November 2019 Articles - Suits the C-Suite | SGV & Co. | EY

25 November 2019

Benjamin N. Villacorte

Are sustainability reports a fad?

Wider corporate reporting is being promoted as a means to improve corporate governance, as stated by International Accounting Standards Board (IASB) Chairman Hans Hoogervorst in his speech in Tokyo on Aug. 29, 2018. The IASB chair admitted that financial reporting has its limitations and cannot adequately capture certain elements that might be important to stakeholders, such as the intangibles that are vital to the company’s business model and its strategy for long-term value creation. Financial statements are essentially backward-looking reports that contain limited forward-looking information, which means that in their current state, financial statements do not address emerging sustainability issues that might impact a company’s future cash flow. However, the IASB Chair made it clear that the Board is not equipped to enter the field of sustainability reporting directly. He recognizes in a speech about sustainability reporting in April at Cambridge University that the Board does not have the expertise required to set sustainability reporting standards. Additionally, he notes that there are already several standard setters in this space. Mr. Hoogervorst also pointed out that regulators and stakeholders should not have exaggerated expectations that sustainability reporting will act as an agent of change and will be effective in forcing companies to “prioritize planet over profit.” That being said, clear public policies can certainly help effect change, and financial incentives are crucial to swaying companies to address material sustainability issues. The rise of sustainability reporting that focuses on stakeholders and provides information about the impact of sustainability issues on the future returns of the company is the most promising development in this space, according to the IASB Chair. While the IASB will not directly participate in sustainability reporting, it is addressing the limitations of financial reporting through its “Better Communication in Financial Reporting” project. This initiative aims to improve financial communication not by creating new standards, but by providing guidelines on how to better present information that has already been collected. The project contains several strands of work, one of which is revising and updating the Management Commentary (Practice Statement) to include a report on how material sustainability issues may impact the business. The IASB is expected to publish an Exposure Draft of the Practice Statement in the second half of 2020. On the local front, the Securities and Exchange Commission (SEC) has released a memorandum requiring publicly-listed companies (PLCs) to submit their Sustainability Report together with the 2019 Annual Report (SEC Form 17-A) in 2020. The memorandum issued early this year stated that the guidelines are to be adopted on a “comply or explain” approach for the first three years upon implementation. This means that “companies will be required to attach the template to their Annual Reports but they can provide explanations for items where they still have no available data. However, by 2023, PLCs will need to comply with the Sustainability Reporting Guidelines specified in the memo, or be subjected to the penalty for Incomplete Annual Report (under SEC Memorandum Circular No. 6, Series of 2005). Like traditional financial reporting, rigorous climate-related financial disclosures do not happen overnight. The path from start to finish can involve twists and turns, as well as the coordination of many moving parts, thereby requiring the collaboration and expertise of a variety of corporate functions to achieve an organization’s ultimate reporting objectives. The following are key action steps companies can take now to prepare themselves for reporting non-financial information. 1. Secure the support of your board of directors and executive leadership team. 2. Integrate climate change into key governance processes, enhancing board-level oversight through audit and risk committees. 3. Bring together sustainability, governance, finance, and compliance colleagues to agree on roles. 4. Look specifically at the financial impacts of climate risk and how it relates to revenues, expenditures, assets, liabilities, and financial capital. 5. Assess your business against at least two scenarios. 6. Adapt existing enterprise-level and other risk management processes to take account of climate risk. 7. Solicit feedback from engaged investors about what information they need to know about climate-related financial risks and opportunities. 8. Look at existing tools you may already use to help you collect and report climate-related financial information. 9. Plan to use the same quality assurance and compliance approaches for climate-related financial information as for finance, management, and governance disclosures. 10. Prepare the information you report as if it were going to be assured, even if you decide not to do so right now. 11. Look at the existing structure of your annual report and think about how you can incorporate the information into your discussion of risks, management’s discussion and analysis (MD&A), and the governance section. The recent pronouncements of the IASB and SEC on the need for reliable and accurate sustainability reporting underlines the necessity for companies to assess and manage its non-financial performance towards achieving the universal target of improved sustainability. However, for sustainability reporting to be effective and useful, companies should not only view it as an exercise in compliance, but actually a responsibility of every corporate citizen to measure and document their best practices towards achieving the goals of sustainable development to meet the needs of the present without compromising the ability of future generations to meet their own needs. It would seem then that need for sustainability reporting is here for good. In which case, companies are encouraged not to wait for sustainability reporting standards, or a regulatory requirement, to be mandatory. The time to act for the greater good is now. 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 author and do not necessarily represent the views of SGV & Co. Benjamin N. Villacorte is a Partner of SGV & Co.

