March 2023

SGV thought leadership on pressing issues faced by chief executives in today’s economic landscape. Articles are published every Monday in the Economy section of the BusinessWorld newspaper.
27 March 2023 Kristopher S. Catalan and Dwayne G. Ignacio

Effective internal controls: A vital enabler for private companies

Change is inevitable, and we know this now more than ever. The technological disruptions that were hastened by the exigencies of the pandemic have now become widely accepted and mainstream, with such changes continuing to grow more rapidly each day.The pace of change in organizations has also accelerated. As a response to risk events such as cybersecurity breaches and fraud, especially during the pandemic, organizations had to quickly reinforce controls to protect their assets and manage compliance, reputational and legal risks. Regulatory activities have increased over the last several years in response to these events, and recently, as a result of corporate failures from previous decades, have become a race to adopt a compliance-focused mindset.With the pandemic slowing down, some companies are now re-aligning risk management with changes in business models and emerging risks in the face of disruption and technological advancements. This is challenging for private companies, especially for small- and medium-sized enterprises (SMEs), which are recovering lost growth and managing transitions to more resilient business and operating models while simultaneously meeting new demands from internal and external stakeholders.Private companies have an opportunity to clarify or reinforce the roles and responsibilities within their internal control environment, stressing that management is responsible for internal controls. Enhancing internal controls by formalizing ad hoc practices, creating units or departments that will complement the monitoring functions of existing business units (such as the compliance department or risk management unit) or strengthening internal audit are some ways to respond to the emerging risks. Controls need to respond to the challenges of ever-changing business and regulatory landscapes. Private companies cannot just focus on growth today; they need to level up to ensure they protect their future.CREATING A WELL-DEFINED GOVERNANCE STRUCTUREClear reporting lines and a strong governance structure play important roles in any organization’s internal control environment. A well-defined governance structure provides an end-to-end view of stakeholder involvement by clearly assigning process ownership and accountabilities, identifying the roles and those responsible for responding to risks, and ensuring that controls are working. It also describes how performance ratings of the control owners are linked to the effectiveness of the controls for which they are responsible.Since maintaining a strong internal control environment normally involves people who work in various functions within the organization, the governance structure of a private company should be designed such that it enables effective coordination and communication across various business units. Having a well-defined governance structure in place also facilitates the timely reporting and analysis of any observations and findings on the effectiveness of controls. This in turn helps ensure that any weaknesses and deficiencies are identified, appropriate risk and impact assessments are performed, and remedial action is taken and implemented.PERIODIC REASSESSMENTWhen governance structures and internal controls are not regularly reassessed, private companies may struggle to keep up with the pace of disruption and change. With today’s dynamic operating environments, controls that worked in the past may no longer be as effective today.As complexity and disruption continue to rise in business, performing periodic reassessments enables private companies to evaluate whether the owners and management still have the appropriate level of oversight over business processes. It also helps private companies assess whether their current structure still fosters a culture of risk awareness and whether internal controls still work as effectively as intended. By periodically reassessing internal controls and their governance framework, private companies can also identify opportunities for improvement and optimization. This includes automating certain processes and controls as well as updating the controls