Advancing technology impacting CFO reporting - EY

BY Fraser Tennant

An increase in data caused by advancing technology is adversely impacting the ability of chief financial officers (CFOs) to deliver effective corporate reporting, according to an EY report published this week.

The report, ‘How can reporting catch up with an accelerating world?’, which is based on a survey of more than 1000 CFOs and heads of reporting of large organisations across 25 countries, reveals that 66 percent of respondents consider technological advances – such as cloud-based systems, data analytics, robotic process automation (RPA) and artificial intelligence (AI) – to be their number one external reporting challenge – up from 57 percent in 2015.

Additionally, almost one third (32 percent) of the CFOs surveyed ranked their current reporting operating model as “average”, with 56 percent stating that transforming their model – perhaps striking a balance between central control and devolved reporting attuned to local needs – is now a major focus.

“CFOs worldwide are struggling to make the most of the increased volume and speed of data available to them,” said Peter Wollmert, EY global and EMEIA Financial Accounting and Advisory Services (FAAS) leader. “Many are encumbered by legacy systems that do not allow reporting teams to extract forward-looking insight from large, fast-changing data sets. The result is an increasing expectation gap between what boards now look for from corporate reporting, and what CFOs can deliver. Until reporting catches up with technological advancements it will continue to be compromised.”

The report also advances some bold strategies to deal with the corporate reporting issue, including increasing the use of: (i) outsourcing; (ii) managed services; (ii) captive shared services centres – onshore or near-shore; (iv) captive shared services centres – offshore; and (v) centralised centres of excellence.

That said, the report does indicate a preference among CFOs for moving towards a model in which control resides with a head office but with significant responsibilities being assigned to local markets. Twenty-nine percent of survey respondents saw this as the future model, while only 24 percent currently operate a system such as this.

Whatever model is eventually established, CFOs hope that the new reporting arrangements will increase the accuracy and effectiveness of reporting, improve data analytics in reporting to drive forward-looking strategic insight, and provide a more flexible and agile reporting function.

Mr Wollmert concluded: “CFOs are mapping how they see the future of reporting. However, unless decisive action is taken quickly to define a bold strategy and vision for advancing the reporting process, they will continue to fall behind the pace of technology. For CFOs contemplating this journey, the mantras for their reporting function need to be responsive and streamlined.”

Report: How can reporting catch up with an accelerating world?

Samsung to acquire Harman International in $8bn deal

BY Richard Summerfield

Samsung Electronics announced on Monday that it had agreed to acquire Harman International Industries in a deal worth $8bn.

Under the terms of the deal, Samsung will pay around $112 per Harman share held. All together, the company will be paying a premium of 28 percent on Harman's closing price on Friday 11 November, the last day of trading before the deal was announced. The two companies expect the transaction to close in mid 2017, though the deal is still subject to regulatory approval.

For beleaguered Samsung, still reeling from the damage done to its mobile phone business following the withdrawal of the fire-prone Galaxy Note 7, the company’s commitment to the connected automotive sector may come as welcome relief. The automotive space is an increasingly popular investment destination for tech firms, and with industry giants Google and Apple both increasing their interest and presence in the industry in recent years, Samsung’s deal for Harman may prove a prudent investment.

Harman's products, which provide infotainment, telematics and connected safety and security services, are used in more than 30 million vehicles made by some of the world’s biggest car manufacturers, including BMW, Toyota and Volkswagen.

“Harman perfectly complements Samsung in terms of technologies, products and solutions, and joining forces is a natural extension of the automotive strategy we have been pursuing for some time,” said Oh-Hyun Kwon, vice chairman and chief executive of Samsung, in a statement. “As a Tier 1 automotive supplier with deep customer relationships, strong brands, leading technology and a recognized portfolio of best-in-class products, Harman immediately establishes a strong foundation for Samsung to grow our automotive platform.”

Samsung’s movement into the automotive space has developed over the last 12 months. Following the creation of the division in 2015, the company has invested $450m in Chinese car manufacturer and rechargeable batteries firm BYD Co Ltd. It has also held negotiations with Fiat Chrysler Automobiles over the potential sale or partnership of its Magneti Marelli manufacturing unit.

Harman will, according to Samsung, continue to operate as a standalone Samsung subsidiary, with its chief executive Dinesh Paliwal continuing to lead the division.

News: Samsung to buy car tech firm Harman for $8 billion, South Korea's biggest overseas deal

Trump wins election, markets fluctuate

BY Richard Summerfield

The political outsider, Republican Donald Trump, has claimed a historic and stunning victory in the US presidential election, bringing an end to eight years of Democratic rule. The result initially plunged the global markets into chaos and stunned Wall Street.

As Mr Trump’s supporters celebrated his victory, along with Republican successes in both the Senate and House of Representatives, the dollar and US stocks endured a mixed day, falling sharply before recovering somewhat throughout Wednesday’s trading.

European shares initially followed suit. Though many news agencies predicted losses of around 4 percent, the FTSE 100 fell around 1.4 percent initially before recovering throughout Wednesday. In the first hours of trading on Thursday morning, the FTSE continued its gains, climbing a further 1.06 percent, nearing the 7000 mark.

The Mexican peso, however, dropped 13 percent against the dollar at one point, marking the currencies biggest daily move in nearly 20 years. The peso did rebound 4 percent on Wednesday, though it was still down 8.5 percent.

Asian shares rallied in trading on Thursday with the Nikkei climbing 7 percent at one point, following of 5 percent drop in the previous day’s trading. Gains were also seen elsewhere as Australian stocks soared 3.3 percent in the largest daily gain since late 2011 . Shanghai rose 1.3 percent.

