CBI Study Guide Module 1 2015.pdf

CONTEMPORARY BUSINESS ISSUES

Module 1THE ACCOUNTANT AS

STRATEGIC BUSINESS ADVISER

COURTNEY CLOWES*

* Updated by Betty Ferguson and Tui McKeown.

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ii | THE ACCOUNTANT AS STRATEGIC BUSINESS ADVISER

ContentsPreview 1

IntroductionObjectives

Part A: The need for advice 3The quest for productivity 3Factors leading to demand for advice 5

Requests for advice: Operational—strategic—globalProviding and implementing advice

Accounting roles 11Providing strategic advice 13

Soft skills—communicationThe accountant as internal adviser—a member in businessThe accountant as external adviser—a member in public practice

Summary 25

Part B: Advising beyond traditional accounting areas 26Physical accounting 27Management accounting and the environment 29

Physical Environmental Management Accounting (PEMA)

Environmental costs and revenues 30Integrating environmental measures—extending the balanced scorecard 31Summary 31

Part C: Ethical interaction 32Addressing conflicts between organisational stakeholders 33Accountants as facilitators of ethical business behaviour 35Summary 36

Part D: Human resource issues and complexity 37Managing people 37

Contemporary people management issuesMaking business sense of people management issuesRole of the accountant in people management issues

Managing complexity 47Addressing messy and wicked problemsIdentifying complexityWorking with complexityWeick modelRole of the accountant in complexity issues

Summary 59

Review 60

References 61Optional reading

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Module 1: The accountant as strategic business adviser

Study guide

Preview

introductionIn this module, we introduce you to the Contemporary Business Issues (CBI) subject, and present you with opportunities to consider key business and ethical concepts. You will be presented with real-life scenarios to illustrate some of the dilemmas and limitations that may be encountered in applying those concepts.

Many people perceive the role of the stereotypical accountant as sitting in an office or finance department recording and reporting financial information. However, that is a very narrow view! Accountants act as internal and external business advisers, carry significant ethical responsibilities, and have expanded their focus well beyond reporting financial measures to consider physical and social areas as well. The focus of this subject is to provide you with a broad range of knowledge that will support you in fulfilling your many and varied roles as an accountant.

Accountants not only perform a variety of financial or accounting roles within organisations, but also in smaller organisations, they may take responsibility for non-financial/non-accounting roles. These may include, for example, information technology (IT) and human resources (HR) functions, as well as contributing strategic advice as part of the executive management team.

For many public practitioners offering accounting services, there is the ability to move beyond compliance services and offer strategic business support. These practitioners have identified that they can add more value than simply preparing tax returns and compiling financial statements. They are well positioned to supply services in financial planning, risk management, strategic planning, the explanation of industry trends, and using financial information to better guide organisations.

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Helping organisations adapt to a carbon-constrained economy and corporate social responsibility (CSR) expectations has expanded the role of the accountant in providing advice and setting up new reporting structures and systems. Professional accountants are perceived as credible and reliable sources of financial information. However, it is critical to properly collect, record and analyse physical data such as energy consumed, raw materials used (and wasted) and emissions. As such, there are opportunities for accountants to be involved in educating others about the many issues that organisations face, as well as in shaping the debate within organisations about how to respond to those issues.

Module 1 aims to broaden your understanding of the many and varied roles that are important for accountants to fulfil. Specifically, it focuses on accountants as strategic business advisers who deal with a growing need for advice beyond traditional accounting areas that address issues such as ethics, human resources and complexities in the business environment. This increase in responsibility, from being providers of information to being partners in decision-making, is challenging. It requires a deeper understanding of the industry in which the accountant operates, and the economy, as well as global social, environmental and political issues.

This module introduces the CBI subject in terms of accountants demonstrating business acumen within their roles—understanding contemporary business issues and being able to offer alternative courses of action that reflect an understanding of commercial, ethical, environmental and human resource constraints, in order to successfully address such issues.

ObjectivesAfter completing this module, you should be able to:• explain the changing role of the accountant and the type of strategic advice that

organisations are increasingly requiring from accountants;• explain the key strategic issues of concern to organisations and propose how the accountant

can provide support in these areas;• determine what actions you would take to facilitate ethical behaviour in a given situation

and why;• evaluate how accountants can add value to organisations by enabling sustainable business

decision-making;• justify why it is important for accountants to be knowledgeable about current people

management issues and approaches; and• examine how complex, adaptive principles could be applied to make sense of particular

business scenarios.

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Part A: The need for adviceProfessional accountants have a deep body of knowledge and experience that is useful to businesses and organisations. It is often easier to consult an expert than to develop the knowledge in-house. So, in addition to the traditional technical areas of financial advice and taxation, opportunities to provide advice across the whole business arise—from setting strategies and business plans through to developing performance measurement systems and rewards, as well as reviewing information systems and assessing the environmental costs and sustainability of the organisation’s operations.

As a CPA, you’ll be sought after by employers for the combination of technical accounting, strategy, leadership and business skills you can bring to any business … With skills and knowledge based in business, CPAs are equipped to make valuable contributions to their organisations in almost every department, from payroll to strategy … That’s invaluable to any employer (CPA Australia 2013).

For example, some concerned small business entrepreneurs who were seeking advice listed the following nine issues about which they required advice or support (Malach & Robinson et al. 2006, p. 569):• selection of business entity structure;• intellectual property;• liability;• regulation;• contracts;• tax;• employment;• financing; and• real property (land and buildings).

Organisations may also require advice on issues such as business efficiency and productivity (through business process redesign), management information systems (for improved reporting and decision-making), as well as risk management and internal controls (including fraud analysis and prevention). At a strategic level, advice on selecting appropriate growth strategies (based on acquisition or on organic, internally generated growth), identifying new products and markets, and establishing a particular market position is also required.

Professional accountants are well placed to provide advice in all these areas. The range of areas in which advice and support are needed is extensive, and in this module we outline the major categories for consideration.

The quest for productivityThe need for advice may come about for a variety of reasons. Typically, it arises from the need for technical or professional expertise where the individual or organisation requesting the advice does not have the necessary skills, experience or time. However, advice may also be required as a form of second opinion to objectively analyse information or perhaps verify a decision that is about to be made. The opportunity to draw on the experience of an external person who may have seen similar issues in other organisations is an additional benefit.

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We can see that there is a wide range of areas where organisations may request specific technical help or advice. It is important to consider the underlying purpose of the work that will be performed. In many circumstances, it will be a quest for improved productivity.

Productivity = outputs as a ratio of the inputs

Productivity = how efficient we are at producing items

If we can improve the level of outputs for a given level of inputs we can produce more at a lower cost. This means that if selling prices stay the same we can then either generate a greater profit for the same number of sales or, alternatively, try and grow the market by offering lower prices and capturing a higher volume of sales.

The benefit of productivity can be kept by the owner of the organisation, or shared amongst others: • with employees (higher wages); • with customers (lower prices); • with suppliers (higher prices); and • with government (higher taxes).

Consider the competitive advantage of Toyota versus General Motors based on the following productivity statistics provided by Geng (2005):

General Motors Toyota

Production time per vehicle: 34.3 hours 27.9 hours

Improvement since 2003: 2.5% 5.5%

Average labour cost: $73.73 $48.00

From this, we can start to understand why the average profit per vehicle for Toyota was USD 1488 whilst for General Motors the average loss per vehicle was USD 2331.

Thinking about productivity may help us understand strategic decisions made by organisations in terms of location of staff and facilities. One way to improve productivity is to increase the output generated by the same employees. However, an alternative method is to use lower-cost employees to generate the same level of output. As such, relocating functions to lower-cost countries (offshoring) may help achieve this improvement. This issue is discussed further in Module 2.

Dramatic cost cutting and other short-term approaches can lead to false productivity. The National Health Service (NHS) in the UK has recently received significant criticism for its focus on achieving financial outcomes at the expense of its patients. The pressure to achieve productivity gains by having fewer staff look after higher numbers of patients has led to thousands of unnecessary deaths due to poor care. What appeared to be a productivity improvement has actually created significant harm (Francis 2013).

Successfully achieving long-term productivity often requires investment in employee skills, training, development and culture, and combining this with new systems, technology and infrastructure. As such, we consider the importance and complexity of understanding and managing human resources later in this module. Then, in Module 5 we consider the power of intellectual property such as patents and licences to help achieve this, and in Module 6 we look at communication techniques and technologies such as social media, knowledge sharing and collaboration, which can also be powerful tools for improving productivity.

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An example of achieving dramatic productivity improvement is the solar panel industry. The costs of producing a ‘watt’ of output have reduced significantly over time, and the aim is to achieve ‘grid parity’ within the next five years. Grid parity refers to producing electricity through solar panels at an equivalent cost to fossil fuel generation (e.g. through burning coal). China currently dominates the industry and is estimated to have production costs per watt that are 25 per cent lower than the US, which is struggling to remain competitive. However, innovations and technology have led experts to predict that production costs in the US will drop by more than half—leading both to grid parity, and a significantly lower cost base than its Chinese competitors (Economist 2012).

Productivity is not purely an economic issue. It has an ethical dimension as well. If we view people merely as resources to be deployed in the most efficient manner, we can dehumanise them. It may also lead to decisions that have ethical implications, if we choose lower costs and productivity at the expense of safety, environmental degradation and living conditions. The importance of this issue was highlighted in 2013 when nearly 400 people died in a fire in a Bangladeshi garment factory that supplied many of the largest international clothing brands. As accountants we need to consider and advise from a broader, holistic view rather than from one purely focused on financial performance.

We can also consider productivity at a national economic level. An important role of government is to help guide a nation’s economy towards greater levels of productivity. Different philosophical approaches can influence the decisions taken to achieve this. For example—the focus may be on controlling wages growth (reducing the cost per unit of productivity). Alternatively, the focus may be on allowing wage growth to occur, but ensuring it is matched by a higher level of skills, ability and outputs (increasing the units produced). This has a significant impact on government spending priorities (such as on a national broadband network and tertiary education) and policy making.

High-cost countries are often advised by economists to focus higher up the value chain rather than trying to compete with low-cost countries by lowering wages. Often, this is because lower wages in a high-cost country are unlikely to make that country competitive against lower-wage countries. As such, high-cost countries must innovate and expand into new areas. This requires investment in the education, skills and ability of the workforce.

➤ Question 1.1 What types of activities or roles could a professional accountant provide to improve productivity for an organisation?

Factors leading to demand for adviceWe need to consider where the demand for advice arises. Important factors influencing the need for advice include: the firm size, the sector or industry, the geographic location of customers and the growth strategy of the firm. From a supply perspective, the main variables influencing the provision of advice include the availability of professional staff and the referral of clients to the firm (Xiao & Fu 2009). This highlights the importance of accountants developing the skills and knowledge to effectively supply these requirements (capacity and capability) and to establish strong networks to create new opportunities (marketing and sales).

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Despite these observations, there is sometimes an interesting disconnection between the need for advice and actually obtaining that advice. Organisations that most need advice may actually be the ones less inclined to request it. Entrepreneurs who are self confident, headstrong and act rapidly, often deny the need for help. In such situations, there are significant opportunities for professional accountants, whether in business or public practice, to identify these needs and offer their services in a way that is beneficial to both parties.

Table 1.1 outlines several characteristics that might apply to different-sized organisations. These characteristics can be useful in identifying potential areas for advisory services and highlighting the varying levels of complexity of issues that may arise. As you read through the table, consider your own organisation, and whether the descriptions accurately depict what you have personally observed.

Table 1.1: Characteristics of different-sized organisations

Small enterprise Mid-sized enterprise Large enterprise

Organisation • Entrepreneurial leadership.

• Focused product/service range.

• Entrepreneur less dominant, with small team of other professionals.

• More sophisticated core business, but still has basic support processes (finance, human resources).

• Separation of capital and management.

• Wider product/service range and multiple locations.

• Formal support functions (finance, legal advice, human resources).

Strategy • Reacts quickly to business changes.

• Managing is intuitive, often no business plan.

• Growth is on a customer-by-customer basis.

• Intermediate reaction time to business changes.

• Market data and business planning beginning to be employed, often with outside help.

• Growth is through new products, new markets and integration.

• Slower response time to business changes.

• Formal planning process and business/ strategic plan.

• Growth is through merger and acquisition.

Customer/community • Few customers account for large part of turnover.

• Close to their customers and customers’ business plans.

• Growth of customer base.

• Moving away from the direct proximity of their clients.

• Large, international customer base.

• Success or failure of the organisation is felt through the whole supply chain, the employee base and the wider community.

