Institutional investors putting financial integrity of large companies under due diligence microscope, says BlackLine


A global survey of institutional investors commissioned by financial automation software leader BlackLine reveals that 82 per cent 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.

Research commissioned by accounting automation software leader BlackLine reveals how Finance & Accounting can help get the green light from investors.

Research commissioned by accounting automation software leader BlackLine reveals the financial red flags fuelilng investor fears.

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 per cent believe that more large companies will resort to these techniques over the next 12 to 18 months.

Worryingly, 83 per cent 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. However, companies should think twice before trying to manipulate their figures; a quarter (25 per cent) 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," says 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 per cent) say risk of internal financial fraud or financial non-compliance make them less likely to invest. Meanwhile, a quarter (25 per cent) are put off by consistently late filings, with a slightly higher portion less likely to invest in companies that make adjustments post reporting (29 per cent).

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 per cent), access to real-time snapshots of company finances (42 per cent) and key metrics within financial reports (46 per cent) 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.

"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," says 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.

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