The Top Trends in Corporate Financial Reporting

In recent years, new technologies have increased the demand for ESG reporting and automation tools have transformed financial reporting. Increasingly, companies are looking to leverage new technologies to reshape their data analytics, with an emphasis on maintaining compliance and increasing transparency.

As new technologies become available and roll out across the financial services industry, companies are able to produce real-time data that guides them in making informed decisions. Let's unpack how these financial reporting trends are changing the face of financial reporting and ways for companies to adapt to the new best practices.

Regulatory Compliance and Corporate Governance

2024 saw a wave of regulatory changes, including those to the International Financial Reporting Standards (IFRS), and on the national level, from the Financial Accounting Standards Board (FASB).

Before we dive into these changes, let's look at how changing regulations and the need to stay in compliance impact the financial reporting process for companies, including supporting actors like an accounting firm.

Organizations such as the FASB are monitoring financial reporting trends and the broader economic and social shifts in society. Taking these new developments into account, these organizations make changes to corporate reporting standards that reflect these underlying shifts and promote transparency and fairness.

For example, the latest changes to the financial reporting center on corporate governance, financial transparency and ethics. Regulators want to make sure that companies disclose key financial information to potential stakeholders. They prioritize transparency and timeliness when sharing cash flow and accounting information.

Corporations need to incorporate these regulatory changes into their required financial reports, including the cash flow report and income statement. Otherwise, they risk fines and penalties for noncompliance.

It takes time and effort to stay up to date with changes and understand the new integrated reporting requirements, whether for a small business worried about domestic requirements or a global entity that needs to monitor regulatory changes on a far broader level.

One solution is to invest in financial reporting tools that automatically integrate new requirements into their reporting forms, prompting employees for the required information as they pull forms together before a filing deadline.

Sustainability Reporting and Corporate Responsibility

Sustainability reporting is another area of focus, as seen in the European Commission's new European Sustainability Reporting Standards (ESRS). Sustainability reporting requirements like the ESRS require companies to monitor and disclose greenhouse gas emissions associated with their operations.

They also require companies to make materiality assessments that identify operationally relevant environmental, social and governance (ESG) issues and track key performance indicators toward stated ESG goals.

Common ESG metrics might include things such as:

• Renewable energy usage
• Greenhouse gas emissions
• Carbon footprint
• Waste produced
• Pay parity
• Diversity of corporate board
• Workplace diversity
• Employee health and safety

Because many sustainability regulations are new, companies need to devote extra time to understanding ESG and sustainability data collection and data analysis needs ahead of any reporting deadlines.

In recent years, investors have shown an increased interest in moving beyond the financial performance of a company to understand the impact of its operations through ESG metrics. Let's pause for a moment to unpack the reason. Why do investors suddenly want data on ESG performance? Investors are looking for any information that will help them decide which company or companies in a sector to invest in.

While in the past, financial information alone might have helped them decide, today's investors are motivated by more than financial performance. Many want to invest in ways that align with their personal ethics, whether that's in pay equality for women and men, workplace diversity or reducing the carbon footprint associated with the production and shipment of goods.

ESG data allows investors to better understand how a potential investment fits with their goals. It helps them decide which company in a sector is the best for their goals, taking values into account.

While there has been a backlash to ESG in the financial sector, the financial data shows that companies with strong ESG ratings deliver stronger returns for shareholders — annual returns of 12.9 percent for ESG leaders vs. 8.6% for companies with low ESG performance. ESG isn't just good for investors. It's good for business, too. Companies with higher ESG scores tend to outperform their peers over the long term.

While ESG solutions can cost companies money in the short term, these investments decrease operational costs in the long term. For example, a factory pays upfront to install solar panels yet decreases its energy costs once the panels are up and running.

Best Ways to Integrate Sustainability into Financial Reports

ESG is clearly important to both investors and company leadership. So, what is the best way to integrate ESG performance and other sustainability metrics into financial statements?

It starts with the materiality assessment to clearly define ESG goals. Once the goals are identified, a company can confidently select the right pieces of data that demonstrate progress toward goals. With a pay parity commitment, the key performance indicator would be salary. With a carbon footprint, necessary data would reflect their energy consumption or energy-saving solutions.

Often, ESG reporting requires companies to pull together different types of data from across operations, not just financial data related to growth or expenses. Thus, it can help to assign a single point person who is in charge of ESG data aggregation and analysis. Once the needed data points have been identified and roles assigned, the final piece of the puzzle is data collection, analysis and reporting.

As we'll examine next, technological advancements including automation streamline the heavy lifting associated with collecting and analyzing this data.

