Industrial Manufacturing in a Time of Disruption

ForbesDecember 3, 2020

Industrial manufacturers are under pressure to interpret and act upon a variety of forces affecting their business, from cyberthreats to changes in the market. These disruptions often occur simultaneously — making their complex interactions difficult to decipher and report — and are typically exacerbated by the technological state of firms.

By and large, industrial manufacturers are burdened by manual data-processing tasks, legacy IT technology and systems that do not easily integrate, if at all. Without a modern IT infrastructure, industrial manufacturers struggle to deploy advanced technologies like predictive data analytics, robotic process automation, and machine learning — all tools that would help their finance and accounting teams better assess the impact of those forces confronting their business.

Real-time data for analysis is urgently needed, but to access and evaluate this information and drive smarter business decisions, data needs to be digitized, manual processes have to be automated and disparate IT systems must be integrated.

“Many industrial manufacturers are getting information from different systems and sources, making it difficult to determine one version of the truth,” says Philip R. Smith, global and national audit leader of industrial manufacturing at KPMG LLP. “This makes it difficult to assess the impact of the disruptors on supply chains, demand fluctuations, cost structures and more, to guide the action steps.” 

A perfect storm

Smith’s comments underline the importance of constructing a modern IT infrastructure, otherwise disruptions may affect industrial manufacturers’ accounting and financial reporting considerations, not to mention the efficacy of their business decisions.

All CFOs must be able to rapidly discern where best to allocate or retract capital and other resources, a decision that is driven by their ability to quickly access accurate internal and external business-related data. This is especially the situation for industrial manufacturers who, as mentioned earlier, continually face a combination of disruptions.

“In my talks with our industrial manufacturing clients, there is a lot on their plates that they’re concerned about,” Smith says.

One concern is geopolitical tension among trading partners like the U.S. and China. Another is the rise of nationalism in several countries, fueled in part by criticism over globalization. Although the U.S. and China have signed the Phase 1 accord relaxing some of the tariffs imposed by the president last year, the countries’ trade issues are not entirely resolved.

Other industry disruptors include cyber threats and technological innovation. Robotics, 3D printing, and the Industrial Internet of Things (IIoT) put the onus on manufacturers to deploy these cost-effective, efficient, and less labor-intensive manufacturing methodologies.

Automated “smart” factory equipment in the IIoT, for instance, transfers data over a network without labor-intensive human-to-human and human-to-computer interactions. There are trade-offs to consider, however, since smart machines can displace jobs and decrease workforce morale and retention.

Burgeoning environmental, social and governance (ESG) responsibilities are another disruptor. Senior executives and boards are being held more accountable for actions taken to sustain the planet’s resources, treat people with respect and promote equality and fairness. “I am just beginning to see signs that ESG is going to be a major issue over the next 10 years,” Smith says.

Each of these disruptors insists upon the need for rapid access to real-time data, and so many disruptors occurring at once only intensifies this need. As Smith puts it, “Pressures are coming from all directions.”

Impact on auditing

These pressures challenge more than company executives and boards. They also increase the complexity for external auditors to inspect client accounting records and state an opinion about whether the financial statements are presented fairly and in accordance with applicable accounting standards.

With so many different disruptors, Smith says, “the challenge for auditors is to assess the reasonableness of the judgments and estimates that management makes about what tomorrow may bring.”

Unfortunately, such information is not only less than clear in many cases, it may also be inaccurate. When a river of transactional data pours into finance from multiple systems that are not integrated, the ability to verify the accuracy of those source documents is hindered.

Unless the data is digitized and systems are automated and integrated, the ability to search for, and quickly access, the underlying source documents pertaining to a particular transaction and obtain a single version of the truth is hindered. This creates havoc for the company and increases the complexity of the audit.

“We have to assess management’s estimate of the fair value of intangible assets and goodwill on the balance sheet, which is based on estimates of future financial performance,” says Smith. “Those values are the foundation of what determines the fair value of intangible assets.”

Cognizant of the challenge, KPMG has invested in the design and development of its next-generation “smart” audit platform, KPMG Clara. The cloud-enabled platform enhances audit execution by speeding the exchange of information needed to perform the audit.

Contextual knowledge is built into the tool to guide audit professionals through a series of procedural milestones, allowing for more precise audit planning and risk assessments, Smith says. A variety of technologies are embedded in the platform to enhance the firm’s risk assessments.

“The platform technology ingests data from source documents like vendor invoices and contracts, freeing up audit professionals to focus on the critical audit areas while reducing the level of effort needed by clients to support the audit and increasing our ability to focus on the issues that matter,” Smith notes.

Integrated approach

The key to unlocking this potential is in the hands of industrial manufacturers. If manufacturers digitize their data and automate their systems, they will be able to leverage analytics and make better decisions while helping audit professionals highlight variances and audit matters that may require further investigation.

“I can foresee the day in the not-too-distant future when populations of transactions are extracted and analyzed, their source documents automatically ingested to test the reliability of the transactional data,” says Smith. “Auditors will analyze the results and draw conclusions in a fraction of the time it takes today.”

In effect, the use of technologies will change the nature of the work conducted by audit firms. No longer will audit teams need to spend an inordinate amount of time chasing down source documents to make sure the transactions match as presented. With automated financial systems processing digitized transactional data, errors are clearer and easier to identify.

That’s good news for industrial manufacturers and all companies at risk of complex business interruptions. The more manufacturers and audit firms can analyze accurate transactional data in real-time, the more actionable this information can be in making decisions to mitigate the impacts.



This article was written by Russ Banham, Insights Team, from Forbes and was legally licensed through the Industry Dive publisher network. Please direct all licensing questions to legal@industrydive.com.