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- 21 November 2019 10:30
INSTITUTIONAL INVESTORS PUTTING FINANCIAL INTEGRITY OF LARGE COMPANIES UNDER DUE DILIGENCE MICROSCOPE, ACCORDING TO RESEARCH FROM BLACKLINE
SYDNEY – 21 November 2019 – A global survey of institutional investors commissioned by financial automation software leader BlackLine, Inc. (Nasdaq: BL) reveals that 91 percent of global investors believe companies in their portfolio often resort to legal but ‘creative’ accounting tactics in order to attract or satisfy investors, causing investors to increase scrutiny over portfolio company financials.
BlackLine commissioned independent global research firm Censuswide to survey over 760 institutional investors across the world to establish their attitudes to financial risk, due diligence and reporting. The findings reveal the financial practices that raise red flags for investors, as well as the factors they rely on to make informed investment decisions.
According to the survey, creative accounting, where companies exploit financial loopholes to present figures in a legal though misleadingly favourable light, was identified as a major concern for the global investor community. Not only do the majority of investors believe that these tactics are commonplace at their portfolio companies, but 91 percent believe that more large companies will resort to these techniques over the next 12 to 18 months. Of those survey respondents in Australia, 85% said they believed companies resort to creative accounting techniques ‘often’ with a further 10% saying it occurred ‘occasionally’.
Worryingly, 83 percent of investors surveyed also agreed on the likelihood of a global recession in the next 12 to 18 months, meaning businesses will need to work even harder to outstrip the competition. In Australia the mood was even more somber with 87% of respondents agreeing or strongly agreeing that a recession was likely.
However, companies should think twice before trying to manipulate their figures; a quarter (25%) of investors singled out evidence of creative accounting as the factor that would make them least likely to invest in a company.
“In many ways the international business landscape is more complex, uncertain and challenging than it was a year ago. Companies are therefore under increasing pressure to perform and retain a competitive edge,” said BlackLine CEO Therese Tucker. “However, businesses cannot afford to have the integrity of their financial data questioned at a time when investors are evidently becoming more stringent about unnecessary and unwarranted financial risks.”
In fact, inaccurate reporting and poor financial controls raise alarm bells for a large number of global investors. Less than 1 percent of those surveyed say they will invest in a company with poor financial controls without taking some form of corrective action first, such as imposing changes on the company or its management team.
A third of investors (33%) say risk of internal financial fraud or financial non-compliance make them less likely to invest. Meanwhile, a quarter (25%) are put off by consistently late filings, with a slightly higher portion less likely to invest in companies that make adjustments post reporting (28%).
In Australia, a lack of clarity around the roles and responsibilities of a company’s management team was nominated by 40% of respondents as something that would make them less likely to invest. This was followed by the risk of internal financial fraud (35%) and evidence of the company mismanaging its finances (33%).
These red flags are encouraging investors to take a much closer look at the numbers, highlighting the importance of accurate and transparent financial data. When asked what the most important considerations were when deciding whether to invest, a company’s financial growth forecasts (46%), access to real-time snapshots of company finances (42%) and key metrics within financial reports (46%) came out on top. This suggests that while investors are forward-looking, they also need a clear and realistic view of current financial data in order to make informed decisions.
Among Australian investors, almost all (99%) said they needed evidence that a company is properly managing its finances before they could make an informed investment decision. This was followed by having a near real-time oversight of the company’s financial data (98%) and proof that a company has a good track record of accurate financial reporting (95%).
“It’s likely that investors will increasingly want to look ‘under the hood’ of their portfolio companies, to ensure they are getting a transparent and accurate view of their finances,” continued Tucker. “The ability to access, and more importantly analyse, data in real time will not only be vital for driving business competitiveness, but also for maintaining investor trust.”
The full findings are outlined in ‘The New Age of Increased Investor Due Diligence’, the first of three detailed whitepapers on the subject. More information on the research can be found here: https://www.blackline.com/resources/whitepapers/the-new-age-of-increased-investor-due-diligence
Notes to editors
The research was conducted by Censuswide, with 763 institutional investors in six markets (U.S., UK, France, Germany, Australia and Singapore) at companies with $100M USD minimum (or equivalent) of assets under management. The number of respondents by region was as follows:
· U.S.: 204
· UK: 150
· France: 101
· Germany: 101
· Australia: 107
· Singapore: 100
The survey was conducted online between July 22nd and August 8th 2019.
BlackLine, Inc.’s (Nasdaq: BL) cloud-based solutions transform Finance and Accounting (F&A) by automating, centralising and streamlining financial close operations, intercompany accounting processes and other key F&A processes for large enterprises and midsize organisations. Designed to complement virtually all ERP and other financial systems including SAP, Oracle and NetSuite, BlackLine increases operational efficiency, real-time visibility, control and compliance to ensure end-to-end financial close management and accounting automation from within a single, unified cloud platform. The company is recognised by Gartner as a Leader in its 2019 Magic Quadrant for Cloud Financial Close Solutions and as a pioneer in the cloud market for enhanced financial control and automation.
Nearly 2,900 companies with users around the world trust BlackLine to help ensure balance sheet integrity and confidence in their financial statements. Based in Los Angeles, BlackLine also has regional headquarters in London, Singapore and Sydney. For more information, please visit www.blackline.com.