Technological Advancements in Financial Reporting

Automation and AI are major trends within financial reporting, helping companies to streamline their operations. Yet they are far from the only technological advancements in financial reporting trend analysis experts are monitoring.

Let's explore a few advancements that could reshape how companies report financial information:

Blockchain integration

If information is intercepted during transmission or there is a data breach, then both sensitive private information and intellectual property could be exposed. Blockchain helps to secure financial information, ensuring data privacy.

The adoption of blockchain also has implications for transparency and trust. Blockchain allows transactions to be verified in real-time, ensuring the accuracy of financial data. Because blockchain is decentralized, the data cannot be changed once it is ingested. This acts as a fraud deterrent, by ensuring that data cannot be changed — purposefully or accidentally — once it has been captured by the system.

Advanced data analytics and data visualization

Data analysis is not new — but companies are finding new and more sophisticated ways to apply data analysis for business intelligence and informed decision-making. This is particularly helpful in sectors that move quickly, such as retail or manufacturing.

In these industries, companies need real-time data to understand their performance in the current market and predictive tools to examine how changing market conditions might ease or stall their progress toward business goals.

Data visualization features help translate this information to an audience that may not be numbers driven. This is helpful on boards, for instance, where some board members might not have the business background to draw inferences from figures alone.

Data privacy protection

Cyberattacks are a constant concern within the financial sector. Attackers use ever more sophisticated techniques, which prompts companies to adopt even more powerful cybersecurity measures to deter them.

Companies should make sure they adapt to these circumstances with powerful cybersecurity and data protection measures, including in any software they rely on for financial reporting.

The Role of Data Analytics and Machine Learning in Finance

Companies increasingly rely on AI for data collection and analysis.

Machine learning refers to the process of teaching an AI how to recognize new patterns, refining the training, so the results are ever more relevant. Leveraging AI for data analytics significantly reduces the amount of time it takes to collect and sort data.

When companies can quickly gather needed data sets, it becomes much easier to prepare financial reports. Humans can operate the AI, then step in and review the information to make sure that everything is correct.

At present, AI is primarily for data collection and reporting. Moving forward, experts expect to see more predictive applications, for example, in financial forecasting. Using process recognition and deep data analysis, the AI assistant can suggest how a company's historical performance is likely to influence its future economic performance.

Another future-oriented application for AI concerns risk modeling. Drawing from past historical examples, AI can evaluate the risk associated with potential actions or outcomes, guiding business decision-making. It is worth pointing out that these types of future-oriented predictions are educated guesses. They may or may not come to pass. Nonetheless, companies may find it helpful to use the AI to examine possible courses of action or financial scenarios.

Impact of Digital Transformation on Financial Reporting

Digital transformation, or the adoption of digital technologies, has greatly reshaped financial reporting. Primarily, digital transformations support transparency and streamline compliance, reducing the workload associated with the financial reporting process. Digital transformation will continue to reshape the reporting process in surprising ways moving forward.

We'll examine some predictions for the future momentarily. For now, let's explore the challenges and opportunities associated with digital transformation in finance.

Opportunities include:

• Saving time and money by using AI to sort and gather data much faster than a team could
• Gaining a competitive advantage over peers who may lag in adoption of these technologies
• Gaining peace of mind knowing that sensitive financial data is protected with leading-edge security solutions
• Gaining access to real-time financial data for stronger decision-making
• Potential to explore future scenarios with predictive analytics

Challenges associated with the adoption of digital technologies include:

• Difficulty integrating new tools with legacy software or legacy processes
• Pushback from team members who are resistant to change or nervous about learning a new way of doing things
• Resistance from other key stakeholders who are caught off-guard by the change
• It can be costly to make investments in these tools and solutions, including cybersecurity protection to deter cyberattacks

Outlook: Financial Reporting Trends

Industry data reports that AI adoption has crossed the majority threshold, with 51% of executives reporting that they use generative AI to improve their business model.

While AI adoption is already widespread, the future holds the potential for further integration of AI and machine learning within financial reporting.

Trend analysis experts also expect to see more blockchain integration within the financial sector. While blockchain has many benefits from a security perspective, mentioned above, it also has the potential to deter fraud in financial statements by adding another layer of access control.

Taken together, each of these trends represents a move toward more transparent, efficient and technology-driven financial reporting. Organizations that adopt these trends will benefit from efficient, streamlined technologies. They will have an easier time keeping up to date with regulatory changes, which leaves more time to focus on mission-critical operations.

Ready to upgrade your financial reporting tools? Explore how DFIN's world-class solutions can help.