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Small enterprise Mid-sized enterprise Large enterprise

Financial • Private funding, family and/or employee owned.

• Often no formal budgeting process.

• Few conformance requirements—mostly from the tax authority.

• External funding sought.

• Annual budget and operating plan.

• Often still weak in applying accounting and tax matters with strong reliance on outside help.

• Capitalisation through public investors, exchange listing.

• Detailed budgeting processes.

• Full finance and accounting function.

Governance • The entrepreneur manages and controls by observation.

• Hands-on management and control.

• No internal audit.

• Advisory board may be set up—mostly insiders.

• Internal control becomes more formalised.

• Internal audit function is likely to appear.

• Independent non-executive board.

• Formal and clear internal control and reporting structure.

• Full internal audit function.

Work force • Individuals are very important: multifunctional, cross-trained and loyal.

• External support services needed (finance, human resources, legal advice, information technology).

• Employees still wearing several hats, though there is recognition that more formal functions and roles are needed.

• Some support services brought in-house (finance, human resources, information technology).

• Formal and specialised functions and roles.

• Most support services brought in-house unless specific decision to outsource.

IT processes • Technology implementation is as needed.

• Using more automation as a means towards business leverage.

• Likely to have a disaster recovery program focused on information technology functions.

• Internally self-sufficient (or function outsourced).

• Has formal contingency plans and business continuity plan.

Source: Adapted from International Federation of Accountants (IFAC) 2008, ‘The crucial roles of professional accountants in business in mid-sized organisations’, IFAC Professional Accountants in

Business Committee, New York, September, pp. 52–4, accessed July 2012, http://web.ifac.org/media/publications/7/the-crucial-roles-of-pro/the-crucial-roles-of pro.pdf. Used with permission of IFAC.

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➤ Question 1.2For each of the characteristics listed in Table 1.1 (i.e. organisation, strategy, customer/community, financial, governance, work force and information technology processes), list one example of the type of strategic advice that professional accountants may be able to provide.

Requests for advice: Operational—strategic—globalIn many cases, requests for advice are focused on improving operational performance, and the assessments are typically related or compared to ‘successful business’:• Do we have all our policies and processes in place and are they being followed?• Are we practising good cost control and cash flow management?• Are we wasting resources and can we be more efficient or productive?

However, there are also situations where the professional accountant must take on a greater strategic role, for which many pathways may be available:• Are we servicing the right markets and are these markets growing or declining?• What will our customers’ future needs be and are we positioned to fulfil those needs?• What are the likely future issues in our industry and are we prepared to face them?

At any point in time, there will always be a number of globally relevant issues with which professional accountants need to be familiar. At present, the most important of these are:• after-effects of the Global Financial Crisis and eurozone crisis;• human-induced climate change and sustainability;• harmonisation or convergence of accounting standards; and• explosion of social media, live communications and cloud computing.

Organisations are expecting more insightful advice from accountants about future opportunities and risks stemming from the global attempts to deal with these issues. They are also expecting increased probity and ethical behaviour. We will explore these global issues throughout this subject.

Example 1.1: A business dilemmaConsider the situation of a major oil company that is faced with declining oil supplies, increasing costs (e.g. carbon prices) and greater consumer awareness of the environment. The community is shifting away from accepting the continued, uncontrolled use of fossil fuels. In addition to important operational issues such as strong policies and procedures, efficient production and disciplined cost management, there are also broader strategic issues:• What do we stand for? • Do we move from oil to other forms of energy or into completely different product areas? • What is the perception of our brand (exploiter or good corporate citizen)?• What will our future customers look like?

CounterpointThere is a counterpoint or opposing argument, to the idea that accountants should be stepping out from their traditional role and pursuing advisory-type roles. Some would argue that accountants should limit themselves to their area of expertise—that is, reporting and auditing financial information. This line of argument suggests that roles like auditing of environmental information (e.g. emissions, pollution and waste) require skills in engineering, environmental science and recording, capturing or auditing physical events, rather than skills in auditing of financial information. In some circumstances, these claims have been made by professions in competition with accountants for these types of roles.

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The response to these arguments is that the term ‘accountant’ is incredibly broad, and the experience and qualifications of accountants span the whole spectrum of business and public sector activities. While the accounting profession requires its members to abide by a set of professional standards, two key expectations are that professional accountants: 1. make the right decisions about the services they perform; and 2. deliver services with professional competence and due care.

So, rather than regulate what accountants can and cannot advise on, the profession places greater reliance on the professional values, ethics and ‘soft skills’ of the individual professional accountant.

➤ Question 1.3Do you believe professional accountants are well placed to provide strategic advisory services (outside the traditional areas of cost accounting, financial accounting and taxation) to organisations? Justify your position.

Providing and implementing adviceSo far we have discussed the need for advice and requests for advice. But in many circumstances, the actual provision of advice, and the usefulness of that advice, can be hampered by the refusal of the organisation to accept and/or implement it effectively. In addition to technical skills, the adviser must also have soft skills such as communication, influence and persuasion. For example, it is important to obtain agreement (buy-in) from the organisation by ensuring that the decision-makers are supportive, and by minimising ‘political’ resistance or upheavals early in the process, before they gain enough momentum to cause harm.

Figure 1.1: Providing business advisory services

Issue

Requirement

Request

Investigation Advice

Decision

Implementation

Review

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Rather than disregard or hide from criticisms or different opinions, consideration should be given to alternative recommendations with justifiable reasons for not pursuing them any further. The recommended actions should be well supported and, ideally, the professional accountant should work with the organisation to implement the advice. The ability to identify key stakeholders, determine their position and develop a plan to actively engage with these stakeholders is essential in turning advice into successful action. Figure 1.1 reveals the typical chain of events in providing business advisory services and Table 1.2 further explores each stage.

Table 1.2: Chain of events for business advisory services

Stage Example Commentary

Issue Lack of expertise What causes the need for strategic advice?

Requirement Expert advice What does the business need to deal with the issue?

Request To professional accountant

Some organisations will not proactively make the request, so accountants need to proactively sell their services and be in front of the client.

Investigation Research and analysis Ethical considerations should be included in the investigation.

Advice Recommended action The accountant needs to make sure that the advice resolves the issue. Again, ethical considerations are important here. The accountant may need to actively influence stakeholders to ensure buy-in and acceptance.

Decision To follow recommendation

It is important to be influential in this process, so soft skills are vital. Make sure the process is timely, such that inaction or delay is not the reason a particular course of action must be taken.

Implementation Actually follow recommendation

This is the most important step in adding strategic value to the organisation.

Review To monitor progress or outcome of implementation

Regular monitoring and follow-up can help ensure that the implementation stage meets its stated objectives. If the desired outcome is not achieved, the review may need to feed back to the Issue, Advice or Implementation stages.

Example 1.2: Succession plan—please helpA small financial services organisation brings in an external adviser to give assistance on succession planning. There are five shareholders who are all executive directors (EDs) and full-time employees of the business. The managing director (MD), the majority shareholder, is hoping to exit the business as both an employee and owner. The EDs act as sales staff (known as business writers), but they also fill the marketing, office manager, operational, administrative and information technology roles.

The key issues that need to be considered include:• valuing the business and therefore providing a value for each share; • determining who should purchase the shares to maintain appropriate balance of ownership; • evaluating the possibility of new shareholders; and• organisational structure of employee responsibilities (this includes considering hiring specialised

personnel for the various operational roles filled by the MD and EDs).

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The external adviser provided a business valuation based on the current position and future projections of the performance of the business. This formed the foundation for a staged transfer of shareholdings to ensure appropriate proportions were maintained. In order to consider having new shareholders (who would likely be EDs), a review of the shareholder agreement as well as the business vision, strategy and objectives was conducted. This review highlighted a significant difference in opinion (relating to the future direction of the business) between the existing owners.

While some shareholders accepted the report and agreed with its findings, an inability to gain ‘buy-in’ and an agreement between all stakeholders during the decision-making phase delayed the retirement of the MD by over three years.

This example reveals a common flaw with many small business arrangements; that is, they rarely encompass succession or exit plans (whether for the overall business, or for individual employees or shareholders). It therefore highlights the need for strategic advisory services at the earliest point in business operations, rather than waiting for a difficult situation to arise.

Accounting rolesA broad range of roles that accountants perform is identified in the Ethics and Governance subject of the CPA Program. As business leaders in an international context, accountants can perform many diverse roles in the profession, including:• financial accountant;• financial executive supervising a team of accountants (chief financial officer (CFO),

financial controller);• management or cost accountant;• internal auditor; and• public practitioner (audit, assurance, financial management, taxation, forensic).

These roles can be matched with the main activities performed by professional accountants in business as identified by the International Federation of Accountants (IFAC 2005, p. 4):

• The generation or creation of value through the effective use of resources (financial and otherwise) through the understanding of the drivers of stakeholder value (which may include shareholders, customers, employees, suppliers, communities, and the government) and organizational innovation.

• The provision, analysis and interpretation of information to management for formulation of strategy, planning, decision-making and control.

• Performance measurement and communication to stakeholders, including the financial recording of transactions and subsequent reporting to stakeholders typically under national or international Generally Accepted Accounting Principles (GAAP).

• Cost determination and financial control, through the use of cost accounting techniques, budgeting and forecasting.

• The reduction of waste in resources used in business processes through the use of process analysis and cost management.

• Risk management and business assurance.

Our focus here is on the accountant as a strategic business adviser. This may arise either as an employee providing advice internally, or as an external service provider advising clients.

From the more traditional areas of finance, right through to supply chain management and talent management, the ability to review, assess and improve a business in multiple areas is an increasingly important skill.

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Example 1.3: The high value of ‘middle men’Whilst many assume that accountants focus purely on the numbers, the reality is that help can be provided in a much broader set of circumstances. Consider the example of two professional accountants, Ross Fyffe and Ivan Boardman, who provide consulting services to mid-sized organisations under significant pressure.

One assignment involved helping a call centre operation that was struggling. The organisation had been losing millions and was facing considerable difficulty. The tasks they performed in order to turn this organisation around involved the following:

Financial skills Refinancing equipment, restructuring debt, getting the books in order, and capital expenditure

Broader management skills Hiring and removing employees and mentoring executives to help improve the situation

Technical skills Ensuring that information technology systems were properly set up and functioning

Fyffe is quoted as saying ‘we worked through the whole financial cycle to see how we could save money … the work also consisted of transforming data into actionable information’, and the organisation ended up turning around from its losses (IFAC 2008, p. 28).

To read more about this and other examples of professional accountants in business please download ‘The crucial roles of professional accountants in business in mid-sized enterprises’, found at: http://www.ifac.org/about-ifac/professional-accountants-business.

This example demonstrates that accountants need to be able to act quickly in a wide range of areas that are often seen to be outside the traditional accounting realm (e.g. talent management/employee skills and supply chain management). It is important to consider the different skills you would require to hire and terminate employees, deal with fraud, improve sales, refinance existing assets, restructure debt and turn losses into profits (all within a short timeframe and whilst managing a variety of stakeholders).

➤ Question 1.4‘The business advisory industry thrives during periods of business change and hardship’ (iFAC 2008, p. 26). Explain why this may be the case.

The variety of advice that can be provided is extremely broad, and is often dependent on the roles currently being performed, as well as the experience and skills of the individual accountant. The following example examines two types of specialist accounting roles and suggests ways in which they can lead to strategic adviser roles.

Example 1.4: Specialist accounting rolesForensic accountants provide expert witness, investigative or consulting services (APES 215, APESB 2013a). The term ‘forensic’ refers to a level of assurance that is suitable for legal proceedings (i.e. use in court). Typically, forensic accountants provide advice on finance-related transactions or conduct that may be illegal, unethical or otherwise improper (e.g. allegations of fraud or money laundering). Strategic advice may be in the form of risk analysis and reduction—ideally provided prior to any disputes, litigation or allegation of wrongdoing.

Taxation accountants ascertain their client’s or employer’s tax liabilities or entitlements, and satisfy their obligations under taxation law (APES 220, APESB 2011). We typically think of taxation accountants providing compliance-related services (e.g. preparation of a tax return). However, the provision of tax planning and advisory services (e.g. transfer pricing or entity structures) can provide significant strategic value to the organisation.

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➤ Question 1.51. Soft skills, especially communication skills, networking and the ability to manage relationships,

are extremely important to progress to senior roles in accounting/finance. At the CFO level, how important do you think it is to be technically competent in the finance role, compared to actually managing the finance role? Explain your reasoning.

