The Long Arc Bends Toward Justice
Many of my articles and those on the Profitability Center of Excellence (PACE) Forum have a recurring message. It is to nudge, and more strongly push, CFOs and accountants to get out of the 1960s and into the 21st century by applying and using progressive management accounting methods.
Martin Luther King, Jr. said that “the arc of history is long, but it bends toward justice.” The origin of this sentence can be traced to Theodore Parker who was a Unitarian minister and prominent American Transcendentalist born in 1810. Parker called for the abolition of slavery in the USA in an 1853 collection of “Ten Sermons of Religion”.
So, what does this have to do with my mission and the mission of PACE? Plenty.
The problem begins with the imbalance of emphasis of external statutory and compliance financial reporting for government regulatory agencies (e.g., the USA’s SEC) dominating over internal management accounting. The purpose of the former is for “valuation” (e.g., inventories, cost of goods sold) whereas the latter’s purpose is for “creating financial value” for shareholders and owners by providing insights for better decisions. Unfortunately, most CFOs and accountants place their emphasis on the former rather than the latter.
Justice and Management Accounting
The word “justice” is in the quote above and the title of this article. Synonyms for justice are fairness, honesty, and righteousness. My message here is that an organizations executives and line managers (e.g., sales, marketing, operations, supply chain) deserve much better financial information from their accountants. The accountants typically provide flawed and misleading management accounting information. The accountants are underserving their managers. It is borderline irresponsible.
( For tips on what to measure and report on watch the CFO Talk: The CFOs Guide to Great KPIs with Bernie Smith )
For example, many CFOs and accountants take the convenient route when allocating indirect expenses (commonly called “overhead”) to calculate product or standard service-lines costs. They allocate expenses (e.g., salaries, purchases) into costs like “spreading butter across bread”. They use broadly averaged cost allocation factors that violate costing’s universal causality principle. Examples of these cost allocation factors are sales volume, number of employees, square feet, or number of direct labor input hours. There is no cause-and-effect relationship! The result is their calculated costs are substantially inaccurate compared to reality. Yes, they reconcile exactly for the external financial accounting, but they are wrong with the parts. (Activity-based costing [ABC] resolves this problem.)
Hope versus Optimism
Advocates of our mission distinguish a difference between hope and optimism.
Optimism is being confident of the future. It is the belief that things will eventually be alright, satisfactory, and positive. Hope, on the other hand, is the feeling that something wanted, and desirable might happen. Hope is an aspiration of a good outcome that overcomes barriers and obstacles.
So, what are those barriers and obstacles? A major one is our natural resistance to change. Most people like the status quo – the current state. Another barrier is the belief that the benefits from applying progressive management accounting will not exceed the extra administrative effort to calculate the costs. That is, it is just not worth the trouble. Sadly, this barrier is due to the misunderstanding and misperception by accountants that applying progressive management accounting methods is too complex and complicated. It is not. (To learn why it is not, search for the term “rapid prototyping implementation”.
We are optimistic. We know that the arc is long, but it will bend towards justice. Executives and managers will eventually receive the valid and reliable information that they deserve from their CFO and accountants.
Remember this. The best of poor reporting is still poor reporting.
Better quality reporting includes speeding up your reporting process. For innovative ideas on how to do that study How to Speed Up Your Financial Processes
This article was originally published in PACE Forum by the nonprofit Profitability Center of Excellence.
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