19 November 2019

Wilson P. Tan

Suits The C-Suite By Wilson P. Tan

With the dizzying speed of digital disruption occurring in the global business environment, small and medium enterprises (SMEs) are increasingly realizing the urgent need to explore digitalization. Incorporating digitalization in their business will help expand and create new sources of value for their enterprises to remain competitive and relevant to their markets. In my recent article, I wrote about the findings of a recent EY study, Redesigning for the digital economy: A study of SMEs in Southeast Asia. In the report, almost 370 SME executives expressed as their top priorities leveraging digital technology and prioritizing the improvement of their customer service. However, to properly implement digitally-enabled operations and meet the consumer’s increasing demand for personalization and convenience, businesses will need the support of a modernized workforce to actualize their strategies. The function of modernized talent is critical to a company’s digital transformation. This increasing demand for appropriate digital services gives rise to new digital roles, such as digital marketers, data scientists, and automation engineers. At the same time, current employees will, by necessity, be disrupted by digital solutions that replace repetitive tasks, such as intelligent automation technologies and robotics process automation (RPA). While the use of intelligent and automated platforms to enhance efficiency will require the traditional workforce to adapt, these new and enhanced roles present the opportunity for companies to reboot their people programs and help employees focus on strategic, more value-added tasks. THE CHALLENGES OF WORKFORCE ADAPTATION The same study on SMEs had identified two main constraints that enterprises face in adapting their workforce to enhanced, digital roles. First is capacity and second is resources. SMEs specifically lack access to digital talent and face challenges in upgrading the skills of their employees, which understandably creates a gap between smaller enterprises and their multinational counterparts. Many SMEs also have the disadvantage of looking less attractive to potential candidates with the right digital skills compared to larger companies with more established names and deeper pockets. In addition, they face the struggle of prioritizing effective development programs to upskill their current workforce in light of other competing business priorities. REDESIGNING THE MODERNIZED WORKFORCE Challenges aside, SMEs will need to go beyond identifying the roles and skills required to achieve their digital transformation. They are expected to also dedicate employees to specific digital roles instead of merely assigning these roles to existing employees as secondary positions. For example, the role of social media manager can often be a full-time job, yet some companies simply assign this task to existing sales or marketing personnel who may not have the experience and exposure to maximize and manage social media assets. SMEs will have to consciously take active steps to evolve their current workforce into one that can maximize digital investment insights and productivity gains. One means to achieve this is by developing a clear view of critical digital roles, functions and skills instead of falling into the trap of blindly following hiring trends. SMEs need to assess and identify what roles are specifically designed to support their own digital transformation strategy. These roles and skills should then be adapted to form the career pathways of an organization, allowing management to conduct effective strategic workforce planning for the company’s future needs. A clear overview of their talent needs also allows management to further maximize their limited pool of human resources by deploying them into strategic roles. Furthermore, this allows management to address capability gaps through targeted employee skill development initiatives and talent attraction. For companies to effectively redesign job functions and business processes, they must leverage insights from the analysis of people data to support changes and decisions. SMEs also need to consider how to best incorporate digital solutions into any redesigned roles to improve efficiency as well as employee and customer satisfaction. This alleviates the pressure on talent shortages by expanding the workforce’s capacity to take on enhanced roles. PRIORITIZING THE ROLE OF DIGITAL Over and beyond considering technological or digital solutions, what is more essential is for SMEs to adopt a digital mindset and develop a digital work culture. This mindset and culture will effectively develop agility and further drive innovation. Attaining this end-goals will entail an assessment and the transformation of traditional policies, processes and platforms to better adopt and support digital thinking. As an organization undergoes digital transformation, SMEs will benefit from engaging their employees by working together with them to minimize resistance and drive the necessary behaviors to integrate digitalization into the company. They can achieve this through effective change management and positive reinforcement through rewards linked to performance and employee recognition, both of which can go a long way in nurturing a digital work culture. The leveraging of transformative technologies should serve as an enabler for SMEs instead of a complete replacement of their human workforce. Disruptive forces will continue to challenge SMEs in the digital age, making it increasingly apparent that digitalization cannot be relegated to a one-off project — it is by necessity a continuous and evolving journey with great impact on the entire workforce. SMEs that prioritize digital roles and fully embrace a digital mindset will, in all likelihood, achieve a competitive edge that leads to success in the digital economy. The question now for individual SMEs is, is it better for you to reboot your digital people strategy or invest in robotic processes? Or find a solution that combines both? 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 author and do not necessarily represent the views of SGV & Co. Wilson P. Tan is the Vice Chairman and Deputy Managing Partner of SGV & Co.

