Preparing for a recession in inflationary times

Conflicting signals on expectations for inflation have whipsawed the Federal Reserve in recent days as it tries to assess whether to raise the main interest rate next month beyond the current 22-year high or hold borrowing costs steady.

The New York Fed, reporting on a survey, said Monday that consumers last month expected inflation to slow to 3.6% in a year and to 2.7% in five years, a brighter outlook compared with their median projections in September of 3.7% and 2.8%, respectively.

The report differed from a release by the University of Michigan on Friday indicating that long-run consumer expectations for inflation rose from 3% in October to 3.2% this month — the highest level since 2011. Consumers also forecast that inflation in a year will increase to 4.4%, or 1.2 percentage points higher than their projection in September.

“The uptick in inflation expectations will be a source of anxiety for the Fed, given lingering fears that the downturn in inflation could stall,” Kieran Clancy, senior U.S. economist at Pantheon Macroeconomics, said in a client note before the release of the New York Fed report.

Fed policymakers closely track inflation expectations as a sign of whether businesses will raise prices and workers will demand higher pay.

While steady or declining forecasts for price pressures bolster confidence that monetary policy is on target, public perceptions that inflation will accelerate may prove self-reinforcing and spur Fed policymakers to tighten further.

Fed Chair Jerome Powell and other central bank officials have often said they aim to anchor inflation expectations and limit the risk that price pressures may rebound after declining for several months.

Richmond Fed President Tom Barkin warned Friday about the momentum behind price gains.

“After decades without pricing power, businesses aren’t going to back down from raising prices until their customers or competitors force their hands,” he said in a speech.

“I fear more will have to happen on the demand side to convince price setters the inflation era is over,” Barkin said.

The Fed has slowed inflation by hiking the main interest rate from near zero to a range between 5.25% and 5.5%. Its preferred inflation measure — the core personal consumption expenditures price index — fell in September to 3.7% on an annual basis from 5.5% in September 2022.      

Policymakers have held off from hiking the main interest rate in two consecutive meetings. They plan to gather again on Dec. 12-13.

Higher oil prices probably spurred much of the gain in inflation expectations as reported by the University of Michigan, Clancy said. Indeed, expectations for increases in gas prices in both the short and long run hit the highest reading in 2023, the university said.  

“It’s reasonable to expect inflation expectations to drop back as the recent drop in oil prices feeds through to the official inflation numbers,” Clancy said.

The average retail price for a gallon of gasoline has fallen 8% during the past month, according to AAA.

“Further substantial falls are in the pipeline,” Clancy said.

While economic optimism – broadly speaking – is on the rise, there remain many stubborn challenges for CFOs to contend with: low growth and productivity malaise, waning pricing power in the face of cost pressures, and increased cost of capital.

Gartner calls these convergent factors the “Deadweight” economy, and it contrasts with a much more favorable economic environment in the decade before the pandemic. In such an environment CFOs are feeling the pressure to manage costs. Yet a decade-long Gartner study of major companies identified a top tier of efficient growth companies that had found a way to take bigger, bolder growth bets and unlock growth even during difficult times.

These companies achieved sustained long-term revenue growth and simultaneous margin improvements even while their peers struggled with economic volatility. The question is how these efficient growth leaders have managed to keep control of costs while still funding the growth plays that have enabled them to outperform their peers.

Growth Ladders and Anchors

Growth ladders are a set of programs, initiatives or incentives adopted by CFOs to drive bigger growth investments. While they aren’t harmful to adopt, they don’t directly address business leaders’ underlying risk aversion that remains, even when they are encouraged to take more risks.

What truly sets apart leading efficient growth companies is the way they seek to mitigate or remove what Gartner calls, “growth anchors.” Particularly in an environment where finance is trying to keep a tight control on costs, the function is prone to creating obstacles that drag on the implementation of growth.

In one case, a technology firm with more than $20 billion revenue created a growth investment committee for business leaders to get funding for big ideas. Yet the process to get in front of the committee was very bureaucratic, involving filling out lengthy business case templates just to be considered, and then needing multiple layers of approval to even get partial funding for a project that was still in the idea stage. For many business leaders, it was much easier just not bothering with growth bets and so ended up working as a growth anchor.

In another example the finance department at a global industrials company was pushing the business for a new product. But when pricing analysis around a potential product was needed to move forward, the company would send the matter to a far-flung center of excellence where it was 14th in line and might come back in a fortnight. Or when a new product required hiring engineers it would get hung up in corporate taking forever to find good candidates. Finance was urging the business to grow and yet at the same time was starving the business of the capacity it needed to grow.

