JAN 2, 2009 3:16am ET

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Increased Regulatory Governance - Why Not Also for Management Information?


The current worldwide financial crisis requires a focus on what distinguishes true economic value realization from artificial creation (such as financial derivatives and credit default swaps). It is now understood that the current financial crisis resulted from a breakdown in governance and antiregulatory advocates - allowing opportunists to let personal greed dominate the interests of citizens from all countries. Now, global leaders are moving to apply new laws, governance and government regulation to place reigns on unbridled capitalism. We’ve learned valuable lessons about what isn’t always true: the market always knows best; government hampers markets; and market problems will automatically fix themselves.


These evolving regulatory reforms will address ways that organizations are externally managed. Are comparable reforms needed for how organizations are internally managed? Who is looking out for the interests of managers and employees to ensure that they receive the right information needed to make better decisions?


Independent accreditation for operational and management accounting information is needed.


Why do nations around the world require financial or cost audits performed by certified public accounting firms to attest to the compliance and accuracy of an organization’s financial reporting, but no certification audit exists for processes, procedures and practices that produce internal managerial information used for decision-making?


One explanation is the commonly accepted belief that internally managed information systems are probably good enough for decision-making because their design is controlled by a management team that obviously needs the internal information.


However, who determines that operational and cost measurement data is good enough? Ask any manager these questions: “How satisfied are you that the information you receive is sufficient for making good decisions? Do you believe you have financial transparency and visibility from your organization’s operations, technology, supply chain management and human resources departments?”  Most likely, they’ll complain that they’re drowning in data but starving for information. They get data that communicates what happened, but it isn’t presented in a manner that helps them also understand why it happened and what best actions to take.


Who Cares About Managers’ Information Needs?


Who’s looking out for the best interests of managers and employee teams? One would like to think it’s the accountants. But evidence from a survey by the Institute of Management Accountants  and Ernst & Young, titled 2003 Survey of Management Accounting, revealed that the majority of accountants acknowledge their cost information is significantly flawed in terms of not using cause-and-effect relationships; however, the cost information is precisely accurate in terms of external compliance accounting for all the resources used.


The executive team is concerned with bigger problems, so high-level summarized reports provide the information they need. Additionally, the IT department typically focuses on the technology, not the relevance of information in the context of good decision-making.


There’s an increasingly slim margin for error in decision-making. Transactional data is not information - it’s only the starting point for transforming data into information. If the transformation doesn’t occur or is flawed, then poor decisions are inevitable, and enterprise performance won’t achieve its full potential.


A New Type of Assessment


Some might think that regulations or certifications (e.g., Sarbanes-Oxley and ISO 9000) help ensure that relevant, high-quality operational and cost measurement data is provided to decision-makers. But, they don’t; the assessments are excellent for determining if an organization has sufficient controls in place and if it is complying with institutional regulations. The method used by the assessments is based on first asking “Do you have a defined process?” and then “Do you adhere to it?” But what if the process is poor or wrong? Those assessments don’t judge that condition. The focus is on identifying the presence of a process, not how effective it is. Even if someone could judge processes, the assessments don’t do an in-depth analysis of the foundational data or whether the information is valid, flawed or incomplete.


A committee of CAM-I, of which I am a member, has proposed an assessment that is designed to measure the quality of: operational data used for planning and execution; and cost information used for budgeting and decision-making. (To read more about this proposal, see “Let’s Certify the Quality of a Manager’s Information”; Strategic Finance, December, 2008; www.imanet.org .) The assessment’s primary purpose is to surface gaps between an organization’s existing and potential data, information, processes, procedures and practices, and to provide prescriptive advice to mitigate deficiencies and close those gaps. It isn’t designed to be a report card to punish organizations that may receive a low assessment score. A secondary purpose is to highlight the existence of internal inconsistencies in information sharing between departments.


Who should be assessed? The assessment could be at the enterprise, department (e.g., an IT shared center) or subcontractor level.


A major reason to introduce the rigor of a formal assessment tool to judge the efficacy of an organization’s operational costs and cost measurement is the prevalence of:


  • Primitive resource capacity planning methods, especially methods for addressing staffing levels and purchases. They tend to be reactive rather than proactive, thus experiencing the consequences of shortages, service-level deterioration or unnecessary costs relative to demand.
  • Misallocated, indirect expenses to calculate product and service-line costs. If capacity planning isn’t in place, drivers that associate the number of resources (supply of capacity - people, equipment, space) with the work required of the work center (demand for capacity) will be missing. Without drivers provided by operations, finance must allocate cost based on overhead pools and arbitrary allocation techniques; or, they must create their own cost drivers. Either solution is likely to misallocate costs to products and processes.
  • The relative absence of tracing cost-to-serve expenses for channel and customer profitability reporting. This information is considered increasingly important because, arguably, the more important information is below the gross margin line.

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