mix in response to changes in the business.AGILE RESPONSEPrivate companies should stay on top of the changes in business, regulatory, tax and financial reporting requirements, and weigh any possible resulting risks to the organization. It is important that private companies have a process to identify these changes early and communicate them to those responsible for related processes and controls.By being proactive, private companies can timely assess the impact of changing regulatory requirements on various functions across the organization, such as governance, technology, people, policy, processes and controls. This also helps facilitate an appropriate interpretation of the changes and their application to the business, enabling management to evaluate whether the current internal control environment remains adequately equipped to respond to the changes.Private companies can stay abreast of these changes by regularly monitoring updates from organizations such as the Philippine Financial and Sustainability Reporting Standards Council (FSRSC) for accounting standard updates, the Securities and Exchange Commission (SEC), the Bureau of Internal Revenue (BIR) and other regulators for new developments and updated regulations. Private companies need to empower their C-suites, such as chief financial officers, chief risk officers or chief legal officers, to proactively discuss changes with the board and craft related action plans. When evaluating the impact that the changes have on the organization, private companies should also closely coordinate and work with their external advisors, experts and even external auditors to ensure that a holistic view of the impact is being considered.TALENT RETENTION AND UPSKILLINGThe success of sustaining an effective control environment also depends on the resources involved. Given the pace of change, private companies may need a workforce with a broad range of skills and competence. It is therefore important for private companies to consider whether current skillsets in the organization are sufficient in addressing its changing requirements. Given their growth strategies and the anticipated changes in their business, private companies should also consider whether these are the same skillsets they will need in the future to maintain an effective control environment.Any gaps in skills should be evaluated for their impact on the organization. Similarly, the organization should identify solutions that can address gaps, such as expanding the sources of talent and upskilling the current workforce through partnerships with training and learning providers.For private companies that are implementing new processes or migrating manual processes to technology-enabled solutions, it is important that, as part of the transition, the organization also evaluates whether the resources selected to monitor the scope and mix of internal controls continue to possess the necessary skills and competence.BUILDING CONFIDENCE IN INTERNAL CONTROLSThe ability to respond to the challenges of today and the future by identifying and managing risks early is a vital enabler of success for any business regardless of its stage of growth. Since businesses with strong and effective internal control environments are in a better position to timely identify and mitigate risk, it is increasingly important for private companies to build confidence in their internal control environment if they are to succeed in navigating business and industry disruptions. Having effective internal controls, especially on financial reporting, builds confidence in the information that management uses. Suffice it to say, timely and reliable financial information are crucial in making impactful business decisions.Investing now to manage the risks of the present and beyond is as crucial as spending to grow a business. In the long run, a strong and effective governance and internal control framework that is responsive to the changing business and regulatory environments will enable private companies to continually build and strengthen the right foundation to support their growth ambitions, comply with regulations, sustain long-term profitability and protect company value. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co.Kristopher S. Catalan is an assurance partner and the EY private leader of SGV & Co., and Dwayne G. Ignacio is a manager from the Financial Accounting Advisory Services (FAAS) of SGV & Co.

