Category Archives: Opportunity

Where CEOs need to focus in 2023—and beyond

Posted on by • Posted in Affordability, Aging Population, Behavioral Health Infrastructure, Business Model, Business Transformations, CEO, Challenge, Change Management, Change Mindset, Chaos, Competition, Costly Specialty Therapeutics, Existential Opportunity, First Mover Advantage, Focus, Growing Senior Population, High Cost Therapies, Leadership Vision, Opportunity, Outcomes, Outcomes Appropriate, Restructure, Strategic Attention, Strategic Change, Strategic Leadership, Strategy, Unmanaged Behavioral Needs • Leave a comment
https://www.advisory.com/daily-briefing/2023/02/02/radio-advisory-146?utm_source=member_db&utm_medium=email&utm_campaign=2023feb02&utm_content=member_headline_finalb_infogram_x_x_x&elq_cid=4838956&

Radio Advisory’s Rachel Woods sat down with Advisory Board‘s Aaron Mauck and Natalie Trebes to talk about where leaders need to focus their attention on longer-term industry challenges—like growing competition, behavioral health infrastructure, and finding success in value-based care.

Read a lightly edited excerpt from the interview below and download the episode for the full conversation.https://player.fireside.fm/v2/HO0EUJAe+VhuSvHlL?theme=dark

Rachel Woods: So I’ve been thinking about the last conversation that we had about what executives need to know to be prepared to be successful in 2023, and I feel like my big takeaway is that the present feels aggressively urgent. The business climate today is extraordinarily tough, there are all these disruptive forces that are changing the competitive landscape, right? That’s where we focused most of our last conversation.

But we also agreed that those were still kind of near-term problems. My question is why, if things feel like they are in such a crisis, do we need to also focus our attention on longer term challenges?

Aaron Mauck: It’s pretty clear that the business environment really isn’t sustainable as it currently stands, and there’s a tendency, of course, for all businesses to focus on the urgent and important items at the expense of the non-urgent and important items. And we have a lot of non-urgent important things that are coming on the horizon that we have to address.

Obviously, you think about the aging population. We have the baby boom reaching an age where they’re going to have multiple care needs that have to be addressed that constitute pretty significant challenges. That aging population is a central concern for all of us.

Costly specialty therapeutics that are coming down the pipeline that are going to yield great results for certain patient segments, but are going to be very expensive. Unmanaged behavioral needs, disagreements around appropriate spending. So we have lots of challenges, myriad of challenges we’re going to have to address simultaneously.

Natalie Trebes: Yeah, that’s right. And I would add that all of those things are at threshold moments where they are pivoting into becoming our real big problems that are very soon going to be the near term problems. And the environment that we talked about last time, it’s competitive chaos that’s happening right now, is actually the perfect time to be making some changes because all the challenges we’re going to talk about require really significant restructuring of how we do business. That’s hard to do when things are stable.

Woods: Yes. But I still think you’re going to get some people who disagree. And let me tell you why. I think there’s two reasons why people are going to disagree. The first reason is, again, they are dealing with not just one massive fire in front of them, but what feels like countless massive fires in front of them that’s just demanding all of their strategic attention. That was the first thing you said every executive needs to know going into this year, and maybe not know, but accept, if I’m thinking about the stages of grief.

But the second reason why I think people are going to push back is the laundry list of things that Aaron just spoke of are areas where, I’m not saying the healthcare industry shouldn’t be focused on them, but we haven’t actually made meaningful progress so far.

Is 2023 actually the year where we should start chipping away at some of those huge industry challenges? That’s where I think you’re going to get disagreement. What do you say to that?

Trebes: I think that’s fair. I think it’s partly that we have to start transforming today and organizations are going to diverge from here in terms of how they are affected. So far, we’ve been really kind of sharing the pain of a lot of these challenges, it’s bits and pieces here. We’re all having to eat a little slice of this.