2. A contemporary business and social issue is maintaining work–life balance. What risks does an accountant providing strategic advice face in this area?

3. in the CFO role, how important do you think it is to:

(a) know the organisation and the products/services it offers?

(b) be passionate about the products/services the organisation offers?

Explain your reasoning.

Providing strategic adviceAccounting roles can typically be classed as either ‘reactive’ or ‘proactive’. Traditional accounting roles and activities are often reactive—that is, they take place after the event. However, contemporary accounting roles and activities, specifically strategic business advisers, need to be proactive—they need to forecast future needs, and influence how the organisation attends to them.

Example 1.5: First strategic decisionThe first strategic decision most small business owners make is the selection of the business structure. The type of entity that is used will have a serious impact in both the short and long term. Mistakes in this area can lead to significant problems, such as higher taxation liabilities, difficulties in transferring ownership and greater risk of liability.

Many small business entrepreneurs have limited understanding of the legal concepts and ramifications of choosing between a sole proprietorship, a partnership, a limited liability corporation or a trust. In addition to legal structures, they also struggle with accounting concepts, most importantly the ‘entity concept’. The accounting entity needs to be kept separate from private activities, but in many situations, the blending of bank accounts, personal withdrawals and business expenses, and lack of clarity of ownership of assets, all create significant issues.

Research findings based on 513 founders of small businesses have indicated ‘that small business owners who obtain counsel from accountants and/or attorneys are more likely to consider the full spectrum of implications of legal entity type and are generally more satisfied that their choice will positively affect firm profitability’ (Hertz & Beasley et al. 2009, p. 81).

Some of the types of advice that may be provided by professional accountants are shown in Table 1.3.

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Table 1.3: Types of advice provided by professional accountants

Financial management Cash flows, working capital, fixed assets, capital expenditure, taxation

Productivity and operations Supply chain management, improving and streamlining activities

Risk and internal controls Business, strategic, operational, health and safety

Capital and organisational structures

Funding sources, outsourcing

People management Succession planning, performance and rewards

Sustainability Environmental assessments and approaches, social impacts

Communications and information technology

Management information systems, customer relationship management

To provide this type of strategic advice, accountants need more than technical accounting skills. They also need a range of soft skills, including the ability to communicate, influence and negotiate. Empathy, the ability to identify with clients and their needs, is required, and the hard-to-describe skill of ‘execution’ is also essential. We can describe execution as the ability to get things done—to break down barriers, meet deadlines and deliver results that are at or above expectations. It describes the ability to turn knowledge of what could or should be done into action and results. Execution skills are often the difference between a knowledgeable adviser and a successful one.

Soft skills—communicationMany accountants rely on their technical expertise as a sufficient basis for clients to accept the advice and guidance they are given. However, ‘being right’ is not enough. Just as important as having potential answers is to be able to communicate them in a manner that is readily understood by the receiver of the information, who may not be an accountant.

In Module 6 we explore communication in detail, including evolving ‘ecological’ models that have greater interaction between sender and receiver of messages.

In the past, strong communication skills were often categorised as either verbal or written. But, with electronic communications and the power of the internet to reach so many people faster than ever before, there is a need to communicate across a much wider variety of mediums.

As part of this change the traditional model of one-way transmission from sender to receiver is changing to one of simultaneous transmission and reception of messages. That is, you are not just ‘providing advice and information’, you are also receiving feedback, interaction and information that you must incorporate into your own messages. Ignoring others is unlikely to lead to successful communication. This is more closely linked with the expected style of today’s accountants, who should be advisers, partners and collaborators, rather than the sole providers of specialised knowledge that is dispensed to others.

People often feel uncomfortable or fearful when interacting with accountants because they may not understand the language, concepts or ideas being discussed, and feel vulnerable or foolish as a result. For this reason, when providing advice, it is helpful to avoid jargon or technical terms without clearly explaining them. The overarching aim is to make people feel comfortable so that they are able to understand and act on your messages. If they feel unsure or intimidated, this is unlikely to occur.

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Other factors that may hinder communication will be clients or employers facing difficult economic decisions or hard choices between multiple options which may lead to tension and conflict in the workplace. Understanding where there is, or may be, potential interference, and adjusting your communication techniques to minimise this, is important.

Some of the ways accountants can help to demystify accounting information is by communicating it visually, with diagrams, colours and graphs. Specific examples include ‘traffic light’ systems, where results coded as green (good), yellow (caution) and red (bad) help show non-specialists where to focus their attention, and what the results actually mean. An example of this is shown in Figure 1.2.

Figure 1.2: Colour-coded ‘traffic light’ reporting system

indicators July August September Total Status Trend line

Financial

KPI 1 x% x% x% x%

KPI 2 x% x% x% x%

KPI 3 x% x% x% x%

Environmental

KPI 4 x% x% x% x%

KPI 5 x% x% x% x%

KPI 6 x% x% x% x%

Customer

KPI 7 x% x% x% x%

KPI 8 x% x% x% x%

Employees

KPI 9 x% x% x% x%

KPI 10 x% x% x% x%

Green (good)

Yellow (caution)

Red (bad)

An additional communication issue that affects accountants is effective filtering. When we attempt to communicate too much data or information we overload the receiver. Too many reports can be just as harmful as too few. In Module 6 you will explore a whole range of communication approaches including communicating with non-accountants and, social networks, and planning your communication. It also explores knowledge sharing, which helps us understand how people horde and guard their knowledge rather than transferring it to others.

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The accountant as internal adviser—a member in businessThere is a vast range of internal advisory opportunities, from creating strategy to costing analysis and restructuring, and from new product development to pricing and revenue models for mature products. Many tools and techniques are presented in the Strategic Management Accounting and Global Strategy and Leadership subjects of the CPA Program.

Figure 1.3 provides a snapshot of the variety of roles the accountant as an internal employee may provide.

As you review Figure 1.3, consider the meaning of the embedded circles and the significance of the inward and outward arrows for the accountant as an internal adviser.

Figure 1.3: The roles and domain of the professional accountant in business

Businessassurance

Strategicsupport

Businessaccounts

CEO,Independent

directorsOther

directors Educators

Advisors

Consultants Member inother roles

Shareholdercommunications

Financialreporting

Internalcontrol

Corporatefinance

IT

ProjectmanagementTreasury

Stakeholdercommunications

Managementinformation &

analysis

Riskmanagement Finance

strategyInformation

strategy

Businessstrategy

Enterprisegovernance

CFO

Source: International Federation of Accountants (IFAC) 2005, The Roles and Domain of the Professional Accountant in Business, IFAC Professional Accountants in Business Committee, New York,

November, p. 3, accessed October 2012, http://www.ifac.org/sites/default/files/publications/files/ the-roles-and-domain-of-the.pdf. Used with permission of IFAC.

We can see from Figure 1.3 that there are a broad range of roles including high-level finance, business and information strategy combined with enterprise governance, as well as more specific roles such as internal control, business assurance, treasury and project management.

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A majority of CPA members are employed in business, whether in the corporate, not for-profit, government or small-to-medium enterprise (SME) sector. As such, this area of internal advice can be very broad. Larger corporate and government bodies often have whole departments dedicated to providing support and advice. So, it is in the smaller enterprises that strong internal, business advisory skills are very critical. For this reason, we will narrow the focus to the role of the accountant as an employee within the SME sector. We will also describe the SME sector and explain the importance of good accounting support and advice, and the main issues and difficulties that arise for many organisations in this area.

Small-to-medium enterprisesThere is no single definition of an SME, and while precise definitions may vary between regions, there are some broad themes that help provide clarity. Usually, SMEs have a low number of employees relative to large, listed corporations. Ranges are usually zero to 10 employees for a micro business, 11 to 100 for a small business and up to either 250 or 500 for a medium enterprise. They also have relatively lower levels of turnover, profits and assets, and find it more difficult to access external sources of funding. They are often family owned, and family desires and relationships may be intertwined with the usual profit objective.

Smaller organisations often require generalist staff who have skills across a broad range of areas and who must perform a variety of tasks within the organisation. While larger organisations can usually afford to hire specialist staff, smaller firms may not be able to afford (or may not need) the services of a full-time professional accountant. Where firms do require full-time support, the accountant must often be a skilled generalist who is able to perform management accounting, financial accounting, financial management, taxation, compliance and other services, or contract out specific pieces of work.

Many SME owners fail to consider a variety of issues, including globalisation (importing, exporting and foreign exchange), appropriate financing arrangements, intellectual property protection, the role of the internet and corporate compliance requirements (Calverley 2010). So, first, it is important for accountants who work for these organisations to be aware of the critical issues and risks that are faced by the organisation. Second, in order to play a more valuable role, there is significant scope for advisory services that can help manage risk and improve results.

It should be noted that many accounting firms also fall into the SME category (i.e. based on their number of employees and turnover) and so face similar issues to other organisations in this category. While a person may be technically proficient at accounting-related tasks, this does not automatically lead to the conclusion that they are able to successfully run their own business, which also involves sales, marketing, systems, managing staff and other non-accounting skills. Therefore, it is imperative that accountants focus on running their practices effectively in order for their advice to have credibility. Example 1.6 helps provide some background to key issues that SMEs in the Asia–Pacific region face, which is useful knowledge when determining what type of advice is suitable.

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Example 1.6: Understanding SME issues and focusCPA Australia undertakes an annual Asia–Pacific small business survey to gauge key business issues in the region, including growth expectations, access to finance, employment trends and business management practices. As CPA Australia’s CEO has noted: ‘Small businesses are key economic drivers and their state of health are not only indicators of broader economic performance but catalysts for such performance’ (CPA Australia 2010).

The latest survey (CPA 2012) found the following:

Confidence and growth Half of Indonesian businesses expected to grow strongly, whilst only 6 per cent believed this in Hong Kong. Meanwhile, Australia, New Zealand and Singapore hovered around the 15 per cent mark, indicating that a large number of businesses have very low levels of confidence in achieving strong growth in the short term.

Indonesian business confidence is extremely high at close to 90 per cent, while Australia, Hong Kong and New Zealand are quite low on the scale.

Employment trends Three-quarters of Indonesian businesses expect to grow staff numbers, with only one in five expecting this in Australia and Hong Kong. Manufacturers were most likely to have a decrease in employee numbers during 2012, although confidence in these businesses is improving.

Access to finance Small businesses in Australia and New Zealand have a relatively lower need for finance with around 40 per cent expecting to require additional funding as compared to Indonesia (94%), Hong Kong and Malaysia (83%), and Singapore (79%).

Hong Kong and Australia have the lowest reported levels of businesses (less than a quarter) who believed obtaining finance would be easy. Nearly half of Indonesian businesses surveyed expected to easily obtain funding over the next 12 months.

Business advice Whilst nearly four out of 10 businesses in Australia sought business advice from an accountant, this number was much lower in Singapore and Hong Kong (14%). New Zealand businesses saw a noticeable decline over 12 months (from 38% to 27%). This highlights the potential growth for accountants, and raises questions about our ability to interact with clients during difficult times.

To read more about these findings please download ‘The CPA Australia Asia–Pacific Small Business Survey 2012’ from: cpaaustralia.com.au/cps/rde/xbcr/cpa-site/small-business-survey-2012.pdf.

Both the need and the opportunity for strategic advice are high. An accountant can add value by evaluating financial consequences and strategic outcomes of capital investments. An accountant who can recommend new products and services and help support marketing efforts based on external economic analysis will be more useful than one who can only provide the estimated cost structure and basic revenue forecasts.

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Example 1.7: Supporting growth whilst instilling financial discipline

Violinist André Rieu, one of the world’s most famous performers, often plays to packed stadiums around the world. However, behind every good performer, there should be a well-run operation. Roel van Veggel is the CFO and concert tour director of André Rieu Group. His generalist role covers a broad range of activities—from dealing with significant internal growth in sales and staff numbers to obtaining finance to support growth while instilling financial discipline—all done while remembering to focus on the founder’s vision.

A large part of an accountant’s role may focus on adding value. Identifying the success or otherwise of product lines (e.g. concerts in different countries and stadiums for the André Rieu Group), the streamlining of revenue collection and more transparent cost information are just some examples of these valuable services.

By handling your primary accounting responsibilities successfully, it may be possible to expand the scope of your role beyond traditional boundaries. As Roel van Veggel states: ‘You can create your own job … You’re expected and encouraged to look for potential needs throughout the company; if you see a challenge you can address, you pick it up’ (IFAC 2008, p. 6).

Some areas of business have often been seen to be outside the area of accounting expertise. However, Example 1.8 shows that financial analysis combined with business understanding can be useful in many areas.

