How CFOs Manage Risks On The Horizon

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As economic times get lean and the larger geopolitical situation adds a huge degree of uncertainty to the near future, many CFOs are focused on cost cutting. A new survey from U.S. Bank found 44% of CFOs say reducing spending and driving efficiencies in finance is one of their top three priorities. More than a third (37%) said cutting costs and driving efficiencies businesswide is one of their most important tasks. And a third ranked improving risk identification and mitigation as a key priority. A total of 26% are prioritizing political risk. The bottom line: There are many unknown risks on the horizon, and CFOs want to do their part to hold their companies’ margins steady throughout whatever turbulence shakes the next several months.

Part of this is investing in the right areas. A total of 51% said they are prioritizing investing in AI for their company’s financial functions. It’s not surprising that the largest proportion (42%) wants to use AI for risk management purposes, since the survey notes 39% of financial leaders said they’re not confident in their ability to manage and mitigate new risks.

“The role of the CFO has changed drastically in just five years,” John Stern, U.S. Bank CFO said in the report. “We used to mainly be preoccupied with forecasting, planning and investment management. Now, managing potential risks around inflation, cyber security and political matters has also become a high priority.”

But, the bank’s survey found, growth is also important. Half of financial leaders said they are struggling to balance the need to cut costs and build resiliency with the need to invest in future growth. And the CFO’s top risk is an old one: Lack of talent, which 41% said led their list of issues. It all adds up to the need for much more strategy and planning in the CFO’s office. But this also means that CFOs are in the position to make more decisions that can set the course for the business as a whole.

While AI as a concept has been widely discussed for about the last year and a half, some businesses are now actually deploying it. AuditBoard recently rolled out AI-driven efficiencies to its platform, including automatic writing and recommendation engines. I talked to Anton Dam, AuditBoard’s vice president of engineering for data, AI/ML about bringing this new technology into auditing functions. A portion of our conversation is later in this newsletter.

ECONOMIC INDICATORS

AI may be the exciting new technology everyone is talking about, but in the last week, it’s also proven to be the great market equalizer. All three major indexes have shown growth in the past several days despite some fairly pessimistic reports on the economy as a whole, thanks to blockbuster earnings from Microsoft and Google parent Alphabet. The not-great news: Last Thursday, the Department of Commerce found only 1.6% GDP growth in the first three months of 2024 when compared with the final quarter of 2023. And on Friday, the core personal expenditures index, the Federal Reserve’s favored inflation gauge, showed 2.8% inflation in March—much higher than the 2% target set by the Federal Reserve.

But Alphabet and Microsoft both reported huge revenue increases, as well as plans and capabilities for AI, after markets closed on Thursday. The rally following their earnings pushed Alphabet’s valuation comfortably over $2 trillion for the first time, and gave a significant boost to the share prices of tech companies in the chip business, including Nvidia, AMD and Arm Holdings.

Electric vehicle maker Tesla’s earnings last week weren’t a home run by any stretch—the company posted a revenue loss of 12% compared to a year prior—but the company’s stock rallied on optimism over Elon Musk's surprise trip to China and a reported agreement with Baidu for semi-autonomous driving. And Apple, which reports earnings later this week, has seen foreboding news as of late, including a drop of nearly 20% in Chinese iPhone sales. But both have benefited from the AI and tech market rally and their share prices are trending upward. Forbes senior contributor Peter Cohan thinks the reason could be lowering expectations for these companies.

HUMAN CAPITAL

Overtime budgets may be going up in the coming months. The Labor Department announced last week it was increasing the exempted salary for mandated overtime pay, and it’s estimated about 4 million more workers will be eligible for overtime under these changes. Currently, workers making more than $35,568 a year are exempt from mandated overtime pay unless their jobs don’t include “executive, administrative, or professional” duties. With the new rule, the exemption increases to $43,888 on July 1, and then again to $58,656 on Jan. 1, 2025. Labor groups praised the rule, but several business organizations were concerned about how it will impact their member companies. The Obama Administration attempted a similar change in 2016, and it was blocked by a federal judge.

In the last week, unions received a pair of wins for their members. The Ninth Circuit Court of Appeals upheld a decision that the March 2022 union election at Starbucks Seattle Roastery, the chain’s flagship store, was valid. The coffee giant disputed the election results because the NLRB allowed organizers to conduct a mail-in vote due to rising Covid cases in the area. The Seattle Roastery is now one of more than 400 unionized coffee chain locations.

The United Auto Workers also won a last-minute deal for workers at Daimler Truck North America, averting a strike of more than 7,000 workers at facilities in North Carolina, Georgia and Tennessee that was slated to start about an hour later. The contract includes raises of more than 25%, the end of wage tiers, profit sharing and cost-of-living increases for the first time since Daimler workers first joined the union.

