Risk and Finance

Just think about it. In 2000, investors’ overly high expectations—but just as much the overly ambitious plans of CFOs, CROs, and CEOs—led to the sudden end of the internet hype. Stock prices plummeted, and countless internet companies went bankrupt. In the “new economy,” after all, spending money had supposedly been more important than making money. Or… maybe not.The internet crisis subsequently led to large-scale accounting fraud suddenly coming to light in other industries. However, due to deteriorating market conditions, executives at companies such as the American utility firm Enron (which went bankrupt) and the supermarket group Ahold (which was bailed out) were no longer able to keep their fraud under the radar. Major accounting scandals followed worldwide.Private equity, which has been on the rise in the Netherlands since the turn of the century, has also given rise to a number of problems. It turned out that some parties had been too eager to burden their private equity investments with debt.These issues led to stricter laws and regulations. Consider, for example, the Dutch Corporate Governance Code or the U.S. Sarbanes-Oxley Act. Regulators such as De Nederlandsche Bank (DNB) and the Netherlands Authority for the Financial Markets (AFM) were given increasing responsibilities and power, which in turn led to the professionalization of finance and risk departments at large corporations.

Rise of the Chief Risk Officer

However, this professionalization could not prevent another financial crisis from emerging. The credit crisis beginning in 2007 primarily affected the financial and banking sectors. Shortly thereafter came the euro crisis, which plunged the eurozone and all of Europe into crisis. It was precisely at the heart of the capitalist system (the financial sector) that risk rules were systematically circumvented and flouted. Compliance proved not to be the solution. A deep economic crisis ensued. Banks faltered or went bankrupt. The European Central Bank (ECB) had to come to the rescue. This crisis led to the rise of the chief risk officer in the boardroom. Especially in financial organizations, the CRO role has since become central. The CRO is not only concerned with rules and compliance but also with encouraging good behavior. These days, this combination is also referred to as “Hearts & Minds.”Back to the beginning. How different the situation is with the COVID-19 crisis. The economic crisis that began in 2020 was not caused by large-scale fraud or risky behavior, but by a health crisis. Financial professionals are literally above suspicion in this crisis. This is not a crisis caused by excessive debt, excessive risk, or poor accounting practices. The crisis was primarily caused by COVID-19 severely restricting everyone’s freedom of movement.The fact that finance professionals or chief financial officers are not the scapegoats does not mean, however, that they had it easy during this crisis. On the contrary, revenue losses in many industries were unprecedented in 2020. Whether it involves private equity investments, publicly traded companies, or family businesses, for the CFO, the crisis means it’s all hands on deck.

Integrated reporting

Finally, this applies not only to risk management or risk control. Certified public accountants have also become busier. Consumers and investors, made wary in part by the crises of the past two decades, are demanding much greater transparency and “a good story” from companies. That “good story” means: do you deal transparently and fairly with customers, suppliers, employees, and other stakeholders? But also: what does the supply chain look like? How sustainable or circular is it? For organizations, this increased social pressure means they must no longer report solely on financial matters, but also on issues such as sustainability and good governance. This is known as integrated reporting. What began with the Sustainability Report, in which companies describe their sustainability aspirations, is increasingly becoming a central part of business operations and, consequently, accounting practices.