Other examples of growth anchors include processes that impede action: finance builds out management reports to help support decision-making around growth projects, but by the time decision makers get the data in their hands, it’s too late to be useful. Also, short-termism: every monthly or quarterly business review is all about ‘why are you 4% over budget on this’ and ‘why was last quarter’s forecast 7% off’ – all short-term issues that distract from longer-term risks and opportunities. But starting to think about removing anchors instead of just following the processes you always have can make all the difference.

For example, when starting to think about growth anchors, one CFO at a manufacturing organization realized that the finance operating reviews they were running to drive performance were having the opposite of the intended effect – they were always dominated by backwards-looking considerations, debates about what numbers were the right ones, justification of budget variances, and so on.

So, the CFO moved the financial review to a 15-minute agenda item at the very end of the multi-hour session, instead devoting the bulk of the time to emerging risks and opportunities, customer changes, market change, and the like. This kept the discussion forward-looking and delivered far more useful information than before.

Tactics to Lessen Growth Anchors

Leading growth companies are proactive about removing growth anchors. A good place to start is to help business managers submit business cases by providing an easy-to-use tool to calculate the ROI of their proposed investment. This curtails bureaucracy by simplifying a lengthy activity and encourages business managers to submit ideas without hesitation.

Address a dangerous-to-fail culture by setting up predefined exit triggers to ease worries about what to do if an investment goes off track and to prevent premature termination of high-risk growth bets. This helps business managers feel more comfortable proposing and managing growth bets and leadership feel more comfortable approving them, and also prioritizes longer term learning over chasing the “sure thing” to hit short term metrics.

To illustrate this let’s examine the case of a CFO at a consumer products organization: They recognized that their incentive structure was acting as a growth anchor. Compensation for business leaders was heavily weighted towards delivering on targets set during the budget process, but their critical growth bets were in emerging markets where the volatility of economic conditions made it less certain that a business could deliver on its target.

This made it hard for the organization to attract their best talent to manage these critical growth opportunities. The CFO led an effort to redefine performance criteria to weight controllable management decisions more heavily, resulting in more business leaders willing to take on higher risk assignments.

In truth, much of this is a shift in mindset.That can’t solve economic volatility, but smoothing the path for growth innovation is a hallmark of those companies that navigate it best.

Half of CFOs and other “treasury professionals” in the U.S. and Canada believe shifts in inflation, interest rates and economic growth pose the biggest risks to company earnings in the next three years, the Association for Financial Professionals found in a survey.

“Looking ahead to 2026, respondents’ lack of confidence in predicting their organizations earnings presents a gloomy outlook,” according the AFP Risk Survey Report. “With the immense uncertainty that has dominated the economic environment, the doubt that appears to exist in the current economic environment can only be expected.”

Seven out of 10 respondents in the U.S. and Canada have tried to adapt to the rapid rise of borrowing costs since early last year by stepping up efforts to ensure liquidity, the AFP said. During the coming year, 63% of those surveyed said they plan to cut costs.

CFOs for more than a year have faced widespread forecasts of recession and rising borrowing costs as the Federal Reserve pushed up the main interest rate from near zero to a range between 5.25% and 5.5%, the highest level in 22 years.

“Fears of recession and other economic uncertainties and interest rate fluctuations caused more treasury professionals to keep their money close,” the AFP said. “With increasing financial pressures, firms are being forced to trim costs.”

Many CFOs face the prospect of strained balance sheets as they refinance debt in coming months at much higher interest rates than were common just two years ago.

The outlook for borrowing has worsened in recent weeks. Since Fed policymakers met on Sept. 19-20, the yield on the 10-year Treasury note has risen about 0.5 percentage points to 4.8%.

The yield — the benchmark for corporate bonds, auto loans, mortgages, student loans and other financing — breached 5% on Monday for the first time in 16 years before falling back. It began 2023 at about 3.8%.

“We’re going to see higher rates for longer,” BlackRock CEO Larry Fink predicted Tuesday at a conference in Riyadh, Saudi Arabia, citing harmful U.S. fiscal policy and other inflationary forces such as the Fed’s large balance sheet, threats to immigration and fragmentation of supply chains.

JPMorgan Chase CEO Jamie Dimon voiced caution about the economic outlook and, like Fink, criticized fiscal and monetary policy, saying that “central banks 18 months ago were 100% dead wrong” in their forecasts.

