Date: 2025-05-02 Page is: DBtxt003.php L0913-TVM-MMW-000018
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TrueValueMetrics ... Peter Burgess Manuscript
Making Management Work for Relief and Development |
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Chapter 18
Financial Control |
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Accounting
The central core of financial control Accounting is at the core of financial control. Accounting is also needed for a variety of other management activities including: (1) measuring performance; (2) reporting to stakeholders; and, (3) planning improvements. Financial control is an important thing for an organization to have. It does not need to be sophisticated and complex. There are two benefits from good financial control: (1) the money and assets do not get stolen; and, (2) the money and other resources of the organization are used without a lot of waste. In the first case the result of stealing is 100% value destruction ... and in the second case there is less value creation than the maximum. Decision makers need to know how much things are costing and what is being done with the money. In general in the modern corporate world the decision makers are pretty clear about the fund flows in the organization, but in the relief and development sector there is nothing like the same level of understanding, and a lot of the financial issues are out of control. This makes it easy for people who want to misappropriate funds to do so, almost at will. Oversight and accounting Accounting facilitates oversight. Good accounting will help to identify areas where problems might exist. Oversight helps to move from identifying problems to fixing them. Sometimes the fix requires aggressive tactics. Financial Control In my corporate career we changed our internal control techniques frequently so that the staff would never know exactly how control was being implemented. Very early on in my career I was faced with a “mafia” run scam where people in our organization and people in a big client's organization were collaborating to have truckloads of product shipped to their own warehouses rather than the client's warehouses. I found the scam simply by doing thorough accounting reconciliations with client accounts ... and then learned all the detail aspects of the scam by having FBI agents work undercover in our shipping department. This was not petty thievery ... it involved collusion to steal a lot of valuable product worth . It is generally accepted that accounting on its own is not very powerful, but accounting within a management system provides a level of control that cannot be bettered. With control, moneys are not misappropriated, and with control the best possible performance can be achieved. Making information accurate Information that is actively used is rarely wrong. But accounting information that is merely a documentation of financial transactions and prepared by rote is often inaccurate, perhaps just plain wrong. But information that is actively used in the management of real activities may be wrong when first used, but is quickly corrected in most material aspects. If the information is wrong, the operating people will criticize it, and poke fun at the accountants who prepared the data. But if the accountants are smart, they will learn where there are errors and then correct them and the systemic issue that created the errors. Soon the information is error free and now is simply measuring performance ... and the operating people now can only criticize themselves. Control through measuring performance Measuring performance is another dimension to financial control. If money goes missing it does nothing to deliver outputs, and if there is measurement of performance, then the money missing is quickly identified. This is not rocket science, but it is very powerful. And measuring performance shows up all sorts of useful information that can be used to manage resources. Some people use resources well and get good performance. Others do not do it as well ... either because they are not as well trained and experienced, they cannot do the work or they are doing inappropriate things with the resources. Performance measurement helps sort out the various possibilities. Sometimes the decisions have been wrong ... and no matter how well the people work, the results cannot be good. Performance measurement highlights issues like this. Getting improvement that sticks Another are of use of accounting information is the area of planning improvement and getting it to stick. Good accounting helps to make changes that improve, rather than merely doing changes that change and make no change in real performance. There are two types of managers ... those that use accounting and those that don't. What happens when you squeeze a balloon and let go? It goes back to where it was before. That is what happens in organizations where there is no accounting control and performance measurement. What happens when you use a wrench on a bolt? It gets tightened and stays there. That is what happens in an organization when there is change and there is accounting control and performance measurement ... and management oversight. Accounting is powerful. When it is part of a management system, the performance can be optimized. Without accounting and the management system resources get used, but good results may or may not be realized. Reporting to stakeholders There are many stakeholders. The beneficiaries in communities deserve to get what has been allocated to them, and there should be reporting that shows this. Staff in organizations should get meaningful information about what is going on, and they should have suitable reports. Donors and funding agencies should also get information about how their moneys have been used, and what results have been achieved. Finally the public at large should be able to feel good about what is going on, and see relevant reports that show this. Less is More I met the Accountant General of India some years ago. In India there were a lot of accounting reports that had to be produced because of the law, and in total these reports were incredibly voluminous ... thousands of pages ... and not very valuable. But the law did not preclude the Accountant General from also producing a brief report about the finances of the Government of India, and so this was prepared in addition to all the reports required by law. It was about 10 pages long. Thousands of copies were called for. It was read by everyone in government, and was largely read by the public as well. The accounting foundation. It is a very solid and logical framework for reporting on economic transactions in an efficient way. It is a system that served well in the old mercantile era 400 years ago, served well as huge industrial organizations emerged in the industrial revolution, and has carried forward