Wall Street, which had lent its considerable support to Ms Clinton during the bruising and historic election campaign, was initially left reeling by the result as investors fled some of their riskier assets. Yet US stocks actually closed up on Wednesday, with investors jumping headlong into sectors which could benefit from Mr Trump's election. Oil & gas producers, energy companies and construction firm sand pipeline operators were all seen as attractive investment destinations, given Mr Trump’s preference for oil & gas investment. The fact that the GOP has indicated that it would invest at least $500m in infrastructure development over the next five years can be seen as one of the driving forces behind these gains.

Mr Trump’s views on the Dodd-Frank reform act, implemented in the wake of the financial crisis, as well as other notable Democrat legislation including the Affordable Care Act, have also affected stocks; healthcare companies fell as the markets anticipated the end of Obamacare.

Oil markets, which have steadied in recent months following two years of uncertainty, fell temporarily below $45 a barrel on Wednesday morning, as the wider global commodities market reacted to the election result with some concern. The global benchmark, Brent Crude, fell to its lowest point since August, down 2.3 percent to $44.98. However, oil prices rebounded on Thursday; at the time of writing, Brent Crude futures were up 1.14 percent, or 53 cents, at $46.89 per barrel. Though the outlook for the commodities market still appears contentious, there is hope that a recovery in the oil & gas sector in 2017 may be relatively rapid.

News: US stocks, bond yields jump after Trump shock, Mexican peso falls

M&A deal flow to be “flat” in 2017 predicts new report

BY Fraser Tennant

The recent levelling off of the global M&A market will lead to a “flat year ahead” for deal flow, according to a new survey by Dykema.

In its "M&A Forecast: 2016 M&A Outlook Survey", Dykema reveals that 47 percent of respondents stated that they expected to see “no significant change” in the global M&A market over the next 12 months - up 43 percent in comparison to last year’s survey.

The survey also found that many executives had major concerns about the effects that corporate tax increases, increased federal regulation and taxation of carried interest could have on M&A in the coming year. Conversely, M&A dealmakers opined that the disruption caused by global events such as the fallout from Brexit and the US presidential election are likely to have a “negligible” effect on deals in 2017.

Moreover, in the case of the US election, survey respondents (by a 2-to-1 margin) indicated that they felt Donald Trump would be more supportive of the US M&A market than Hillary Clinton. However, a plurality of respondents stated that both candidates would have a neutralising effect on US M&A next year.

“When it comes to M&A in 2017, the biggest determining factor is likely the fate of the US economy,” said Thomas Vaughn, co-leader of Dykema’s M&A practice. “It’s not surprising that respondents – seeing a decline in 2016 deal volume after several years of strong growth – are taking a wait-and-see approach.”

Additional findings in the survey include the continued rise in inbound M&A activity to the US due to increased investment from China. In contrast, US outbound activity in China has remained low for the second consecutive year.

“On the international front, the pace of outbound acquisitions by Chinese companies, particularly in the US and Europe, does not appear to be slowing down anytime soon,” said Jeff Gifford, co-leader of Dykema’s M&A practice. “This trend is in large part due to an increasing level of comfort navigating Chinese regulatory bodies and growing confidence that these deals will go through successfully.”

While overall the survey does suggest a subdued outlook for the global M&A market in 2017, respondents also displayed a fair degree of optimism in relation to certain segments of the market, such as the energy, healthcare and technology sectors, which they say are grabbing increasing attention from M&A practitioners.

Report: M&A Forecast 2016 M&A Outlook Survey Summary

Institutional funds hit Tesco with £100m damages claim

BY Fraser Tennant

In a move set to send further shockwaves through the financial world, more than 125 institutional funds have filed a £100m claim for damages against Tesco PLC over alleged breaches of the Financial Services & Markets Act.

The aim of the legal action is to prove that Tesco made a series of misleading statements to the stock market – comments which (it is alleged) omitted pertinent information and resulted in investors making investment decisions based on erroneous data.

“The misstatement of profits leading to a dramatic collapse in the Tesco share price caused substantial damage to many shareholders who manage money for thousands of investors,” said Jeremy Marshall, chief investment officer at Bentham Europe, the litigation funder coordinating the claim for damages. “Investors have a right to rely on statements made by companies to ensure that they correctly allocate capital.”

 In October 2014, Tesco admitted to overstating its profits by £263m. Following the announcement, the retail giant posted a 92 percent fall in interim profits.

“Tesco has misstated its accounts, and in particular its treatment of payments from suppliers, to give the appearance of static trading margins,” said Sean Upson, a partner at Stewarts Law, which is leading the case against Tesco. “The reality was that those margins were falling.  Institutional investors were therefore misled when making investment decisions in respect of Tesco. This is precisely the type of wrongdoing which the Financial Services and Markets Act was designed to redress and therefore to prevent”.

Last month, the UK’s Serious Fraud Office charged three former Tesco executives – Christopher Bush, at one time Tesco’s UK managing director; Carl Rogberg, a former UK finance director; and John Scouler, who used to be Tesco’s UK commercial director for food – over the scandal, alleging that they acted dishonestly by giving false accounts of the commercial income earned by Tesco Stores as well as its financial position.

The men are scheduled to stand trial at Southwark Crown Court in September 2017. 

Jeremy Marshall concluded: “The (damages) claim will assert that Tesco’s misstatements are in clear breach of its obligations under the Financial Services & Markets Act and investors must be compensated.”

News: Institutional funds file 100 million pounds damages claim against Tesco