11 November 2019

Faith Mariel N. Reoyan

Seven lessons from IFRS 17 live engagements

The financial statements of companies issuing insurance contracts are bound to change dramatically beginning Jan. 1, 2022, as the date marks the global adoption of International Financial Reporting Standard (IFRS) 17. IFRS 17 introduces the concept of deferring profit and recognizing this profit over the duration of the contract. This significantly changes the way companies measure and account for long-term insurance contracts. This poses the question of whether current financial metrics will remain relevant (such as gross premiums as a basis for ranking) and even if so, new metrics will surely be introduced (such as the future profits for new business) upon adoption of IFRS 17. Along with this key change, several requirements of IFRS 17 will force companies to implement changes to their data, systems and processes. While local companies are given an additional one-year reprieve at this time, companies should ideally be either in the last stage of their impact assessment or in the early phase of their implementation. Though the implementation experience varies from one company to another, several unique insights and lessons can be gained from each company’s IFRS 17 journey. We present seven important lessons learned from our own live IFRS 17 engagements which are bound to benefit the insurance industry. 1. DO IT NOW It is essential for companies that have not started any IFRS 17 activity to begin with a comprehensive data gap analysis. This will provide a view of the extent of work needed to implement IFRS 17. While 2023 might seem far away, it will easily take an average of 12-15 months to change systems and processes that conform with the new rules. Extra time will be better spent on parallel runs rather than on impact assessment. A detailed timeline including milestones and key dates should be clearly in place, with leeway for potential setbacks, whether these are caused internally or externally. Several key decision points that can affect the overall implementation journey also need to be addressed early on. The most critical of these is deciding whether the ambition level for change is for minimal compliance, smarter reporting, or a full finance transformation. 2. THE OPPORTUNITY TO UNLOCK THE POTENTIAL OF CROSS-FUNCTIONAL TEAMS Implementing IFRS 17 is more than just an accounting and compliance task; it should encompass a team that consists, at a minimum, of the following competencies: a. Accountants b. Actuaries c. Finance Subject Matter Experts d. Technology Subject Matter Experts e. Project and Change Managers Currently, there is a scarcity of talent equipped with IFRS 17 knowledge and experience to lead and drive the implementation. A reasonable assessment of a company’s internal resources should be performed to match each employee’s skills and availability to identified workstreams. Accountants and actuarial resources for most insurers are already stretched with business-as-usual (BAU) activities and other ongoing conflicting internal initiatives. This resulting gap must then be properly addressed with IFRS 17 content owners and drivers, whether to hire new employees or contract external advisors. The team should also have a strong and effective project manager with IFRS 17 content knowledge to ensure everyone is on the same boat and that key stakeholders are well-briefed and engaged. To plan for a sustainable future, companies need to adapt to an evolving relevant mix of resources, skills and capabilities to properly implement expected changes in the business under the new standard. A clear governance structure should also be in place to enable the timely alignment of key decision points. 