Accounting tools a part of corporate culture
by Miki Saxon
Gavin Cassar, a Wharton accounting professor, tested the prevailing wisdom of whether accounting techniques, such as budgeting, sales projections and financial reporting, would, in fact, help prevent business failures. In surprising results, he found that some accounting tools may actually lead them astray.
He found the culprit not to be the tools, but rather the MAP (mindset, attitude, philosophy™) of those using them.
I sent the article to a long-time CEO and thought you would find his comments interesting and useful. I’ve changed names to keep the examples he mentions anonymous, but note that CorpA was part of a Fortune 500 company and CorpB was public with sales of several hundred million with a CEO who had been around the block numerous times.
There’s only one important accounting problem described in this article. The other problems discussed are really problems in human psychology, such as being guided by hopes instead of realistic considerations and ignoring (widening) gaps between plans and results.
But the serious accounting problem described is the failure to collect and publish accurate and timely accounting information. If you have a carefully worked out budget, unless the monthly accounting figures are available quickly and are correct, the budget is useless as a planning tool because it’s impossible to really judge whether the company is on plan or not.
To some extent, both CorpA and CorpB suffered from this. Accounting was not held to high enough standards. Expenses were misclassified and weren’t posted in the months in which they were actually incurred. Managers initially tried to sit down with accounting and straighten out the discrepancies. But it was impossible, either because of poor accounting tools or probably just gross incompetence. After a time, managers stopped trying to correct the internal financial reports. They thought it was just wasting their time. They also stopped trying to control their expenses. Why bother? The financial reports were so inaccurate they didn’t show up even large and willful expenses outside budget limits.
So of course this led to increasing attempts by higher management to exert personal control over expenses. At one point, the CorpB CEO was signing all expense reports. You had to receive his personal permission to go on a trip or to even take a client to lunch. The budget meant nothing. And there was a line of managers outside his office asking permission to buy essential test equipment or fly an applicant in for an interview. Stuff that should have been decided instantly by the managers concerned was delayed, frustrated and often cancelled altogether.
Does your company provide timely accounting information to its managers?