“Fiscal spending is more than it’s ever been in peacetime and there’s this omnipotent feeling that central banks and governments can manage through all this stuff,” Dimon said during a roundtable discussion with Fink sponsored by the Future Investment Initiative Institute.

Fifty-four percent of CFOs and other “treasury professionals” believe inflation will challenge earnings during the next three years, AFP said.

“Future earnings are likely to be affected by rising costs and rising wages, resulting in higher costs of goods sold and selling costs and administrative costs,” according to AFP.

In the U.S. and Canada, 58% of survey respondents identified cyberattacks such as phishing and ransomware as the most challenging risks, an increase from 47% in 2021 and 12% in 2010, AFP said.

More than four out of five respondents in the U.S. and Canada (82%) said expanded use of technology has increased company vulnerability to cyberattack, AFP said.

“As much as companies try to prepare for such attacks, breaches arise when least expected,” according to AFP. It conducted a worldwide survey in May of 408 CFOs, treasurers, controllers and other financial professionals.

Inflation and a lack of skilled talent are putting pressure on CFOs who are tasked with keeping their companies steady despite shrinking resources. Such pressures are leaving finance teams markedly less efficient this year than they were a year prior, according to a recent survey by reporting, analytics, and performance management solution provider insightsoftware.

Finance teams were found to be less efficient in all responsibilities tracked by the software provider’s Finance Team Trends Report for 2023, with capital management and treasury, short-term business strategy, and mergers and acquisitions seeing the steepest drops.  

To boost efficiency — even as they face a rise in the responsibilities associated with the finance function — CFOs “need to focus on prioritizing the most impactful projects to create a more agile, resilient organization enabled to capitalize on growth opportunities throughout the market changes,” insightsoftware CFO David Woodworth said in response to questions emailed by CFO Dive.

Nearly 70% of finance professionals reported feeling pressure from inflation, economic disruption and the possibility of recession, according to the survey — factors which have also pushed up the demand for finance teams to increase their efficiency.

“This means CFOs commonly find themselves with their head down to deliver the immediate requirements instead of looking forward and making changes to enable the future, including using the best tools to enhance team efficiency,” Woodworth said of how macroeconomic factors are affecting finance teams.  

Budget constraints (32%), raised prices (29%) and a lack of skill present in their team members (27%) are all top challenges finance leaders are facing, the survey found.

CFOs therefore need to find ways to be more efficient with less resources —"doing more with less is the key to scaling effectively,” Woodworth said, which includes eliminating “as many manual processes as possible” to help save time and funds.

Skill shortages in particular remain troublesome for finance professionals, with 41% of survey respondents indicating talent woes were a top external factor impacting their efficiency.

Federal Reserve Chair Jerome Powell pointed to persistent tightness in the labor market as one of the reasons contributing to continued inflation in comments to the House Financial Services Committee last week. Inflation remains well above the Fed’s 2% target as demand for labor continues to outstrip supply, Powell said, making it likely that the Fed will once again raise interest rates before the end of the year despite its June pause.

CFOs need to weather both demands to improve efficiency and a need to be more discerning with their hiring; 64% of finance professionals expect their teams to grow this year, compared to 73% in 2022, according to the insightsoftware survey.

Controllership, capital management and FP&A are among the finance functions suffering the worst talent gaps, Woodworth said.  CFOs “need to prioritize training and development, balanced with progress toward digitization and automation,” he said. “Enabling teams with the best tools to decrease non-value-added work helps attract and retain top talent.”

However, while strategic hiring and an increased focus on training can help some financial leaders bridge existing skill gaps, a “significant percentage of leaders” need to focus on software implementation and automation to do so, Woodworth said.

CFOs are looking outside of their teams and leaning on their IT departments for the skills their teams lack  — something that then creates a “bottleneck” for both teams when they need to focus on potentially weathering a coming recession, the survey found.

The percentage of finance professionals who reported being satisfied with their relationship with their IT counterparts dropped sharply this year, according to the survey, with 28% reporting they were completely satisfied with this relationship compared to the 54% who said the same last year. Moreover, 66% of finance professionals say they are too reliant on IT, according to the survey.

Implementing automation can help to ease the pressure on the finance team by reducing the need for existing employees to learn specific technical skills, Woodworth explained, or by easing the need to rely on the company’s IT teams for such skills.  

“Ultimately, there needs to be a focus on the right technology and increased training to ensure these skill gaps are addressed effectively,” he said.