NOTABLE NEWS

Last spring, a trio of high profile bank collapses shook the startup community. Republic First Bancorp, a Philadelphia-based regional bank, is continuing the trend of springtime banking failures. The bank’s assets, which had roughly $6 billion in assets and $4 billion in January deposits, according to the FDIC, were seized by Pennsylvania regulators last Friday. But the funds—and even the branches—already have a new owner. Fulton Bank reached an agreement with regulators to take over Republic First’s branches in Pennsylvania, New York and New Jersey, assuming substantially all of the defunct bank’s assets and accounts. Because this bank is relatively small, experts told the New York Times its failure is unlikely to cause shockwaves in the financial system. Republic First had been in trouble for some time, but the reason why is worth noting: Alongside fewer deposits, its mortgage loan portfolio had substantially declined. Total home sales in March were down more than 4%, according to the National Association of Realtors. More people want to buy, but prices are up—about 4.8% over a year ago—and the average interest rate has climbed to about 6.88%, which is more than twice the rate from April 2021.

OFF THE LEDGER

AuditBoard VP Talks About AI For Auditing

Last October, cloud-based auditing platform AuditBoard added a few AI-powered functions as a beta test for some users: Automatically written descriptions of issues, and AI recommendations based on issues that a customer may face in terms of national, state or local regulations. Those AI functions were pushed out to all users of the revamped AuditBoard AI platform last week. I talked to Vice President of Engineering for Data, AI/ML Anton Dam about the beta program and bringing AI to business financial functions. This conversation has been edited for length, clarity and continuity.

What was the thought process behind putting AI in place for these uses?

Dam: When we look at the day in the life of an auditor or risk or compliance professional, we see a handful of different things. First, there’s an increasing amount of work with a limited staffing capacity. That’s what we call the risk exposure graph. When we dug deeper, we found two things. First is that auditors spent hundreds of hours just writing descriptions. A single description of a risk statement, of a control, of really anything takes upwards of 10 minutes. That was something that naturally lends itself [to this sort of solution]: Hey, can you create a sort of a generative AI assistant that helps them with that?

The second thing is with all these requirements from the various frameworks, the laws, all the things that you have within your systems to run controls and risks, auditors also spent a lot of time connecting the dots. That’s the use case that we are bringing: We’re helping with intelligent recommendations, right. Instead of [figuring out] this massive explosion of combinations of entities, we’re helping cut that gap.

Among the community of auditors and your customers, what was the appetite for using AI for something like this? Were they interested in it from the get-go, or was it something that took some convincing because it’s new technology?

On the whole, the appetite is tremendous. We have not seen many cases where the answer is like, ‘Hey, we don't want this app.’ Now, that doesn’t mean that the other response has been, ‘We want it under any circumstances.’ They want certain guarantees. That’s what we provide them.

Take security, for example. We don’t mix customer data. We currently maintain pretty high standards for security and privacy and protecting our customer data, our customer workflows, which are very sensitive. We did not tear down any walls. We did not compromise anything in our delivery of this functionality. The same promise that we had for the non-AI workflows, is the same promise we have for the AI workflows. That’s a guarantee that makes a lot more customers comfortable.

Additionally, one of the pieces of feedback that we’ve gotten from both the beta program customers as well as elsewhere is that because it’s on AuditBoard, it’s already trusted. The hurdle to enabling the auditors, the risk and compliance professionals with AI is lower. What they’re afraid of is an auditor downloading sensitive data and uploading it to ChatGPT. On AuditBoard, that same protection that we have for their other workflow [is there]. The security teams are more comfortable with that.

The interest has been tremendous. Even on launch day, it’s far exceeding our expectations in terms of number of customers that are opting in. The guarantees that they need are pretty simple. They just want to make sure that we’re living up to our promise.

What are some of the things you learned about using AI for these types of functions during the beta test?

The key thing that we learned is the scope goes back to the appetite. Auditors, you think about their day-to-day job, it’s incredibly important. It’s what guarantees that all the processes and procedures inside the company are appropriately followed. The thing that we learned is that a lot of that work today is very manual. It’s very rote. Auditors don’t want to do that. They’re smart humans. They want to operate at a higher cognitive level than they’re able to [because they’re overwhelmed with this work]. We had a customer the other day give us the feedback that all risk descriptions are now written with AuditBoard AI. From speaking broadly across the customer base, more than half of the issues and controls that we see being edited within our beta program are written using AuditBoard AI.

We’re early in terms of where our vision is relative to where we want to go, but even these various early [domain work] in AI is working, providing value out of the box.

FACTS + COMMENTS

Pay for CEOs at some of the largest entertainment companies in the U.S. rose at a rate of more than twice that of chief executives at other large companies, data shows.

$34.8 million: Average 2023 salary of top executives at Disney, Warner Bros., Netflix and five other companies

24.7%: Increase in entertainment CEOs’ pay in 2023

284%: One-year increase in compensation for Lionsgate CEO Jon Feltheimer, who made $21.5 million last year

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STRATEGIES + ADVICE

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QUIZ

After the Federal Trade Commission issued a new rule banning noncompete clauses, which prohibit employees from working for competitors, the U.S. Chamber of Commerce filed a lawsuit to have the rule overturned. Which one of the following isn’t an argument made in the suit?

A. Companies will have to pay employees more in order to keep them from going to competitors

B. The FTC lacks the power to make this rule

C. It undermines businesses’ ability to remain competitive

D. It sets a precedent for government micromanagement of business

See if you got the answer right here.