Example 1.8: Accountants advising on human resourcesVoluntary turnover of employees in Australian SMEs was 12.7 per cent in 2008. This decreased to 9 per cent in 2009 and 2010, which was understandable due to the difficult nature of the economy as a result of the global financial crisis.

Losing nearly one in 10 employees through voluntary turnover is a significant cost to any organisation. The intangibles include the loss of institutional knowledge and intellectual property, and the risk that replacement employees may lack appropriate skills and the right cultural fit. Direct and indirect administrative costs also arise (e.g. holding exit interviews, making payroll adjustments, closing IT and office security accounts, as well as recruiting and induction processes).

Accountants should be able to provide both an analysis of this situation and strategic advice about trying to improve the result. For example, nearly two-thirds of those who left an employer cited the need for new challenges, while more than half desired better pay. This indicates that opportunities to reduce turnover abound, possibly starting with a focus on higher salaries and appropriate career planning and training opportunities. The costs of providing these additional benefits can then be weighed against the cost of doing nothing and continuing to operate with a high staff turnover. Remember though, the financial and other costs of replacing a new staff member can often be significant, so the savings from avoiding a bonus or an appropriate pay rise may be false gains indeed (D’Angelo Fisher 2009, p. 41; AIM 2010).

Family-owned businessA significant subset of SMEs is the family-owned business. For example, approximately three-quarters of companies that are registered in the UK are family owned; in some countries this number can rise to 95 per cent (Cadbury 2000). Research by the Organization for Economic Cooperation and Development (OECD) found approximately two -thirds of listed companies in Asia, and almost all private companies, are family run (OECD 2003). In addition to the issues that arise for many SMEs, there are a number of specific family-based issues that may affect organisations.

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While Cadbury (2000) identified that family businesses often demonstrated strong identity and clear, longer-term vision, there were other problems. Major risks included dissension between family members, especially when the roles intertwined between being a shareholder and being an employee. Difficulties also arose as growth occurred—for example, the increasing need for non-family employees, having to share control with external financiers, and a lack of separation of strategic and operational issues. Succession planning also became an issue over generations. Useful recommendations included creating a board of directors, including external non-family directors, and providing external objective advice to help examine issues when family-member viewpoints may be ‘clouded’.

As advisers, it is important to be able to understand the size, type, purpose and vision of an organisation. Without a clear understanding of its structure and style, it is unlikely that an adviser will be able to identify all the relevant issues and provide appropriately tailored advice. Learning to deal with executives/owners who have a strong emotional attachment to an organisation as well as a significant financial interest is a valuable skill.

Supporting entrepreneurial activityThe purpose of entrepreneurial activity is to generate new ways of doing things, which can include starting up a new business venture, changing how a product is produced or sold, and creating new services for customers.

A useful definition of entrepreneurship is as follows:

Entrepreneurship is a dynamic process of vision, change, and creation. It requires an application of energy and passion towards the creation and implementation of new ideas and creative solutions. Essential ingredients include the willingness to take calculated risks—in terms of time, equity, or career; the ability to formulate an effective venture team; the creative skill to marshal needed resources; the fundamental skill of building a solid business plan; and finally, the vision to recognize opportunity where others see chaos, contradiction, and confusion (Kuratko & Hodgetts 2004, p. 30).

What you will notice from this description is the sense of uncertainty or risk, as well as innovation, energy and change. Whilst many businesses are focusing on streamlining operations and making sure things are done systematically and in exactly the same manner day after day, entrepreneurship is about doing completely new things and exploring new territory. This requires a very different type of support from accountants, with less focus on control and more focus on successful implementation of new ideas and change, as the following example indicates.

Example 1.9: Six sigma versus rapid prototypingSix sigma is a management strategy that attempts to minimise deviations in organisational processes and systems. Achieving six sigma involves having only 3.4 deviations per million (i.e. 99.99966% error free). This process can be applied to services as well as manufacturing, and examples include trying to reduce the number of mistakes made in food processing, with customer deliveries, and even during patient surgeries. A variety of tools are used to pursue six sigma targets, and focus on eliminating variability in activity by consistently doing things in a correct and identical manner.

Rapid prototyping, on the other hand, is a method of constantly changing a product, service or the sequence of activities that are performed to provide goods or services. This perspective can be described by the phrase ‘if it ain’t broke, break it’. Entrepreneurship usually involves taking something and changing it—often in the face of significant resistance. Changes and refinements are made continually until the right outcome is achieved, and this involves a willingness to try new things and take risks.

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One useful concept that helps explain the different needs of entrepreneurs is the business life cycle. A traditional life cycle will see an organisation move from formation to growth, then reach maturity, followed by decline. Entrepreneurs, who are in the formation and growth phase, often have a different focus compared to those that are now in the maturity phase with well established products, services, customers and markets.

An example of a successful entrepreneurial startup is Airbnb, founded in 2008. Its approach is a twist on the normal accommodation plans for most travellers—instead of booking into a hotel, Airbnb has created a matching service that links travellers with individuals who are willing to rent out their own houses and apartments. By 2011, the company was able to raise USD 112 million in funding and now claims to have listings in nearly 200 countries (Takahashi 2011).

Entrepreneurial activity requires certain support that accountants may be able to provide. Access to funding is normally a very difficult process and accountants can help identify and guide people through different sources (e.g. from family members, banks, angel investors and venture capitalists). Business plan documentation, revenue and cost forecasting, scenario analysis, risk management, and identification and management of intangible assets are all essential components of entrepreneurship where support and advice may be beneficial.

One additional benefit accountants may bring to entrepreneurial activity is the ability to balance both compliance and performance roles. Risk-taking is important, but it still needs to be considered and managed carefully. A balance is needed between quick decision-making, energetic action and rapid change on the one hand, and calm evaluation of the situation and ensuring legal compliance on the other. Accountants can help provide an objective evaluation of performance, governance, structures and systems whilst still encouraging innovation. In Module 5, we focus on innovation and managing risk, and we explore the concept of entrepreneurship in more detail, including social entrepreneurship, and links with economic development and the global economy.

The accountant as external adviser—a member in public practiceThe ability to act as an external adviser is often a suitable way of providing services to organisations that need special expertise, but only require that expertise in a one-off or part-time capacity. Areas where accountants have strong skills include: • assessing entity structures and obligations;• developing manual and automated systems, processes and procedures coupled with strong

internal controls, performance measurement and reporting; and• managing working capital operational issues in accounts receivable, accounts payable,

inventory management and cash management.

When deciding to adopt external advisory roles, special consideration must be given not only to the client’s situation, but also to the accountant’s own organisation. The Practice Management subject in CPA Australia’s Public Practice Program provides detailed advice on many of these issues, including setting fees, obtaining clients, services to offer, systems and procedures, and sales and marketing methods.

In the following section we discuss an important decision that must be made—the range of services to be provided and whether that involves partnership with professionals from other industries. We also explore the need for marketing and introduce ideas for expanding the advisory services, and offer a tangible example of how that might develop.

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Cross-selling and strategic partneringAccounting roles in public practice are varied, and can include financial accounting (and book-keeping), taxation, auditing, insolvency, mergers and acquisitions, as well as advisory services. Often, accountants will specialise in one particular accounting discipline. The opportunity then arises to partner with other accountants who offer specialised and complementary services in another accounting discipline. Such partnerships can exploit the benefits of ‘cross-selling’, where existing clients are offered additional services, thereby increasing income levels and, hopefully, further entrenching the client relationship.

Other industries are keen to team up with accountants because of their established client base. The following extract outlines a scenario where financial planners are encouraged to partner with CPAs to provide holistic wealth management services—that is, accounting, financial planning, estate planning, mortgage broking, insurance and stockbroking.

… one of the biggest challenges CPAs face is one of your biggest opportunities: the desire of many CPA clients to receive comprehensive financial planning and financial services from their accountants …

The good news is that you can make a compelling case that CPAs can address nearly all of these difficulties by partnering with the right financial adviser—that is, one who provides comprehensive wealth management …

You also must emphasize that the CPA firm’s clients would be receiving the comprehensive wealth management services that they are already seeking and that would keep them as clients. Your approach should be to highlight the win-win-win situation an alliance would create for the clients, the CPAs and you (Bowen 2009, p. 26).

Partnering with the legal industry can also provide cross-selling opportunities for accountants, especially for corporate clients. Accountants are often confronted with commercial legal issues surrounding contract management, taxation, mergers and acquisitions and insolvency. Having the ability to offer a full range of commercial and financial services can be a key competitive advantage.

Marketing When an accountant decides to step into the strategic advisory role, they need to realise that there is often more work to be performed than just advisory services. The reality is that an accountant needs to build up a client base—through sales and marketing. Current clients may be used to receiving only the more traditional services. In order to expand the service offering, accountants need to be able to communicate the new services that they are able to provide and why these services are useful to the client, and demonstrate that the pricing is appropriate. Marketing skills and non-billable time building client relationships become essential, and these skills need to be developed and refined.

Strategic adviceWhen we talk about providing strategic advice, we are not simply limited to advising on an organisation’s strategy. Advice can be strategic in nature, even if it relates to the technical and operational aspects of an organisation. Strategic advice should, however, have the longer-term objectives of the organisation in mind, whilst focusing on the various steps and initiatives that are required to achieve those objectives.

If you are going to provide strategic advice, it is crucial to understand not only what your client needs and wants, but also your client’s state of mind. You need to have a clear understanding of the how the organisation approaches issues—so that you can effectively guide them along. The advice by itself may not be of much value without guidance towards successful implementation. Table 1.4 outlines some different ways of approaching the provision of strategic advice in difference scenarios.

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Table 1.4: Provision of strategic advice

Client behaviour Potential approach

Aware of approaching issues but paralysed and unable to make a decision.

In this situation the client may actually know the appropriate course of action, but feels powerless to make it or act upon it. In this case, step by step guidance through the process will be just as valuable as making the actual decision itself.

Inability to take decisive action about previously ‘loved’ parts of the organisation.

Often called ‘sacred cows’, there is a sense that these items (such as a once popular product or manufacturing facility) cannot be touched, despite poor ongoing performance.

A focus on identifying sunk costs and addressing the need for innovation and change are crucial here.

Dealing with emotional and cultural attachment is just as important as the ‘rational’ or ‘logical’ analysis and decision.

Denial and avoidance—pretending that potential issues are not in fact occurring or serious. Over-estimating positive outcomes and ignoring reality.

A firm focus on technical analysis of financial results, economic indicators and other factors to show the severity of the situation may be helpful here. Moving away from ideas and opinions and instead relying on numerical data and forecasts should help remove emotion and move towards more disciplined action.

A lack of urgency, with positive but slow action when faster, decisive movement is required.

Scenario analysis—that shows the expected outcomes of different implementation schedules, may help generate more intensity towards implementation.

Inaction and limited ability to respond due to lack of skills, financial or technical resources.

Support with training and skill development combined with creating potential future scenarios and step by step action plans for achieving outcomes.

However, it is not enough to say accountants should give strategic advice in these areas. To clarify what this might actually mean, a specific example follows of turning advice into results in the area of cash flow collection—an area that has been identified as critical for many organisations and yet is often poorly managed.

Example 1.10: Turning advice into results—collecting receivables

Consider an external accountant who currently creates the year-end financial statements for a client and is exploring what opportunities may exist to provide additional advice. One of the biggest issues clients can face in difficult times is slow cash receipts from debtors. This is a significant cost to the organisation through increased working capital requirements that must be financed. The additional stress it puts on an organisation to meet its own cash flow requirements (payments to suppliers, employees and government taxes) can also be high, and may lead to financial distress or even failure. The accountant should have the knowledge to advise on appropriate debtor management policies and processes and the skills to successfully execute the implementation of such a system.

Organisations which do not have detailed systems and processes in place can benefit from advice that identifies the current situation, explores potential solutions and leads to improved systems, collections and reduced cash flow issues.

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Improving collections is a combination of technical understanding and procedural and operational skill. From a technical side, the accountant can capture and report the structure of accounts receivable or debtors—that is, how many debtors are current or 30/60/90+ days overdue. From here, analysis can be used to calculate the financial cost of these delayed payments as well as the risk and value of bad and doubtful debts.

From reporting to advisingThe traditional role of just reporting the level of debtors on a balance sheet has evolved. The information that is provided can help identify potential underlying issues—that is, the strategic adviser can quickly provide information to a client about whether there is a problem, such as a negative trend line, an increase in bad and doubtful debts or a declining cash balance.