However, with CFOs caught addressing the immediate needs of the business, automation’s potential has slumped slightly on finance leaders’ priority lists, insightsoftware’s survey found. While 24% of finance professionals pointed to manual processes as a key challenge impacting their teams’ efficiency, only 25% said they were prioritizing automation — a 15% drop from last year.

Failing to integrate automation now — especially as generative AI models in particular continue to improve — will lead to a competitive disadvantage for companies later down the line, Woodworth said. CFOs therefore need to understand that using such tools, which allow for greater collection and use of data, will enable greater and more agile reporting, allowing decision-makers access to the most current information to make the best decisions.

“They must also recognize that the right technology can address the challenge of lack of skills on their finance team — especially when prioritizing technology that uses familiar interfaces to conduct new tasks.” Woodworth said.

Conducted in partnership with Hanover Research, the survey included responses from 519 senior finance and accounting professionals across North America, Europe, the Middle East and Africa.

While a slump in jobs and other factors indicate the economy may be softening, retailer Walmart is still preparing for inflation to potentially impact its pricing, executives said this week during the company’s two-day investor community meetings.

Walmart is “assuming that this year is going to be somewhat anomalous, still feeling the effects of higher prices last year,” CFO John Rainey told analysts in a Q&A Wednesday following its investor presentations. “But hopefully, as we get to next year and then certainly beyond that, we get to a more normalized inflationary environment — not just inflationary, but overall economic growth as well.”

The retailer expects inflation to hover around 3% by the end of the year, Rainey — as well as CEO and President Douglas McMillon — said in response to analyst questions.  

The company is “comfortable with our current price gaps to the market,” Rainey told investors Wednesday, noting it is “something we monitor very closely and we’re confident in our ability to win share by maintaining the price gaps we’ve established,” he said.

Nevertheless, inflation is “still an issue,” Rainey said, which will continue to impact retail as well as the larger economy over the next year.

Despite a decline in manufacturing as well as jobs, officials at the Federal Reserve remain committed to their 2% inflation target as a potential recession continues to loom. The Fed should move further into “restrictive territory,” with the federal funds rate reaching above 5%, Cleveland Fed President Loretta Mester said Tuesday, with other officials agreeing that inflation still remains too high for a pullback in monetary tightening.  

Hiring slightly slowed in March, the Bureau of Labor Statistics said Friday, with total nonfarm payroll rising by 236,000 for the month and the unemployment rate inching down to 3.5%.

Walmart’s price challenges come after the retailer reported a weaker-than-expected outlook for fiscal year 2024 during its last earnings call in February, expecting same-store U.S. sales to grow by 2% to 2.5% and earnings per share between $5.90 to $6.05.

As part of its bid to reduce costs, the retailer is continuing to make investments in emerging technologies such as automation, Rainey said.

“The investments in automation are already far exceeding our productivity targets, in some cases almost 30% better, as we are able to flow inventory at lower costs and with less manual labor,” he said, noting Walmart expects 65% of its stores to be equipped with automation by the end of full year 2026.

Walmart’s automation push comes as the company takes steps to reduce its workforce and slow down hiring, having recently laid off about 2,000 workers across several U.S. warehouses, according to a Tuesday report by CNN.

Walmart is seeking to “complement” growth in headcount with emerging technologies, Rainey said Wednesday.  

CFOs in 2023 may want to think twice before planning for an end to the turmoil of the past two years.

A new variant of COVID-19 may flare up, inflation persists well above the Federal Reserve’s 2% target and geopolitical tensions, such as Russia’s invasion of Ukraine, loom large in even the most carefully crafted scenario planning.

The U.S. government is trying to curb many of the risks, with mixed results so far. One of its antidotes, as prescribed by the Securities and Exchange Commission (SEC), will require CFOs to spend more on compliance and plan for more disclosure and detailed risk management.

Other trends, such as a possible slide into recession, are beyond a CFO’s control.

Here’s a look at four of the trends for 2023. 

1. Close combat against inflation

Battling inflation is a core mission of the Federal Reserve. Since 2021, inflation has won.

Fed Chair Jerome Powell acknowledged early last year that policymakers underestimated price pressures.

In March, three months before the consumer price index (CPI) hit a four-decade high of 9.1% on an annual basis, policymakers began the most aggressive pullback in stimulus since the 1980s. Over the course of last year, they pushed up the federal funds rate by 4.25 percentage points.