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20 March 2023 Joseph Ian M. Canlas

Accelerating sustainability with emerging technology (Second Part)

Second of two partsThe most recent EY Reimagining Industry Futures Study, which examined executive attitudes and intentions toward 5G, IoT, and other emerging technologies from respondents across 1,325 global firms from various industries, found that organizations are increasingly relying on these emerging technologies to advance their sustainability initiatives. The study offers Chief Information Officers (CIOs) crucial solutions and steps to help their organizations rethink their future and demonstrates that emerging technologies provide advantages that include improved measurement, increased efficiency, and the capacity to create virtual goods and processes.Findings from the study demonstrate significant convergence between business technology and sustainability strategy. The first part of the article discussed emerging technology as sustainability drivers, sustainability-related benefits of modern technology, environmental, social, and governance (ESG) as a key factor in emerging technology investments, enterprise sustainability strategies already benefiting from 5G and IoT, and how sustainability imperatives are changing perspectives towards industry ecosystems and technology suppliers.The second part of this article discusses differing industry perspectives on emerging technology and sustainability, and considerations organizations can make to ensure expectations translate into long-term value creation.DIFFERING INDUSTRY PERSPECTIVESEnergy efficiency and business circularity expectations at the sector level showed notable differences when respondents were asked how they perceive the sustainability benefits of emerging technology. Despite the fact that 46% of respondents across all industries cite decreased energy usage as the top benefit, only 38% of the healthcare sector mentioned this benefit compared to 54% of the automobile sector. Only 35% of executives in government organizations mentioned reduced waste output, compared to 50% of executives in the manufacturing sector.The two industries most likely to point to benefits from emerging technology in gauging the environmental effect of their organizations were government and healthcare with both at 44%. However, evaluating the environmental impact of suppliers is seen as significantly less critical in government and healthcare but as a significant advantage among manufacturing and energy respondents.This is because reporting Scope 3 emissions makes it more necessary than ever. Industries are aware of the potential for new technologies to aid in measuring performance and advancement, but the scope of their ambition varies depending on whether they are concentrating on their own organization or expanding to include their supplier chain.CONSIDERATIONS FOR LONG-TERM VALUE CREATIONESG factors are already influencing the technology investment decisions of several businesses, and sustainability requirements are expected to overpower other considerations when selecting technology vendors.However, CIOs are able to do more to ensure that high expectations result in the production of long-term value through the following points of action:Long-term sustainable advantagesAlthough businesses are aware of the variety of sustainability advantages offered by emerging technologies, it is crucial that technology leaders concentrate their ambitions. Technology leaders have to carefully consider the combined impact of many technologies before prioritizing and phasing the important ESG outcomes they are seeking and selecting the best technologies that can deliver them. Another consideration is including ESG risks as part of the assessment, as ESG risk should be embedded in a company’s enterprise risk management process. In certain instances, these ESG risks can be resolved by utilizing appropriate technologies.Assessing environmental implicationsOrganizations can examine the carbon footprint and energy efficiency of their portfolio of emerging technologies, and make sure their approach directly ties into the overarching goals of the organization for lower IT energy use. They will have to be sure to consider how upgrading their IT to newer standards and technologies will improve sustainability, particularly in how it will impact their carbon footprint and energy efficiency.Sustainability agendas informed by techWorking closely together with other leadership roles and responsibilities will make sure that everyone in the organization is aware of how new technology can accelerate ESG goals. Discussions with the Chief Sustainability Officer (CSO), or equivalent role, will contribute to the proper assessment of the acquisition and use of new technology. This will ensure that existing digital transformation roadmaps continue to serve their intended purposes while sustainable principles take on greater significance as motivating factors.Sustainability as a guiding concept for relationships with technology suppliersCIOs are already giving sustainability capabilities priority when looking for qualities in technology companies. It is critical that businesses prioritize sustainability in their conversations with wider partner networks. Although decisions about vendors and technology investments are currently being made with sustainability in mind, there is still room for more cooperation in the future regarding circular business models and shared ESG objectives.Technological use cases created with sustainability in mindSeveral firms already have established IoT projects, and the rapidly expanding deployment of 5G and edge computing is progressively enhancing these initiatives. Sustainability-aligned results must be incorporated into use cases and deployment methods. To do this, CIOs must think about how new technology use cases might benefit partners, customers, and employees alike. They must also establish the proper feedback loops with technology vendors to make their vision a reality.Using emerging tech to drive sustainable outcomesWith sustainability goals coming under even more intense scrutiny, organizations will have to keep prioritizing the sustainability capabilities and credentials of their technology vendors in the future. CIOs will have to assess the benefits and drawbacks of developing technologies in achieving sustainability goals, creating long-term value and ultimately building a better working world. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Joseph Ian M. Canlas is a consulting partner and part of the Climate Change and Sustainability Services team of SGV & Co.

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13 March 2023 Joseph Ian M. Canlas

Accelerating sustainability with emerging technology (First Part)