This information could be combined with an analysis of external factors, such as customer industries that are experiencing economic decline. The next step would involve reviewing the systems and processes for issues such as:• how and when invoicing is done;• how credit terms are established;• establishing whether statements are provided;• when and how reminders to customers are made; and• how slow payments are followed up.

In many circumstances, formal procedures are either non-existent, or employees do not heed them. The opportunity then arises to develop and implement systematic procedures for invoicing and cash collection. Improvements can be measured against the baseline trends that have already been noted. The financial benefits from improved cash flow collection (lower net working capital financing requirements) can be easily calculated and the non-financial benefits (such as less stress from having a stronger cash balance and less time wasted chasing up slow-paying customers) can also be discussed.

The end result is the accountant, working in strategic partnership with the client, creating not only a set of financial results, but systematically improving profits, cash flows and business efficiency.

The next step: From receivables to working capitalThe same type of approach can be taken throughout the organisation with issues such as:• accounts payable—ensuring all invoices are properly receipted and genuine, discounts have been

taken up where appropriate, and payments have internal controls and match the goods/services actually received; and

• inventory—identifying holding costs, slow moving and obsolete stock, purchasing processes and ordering costs, production capacity and scheduling.

The CPA Program Strategic Management Accounting subject outlines a range of tools to provide strategic advice on pricing, product selection, strategic costing and product life cycle analysis. CPA Australia also offers a variety of professional development opportunities for members to enhance their skills in a range of accounting-related disciplines.

The opportunities to add value through advice are also beneficial to the provider, offering more interesting engagements and the ability to earn greater returns.

➤ Question 1.6Refer back to Table 1.1. Consider the strategic advice that a professional accountant could give an enterprise in relation to its customers. Explain how that advice might differ depending on whether an accountant was advising a small, medium or large enterprise.

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SummaryIn Part A, we considered the role of the accountant as strategic business adviser. As accountants have a deep body of knowledge and experience regarding business and organisations, they are well placed to provide a broad range of advice to organisations of all types and sizes.

The major categories of advice needs were introduced and examined, highlighting the differences that exist between different types of organisations. The advice could be required at operational and strategic levels; for example, advice on improving productivity or re-positioning the organisation to address future customer needs. In meeting these needs, an external adviser in public practice can offer more than mere compliance services by leveraging the knowledge they gain from working with a variety of businesses across a variety of industries to provide extensive strategic advisory services.

Advisory work is not restricted to external consultants alone. The accountant can also perform many roles as an employee from within an organisation. Indeed, internal accountants are well positioned to proactively offer strategic advice in addition to the more traditional, reactive activities. For smaller organisations, it is vital that accountants provide a broad range of advisory services that stretch across disciplines and functions.

The required skill set for accountants is broad where strategic advisory services are involved. In addition to technical knowledge, key skills include communication and collaboration at all levels of an organisation.

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Part B: Advising beyond traditional accounting areas

Traditional accounting focuses on monetary input, outputs and costs. The expansion of accounting information and advice to include non-financial, or operational data has accelerated over the last two decades. There is now a strong focus on internal balanced scorecard reporting, as well as externally focused triple-bottom-line and sustainability reports. In addition, regulated environmental reporting now exists in many countries and industries (e.g. National Greenhouse Energy Reporting in Australia). Accountants as strategic business advisers need to be able to help explain, capture, communicate, report and act on the whole of the business, including its monetary, physical and social impacts.

From an internal, management accounting perspective, we are seeing the broadening of focus from costs to include physical flows (such as inputs of energy, water and oil in terms of volume), physical outputs (such as volume of waste and emissions) and the costs attributed to these physical amounts (such as carbon prices). A strategic business adviser needs to be able to advise on more than just monetary flows and monetary impacts. They must also be able to communicate about physical flows and impacts.

Example 1.11: Sustainable supply chain managementAs accountants, when we think of supply chain management, we typically think of minimising stock-outs, cutting costs, improving data quality and increasing efficiency. However, in recent times, a key focus of supply chain management has been sustainability—that is, the environmental, social and ethical impact of the supply chain. Key areas to be considered include the level of emissions and waste, employment practices, and the way suppliers and customers interact throughout the supply chain.

Rather than being a separate, stand-alone focus on sustainability, these measures actually relate back to, and can improve, the traditional focus of reducing costs and improving efficiency. This is because unsustainable practices typically involve higher risks that can cause greater damage to reputation, quality, culture and profitability over the long term.

There are a number of examples of customers using their buying power to instil sustainable practices throughout the supply chain. For example, Westpac Banking Corporation has a code of conduct for sustainable supply chain management, and requires suppliers to confirm their compliance with the standards. However, rather than a simple ‘push-down’ approach, sustainable supply chain management can involve consultation with, and active engagement from, all parties in the supply chain. Such approaches can lead to new innovations, greater customer/supplier alignment, increased efficiency, lower risks and lower costs throughout the supply chain. The Global Reporting Initiative (GRI) provides guidance for sustainable reporting. For example, the guidelines suggest that organisations explain specific practices in relation to the supply chain, as shown in Table 1.5.

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Table 1.5: GRi supply chain guidelines

Supplier selection List the economic, environmental and social criteria used when selecting new suppliers, and describe how the use of these criteria is encouraged within the organisation.

Supplier management Explain:• how expectations are established and defined in contracts with

suppliers to promote improvement in economic, environmental and social performance (including targets and objectives);

• how suppliers are incentivised and rewarded for economic, environmental and social performance; and

• feedback and dialogue mechanisms for suppliers.

Product and service design Identify changes, and describe their outcomes and progress.

Certifying and auditing suppliers List the type, system, scope, frequency and current status of certification and audit.

Supplier termination Describe systems in place to assess the potential economic, environmental and social impacts of terminating a relationship with a supplier, and strategy to mitigate the impacts.

Source: Global Reporting Initiative (GRI) 2012, G4 Developments, Second G4 Public Comment Period, G4 Exposure Draft, accessed July 2014, p. 45,

https://www.globalreporting.org/resourcelibrary/G4-Exposure-Draft.pdf.

For more details on the G4 Guidelines refer to Module 4.

In the contemporary environment, accountants therefore need to be aware of the focus on sustainable supply chain management, both from an external reporting perspective and when providing supply chain management advisory services to organisations.

Physical accountingPhysical accounting involves recording and reporting on the use of different types of physical materials and the volumes used, consumed or transformed. This includes considerations of waste, commercial and environmental sustainability, continuity of supply chains, and the effective use of resources. The social and ethical outcomes of the use of physical resources must also be considered. Major items that will be included in any analysis will be water, oil, energy, and non-renewable resources.

The importance of understanding the source and sustainability of raw materials is demonstrated in Example 1.12. Changing how raw materials are obtained or processed may have a significant impact on the long-term viability of an organisation’s products and profits.

Example 1.12: Sustainable supply chainsUnilever is a global producer of consumer goods, particularly of food, personal care and household cleaning products. In 2010 it launched the Sustainable Living Plan in which it adopted a vision to grow its business while reducing the environmental footprint. Unilever has committed to sustainable sourcing of all its agricultural raw materials by 2020. One of those raw materials is tea leaves (Unilever 2013).

As the world’s largest purchaser of black tea, Unilever supports social change through its Better Livelihoods program. It has already trained about 450 000 smallholder tea farmers in sustainable agricultural practices and made high-quality seeds and fertilisers available to them. Farmers have improved their yield and their livelihood, while the company has a more robust supply chain focused on smallholders (TELUS International 2013).

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In many circumstances, we will already be collecting data about physical quantities and inputs. These will be found in purchase orders, bills of material, and standard costing systems (especially for larger purchases). However, many items are ignored or hidden. These include items treated as overhead (e.g. unmetered water usage or energy), or regarded as externalities (e.g. the use of air from the atmosphere). It is important to ensure we have systems in place to collect and collate this information so that it can be reviewed, analysed and reported quickly and easily.

Nitto Denko Corporation is a Japanese company that manufactures a variety of products including optical films for liquid-crystal display (LCD) screens, automotive materials and parts, and electronics. It has produced the following diagram (Figure 1.4), which is a useful example of how we can capture and report both physical and monetary results.

Figure 1.4: Nitto Denko Corporation—physical flows and volumes

Material recycling

Energy recycling(thermal recycling)

INPUT OUTPUT

Amount ofmaterials recycled:18 186 metric tons

Waste plastic recycled: 6240 metric tonsSolvents recycled: 11 946 metric tons Solvent vapors

emitted into the air:779 metric tons

Products: 171 947 metric tons

Industrial waste disposed outside the company: 45 983 metric tonsFinal disposal: 673 metric tons

Wastewater: 3 888 579 metric tonsWater consumed: 4 462 787 metric tons

Amount of energyrecycled: 43 865 kl(in crude oil equivalent)

Energy purchased:143 122 kl (in crude oil equivalent)

Solvents purchased: 36 319 metric tons

Raw materials purchased(including solvents):202 026 metric tons

CO2 emissions:390 824 CO2

metric tons

Manufacturingprocess

Source: Nitto Denko Corporation 2011, ‘Environmental construction activities: Material flow in business activities (non-consolidated)’, accessed July 2014,

http://www.nitto.com/company/environment/2010/environmental.html.

Figure 1.5 provides powerful information for internal decision-making and advice. For example, we can see that 87 per cent of water consumed ends up as waste water. It also shows that 33 per cent of solvents have managed to be recycled. By clearly presenting physical information as well as costs, we are able to focus attention on process redesign, product changes, and recycling efforts to improve profitability, minimise waste and reduce the level of raw materials required in the first place.

When companies start producing and analysing this information, it can be a catalyst for change. Consider the following examples:• McDonald’s moved away from polystyrene to recyclable packaging for its hamburgers.• Dulux and other paint companies create water-based paints that have low or zero volatile

organic compounds.• MonoSol has developed soluble and even edible packing films that replace plastic.• EADS (the parent company of Airbus) uses three-dimensional printers (additive manufacturing

technology) to ‘print’ aircraft parts rather than manufacture them, significantly reducing waste of metal alloys, and cutting weight by up to 50 per cent, which in turn saves fuel costs (Andy 2011).

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➤ Question 1.7‘A business cannot achieve sustainability and profitability at the same time—one must always be sacrificed for the other’. Do you agree or disagree? Explain your answer.

Management accounting and the environmentAccountants are aiming to improve outcomes for all stakeholders and the focus should be to obtain and exploit competitive advantages in an ethical and honest manner. Integrating environmental analysis into management accounting, often called Environmental Management Accounting or EMA, is a powerful approach that helps achieve this.

EMA uses a combination of tools, some of which focus more heavily on monetary aspects, whilst others consider physical interactions. This leads to the following classifications being used:

Physical Environmental Management Accounting (PEMA)This includes the use of tools to record material, energy and water flows, as well as incorporating physical amounts into budgets, forecasts and capital investment evaluations. Performance evaluation in regard to environmental criteria, developing systems that minimise pollution and waste and improve recycling, are all linked to PEMA.

Traditionally, invoices for utilities (e.g. water, electricity, gas) are received by the finance department and the amount outstanding is entered into the accounting system, along with the scheduled payment date. PEMA, on the other hand, would advocate some or all of the following:• capturing the total energy usage for the period and comparing to budget;• identifying the usage between peak and off-peak times and maximising off peak usage;• assessing the emissions from the energy used and identifying ways to reduce emissions; and• retrofitting high-use machinery with meters to assess energy usage and look for efficiencies.

Monetary Environmental Management Accounting (MEMA)According to a United Nations report (UN 2003), many organisations of all sizes in business and government underestimate or do not track the costs of energy and materials used or wasted. There are additional related costs of waste handling for recycling, treatment or disposal, insurance and possible contamination liability, and regulatory costs current and future. If these costs are not adequately tracked and estimated then they cannot be managed or reduced.

We need accounting systems to properly capture these costs and report them in the correct areas, rather than just bundling them into overhead accounts. Once we identify the key drivers and causes of these environmental costs, we can start devoting attention to making improvements. MEMA focuses on costs incurred, and costs that may be avoided. Specific tools that are useful to achieving this include activity based costing and life cycle costing.

These tools are explained in detail in the ‘Strategic Management Accounting’ subject in the CPA Program.

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Management activities where EMA may typically be used for internal purposes include:• cost management;• cost allocation;• inventory and production planning;• investment appraisal;• performance evaluation and benchmarking;• product/service design;• product/service mix;• product/service pricing;• purchasing;• supply chain management; and• external financial and environmental reporting (United Nations 2003).

if you are interested in learning more about this area, please refer to useful resources on My Online Learning.