Fed tightening reduced the CPI to 7.1% by November while also increasing the risk of recession. The probability of a downturn during the next 12 months is 65%, Goldman Sachs said Thursday, citing consensus estimates while adding that its own researchers see a 35% probability of recession.

Powell has repeatedly said the Fed will curb inflation even at the cost of setting back businesses and employment. But with price gains easing and the risk of a downturn rising, some economists fear policymakers in 2023 will pause or reverse course before bringing down inflation to their 2% target.

“What worries me is if inflation starts approaching 5%, they might let up and then we’ll see inflation shoot back up,” according to Aleksandar Tomic, director of the graduate programs in applied economics and applied analytics at Boston College.

Inflation this year will likely persist somewhere between 5% and 7%, Tomic predicted in an interview. “I don’t think there is any way we will get to 2% within 12 months without really bringing the economy down tremendously.”

Based on their median projections last month, Fed officials forecast that they will raise the federal funds rate by December to 5.1% — from a current range of 4.25% to 4.5% — before trimming the benchmark to 4.1% by Dec. 2024. They see the economy growing 0.5% this year and 1.6% in 2024.

Powell acknowledged that the forecasts are educated guesses at best. “No one knows with any certainty where the economy will be a year or more from now,” he said at a Dec. 14 press conference after the Fed released its projections.

Given the murky outlook, CFOs should avoid borrowing at variable interest rates or use swaps to hedge against rising rates, Tomic said.

Scenario planning is also essential when preparing for the future economic or monetary policy landscape, Tomic said, adding “whoever tells you anything with certainty is just lying to you.”

“This time last year, nobody thought Russia would invade Ukraine,” he said. “For many companies that turned everything upside down.”

2. Job openings go unfilled

Many CFOs eager to fill some of the economy’s 10.5 million job openings may need to keep “help wanted” signs posted well into 2023.

The tight labor market will probably persist for at least the next few months, according to Cristian deRitis, deputy chief economist at Moody’s Analytics.

“The dynamic in terms of demand exceeding supply is going to hold for a long while,” he said in an interview. “I don’t see a reversal of the trends there unless we go into recession,” he said, noting that Moody’s forecasts a “slowcession” of low growth rather than a downturn.

The unemployment rate in December fell to 3.5% from 3.6% the prior month as U.S. employers added 233,000 jobs, the Labor Department said Friday. The total number of available jobs was unchanged.

CFOs aiming to hire workers face several obstacles, including limits on immigration, an aging and shrinking labor force, and a trend of pandemic-induced early retirement, deRitis said.

Fed policymakers worry that the strong labor market will fuel wage pressures and worsen inflation by compelling companies to raise prices. Wages rose last year by 4.6%, according to the Labor Department.

“Wages are running well above what would be consistent with 2% inflation,” Powell said at a Dec. 14 press conference.

At the same time, compensation gains lagged inflation by more than 2 percentage points, prompting many workers to quit jobs for higher pay elsewhere and compounding wage pressures.

For some workers, “the only way for your salary to keep up with inflation is to change jobs,” Tomic said.

Eventually, as the Fed’s aggressive monetary tightening takes hold, unemployment will likely rise this year to 4.2%, deRitis said. Average monthly job growth will probably slump to around 75,000 from 370,000 in 2022, taking “some of the pressure off wage growth that we’ve been seeing that would certainly help the Fed’s case.”

Annual growth in wages may fall to between 3% and 3.5%, deRitis said.

CFOs leery of raising wages too much may want to consider providing workers with more job flexibility, including out-of-office work arrangements, deRitis said.

“It’s key for the employer to be creative in terms of the ways that they compensate employees,” he said. “I think you can build loyalty and high retention by having flexible policies.”

3. SEC demands disclosure

Since his swearing in as SEC chair in April 2021, Gary Gensler has laid out aggressive goals for increasing disclosure by public companies.

Investors need more information on companies’ cybersecurity, workforce diversity and vulnerability to crypto asset markets, Gensler has said.

Some proposed rules would shake up management by CFOs and their C-suite colleagues, compelling more detailed measurement of employee demographics and an overhaul in aspects of risk management, according to David Brown, a partner at Alston & Bird.

“We are forcing companies through disclosure to change the way they operate,” Brown said in an interview. “It’s extraordinarily ambitious.”

Gensler in March sparked criticism — and more than 14,000 public comment letters — after releasing a 490-page proposed rule that would require publicly traded companies to provide detailed disclosures on carbon emissions and climate risk.

The SEC aims to mandate that companies describe on Form 10-K their strategy toward climate risk, including plans to achieve any targets they have set for curbing such risk.