First of two partsWith sustainability and digitalization increasingly becoming a business imperative, organizations are relying more and more on 5G, the Internet of Things (IoT), and emerging technologies to advance their sustainability initiatives. The advantages these technologies provide include improved measurement, increased efficiency, and the capacity to create virtual goods and processes.These are some of the key findings of the most recent EY Reimagining Industry Futures Study, which examined executive attitudes and intentions toward 5G, IoT, and other emerging technologies from 1,325 global firms across a range of industries. The study offers Chief Information Officers (CIOs) crucial solutions and steps to help their organizations rethink their future, with findings demonstrating significant convergence between business technology and sustainability strategy.EMERGING TECH AS SUSTAINABILITY DRIVERSMore than half of surveyed businesses at 54% believe that emerging technology can significantly speed up their path toward sustainability, while 41% agree that new technologies play a mostly positive function but with some risks. This knowledge of potential drawbacks is in line with a 2021 study by Science Direct indicating that information and communication technology (ICT) as a whole accounts for 1.8% to 2.8% of greenhouse gas emissions and an even larger percentage of electricity usage.Interestingly, organizations in Asia are more likely to emphasize the importance of new technology than businesses based in Europe (62% versus 49%, respectively). This regional variation may be a result of the historical attention paid by European governments to the potential energy consumption problems posed by data centers and cloud computing.SUSTAINABILITY-RELATED BENEFITS OF EMERGING TECHRespondents believed that emerging technologies such as AI, automation, 5G and IoT can provide a variety of beneficial contributions to long-term sustainability plans. Topping the list of these benefits are decreased energy use, improved measurement and planning, and decreased waste output. The use of virtual services and workforce tools is another significant trend.Only around a quarter of respondents highlighted the advantages of adopting circular business models and renewable energy sources, suggesting that these might be areas that require more attention from the CIO community in the future. Nonetheless, the variety of positive results highlights the multifaceted potential of these technologies from a sustainability perspective.ESG A KEY FACTOR IN EMERGING TECH INVESTMENTWhen considering all emerging technologies, 35% of respondents identified environmental, social, and governance (ESG) as a leading factor in their decision-making, while 41% saw it as important. 5G investments were most likely to involve ESG as a key factor, with IoT close behind.ENTERPRISE SUSTAINABILITY BENEFITING FROM 5G, IoTCompared to other emerging technologies, the ESG implications of 5G and IoT tend to weigh more heavily on business investment decisions. Organizations investing in these two technologies are more likely to already see current benefits compared to other organizations who looked at a broader scope.As a result, 5G and IoT are even more directly tied to many of the ESG advantages associated with emerging technologies as a whole, with 48% highlighting the increased productivity benefits from 5G and IoT, compared to just 22% for all developing technologies. More than half (55%) of those currently investing in 5G and IoT said that these investments assist in improving sustainability planning and forecasting compared to 39% of organizations who believed that the same could be said of emerging technologies in general.SUSTAINABILITY IMPERATIVES CHANGING PERSPECTIVESThe qualities that businesses are looking for in their IT vendors are evolving as sustainability takes center stage in the technology strategy of many CIOs. More than 75% of businesses claimed to give priority to vendors who can explain how emerging technologies affect the environment. Companies also considered that suppliers need to do more to include sustainability into their service offerings.These viewpoints are reflected in the qualities that businesses look for in their technology vendors, where respondents prioritized speed of deployment and execution, end-to-end solution capabilities and sustainability credentials and capabilities. However, corporations predict that sustainability credentials and competencies will be even more sought-after in the future.Business ecosystem strategies that facilitate the acquisition of new skills and competencies through partnerships with vendors and other businesses will also be able to provide sustainability benefits. Eighty percent of businesses concurred that, over the next five years, working with other groups and sectors to develop circular business models will become significantly more crucial.The second part of this article will discuss differing industry perspectives on emerging technology and sustainability, and considerations organizations can make to ensure expectations translate into long-term value creation. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Joseph Ian M. Canlas is a consulting partner and part of the Climate Change and Sustainability Services team of SGV & Co.

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06 March 2023 Luisa Anna E. Hebron