Environmental costs and revenuesAlong with the actual volumes of physical items that are used, consumed or wasted, costs are attached to these items. In many instances, these costs may well be ‘externalities’. These are discussed in detail in the Ethics and Governance subject in the CPA Program. As these externalities transfer costs from the organisation to society we are likely to see more and more regulations that aim to minimise these externalities or transfer them back to the organisation. An example is the cost of carbon. Previously, carbon was a waste by product of many industrial processes, but there was no cost attached. However, many governments have now put a ‘price’ on carbon. Essentially, this has turned an ‘externality’, or cost outside the entity, into an internal cost.

There will be a range of consequences as a result of such costs. Some industries may become unprofitable, and foreign competitors may become more aggressive and able to capture market share. But, such developments will certainly motivate companies to become more efficient, and focus on minimising these costs throughout the supply chain. So the focus will be on the physical items consumed. Efforts to reduce the level of raw material used, wasted or emitted will require more analysis, investment and consideration.

An example of reducing environmental costs is motor vehicle emissions. Transport companies are channelling their attention to areas that they can control to not only reduce emissions but to also reduce costs through: • more efficient driving; • more efficient vehicles; • designing their routes more carefully; and • using different raw materials (e.g. biofuels).

A simple example of success in this area is provided by South East Water, a water retailer in Victoria, Australia. It was able to reduce printing waste by 2000 pages per person per annum and reduced the number of printers from 120 to just 15. This was achieved by a combination of strategies including having staff walk to the printer and using a swipe card to activate the print job, printing duplex (two-sided), and printing two pages to a page (Hall 2010).

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integrating environmental measures—extending the balanced scorecardWith a growing focus on sustainability and the environment, it is no surprise that organisations have set performance targets and adopted performance measures in this area. Capturing environmental data and reporting the information has allowed actual performance to be compared to benchmarks (e.g. internal targets, historical performance or competitor results). As with traditional performance indicators, environmental performance measures can comprise a range of input, output, outcome or impact measures, including:• volume or percentage of waste;• number or percentage of suppliers certified;• percentage of waste recycled/re-used;• volume of output per input;• volume or percentage reduction in emissions; and• proportion of non-toxic, dissolvable materials.

Many organisations now use balanced scorecard reporting. By providing detailed results for leading indicators relating to customers, employees and processes, it is hoped that attention will be devoted to issues quickly, and that appropriate changes and controls can be put in place to influence the financial (lagging) results.

Many scorecards are now attempting to incorporate environmental aspects into their structure. Two main ways of doing this are to create a separate ‘perspective’ or area for environmental results. An alternative approach is to integrate measures throughout existing perspectives of the scorecard.

The benefit of a separately reported area for environmental performance is that it demonstrates the importance and attention being devoted to this area. However, there is a potential downside. By ‘separating’ out environmental action and results it can be seen to be a separate, add-on and a tokenistic component to the organisation—rather than as being integrated throughout all aspects of the business. Another problem is that it tends to focus on ‘outputs’ or ‘results’, but not on the drivers, causes or inputs. This limits the identification of opportunities for change and improvement.

SummaryIn Part B we discussed that the role of the accountant is a broad one and includes providing strategic advice outside traditional areas. There has been growth in regulation requiring environmental and sustainability reporting at both local and international levels, as well as widespread adoption of the GRI guidelines.

Accounting information should not be restricted to traditional financial matters. It now includes physical accounting for flows and volumes of materials, and environmental management accounting for physical usage and environmental costing. There is a growing interest in sustainability in supply chain management being generated within organisations themselves, and the need for sustainable operations is also being influenced by customers, investors and other stakeholders.

Because accountants have relevant skills and knowledge that can be applied to these new areas of measurement, recording, analysis and reporting, they are well placed to provide services to these areas of growing demand.

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Part C: Ethical interactionWe now turn our attention to another consideration for the accountant acting as a strategic business adviser. Ethical decision-making is increasingly important in today’s business environment and is expected in many industries. In this section we explore the ethical dimensions involved in providing strategic advice, and how the traditional attributes of professional accountants, including integrity, honesty, credibility and service, form a strong foundation for accountants to provide appropriate support to organisations.

Professional accountants are much more than just numbers-focused. They are expected to be able to tie together:• quantitative/financial factors;• qualitative/non-financial factors;• strategic and operational attributes; and• ethical, social and moral implications.

As members of CPA Australia, it is a mandatory requirement to comply with the Compiled APES 110 Code of Ethics for Professional Accountants (the Code) (APESB 2013b). The Code is examined in detail in the Ethics and Governance subject in the CPA Program, and requires that a member act in the public interest and maintain the following fundamental principles:• integrity—to be straightforward and honest in all professional and business relationships.• Objectivity—to not allow bias, conflict of interest or undue influence of others to override

professional or business judgments.• Professional competence and due care—to maintain professional knowledge and skill

at the level required to ensure that a client or employer receives competent professional services based on current developments in practice, legislation and techniques, and act diligently and in accordance with applicable technical and professional standards.

• Confidentiality—to respect the confidentiality of information acquired as a result of professional and business relationships and, therefore, not disclose any such information to third parties without proper and specific authority, unless there is a legal or professional right or duty to disclose, nor use the information for the personal advantage of the member or third parties.

• Professional behaviour—to comply with relevant laws and regulations and avoid any action that discredits the profession (s. 100.5, APESB 2013b).

The Code also provides a conceptual framework for members to apply as follows:(a) Identify threats to compliance with the fundamental principles; (b) Evaluate the significance of the threats identified; and (c) Apply safeguards, when necessary, to eliminate the threats or reduce them to an acceptable

level (s. 100.2, APESB 2013b).

➤ Question 1.8‘The iT snag’ (adapted from Sexton 2010).

in the face of a recent economic downturn, the board has requested that you, as the CFO, together with the chief information officer (CiO), produce a business case for outsourcing the organisation’s information technology (iT) operations offshore. The CiO sees this as an opportunity to significantly reduce costs within his business unit, which will help him achieve his substantial end-of-year bonus. As the CFO, you acknowledge that there is a possibility to reduce overheads associated with the iT operations and, as a consequence, increase profitability.

What ethical issues need to be considered in this situation?

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By acting in a professional manner, accountants build trust and are granted further responsibility. Their ability to put the public interest and those of the client before their own self-interest is paramount in providing useful and valuable advice. If trust is lost because of self-interest or unethical practices, it is unlikely that a client will ask for advice because there will always be an underlying worry that they are at risk of the advice not being in their best interests.

➤ Question 1.9‘Fair dealings’ (adapted from Sexton 2009).

As CFO you have been asked to develop a business plan to support a major restructure of your organisation. The board is hesitant to approve such a major restructure, so you decide to conceal the key assumptions contained in the business plan as this would only confuse the board in its decision-making. At the next board meeting you intend to present your business plan. You are hoping that no director questions you on the assumptions or limitations of the business plan and that the decision to restructure is approved.

if you proceed with this course of action, which fundamental ethical principle would you most likely breach?

Addressing conflicts between organisational stakeholdersIn this section we expand on the concept of ethical behaviour to incorporate the decisions that organisations make. Discussion will focus on how the accountant should behave, ethical issues that exist specifically for accountants, and organisational ethics and decision-making. We consider how the accountant can help organisations make sound, ethical decisions and manage to consider the needs and interests of various stakeholders. With the increasing focus on sustainability, the advice given by accountants needs to move beyond financial analysis to consider people and the planet, as well as profits. Examples 1.13 to 1.15 outline the potential conflicts that can arise between economic, social and environmental issues, and how accountants providing analytical and advisory services can help organisations identify and navigate these issues.

Example 1.13: Potential conflict no. 1: Societal improvement from outsourcing?

Outsourcing and offshoring have earned a negative reputation in the developed world. A number of ethical issues arise when considering transferring work to different geographical locations, many relating to the social and environmental standards to be adopted by vendors. Typically, concerns arise over the working standards of the outsourced employees, with many arguing that they are exploited by the disparity in wage rates between the developed and developing worlds. In contrast, some argue there are real benefits for workers in developing regions.

The pioneer of what is called socially-responsible outsourcing or simply impact sourcing is DDD (Digital Divide Data), a New York-based nonprofit that operates for-profit data centers in Cambodia, Laos and Kenya. DDD and its impact-oriented peers set themselves apart because, they say, they deliberately seek out workers in the some of the world’s poorest places and provide them not just with jobs, but with the education, training and career counseling they need to rise into the middle class (Gunther 2014).

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In addition, the idea that outsourcing is merely a cost cutting exercise is countered by the realisation illustrated in the following extract, that customers are evaluating suppliers on their values as well as traditional value for money.

The Business Process Outsourcing (BPO) industry was born out of a desire to cut operating costs. However, the industry is changing considerably. Today, progressive BPOs are focused on creating an exceptional customer experience while delivering top-line value to their clients in a way that also addresses social inequities in the countries where they operate. At the same time, clients are evaluating BPO suppliers on more than the conventional value proposition. Clients have come to recognize that Corporate Social Responsibility (CSR) is a vital way to assess the values of a company. By responsibly and ethically employing hundreds of thousands of people, BPOs have a role to play in shifting the social landscape in emerging economies around the world (TELUS International 2013).

At the end of the day, the outsourcing dilemma seems to be a double-edged sword. Critics can rightly juxtapose domestic jobs loss with foreign exploitation and sweatshops. Yet, there is often a greater gain for developing countries that benefit from the resulting economic development. Creative social enterprises like DDD have found a way to make outsourcing a win–win proposition for all parties involved. Thus, it’s fair to say that ‘outsourcing’ in and of itself is a morally neutral concept, it’s the circumstances and implementation of outsourcing contracts that create the ethical challenges (Schlemmer 2004).

Example 1.14: Potential conflict no. 2: Oil or ethanol—the lesser of two evils?

The use of ethanol and other biofuels has been touted as the solution to the world’s reliance on fossil fuels for energy. However, in attempting to solve one problem, a new problem has been created.

Biofuels are made from crops such as wheat and corn. As agricultural land is finite, this means that products previously used for food are being redirected to create energy. This in turn has had the effect of increasing global food prices and is expected to lead to significant food shortages in future.

Attempts to provide commercial and ethical advice to organisations on key decisions like the fuel source of vehicle fleets, sourcing of energy for manufacturing and production, and product packaging must therefore be carefully considered in order to avoid unforeseen ramifications. (We consider this issue in more detail in Module 2.)

Example 1.15: Potential conflict no. 3: Capacity to pay—extracting excess profits

Many companies offer differential pricing (different pricing for the same product in different locations), which is often a factor of capacity to pay (of the customer) and lack of competition in the market. An important point to consider is the long-term consequences of stakeholder relationships when extracting the maximum amount of profit in the short term. Potential examples include the following:• The selling price for an item in an online store being based on the user’s estimated location.

The differentiated pricing may be based on average house prices in the user’s suburb/town, or perhaps even how close the user is to a competitor’s physical store. Variations on this theme include differential pricing based on the user’s browsing history, the web browser used and even the type of device or platform being used. For example, some websites charge higher prices if you access them with an Apple computer because they assume you have greater capacity and willingness to pay higher prices.

• Apple iTunes routinely charging more in Australia versus the United States. For example, the Apple iTunes store in the United States sells most albums between $9.99 and $12.99, while in Australia albums are frequently sold for $16.99 and higher. The price differential is not explained by Australian license fees, currency exchange rates, taxes or consumer protection regulations. Consumer group Choice believes that it is international price discrimination which has no place in the globalised market (Bender 2012).

• The latest brand name running shoes (e.g. Brooks, Nike) in Australia can cost more than double the price of those purchased directly from the United States (even after postage costs). To compound the issue, US shoe companies are attempting to protect their Australian distributors by preventing the international postage of shoes from US stores directly to Australian customers.

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These examples demonstrate that accountants face difficult moral, social and commercial decisions on a daily basis. Balancing the needs of stakeholders—the need to retain financial viability and the desire to work in a sustainable manner, in a global and fiercely competitive environment—is extremely challenging.

Accountants as facilitators of ethical business behaviourThe focus of many organisations has been largely on improving results for owners or shareholders. However, there has been an increasing focus on stakeholders that is reflected in external reporting requirements (such as with sustainability reports), and also in internal systems (with the rise of non-financial measurement systems such as balanced scorecards). Leaders realise the deep interactions that are required between the various groups to effectively achieve goals and objectives. Those who act with a short term mindset and ignore the needs and desires of the different groups will be exposed to long-term problems as this type of approach is becoming less acceptable. The need to consider employees, customers, suppliers and, more broadly, communities, the environment and the government, is essential. As such, there is a formal or informal need for the role of ‘ethical adviser’ to review decisions that make great commercial sense, but may be not be in keeping with societal norms and values.

