I found the below in communication problems with Authentication app (https://support.microsoft.com/en-us/account-billing/common-problems-with-the-microsoft-authenticator-app-12d283d1-bcef-4875-9ae5-ac360e2945dd)
"Apple Watch watchOS 7
Q: Why I am having issues with Apple Watch on watchOS 7?
A: Sometimes, approving or denying a session on watchOS 7 fails with the error message "Failed to communicate with the phone. Make sure to keep your Watch screen awake during future requests. See the FAQs for more info.". There is a known issue with notifications when app lock is enabled or when number matching is required, and we’re working with Apple to get this fixed. In the meantime, any notifications that require the Microsoft Authenticator watchOS app should be approved on your phone instead."
I have the same problem even though my Authenticator app, watch and phone are updated to the latest versions. Is there any solution to this yet?