in technologies for handling paper and PDF-based invoices.

None of this is new, of course, so let’s make a real prediction: 2018 will be the year when artificial intelligence (AI) moves to the forefront of invoice automation. We’ve already seen this technology applied to the related process of accounts-receivable cash application. Invoice reconciliation and matching is a logical next step. When compared to optical character recognition applications, the key difference is the ability to train a system so that it learns over time. Expect to see real progress here, largely automating the process of accurately extracting invoice information—and handling exceptions that occur—in a way that we haven’t seen before.

5. Workforce planning ramps up

Picking up on the idea of new technologies like AI impacting not just the speed of payables processing, but also the nature of what needs to be done, workforce planning will ramp up. I see 2018 as the year when companies begin planning in earnest for the job roles and tasks that humans will fulfill in the future. Much as we saw with general automation, some tasks will be completed entirely by systems. That will create opportunities for employees to take on new or expanded responsibilities, for which they may need additional training. When looking specifically at AI and machine learning, new tasks will involve preparing data and reviewing results to train these new systems to learn for themselves how to identify important information and handle exceptions.

6. Blockchain comes of age

We’ve covered a wide array of topics so far, but I’d be remiss (and correctly called out) if I didn’t mention blockchain in a discussion of what’s to come. Some technologies help us deal with our current situation more efficiently and effectively. A great example of that is applying AI to invoice processing, as mentioned above. Truly innovative technologies, however, can completely change the process itself. That’s why I see so much promise in blockchain, and in the “smart contracts” that they enable.

Here’s why: With a smart contract, the contract isn’t text on a piece of paper or in a Word document; it’s a set of code containing information about the trading partners working together and the rules that govern their relationship. A purchase order is more code, signifying a request for goods or services that adheres to the contract’s rules. A receipt is simply more code registering completed delivery, which can trigger an agreed-upon payment as defined in those rules. In essence, smart contracts can bring Evaluated Receipt Settlement (ERS) to every transaction – potentially. There’s still work to be done here, and there’s still a human element throughout the process as employees acknowledge receipt, conduct and record the results of quality assessments, and so on. At its core, however, this application of blockchain technology really could reimagine the source-to-settle process.

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