Accountants are well placed to facilitate ethical business choices. In addition to reporting and analysing financial performance, accountants are also designing non financial performance and operational measurement systems. These systems capture the impact of organisational behaviour on various stakeholders and enable reporting both internally and externally. They highlight areas for improvement and offer the opportunity to celebrate successful improvements.

Julian Clarke (IFAC 2008), an Ireland-based professional accountant in business (PAIB), further explains why accountants are viewed as beacons of ethical business behaviour:

One of the more difficult challenges facing PAIBs is when they encounter an integrity issue within their own organization. As one of the few professionally qualified managers in [a mid-sized organisation], PAIBs have the professional standards and the responsibility for responding quickly and appropriately when issues of integrity arise. PAIBs understand the rationale for business integrity—not integrity for integrity’s sake, but because of its strong link with reputation and longer-term business success, based on mutual benefit, fair play and trust (IFAC 2008, p. 10).

Clarke believes that trust, reputation, integrity and professionalism are powerfully interlinked, and can be a guiding force for organisations:

• Organizations that conduct their affairs with integrity are trusted;

• Trusted organizations gain a good reputation;

• Organizations with a good reputation are consistently successful; and

• The public expects higher standards of integrity from members of professions (IFAC 2008, p. 10).

Accountants therefore need to demonstrate ethical business acumen—combining technical competence with a detailed knowledge of broader issues affecting industries, the economy, the environment and society.

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SummaryIn Part C, the importance of ethical decision-making for strategic business advisers was considered. Ethical behaviour is a founding principle of professionalism, and for members of CPA Australia there is a requirement to comply with The Code of Ethics for Professional Accountants. The Code provides a conceptual framework for members to apply when dealing with threats to compliance with the fundamental principles of ethics.

The professional accountant is not only concerned with ethical personal behaviour but also has a role in addressing issues within organisations and between stakeholders. This is particularly relevant in the emerging areas of environmental and sustainability concerns where accountants are applying their skill set to non-financial performance and operational measurement considerations.

As you continue to explore contemporary business issues in this subject, the challenge is for you to develop a robust framework that helps you to analyse and reach appropriate decisions. By exposing accountants to these issues and building related competencies, we increase the understanding of members and create new opportunities for them to provide valuable service and advice.

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Part D: Human resource issues and complexity

Accountants often focus their attention on their technical role. However, to provide useful strategic advice and guide the successful implementation of new plans and strategies, it is important to carefully consider the people that will be involved or affected by changes within organisations. In Part D we address a number of aspects of people management that are relevant to the viability and profitability of organisations. The ability to analyse and assess employee-based issues and include these in formal recommendations and plans is an additional set of skills that accountants require.

Organisations in the 21st century are becoming increasingly complex as they depend more and more on their employees and the knowledge their employees hold and create. An additional factor contributing to this complexity is the increasingly rapid change in technology. This part of the module also presents a number of models which highlight the important role that the accountant plays as a strategic partner who has both the hard and soft skill sets required to assist organisations to manage this complexity.

Managing peopleThere are significant and obvious reasons why accountants should develop and maintain a current view of the people management issues that are relevant to their own organisation, their customers’ organisations and their industry. In this section we describe some of these reasons under the categories of cost, assets and knowledge, and relationships.

CostPeople represent a large proportion of an organisation’s costs. In many organisations this cost is also regarded as fixed, as employees are on long-term contracts. Attempts to make this cost more controllable include moving more employees into short-term contract and casual positions and lobbying governments to make it easier to remove employees. Employees may resist these moves as it makes them more vulnerable (due to job insecurity). Accountants need to ensure that financial calculations are combined with stakeholder analysis to ensure strategies in this area are carefully designed and implemented.

A major cost that often has limited visibility is employee turnover. Hiring new staff and training them so they can contribute productively takes time and the cost can be significant, so initiatives focused on employee retention should be developed. Accountants should develop reporting tools that report on employee turnover and highlight the cost of this to the organisation, rather than letting it be hidden in salary or overhead accounts.

Assets and knowledgeDespite being a significant cost to the organisation, people are also an enormous organisational asset. As mentioned in the earlier discussion on productivity, well-trained and highly skilled employees are able to improve an organisation’s productivity well beyond that of its competitors, and provide a significant advantage in the competitive business environment.

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People represent a crucial capital resource. Human capital is the primary component of intellectual capital and vital to the creation of organisational value. Without it, all the other investments made by the organisation in buildings, plant and equipment, information systems and marketing might remain inert and ineffective (Cuganesan & Carlin et al. 2006).

Employees also bring knowledge and diversity to an organisation through an almost infinite variety of attitudes, work histories, prejudices, skills, achievements, failures and expectations. The potential for continued innovation and creativity is just one of the benefits for organisations who effectively manage their human resources. Organisations that succeed in building a corporate culture that engages, unifies and motivates its employees to achieve corporate goals are those most likely to be profitable (Gordon 2008).

RelationshipsEmployees are constantly interacting with other people, both inside and outside an organisation. Developing these relationships between organisational areas and with customers, suppliers, lenders and owners is an essential part of building and growing a successful organisation. The quality and strength of these relationships has been shown to have a marked effect on business performance and productivity (Lock Lee & Guthrie 2008). The relationship with customers is especially important. This is because an organisation’s employees provide the human face of an organisation to its customers, and these interactions will often determine the customer’s perceptions of the organisation. The link between ‘employee engagement and customer engagement are intimately connected—and, taken together, they have an outsized effect on financial performance’ (Fleming & Coffman et al. 2005).

These points show the mutual dependence that exists between the management of an organisation’s human resources and business profitability, which justifies the interest of the professional accountant.

Complete the ‘Cashing in on corporate culture’ quiz at: http://www.camagazine.com/archives/print-edition/2008/january-february/regulars/camagazine5413.aspx. Share the results with your manager or human resources partner.

Contemporary people management issuesIn Table 1.6 we briefly outline some high-profile people management issues that contemporary business leaders face. Accountants who want to add value to their organisations beyond the immediate delivery of accounting services need to be knowledgeable about these issues. What is more, accountants who want to become CFOs will need to understand not only that these issues exist, but how to work in partnership with human resources (HR) staff and the rest of the business to manage them.

Table 1.6: Some people issues faced by contemporary business leaders

issue People dimension Business dimension

Innovation Determining and building skills required to drive innovation; handling employee ideas and suggestions; building a corporate culture that rewards innovation.

Keeping ahead of competitors; exploring for new ideas; exploiting the right ideas for new products and services; innovation through mergers and acquisitions.

Business ethics Determining how best to train effectively in business ethics; dealing with grey areas; preserving levels of trust in workforce; selecting and establishing an ethics arbiter.

Costs of unethical behaviour; damage to corporate image; measuring and reporting ethics compliance.

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issue People dimension Business dimension

Offshoring Impact of domestic job losses on current workforce; redundancy costs; management of remote workforce; overcoming language issues; morale issues for continuing local staff; industrial action.

Requirement to reduce cost base; gauging customer satisfaction with offshored capability; dealing with privacy and security concerns; consequences of industrial action; increased risk of business disruption; damage from disgruntled staff.

Teleworking and virtual work

Increasing the talent pool; incorporating flexible working hours; supervision and performance evaluation of virtual workers; setting and enforcing virtual work policies; remote location health and safety; engaging virtual workers in corporate activities and culture.

Reducing infrastructure costs; insurance and workers compensation liability; quality control of virtual work outputs; productivity improvement.

Talent management—acquisition and retention

Accessing scarce skill sets; identifying critical skills; identifying talent within the workforce; keeping talent; managing age profiles for critical skills; succession planning; long-term effects of reliance on contractors.

Marginal costs of scarce skills; costs of skills gaps; costs of workforce turnover; acquiring skills via mergers and acquisitions (M&A); outsourcing or insourcing recruitment; financial incentives to keep key staff from leaving the company (golden handcuffs).

Skills maintenance Balancing business requirements with personal interests; identifying skills that need to be updated or are becoming obsolete; motivating people to retrain; dealing with redundant skill sets.

Maintaining operational capability while training for innovation; costs and benefits of training to keep skills up to date; certification costs; outsourcing or insourcing training.

Career management Building career paths in flat structures; balancing generalists and specialists; effective performance management and reporting; succession planning; deciding when to advertise externally; evaluating whether qualifications or experience provide better leaders.

Costs of career management; outsourcing or insourcing career management; protection from head-hunting; facilitating access to professional associations; golden handcuffs for key staff; significant financial rewards (golden parachute or golden handshake) and non-compete contracts for leavers.

Equal opportunity and employment

Attracting the best employees because the company is fair and just; ensuring access to the best talent is not compromised through bias; complaint handling; staff development.

Complying with legislation; equality of opportunity as an employment differentiator; productivity enhancement at individual and team level.

Occupational health and safety

Creating a safe place to work; showing that the company cares about its workers; avoiding unsafe practices; handling employee suggestions and observations.

Complying with legislation; reduced down time; better productivity; reduced compensation costs; healthy work environment as an employment differentiator; incident reporting and management.

Managing diversity Recognising that different perspectives are required to optimise engagement and productivity; managing sub-cultural tensions; managing language issues; staff development.

Complying with legislation; international recruitment; working visas and sponsorship; productivity enhancement at individual and team level.

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Review Table 1.6 with your HR partner and identify which people issues your organisation is currently dealing with. Volunteer to assist in an area that:• is not being dealt with satisfactorily;• you find interesting; or• you have little knowledge of.

We now provide a detailed examination of virtual work, or teleworking (the fourth issue in Table 1.6). As you read Example 1.16, you should consider the organisational and accounting implications of this issue.

Example 1.16: TeleworkingPeople management issues are not just about managing the skills, knowledge and abilities of an organisation’s human resources (HR). It is also about increasing the flexibility of how and where people work. Teleworking is an example of a current HR issue which is specifically focussed on increasing flexibility. The emergence of teleworking or virtual working in various forms is having a major effect on both the work and personal lives of many people.

What is teleworking?Telework is defined as ‘the use of information and communication technology to support work activities away from the office’ (Campbell & McDonald 2009, p. 3). This can include working independently at home (often referred to as ‘telecommuting’), or working remotely from the normal office at any other location—from another office or business place, a café or public building, or while travelling. This may also be referred to as ‘mobile working’.

Virtual working is a more general term, and can be defined in several ways. It can be used to mean teleworking, but can also relate to ‘virtual teams’, formed across organisations, across departments within organisations or across geographically diverse locations, where technologies similar to those used for teleworking may be employed. This includes organisations engaged in offshoring or regionalisation where virtual teaming is established (discussed later in Module 2).

The defining issue—trustAn important consideration for organisations and individuals in moving to teleworking arrangements is that it requires the management of an organisation to have trust in the individuals involved. ‘The rules of trust are both obvious and well established, but they do not sit easily with a managerial tradition that believes efficiency and control are closely linked and that you can’t have one without a lot of the other’ (Handy 1995, p. 41).

Many organisations are today quite familiar with trusting some defined groups of staff to work remotely—this is particularly the case where sales people work by travelling to visit clients. In order to gain the efficiencies of teleworking or other forms of virtual working, this same trust must also be extended to other staff.

To establish an environment of mutual trust, the staff involved must honour the trust extended to them, but the initiative needs to be taken by management. Managers need to show confidence in their people—in their ‘competence and in [their] commitment to a goal. Define that goal, and the individual or the team can be left to get on with it’ (Handy 1995). The results can then be assessed after the event, based on achievement of the goal. Accountants play a valuable role in creating structures that help demonstrate trust. This includes switching the focus away from supervising workers to focusing on establishing goals and measuring performance against targets.

Why organisations choose teleworkingTelework has been in use in some organisations for at least the last twenty years, and was initially applied as a way to reduce energy use in office buildings, reduce the use of public and private transport for commuting and to improve work/life balance for the affected workers (US OPM 2001).

As part of the National Digital Economy Strategy, the Australian Government’s (2014) stated aim is to at least double the level of telework to at least 12 per cent by 2020. Achieving this objective would see Australia becoming one of the world’s leading digital economies.