Companies would need to disclose data on their greenhouse gas (GHG) emissions, either from their facilities (so-called Scope 1 emissions) or through their energy purchases (Scope 2). They would also need to obtain independent attestation of their data.

Clear, uniform disclosures on the costs from climate change will benefit both businesses and investors, according to Gensler. Businesses will gain detailed insights into potential costs and opportunities, while investors will be able to better gauge risks at specific companies and compare risk levels across industries.

Companies, industry groups, lawmakers and asset managers — including BlackRock — have focused much of their criticism on the mandate that companies disclose in detail Scope 3 carbon emissions by their upstream and downstream suppliers and vendors.

Gensler has said the requirement would only apply to large companies that have already committed to Scope 3 measurement. Yet critics say the rule would impose onerous costs and challenges in measurement on small businesses, such as farmers, woven into the supply chains of big companies.

The SEC in coming months may sidestep opposition to the Scope III requirement and other controversial aspects of the proposed rule by rolling out the final regulation in two phases, Brown said.

In the first phase, the agency would require measurement and disclosure of Scope 1 and Scope 2 emissions and details on climate risk, including how the C-suite and board track and manage such risks, Brown said.

In the second phase, companies would need to gain external assessments of their GHG emissions and climate risk calculations, and report measurement of climate risks on their 10-Ks, Brown said. As part of this phase, large companies that made prior pledges to disclose Scope 3 emissions would be required to do so.

In a two-step approach, “people still may challenge it, but there may be less of a chance that the challenge is successful,” Brown said.

Despite opposition, the SEC will push forward with the regulation, he said. “I don’t think there’s any chance whatsoever that they’re going to shelve it.”

4. Sharper accounting oversight

The implosion of crypto exchange FTX and absence of financial controls revealed in its bankruptcy filings — such as the use of emojis in an on-line chat platform to approve disbursements — will sharpen scrutiny of the accounting industry and its standards this year, experts say.

While some accounting experts are quick to note that regulations won’t prevent those who flout the law from harming investors, others say the FTX failure will likely intensify efforts by regulators to avert failures in accounting and financial reporting.

Soon after FTX collapsed in December, the SEC called on companies to fully disclose crypto asset risks, joining efforts by lawmakers, investors and creditors to gauge the crypto market’s vulnerabilities.

“We don’t know where FTX is going to fall out … it’s a period of time where we’re trying to see where all these things are going to land,” Kecia Williams Smith, an accounting professor at North Carolina Agricultural and Technical State University, said in an interview.

The blowback from FTX, although big, will probably not prompt the same sweeping changes in accounting and financial reporting that followed the Enron accounting scandal, she said. “We’re tiptoeing on the precipice but I don’t think we’re back at Enron proportions.”

But the failure of FTX, which owes more than $3 billion to its top creditors, will undoubtedly spotlight for the Financial Accounting Standards Board (FASB) the problems it needs to address as it sets standards for crypto-currency this year, according to Kelly Richmond Pope, an accounting professor at DePaul University in Chicago.

“This fraud is so egregious it’s forcing you to see how bad it can actually be and how negligent founders and CEOs can be,” Pope said. FTX “gives [FASB] something to dissect … We need to see this so we can set up the right protocols for us to follow in the future.”

The FTX debacle played out late last year as CFOs and their finance and accounting teams were already facing sharper regulatory scrutiny of financial reporting and a push for more disclosure.

The FASB begins 2023 with many ambitious projects carrying over from 2022. In addition to crypto standards, it also plans to revamp outdated accounting for software and is poised to beef up the income tax information that companies would be required to disclose in financial reports.

The board is also making the most sweeping segment accounting change in 25 years — a move that would require companies to require more frequent and comprehensive data broken down by business units.

Meanwhile, the Public Company Accounting Oversight Board (PCAOB), under its new Chair Erica Williams, pledged in its 2022-2026 draft strategic plan to increase average penalties and enforce some rules for the first time.

Intensified enforcement will persist in 2023, Smith predicted.

“CFOs who are trying to have a good 2023 just don’t want to be on the bad actors list,” Smith said. To avoid sanctions, finance chiefs should work closely with their audit committees and keep in close communication over changes in disclosure requirements and other matters.

“The common theme … is making sure the company’s disclosures are transparent and not misleading to investors,” Smith said. “The preventative measure is to always have investors top of mind, because that’s the kind of enforcement actions we’re seeing.”