3. LEARN TO MANAGE THE DETAILS IN THE DATA IFRS 17 has extensive requirements for data quality, calculation, transfer and storage. Experience suggests that data cleansing should be initiated, considering both accounting and actuarial perspectives, before embarking on any data transformation. Though it may vary from one company to another, securing the availability of clean and controlled source data to be extracted can take longer than expected. Significant time in the project plan must be invested to determine how information would feed smoothly into the IFRS 17 Information Technology solution. The vast data requirements will then need to be managed continually and effectively. This can be particularly useful for decision-making factors such as real-time data driven pricing models, “what if” scenarios, determining the most critical key performance indicators, and identifying high-risk transactions or customers. 4. EMBRACE TECHNOLOGY AS A KEY ENABLER For large multinational companies, it is apparent that one of the significant line items in the IFRS 17 budget will be the cost of acquiring a new system or changing an existing one. Most companies expect to change existing systems to operationalize and further centralize their modelling systems. While certain life companies have decided on a software vendor, most are still in the process of vendor evaluation and selection. One of the challenges encountered is the current assessment of system architecture. This pertains, but is not limited, to the complexity of system architecture, data granularity to support required reporting in the future, current functionality uses and existing model updates, the number of reporting basis and ledgers, and the alignment of various processes under one workflow software, whether this is built in-house or purchased. There is no magic “one size fits all” solution available but companies in the midst of designing or upgrading their systems, need to revisit their programs to consider the potential impact of the proposed IFRS 17 amendments. In addition, a big consideration is to have an integrated data model covering both actuarial and finance systems, ensuring that the technology and data are aligned and not just the workstreams. 5. THE NEED FOR KNOWLEDGE TRANSFER AND STAKEHOLDER AWARENESS IFRS 17 training should be provided to core team members to keep them abreast of current developments and proposed amendments. Collaborative awareness and education sessions must be continually adopted with a phased rollout approach not only for key team members but also for other relevant internal and external stakeholders. Moreover, members of the core team should be expanded to include members of BAU processes to facilitate a smooth transition. 6. TALK TO THE RIGHT PEOPLE EARLY ON Participating in industry working groups, advocacy initiatives with local regulatory bodies, and submitting comments and feedback to the International Accounting Standards Board will enable companies to raise peculiarities or transactions requiring special handling. The earlier the concerns and challenges are heard and addressed, the easier it will be for companies to incorporate necessary action required in their implementation activities. Proactiveness in reaching out to national standard-setting bodies and regional groups has a vital role in ensuring that the interests of the company are heard. These groups undertake relevant research, conduct surveys and identify emerging issues, thus providing further opportunities for companies to benchmark against the experiences and best practices of one another. 7. FORM A CHANGE MANAGEMENT TEAM Consideration to turnover, the language, and communication methods for employees to manage resistance and change fatigue, should be in put in place. External stakeholders must also be included in the plan, as many will be interested to know the projected changes to key performance indicators and revenue-driven metrics that will serve as the new language when presenting business results. A WAITING OPPORTUNITY As the timeline shortens with the approaching deadline, the key to a successful and relatively smooth adoption generally rests on management ensuring that the collaboration of the several moving pieces is closely monitored. Companies can take this as an opportunity to adapt and emerge from the change to further drive growth and agility. 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 author and do not necessarily represent the views of SGV & Co. Faith Mariel N. Reoyan is an Advisory Senior Manager of SGV & Co.