Championing social equity on International Women’s Day

The 2023 International Women’s Day campaign theme on equity seeks to help forge conversations on why “equal opportunities are no longer enough” in today’s world. In recent years, the debate has grown significantly and the words equity and equality are often used interchangeably. In order to champion social equity, it is important for organizations to understand and acknowledge the difference between the two.EQUALITY VS EQUITYEquality is defined as the state of being equal while equity takes the element of justice or fairness into consideration. When conditions and circumstances differ, it is possible that “equal” treatment does not produce “equity.” This distinction is explained with the famous illustration showing people of different heights using boxes to stand on in order to see over a fence; equality means all boxes are identical, but equity means the boxes are the appropriate sizes to permit the people, regardless of their height, the ability to see over the fence.Equity has become an important focal point in Diversity and Inclusiveness campaigns, changing the former D&I to DE&I as socio-political polarization and social inequities continue to increase. However, it is important to note that while an inclusive group is diverse by definition, a diverse group is not always inclusive. An inclusive organization strives for equity and respects, accepts and values differences. Therefore, equity is the means to achieve an inclusive environment and remove impeding equal outcomes.INCORPORATING EQUITY INTO THE D&I STRATEGYLast year, SGV made a conscious effort to explicitly incorporate equity in our overall D&I strategy. It better reflects who we are and how we work. It shows our commitment to shaping environments that support inclusive experiences for our people to thrive. Equity accounts for the uniqueness we all bring to the firm — recognizing that different individuals and social groups have different needs, starting points and opportunities. We want our DE&I journey to enable a sustainable, inclusive environment that advances our culture by continuously looking for opportunities to close our ‘say/do’ gaps and remove fences within the organization.The firm has introduced a series of actions to ensure a safe environment, fair access for all and to make opportunities more equitable. For example, SGV professionals have access to communication channels they can contact to ensure compliance with ethical behaviors within the framework of our Global Code of Conduct and in accordance with our values. We also have a coaching culture; coaching helps us uncover different perspectives and creates a safe space that enables vulnerable and authentic conversations. We are committed to providing the tools, resources, and environment that our people need to be successful and build meaningful careers.As highlighted in a recent EY article, “How EY is working to uplift social equity through authentic storytelling,” EY, of which SGV is a member firm, has been stepping up its existing commitment with specific focus on social equity. This includes the formation of the Global Social Equity Taskforce (GSET) in 2020, which is made up of 40 senior leaders across geographies, functions, and backgrounds. The GSET has developed a suite of actions to advance social equity in the firm and beyond.A global standard for DE&I measurement across all business units was also developed three years ago in the form of the DE&I Tracker, which was created to hold everyone accountable to progress and covers a range of visible and invisible differences. Moreover, all partners and employees have access to an “Inclusive Leadership for ALL” e-learning course within EY, and can also work towards an Inclusion and Belonging Badge through the global upskilling program, EY Badges.To identify gaps and ensure that hidden inequities are uncovered and addressed, EY launched additional global Self-ID capabilities in 2022. This increased the range of personal information choices that people can select in EY HR reporting systems. In addition, listening tools like the EY People Pulse Survey help EY better understand how its people are feeling and what they need. The survey takes into consideration differentials in responses based on various dimensions such as gender, cultural background, and generation to minimize gaps.SUPPORTING THE EFFORT TO PROMOTE SOCIAL EQUITYOrganizations can support efforts to further encourage social equity by creating a strong sense of belonging for all. When people feel they genuinely belong, they are more motivated and engaged, as well as exhibit lower stress, greater wellbeing, and higher performance. Equitable sponsorships can also boost progression, inspire confidence and transform careers.While everyone has biases — these can be challenged and mitigated by understanding what these biases can look like, what shapes them, and when they’re likely to arise. By questioning whether a decision is a preference, a tradition or requirement in every process, we can uncover different perspectives, remove barriers, expand options, and improve the quality of our decisions.INSPIRING CONVERSATION THROUGH AUTHENTIC STORIESOn Feb. 27, Karyn Twaronite, the EY Global Vice-Chair for Diversity, Equity and Inclusiveness, officially announced the external launching of a short film series featuring EY colleagues from around the world. These films spotlight a range of different experiences and inequities to help our people better connect and understand each other. The storytelling campaign has been internally meaningful, sparking reflections, insights, and conversations. The stories have helped our people to better engage with one another as a community, building greater connections and understanding. These films are shared with broader audiences to create a positive impact beyond our organization.This is one step forward to create positive change through a greater awareness and an invitation to participate in the conversation. It is hoped that by sharing these stories, we make a difference beyond us. Together, we can inspire social equity and create meaningful change towards a more inclusive environment where everyone can thrive. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Luisa Anna E. Hebron is a talent director and the talent leader of SGV & Co.

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