In 2023, chief financial officers (CFOs) planning for the future may not be able to count on the turbulence of the past two years coming to an end. New variants of COVID-19 could erupt again, inflation remains well above the Federal Reserve's 2% target, and geopolitical tensions, such as Russia's invasion of Ukraine, cast a shadow even over the most prudent scenario planning.

The U.S. government is trying to curb numerous risks, but with mixed results so far. One of the "prescriptions" from the U.S. Securities and Exchange Commission (SEC) will require CFOs to invest more in compliance and plan for more detailed disclosures and risk management.

Other trends, such as the economy potentially slipping into recession, are beyond CFOs' control. Here are four major trends to watch in 2023.

1. A Close Fight with Inflation

Fighting inflation is the Federal Reserve's core mission. Since 2021, inflation has had the upper hand. Fed Chair Jerome Powell admitted early last year that policymakers had underestimated price pressures.

In March of last year, three months before the Consumer Price Index (CPI) hit a 40-year high of 9.1% year over year, policymakers began their most aggressive stimulus withdrawal since the 1980s. Throughout 2022, they raised the federal funds rate by a cumulative 4.25 percentage points.

The Fed's tightening brought CPI down to 7.1% in November, while also increasing the risk of a recession. Goldman Sachs said Thursday that the probability of an economic downturn over the next 12 months is 65%, citing consensus expectations, while noting its own researchers see a 35% chance of recession.

Powell has repeatedly said the Fed will curb inflation even at the cost of hurting businesses and employment. But with price increases slowing and recession risks rising, some economists worry that policymakers may pause or reverse course in 2023 rather than bring inflation down to the 2% target level.

"My concern is that if inflation gets close to 5%, they might let go, and then we'll see inflation spike again," said Aleksandar Tomic, director of the graduate programs in applied economics and applied analytics at Boston College. Tomic predicted in an interview that inflation could persist between 5% and 7% this year. "I don't think we can get to 2% in 12 months without seriously dragging down the economy," he said.

According to the median forecasts of Fed officials last month, they expect to raise the federal funds rate to 5.1% by December—currently at 4.25% to 4.5%—and then cut the benchmark rate to 4.1% by December 2024. They project economic growth of 0.5% this year and 1.6% in 2024.

Powell acknowledged that these forecasts are, at best, educated guesses. "No one knows exactly what the economy will look like a year or more from now," he said at a press conference on December 14 following the Fed's forecast release.

Given the uncertain outlook, Tomic advises CFOs to avoid borrowing at floating rates or to use swap contracts to hedge against rising interest rates. He also said scenario planning is crucial when preparing for future economic or monetary policy landscapes, adding: "Anyone who tells you they're certain is lying to you." He said, "At this time last year, no one thought Russia would invade Ukraine. For many companies, that turned everything upside down."

2. Hard-to-Fill Job Openings

Many CFOs are eager to fill some of the 10.5 million job openings in the economy, but may need to keep the "help wanted" signs up in 2023. Cristian deRitis, deputy chief economist at Moody's Analytics, said the tight labor market could persist for at least the next few months.

"The situation where demand exceeds supply will continue for quite some time. Unless we fall into a recession, I don't see the trend reversing," he said in an interview, adding that Moody's forecasts a low-growth "slowcession" rather than an economic downturn.

The Labor Department said Friday that the unemployment rate fell to 3.5% in December from 3.6% in November, and U.S. employers added 233,000 jobs. The total number of available positions remained unchanged.

deRitis noted that CFOs face multiple obstacles in hiring, including immigration restrictions, an aging and shrinking workforce, and a wave of early retirements triggered by the pandemic. Fed policymakers worry that a strong labor market will push up wage pressures and force companies to raise prices, thereby fueling inflation. Labor Department data shows wages rose 4.6% last year.

"Wage increases are running well above levels consistent with 2% inflation," Powell said at his December 14 press conference. Meanwhile, compensation gains have lagged inflation by more than 2 percentage points, prompting many workers to switch jobs for higher pay, thereby intensifying wage pressures.

For some workers, "the only way to keep up with inflation is to change jobs," Tomic said. deRitis believes the unemployment rate could rise to 4.2% this year as the Fed's aggressive monetary tightening takes effect. Monthly average job growth could plummet from 370,000 in 2022 to around 75,000, thereby "easing the wage growth pressures we've been seeing, which would certainly help Fed policy." deRitis said annual wage growth could fall to between 3% and 3.5%.

deRitis suggests that CFOs reluctant to raise wages excessively could consider offering employees more flexibility, including remote work arrangements. "It's crucial for employers to be creative in how they compensate. I think through flexible policies, you can build loyalty and maintain high retention rates," he said.

3. SEC Demands Enhanced Disclosures

Since being sworn in as SEC chair in April 2021, Gary Gensler has set ambitious goals for increasing disclosures from public companies. Gensler says investors need more information about companies' cybersecurity, workforce diversity, and exposure to crypto asset markets.