I think different organizations right now, if they are careful about understanding their vulnerabilities and thinking about where they’re exposed, are going to be setting themselves up to pass along some of that to other organizations. And so this is the moment to really understand how do we collectively want to address these challenges rather than continue to try to touch as little of it as we possibly can and scrape by?

Woods: That’s interesting because it’s also probably not just preparing for where you have vulnerabilities that are going to be exposed sooner rather than later, but also where might you have a first mover advantage? That gets back to what you were talking about when it comes to the kind of competitive landscape, and there’s probably people who can use these as an opportunity for the future.

Mauck: Crises are always opportunities and even for those players across the healthcare system who have really felt like they’re boxers in the later rounds covering up under a lot of blows, there’s opportunities for them to come back and devise strategies for the long term that really yield growth.

We shouldn’t treat this as a time just of contraction. There are major opportunities even for some of the traditional incumbents if they’re approaching these challenges in the right fashion. When we think about that in terms of things like labor or care delivery models, there’s huge opportunities and when I talk with C-suites from across the sector, they recognize those opportunities. They’re thinking in the long term, they need to think in the long term if they’re going to sustain themselves. It is a time of existential crisis, but also a time for existential opportunity.

Trebes: Yeah, let’s be real, there is a big risk of being a first mover, but there is a really big opportunity in being on the forefront of designing the infrastructure and setting the table of where we want to go and designing this to work for you. Because changes have to happen, you really want to be involved in that kind of decision making.

Woods: And in the vein of acceptance, we should all accept that this isn’t going to be easy. The challenges that I think we want to focus on for the rest of this conversation are challenges that up to this point have seemed unsolvable. What are the specific areas that you think should really demand executive attention in 2023?

Trebes: Well, I think they break into a few different categories. We are having real debates about how do we decide what are appropriate outcomes in healthcare? And so the concept of measuring value and paying for value. We have to make some decisions about what trade-offs we want to make there, and how do we build in health equity into our business model and do we want to make that a reality for everyone?

Another category is all of the expensive care that we have to figure out how to deliver and finance over the coming years. So we’re talking about the already inadequate behavioral health infrastructure that’s seen a huge influx in demand.

We’re talking about what Aaron mentioned, the growing senior population, especially with boomers getting older and requiring a lot more care, and the pipeline of high-cost therapies. All of this is not what we are ready as the healthcare system as it exists today to manage appropriately in a financially sustainable way. And that’s going to be really hard for purchasers who are financing all of this.

As fraud rises, CFOs must approach numbers skeptically, report finds

Posted on by • Posted in Asset Impairment, Audit Committee, Auditor External, Auditor Internal, CEO, CFO, Checks and Balances, Financial Reporting Fraud, Financial Reserve Manipulation, Financial Statement Fraud, Financial Stewardship, Financial Transparency, Financially Distressed, Fraud Deterrent and Detection, Fraud Triangle, Improper Revenue Recognition, Internal Audit, Internal Control, Inventory Manipulation, Manipulation of Debt Compliance Covenants, Opportunity, Over/Understating Accounting Estimates, Pandemic, Pressure, Professional Skepticism, Rationalization, Revenue Fabrication, Revenue Manipulation, Understate of Accounts Receivable Reserves, Unrecognized Inventory Impairments • Leave a comment

https://www.cfodive.com/news/Center-Audit-Quality-financial-reporting-fraud/593123/

Executives might be committed to accuracy, but middle managers and others throughout the organization must be on board, too.

The pandemic is increasing financial reporting fraud, putting the onus on CFOs to create an organization-wide system that prevents wrongdoing, a coalition of auditing and other oversight groups said in a report released today.

“Financial statement fraud in public companies is real and that risk has only increased during the Covid-19 pandemic,” said Julie Bell Lindsay, executive director of the Center for Audit Quality, one of four groups to release the report.

To help ensure the integrity of their company’s financial reporting, CFOs can’t rely on external auditors as their bulwark against fraud; they must weave protection into the fabric of the organization and exercise the same skepticism toward numbers auditors are trained to do.

