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. Weve learned valuable lessons about what isnt 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 organizations 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 organizations operations, technology, supply chain management and human resources departments?Most likely, theyll complain that theyre drowning in data but starving for information. They get data that communicates what happened, but it isnt presented in a manner that helps them also understand why it happened and what best actions to take.
Who Cares About Managers Information Needs?
Whos looking out for the best interests of managers and employee teams? One would like to think its the accountants. But evidence from a survey by the Institute of Management Accountantsand 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.
Theres an increasingly slim margin for error in decision-making. Transactional data is not information - its only the starting point for transforming data into information. If the transformation doesnt occur or is flawed, then poor decisions are inevitable, and enterprise performance wont 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 dont; 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 dont 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 dont 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 Lets Certify the Quality of a Managers Information; Strategic Finance, December, 2008; www.imanet.org .) The assessments primary purpose is to surface gaps between an organizations existing and potential data, information, processes, procedures and practices, and to provide prescriptive advice to mitigate deficiencies and close those gaps. It isnt 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 organizations 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 isnt 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.
Despite the absence of organizational requests for a data quality assessment, there is a compelling case for its value.
Who Should Ultimately Care About Managers Information Needs?
So far, I havent answered the question, Who will care about managers information needs? Ive rationalized why sufficient caring wont come from the organizations accountants, executive team or IT. While you would think that a CFO, CEO or CIO would be the ombudsperson for managers, they already have other agendas. So, who should care?
If we look to the history of the ISO 9000 certification movement, it was driven by customers. Initially it was the manufacturers near the back end of the supply chain, who needed much greater assurance regarding zero-defect deliveries from their components and raw materials suppliers. Manufacturers no longer could tolerate a suppliers broken promises; they wanted an objective, third-party certification that a supplier had implemented processes and procedures to mitigate shipping anything that didnt meet specifications or was defective. ISO 9000 certification addressed this and eventually spread to the service industries as well.
But, the quality of internal managements data isnt known by trading partners in a value chain. And why should they care? The customers indication of realized compliance, even with an ISO 9000 certification, is the quality of the delivered outputs.
Its the CAM-I committees opinion that the strongest and loudest advocate for an operational data and cost measurement assessment should be an organizations board of directors. The board already has a fiduciary responsibility, and it relies on a financial audit committee to ensure that the financial controls prevent fraud and that stakeholders investments arent destroyed. But, there are no standards or compulsory regulations for internal management accounting practices to mirror operating processes - guaranteeing that the accountants dont violate the basic cause-and-effect principle for calculating costs. The two facets of oversight - 1) overseeing that sustainable profit growth comes from managers having good operational data and cost measurements and 2) visibility to make good decisions - are congruent with the boards other responsibilities.
Register or login for access to this item and much more
All Information Management content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access