04 November 2019

Clairma T. Mangangey

Digital audits: the advantages add up

The rules of business have changed. Gone are the days when business leaders had the luxury of time to ponder significant business decisions and make momentous changes to their organizations or processes. Now, businesses are transacting and making decisions practically in real time, which also necessitates that businesses manage risks and leverage opportunities with speed, accuracy and efficiency. As auditors, we have an unparalleled view of all the aspects of a business — both up-close from an operational standpoint, as well as from a larger perspective in the global business environment. This combination of macro and micro views allows auditors to be well-placed to advise businesses on possible risks. But given the changes in the business environment, it is not enough to simply have a deep understanding of business, accounting principles and regulatory requirements — auditors in today’s digital age also need to adopt a digital-first mindset in order to elevate traditional audits with more digital dimensions. MANAGING AUDIT DATA We operate in an age where connectivity is becoming ever more seamless, making the sharing of data among businesses, customers and even governments a standard practice. As connectivity increases, we move into a time where operational, transactional and financial data will eventually reside on shared networks instead of physically with companies. Auditors who can connect to these networks directly and issue audit instructions instantaneously through a secure and dedicated online platform can greatly streamline the audit process. No longer will clients have to manually transfer massive data files and communicate via e-mails — all parties involved in an audit can now manage and view their data on one shared platform or client portal. In fact, SGV, as a member firm of EY Global, leverages such a proprietary global tool called EY Canvas. The client portal linked to EY Canvas provides live, real-time reporting on the actual status of audit requirements and issues alerts to all parties on any concerns as they occur. This means that everyone from the audit engagement team to a client’s management team are always on the same page in the audit, increasing efficiency, flexibility and transparency. This is particularly useful for companies with a large global footprint since the superior connectivity effectively removes physical boundaries and enables operations to be digitally enabled across locations. Even as a business spreads out globally, auditors can have the flexibility and scalability to conduct an audit regardless of size, complexity or location. Understandably, such data-sharing platforms also necessitate a greater focus on data security and privacy. The greater challenge and opportunity, however, is in mining the data for valuable insights and information. ANALYZING AUDIT DATA The sheer volume of data generated through data sharing platforms can make identifying risks more challenging. Auditors have to develop new approaches to process data and document information, which thankfully, rules-based automation can now handle with ease and accuracy. The advent of technology now allows auditors to focus on areas that require judgment, which makes the case for data analytics-driven audits. By today’s evolving standards, a high-quality audit is one that can both process and interpret data in meaningful and consistent ways, helping businesses identify anomalies, operational, financial and non-financial risks. This requires a suite of powerful data analytics technologies, such as the array of data analyzers we have with our EY Helix platform. Why is data analytics so important? First, the high processing speed and capabilities of data processing technologies can cover the entire data population loaded into EY Canvas, rather than the traditional method of random sampling. This complete coverage provides even greater assurance to the people who oversee governance and compliance. Second, by applying data analyzers to comprehensive and granular data, auditors are able to do deeper analysis to uncover new perspectives and improvement areas. Third, data analytics technologies are able to conduct a “continuous audit,” allowing audit efforts to be spread out across the year instead of only during peak periods. This allows an audit that is more efficient and productive, and where clients and auditors can focus on issues rather than processes. MAXIMIZING AUDIT DATA With the insights gleaned through thorough data analytics across a seamlessly connected audit data management platform, robotic process automation (RPA) and artificial intelligence (AI) technologies are now applied to further digitize the audit. By using RPA and AI, tedious mundane processes such as bank and accounts receivable audit confirmations can be done without human error. At the same time, digitizing these transactions open the possibility of data analytics providing even more insights and alerts to audit teams for necessary actions. Intelligent automation and AI in the audit process can help filter data or deliver initial findings, which allows auditors to focus on higher value analysis and raise audit quality. CROSSING THE DIGITAL DIVIDE At its core, the idea of a digital audit, however, implies more than just using digital tools and technologies in the audit process. A digital audit requires adopting a truly digital mindset, one that embodies seamless project management and drives global audit coordination. Having a digital mindset means developing new attitudes and behaviors that allow auditors — and clients — to foresee possibilities while being increasingly resourceful, innovative, adaptable and open to leveraging emerging technologies to change traditional processes. 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 author and do not necessarily represent the views of SGV & Co. Clairma T. Mangangey is a Partner and the Quality Enablement Leader of SGV & Co.

November 2019

Are sustainability reports a fad?

Suits The C-Suite By Wilson P. Tan

Seven lessons from IFRS 17 live engagements

Digital audits: the advantages add up

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