“The strongest fraud deterrent and detection program requires extreme diligence from all participants in the financial reporting system,” Lindsay said. “Certainly, you have internal and external auditors, but you also have regulators, audit committees and, especially, public company management.”

Heightened stress

The report looks at SEC enforcement data from 2014 to 2019, a period of relative calm Linsday said can help set a baseline for assessing how much in pandemic-caused fraud regulators will find when they do their post-crisis analysis.

“The timing of this report is really a great way to … remind all the folks in the financial reporting ecosystem that … the pressures for fraud to happen are strong right now,” she said. 

Improper revenue recognition comprises about 40% of wrongdoing in financial reporting, more than any other type, a finding that tracks an SEC analysis released last August. 

Companies tend to manipulate revenue in four ways:

  1. The timing of recognition
  2. The value applied
  3. The source
  4. The percentage of contract completion claimed

The report singles out revenue-recognition manipulation by OCZ Technology Group, a solid-state drive manufacturer that went bankrupt in 2013, as a typical case.

The company had to restate its revenues by more than $100 million after it was caught mis-characterizing sales discounts as marketing expenses, shipping more goods to a large customer than it could be expected to sell, and withholding information on product returns.

The CEO was charged with fraud and the CFO with accounting, disclosure, and internal accounting controls failures.

The report lists three other common types of fraud: manipulation of financial reserves, manipulation of inventories, and improper calculation of impairment.

Reserve issues involve how, and when, balances are changed, and how expenses are classified; inventory issues involve the amounts that are listed and how much sales cost; and impairment issues involve the timing and accuracy of the calculation. 

Increase expected

More of these kinds of problems will likely be found to be happening because of the pandemic, the report said. 

“This is where all of this comes to a head,” Lindsay said. “You certainly can see pressure, because some companies are struggling right now and there can be pressure to meet numbers, analysts expectations.”

The pressure finance professionals face is part of what the report calls a “fraud triangle,” a convergence of three factors that can lead to fraud: pressure, opportunity and rationalization.

In the context of the pandemic, pressure comes as companies struggle with big drops in revenue; opportunity arises as employees work remotely; and the rationalization for fraud is reinforced by the unprecedented challenges people are facing. 

“It could be anything,” said Lindsay. “‘My wife just lost her job, so I need to make up for it.'”

The report lists fraud types that analysts expect are rising because of the pandemic:

  • Fabrication of revenue to offset losses.
  • Understatement of accounts receivable reserves as customers delay payments. 
  • Manipulation of compliance with debt covenants. 
  • Unrecognized inventory impairments.
  • Over- or understated accounting estimates to meet projection.

About a dozen types in all are listed. 

“Past crises have proven that at any time of large-scale disruption or stress on an economy or industry, companies should be prepared for the possibility of increased fraud.” the report said. 

Lindsay stressed three lessons she’d like to see CFOs take away from the report.

First, the potential for fraud in their companies shouldn’t be an afterthought. Second, protection against it is management’s responsibility but there’s also a role for company’s audit committee, its internal auditors and it’s external auditors. Third, CFOs and the finance executives they work with, including at the middle management level, must bring that same skepticism toward the numbers that auditors are trained to bring.

“Professional skepticism is a core competency of the external auditor and, quite frankly, the internal auditor,” she said. “Management and committee members are not necessarily trained on what it is, but it doesn’t mean you shouldn’t be exercising skepticism, [which is] asking questions about the numbers that are being reported. Is this exactly what happened? Do we have weaknesses? Do we have areas of positivity? It’s really about drilling down and having a dialogue and not just taking the numbers at face value.”

In addition to the Center for Audit Quality, Mitigating the Risks of Common Fraud Schemes: Insights From SEC Enforcement Actions was prepared by Financial Executives International, The Institute of Internal Auditors and the National Association of Corporate Directors.