very well into the computer era. It could have done better. Some basic accounting principles have been weakened by a growing focus on legal constructs and the tax implications of the accounting. The profession of accounting has morphed more than it should have into the business of accounting. Rules Versus Principles Some of the accounting that has been allowed under US Generally Accepted Accounting Principles (GAAP) and the FASB (Financial Accounting Standards Board) rules absolutely flaunt common sense and my idea of the basic principles of accounting. The idea that contracted liabilities about future health and pensions for employees should not been on the books and included in corporate liabilities makes no sense ... but FASB and the US accounting profession has allowed it. Ridiculous. Meanwhile, leased aircraft operated by an airline that are owned by a third party are required to be included in the assets of the airline. Yes, analysts should know the capital value of the aircrafts being leased, but the airline does not own these aircraft and they are not airline assets and do not belong on the balance sheet of the airline but in the notes. In the field of relief and development, management information and accounting needs to be principled and it needs to be simple and understandable. The need is for good basic accounting that is easy to understand and communicates operational realities, and especially operational performance. Transactions All economic or financial transactions of an entity are recorded in an accounting system, and then analyzed and organized according to some basic principles. Some transactions relate to the acquisition of assets and are balance sheet transactions, and some relate to payments related to activities, and they are part of the operating statement or profit and loss account. There are many ways to record the information. I like to think of basic accounting as little more than a series of lists that show key information about every transaction. Accountants call these lists by names like: sales journal, invoice register, day books, cash books, etc. but essentially they are just lists of the transactions, listed chronologically. Typical information needed for any single transactions are things like: date, who is the transaction with, amount of the transaction, description of the transaction. Usually there is also a way of referencing the transaction to further documentation about the transaction. Balance sheet and operating statement Some transactions change the balance sheet. The idea of a balance sheet is very helpful. It is integral to corporate style financial reporting, but is missing in government accounting and in many not for profit accounting systems. If money is spent, and is used to buy some asset, the purchase is reported in the balance sheet. If money is spent, and is used for some operational activity, the cost is reported in the “operating statement” or “profit and loss account”. ALL disbursements are recorded in the accounts. Every penny of spending is accounted for. This is an important concept and very powerful for keeping “control” of the entities resources. A balance sheet report shows assets, and it shows liabilities and an analysis of the difference. A balance sheet is a status report at a particular point in time. The comparison of two balance sheets for the entity ... one taken at the beginning of a period (a year, say) and one taken at the end of the period ... shows progress or regression. This is a very simple way of creating a reportable metric for any entity of interest. Purposes of financial and operational reporting There are many reasons for reporting, some of which are: (1) to circulate operational performance information internal to the organization; (2) to satisfy external regulatory reporting requirements; (3) to satisfy the requirement for reporting to donors; (4) to inform the public at large about activities and performance; (5) to advise beneficiaries of the program performance; and, (6) to contribute to management knowledge and performance information that is in the public domain. Complete report sets The best financial reports are those that have operating information, balance sheet information and cash flow information, together with enough supplementary information for readers to be able to understand the information presented. The problem with much public sector reporting is that the underlying accounts are “cash based” and there is no formal accounting for assets and liabilities integrated into the accounting system. While accounting of this sort has been banned from the corporate world for around 150 years, it is still the norm in government, and ought to be banned for government as well. Reports that are derived from cash based accounting do not have the “double entry” check that is so vital and powerful in mainstream corporate accounting systems, and any good performance oriented accounting and management information system. Reporting can have different formats The aim of any report is to show what is important in as clear a way as is possible. Sometimes reporting is defined by some statute or regulations and this defines the format. But whatever the reporting format, all accounting reports reflect the underlying transactions. Reports are usually prepared in some sort of hierarchy so that it is possible to track summary information back to more detailed information, and eventually the underlying transaction information. The format is often different based on language and local rules. The words may be different but the concepts remain the same. The convention for format is all that substantively changes. The report may look quite different depending on the conventions used, but they still faithfully reflect the underlying transactions. Reports Over the years I have worked in a lot of different parts of the world. I learned my accounting in the UK and my starting point is how reporting would be done in the UK. But different countries have different conventions and ways they like to see accounting reports. Everywhere an accounting transactions has the same form, because it is the same thing. The reports can be in any number of formats, depending on the custom The UK and the USA use a different convention in the presentation of a balance sheet ... it does not change the numbers. The French have a different convention about how they report depreciation and report the operating statement (Compte d'Exploitation). The Soviets used to have (before 1991) a reporting system that had a totally different focus reflecting their concern about the analysis of capital, and little focus at all on operating activities. But in all these different places the underlying transactions were accounted for in the same way. It was only the reporting conventions that were different. |
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