According to David Brown, a partner at law firm Alston & Bird, some proposed rules would shake up how CFOs and their executive colleagues manage, requiring more detailed measurement of workforce demographics and overhauling certain aspects of risk management. "We are forcing companies to change how they operate through disclosure," Brown said in an interview. "It's extraordinarily ambitious."

Gensler released a 490-page proposed rule in March requiring public companies to provide detailed disclosures of carbon emissions and climate risks, drawing criticism and more than 14,000 public comment letters. The SEC aims to force companies to describe their strategies for addressing climate risks in their 10-K filings, including plans to meet targets they set to curb such risks.

Companies would need to disclose their greenhouse gas (GHG) emissions data, whether from their facilities (so-called Scope 1 emissions) or through their energy purchases (Scope 2). They would also need independent attestation of their data. Gensler argues that clear, uniform disclosure of climate change costs would benefit both companies and investors. Companies would gain insight into potential costs and opportunities, while investors would be better able to assess risks at specific companies and compare risk levels across industries.

Criticism from companies, industry groups, lawmakers, and asset managers, including BlackRock, has focused mainly on requirements for companies to detail Scope 3 carbon emissions from their upstream and downstream suppliers and vendors. Gensler says that requirement applies only to large companies that have already committed to Scope 3 measurement. However, critics say the rule would impose burdensome costs and measurement challenges on small businesses, such as farmers, embedded in large companies' supply chains.

Brown said the SEC may seek to circumvent opposition to the Scope 3 requirements and other controversial provisions by rolling out the final rule in two phases in the coming months. In the first phase, the agency would require measurement and disclosure of Scope 1 and Scope 2 emissions and climate risk details, including how executive management and boards track and manage such risks. In the second phase, companies would need external assessments of their GHG emissions and climate risk calculations and report climate risk measurements in their 10-K filings. As part of that phase, large companies that previously committed to disclosing Scope 3 emissions would be required to do so. Under the two-step approach, "people could still raise challenges, but the likelihood of success might be lower," Brown said. Despite opposition, the SEC will move forward with the rule. "I think there's no way they shelve it," he said.

4. Stricter Accounting Oversight

Experts say the collapse of cryptocurrency exchange FTX and the lack of financial controls exposed in its bankruptcy filing—such as using emojis on online chat platforms to approve payments—will intensify scrutiny of the accounting profession and its standards this year. While some accounting experts are quick to note that regulations cannot prevent those who flout the law from harming investors, others say FTX's failure could prompt regulators to step up efforts to avoid accounting and financial reporting missteps.

Shortly after FTX's collapse in December, the SEC called on companies to comprehensively disclose crypto asset risks, echoing efforts by lawmakers, investors, and creditors to assess vulnerabilities in the crypto market. "We don't know how FTX will end... We're in a period of trying to see how all these things will settle," Kecia Williams Smith, an accounting professor at North Carolina Agricultural and Technical State University, said in an interview. She said that while FTX's shock is significant, it may not trigger the kind of sweeping changes in accounting and financial reporting that the Enron accounting scandal did. "We're standing on the edge of a cliff, but I don't think we're back to Enron scale yet."

However, FTX's failure—which owes more than $3 billion to its top 50 creditors—will undoubtedly focus the Financial Accounting Standards Board (FASB) on the issues it needs to address when setting cryptocurrency standards, said Kelly Richmond Pope, an accounting professor at DePaul University in Chicago. "This fraud is so egregious that it forces you to see how bad things can get and how negligent founders and CEOs can be," Pope said. FTX "gave the FASB something to dissect... We need to see this so we can set the right protocols for the future."

FTX's downfall came at the end of last year, when CFOs and their finance and accounting teams were already facing stricter regulatory scrutiny of financial reporting and more disclosure requirements. The FASB entered 2023 carrying many ambitious projects from 2022. In addition to crypto standards, it plans to update outdated accounting for software and prepare to strengthen the income tax information companies must disclose in financial reports. The board is also undertaking its most significant segment accounting reform in 25 years—which would require companies to provide more frequent and comprehensive data by business segment.

Meanwhile, the Public Company Accounting Oversight Board (PCAOB), under new chair Erica Williams, has committed in its draft 2022-2026 strategic plan to raising average fine amounts and enforcing certain rules for the first time. Smith predicts enforcement will continue to intensify in 2023. "A CFO who wants to thrive in 2023 is the last person who wants to end up on the 'bad actor' list," Smith said. To avoid sanctions, finance chiefs should work closely with their audit committees and maintain close communication on changes in disclosure requirements and other matters. "The common theme... is ensuring that company disclosures are transparent and not misleading to investors," Smith said. "The preventive measure is to always put investors first, because that's the direction we see enforcement actions heading."