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Does it actually work?There are important barriers to achieving this objective. A traditional view is that allowing staff to work remotely from the office would create communication problems and cause lower productivity or work quality, yet the US OPM report (2001) found that initial reservations about communication were unfounded, and that productivity in fact increased. In the later study reported on by Campbell and McDonald (2009, p. 6), teleworkers ‘reported that they worked … three hours extra per week on average [than non teleworkers]’. This study also found that 90 per cent of teleworkers regarded their remote work as being as good as, or better than, work done in traditional workplace environments (Campbell & McDonald 2009, p. 7).

The research findings on productivity and work quality suggest that where trust is shown to people, it tends to be honoured. Professional staff in general will tend to work well when given the tools and resources they need to do their job effectively, and are left to do it without direct supervision. These people are measured on the results they deliver when working either in the traditional office setting or outside it. The Australian Government’s Department of Communications provides an interactive return on investment (ROI) tool for both employers and employees to assess costs, savings and benefits of telework—see: http://www.telework.gov.au/roi_tool.

The opposing viewThere is another side to the flexible work debate, which is illustrated in the 2013 decision of Yahoo CEO Marissa Mayer to bring people back into the office. The now famous email announcement of the initiative explained that:

To become the absolute best place to work, communication and collaboration will be important, so we need to be working side-by-side. That is why it is critical that we are all present in our offices. Some of the best decisions and insights come from hallway and cafeteria discussions, meeting new people, and impromptu team meetings. Speed and quality are often sacrificed when we work from home. We need to be one Yahoo!, and that starts with physically being together (Mayer, cited in Swisher 2013).

This highlights the tension between the benefits of teleworking and the need for face-to-face interactions. The spontaneous interactions, as well as the information-rich non-verbal communication provided when people work together in person, need to be reproduced in some way for telecommuting to become fully accepted. Several technologies helping to address this issue include videoconferencing, monitor sharing, and cloud-based file sharing, which allow teleworkers to interact seamlessly with colleagues.

The impact on employees

Teleworkers report more job autonomy, greater organisational commitment, and less intention to leave their current organisation. However, they also report more work/private life conflict (Campbell & McDonald 2009, p. 3).

The benefits of teleworking for employees range from improved work–life balance and a reduction in the stress of commuting to the ability to live where you want (Australian Government 2014). Campbell & McDonald (2009, p. 6) found that while a majority of teleworkers saw the availability of teleworking to be important, many non-teleworkers were reluctant to take it up, possibly due to ‘perceptions about increased workloads, [and] potential for work/private life conflict’.

The impact on employersThere are a number of employer benefits from providing telework including:• reductions in operational costs;• increases in the level of productivity; • being a driver for innovation;• improved recruitment and retention outcomes, particularly when telework is implemented to help

overcome skill shortages caused by geographical barriers; and• a reduction in absenteeism associated with short-term staff family issues and through improving

work–life balance for staff (Australian Government 2014).

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EvaluationJust as teleworking is important to accountants for their own work purposes, it is equally important for accountants to understand the importance of teleworking for other staff within the organisation. Accountants must be able to evaluate teleworking and virtual working initiatives appropriately, taking into account the full picture of the benefits gained from these, as well as any costs involved. The focus should be much broader than focusing on inputs (i.e. hours worked) with a greater focus on outputs and outcomes (i.e. work performed and results achieved).

Consider your working environment. Are you working in an environment where you believe that teleworking would be advantageous for yourself or for other staff, but management is resisting it?

Read the article ‘Winning support for flexible work’ at: http://blogs.hbr.org/hmu/2010/12/winning-support-for-flexible-w.html. Examine the case studies in this article to see if any are similar to your situation.

➤ Question 1.10Assume you are a senior accountant in a construction organisation that undertakes large-scale projects. in your role to date, you have learnt a lot about the project management staff. You know that they are predominantly highly professional engineers, who work quite autonomously, and show a strong work ethic and dedication to their job role.

Your organisation has recently deployed a knowledge sharing system and telecommunications infrastructure that can effectively support teleworking. The project managers have demonstrated a strong commitment to the knowledge sharing system, and it has become a key part of their collaborative working.

Your organisation is now considering the introduction of teleworking for project management staff. You have been asked to provide advice on the likely costs, risks and benefits of this proposal.

What would be your main considerations?

Making business sense of people management issuesIn this section we expand on a number of concepts of people management. Figure 1.5 contains a summary of these concepts and their interrelationship. Following Figure 1.5 we provide explanations of the concepts in the diagram that will provide both theoretical and practical assistance in making sense of these issues.

Figure 1.5: People management concepts

Corporatesocial capital

Values

Externalpartner networks

Structural capital

Sense-making

Leadership branding

Financial soundness

Relational capital

Human sigma

Vision

Intellectual capital

Human capital

Corporate culture

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Human capitalThe notion of human capital lies at the centre of people management. As Figure 1.5 shows, human capital is a component of intellectual capital and refers to the ‘skill, training and education, and experience and value characteristics of an organisation’s workforce’ (Cuganesan & Carlin et al. 2006, p. 2). While human capital is an intangible resource, there are a number ways organisations measure its value to them—ranging from a market-based evaluation of the capability of the organisation’s HR to an activity-based costing approach (Chen & Qiao 2008, p. 55). However it is measured, it is important that accountants understand that an organisation’s human capital represents an important resource which has real and tangible value. This understanding helps accountants provide advice and make decisions that consider this broader perspective rather than simply treating labour as a cost.

intellectual capitalIntellectual capital is closely tied to the notion of human capital. It is usually described as a combination of human capital (human competences and know-how), relational capital (an organisation’s external relationships) and structural capital (an organisation’s internal procedures and structures). The human contribution to organisational success is one where:

Skilled and engaged employees are required to drive innovation and both create and subsequently realise the benefits of favourable customer, supplier and broader external relations (Sveiby 1997, cited in Cuganesan & Carlin et al. 2006, p. 2).

Again, the accountant will benefit from recognising the broader notion of value to be derived from understanding the situation of the business within its external environment and incorporating the capabilities provided by its people and configuration.

Corporate social capitalAs Figure 1.5 shows, the sum total of individual employee intellectual and human capital provides an important contribution to corporate social capital. It is the social capital of an organisation that provides a unique combination of intellectual capital, financial soundness and an organisation’s ability to operate in alliances with, and absorb knowledge and capabilities from, a network of external partners (Lock Lee & Guthrie 2008, pp. 3–7). Familiarity with this concept will assist the accountant in providing advice and making decisions that draw on both the organic and the structural capabilities of an organisation as well as acknowledging its ability to access and absorb additional value from its external relationships.

Human sigmaThe concept of human sigma builds on the six sigma concept discussed earlier, and is a means by which an organisation can measure and monitor the employee–customer encounter, particularly for organisations with decentralised customer transactions (Fleming & Coffman et al. 2005, p. 108). Like six sigma, human sigma focusses on reducing variability and improving organisational performance through addressing the human aspects of organisational performance. This notion explores the contributing factors behind the claim that ‘fully engaged customers deliver a 23 per cent premium over the average customer in terms of share of wallet, profitability, revenue and relationship growth’ (Fleming & Coffman et al. 2005, p. 110). The path to fully engaged customers is through fully engaged employees, who consistently and professionally present customers with the best face of the organisation, irrespective of their location. These staff will persevere with problems experienced by customers, and follow them through to completion.

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Cialdini (cited in Ostergaard 2009) reports that it is not the customers who have a problem-free experience ‘who reported the highest satisfaction ratings and future loyalty—rather, it was those who experienced a service stumble that was immediately put right by … staff.’

Human sigma techniques allow accountants to produce hard data and, therefore, tangible measures of employee–customer encounters. This data will assist the accountant in providing authoritative advice and assist management in making informed decisions that will affect customer-facing employees.

Corporate culture Corporate culture is another intangible but important concept as there is strong evidence that it plays an important role in both employee engagement and customer satisfaction (Gordon 2008). Corporate culture can be described as containing: ‘three main components: vision, values and leadership branding’ (Gordon 2008). It is important that accountants appreciate the role of corporate culture and acknowledge its role in sustained organisational profitability.

Sense-makingThe notion of sense-making is the process by which people give meaning to experience. It focusses attention on how people ‘think through’ experienced situations and ‘frame’ them as meaningful. It is a collaborative process of creating shared awareness and understanding out of different people’s perspectives and varied interests. In a general business context, sense-making involves building a shared understanding of a current situation and a desired objective. In practice, this is not as simple to achieve as it might sound—what is understandable to an accountant might be completely incomprehensible to a plant operator.

Approaches such as narrative techniques (Callahan 2006, p. 1) can help to develop shared understanding and map a way forward through sense-making. Narrative techniques are ‘anecdotes of people’s lives at work, how they get things done, who they work with’ (Callahan 2006, p. 1). These stories can usually provide a more accurate picture of the realities of organisational life than analytical techniques or compliance evaluation.

Understanding the sense-making of an organisation provides an accountant with a powerful tool for understanding a business problem in a way where the solutions they offer will support and assist others. One approach to sense-making (the Weick model) is discussed later in the section ‘Managing complexity’.

The value of sense-making can be illustrated through the example of a conventional employee engagement survey, which provides no clear area to address or plan for action. For instance, while:

63% of staff agreed or strongly agreed with the statement ‘I am proud to work for this company’ and this might be down 6% from the previous survey. On its own, however, the data doesn’t help with the question ‘what does this mean and what should be done?’ (Schenk 2009).

Adopting a sense-making view allows organisations to discover and organise information that a survey will not usually uncover. These techniques can also assist in developing a shared understanding amongst all members of the organisation.

This enhanced understanding provides accountants with a stronger base from which to make decisions and offer advice.

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Role of the accountant in people management issuesWhile the previous sections outline some of the challenges of the 21st century and the changing role of the accountant, an important question is whether it is ‘enough for accountants simply to be aware of people management issues in their organisations’? There are immediate short-term benefits in developing awareness, including better-informed responses to management questions and better preparation of accountants for senior management roles. Adopting a more proactive role will see accountants go beyond awareness, and able to add far greater value to their organisations. This section outlines five possible avenues by which accountants can achieve such awareness; these are summarised in Figure 1.6.

Figure 1.6: Accountant role concepts

Providing advice

Evaluating initiatives

Decision-making andissue resolution

Communication

Employeeengagement

Role of theaccountant

Providing adviceThe traditional expectation of an accountant being asked to provide advice on an issue is that the response will be financial in nature. The reality today is that the professional accountant will not only provide the advice requested, but will also advise on additional issues such as people management issues, which could influence the situation being considered. A key driver of this change is the realisation that the accountant cannot assume that someone else will provide this additional advice, particularly if its absence constitutes a risk.

However, there can be organisational resistance to accountants providing this kind of additional advice. This is where the advising accountants need to ensure that advice is channelled through a conduit that is acceptable to the organisation. This may be an HR manager, the CFO, a close colleague with operational responsibility for an area affected or even a staff suggestion scheme.

CommunicationEnsuring good communication is another role for the accountant in people management. It is a role which sees the accountant operating as an individual employee, as well as in their professional capacity. As an employee, the accountant will interact with and hear stories from other employees which indicate that there are unresolved people management issues within the organisation. The accountant is in the privileged position of understanding the financial and business impacts of such issues, and can therefore appreciate the importance of initiating processes for their discovery and resolution. This moves the accountant into their professional capacity and might involve confidential and tactful discussions with an appropriate HR manager or business leader. Alternatively, it might involve initiating management action to employ specialists who use approaches such as narrative techniques to engage the workforce and uncover issues which might not be identified by traditional internal attempts. The accountant’s role in organisational communication is discussed further in Module 6.

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Employee engagementThe professional accountant’s understanding of the links between employee engagement and business profitability provide an important opportunity to contribute positively to employee engagement. This might occur through the use of sense-making as noted previously, or through similar techniques that ensure business strategies resonate and become embedded in employee behaviour. Alternatively, employee engagement might come about through using the accountant’s professional network to increase enthusiasm for initiatives that will boost business profitability. Again, the professional aspect of the accountant’s role within an organisation interplays with the role as an employee. The accountant has the advantage of access to information about benefits of an initiative that help ‘make it real’ for those in the business who might otherwise see a policy or initiative as a disconnected managerial whim.

Decision-making and issue resolutionDirect involvement in decision-making and resolving issues that affect profitability has been a traditional strength of the contribution accountants make to an organisation. To the extent that the accountant has the flexibility to initiate action and allocate resources, this mode of adding value can pay the greatest dividends to the organisation through being deliberate, targeted and informed. It requires accountants to exhibit courage, initiative and judgment, to be realistic in their plans, and to set and manage expectations.

Above all, accountants who choose to take direct action must be committed to delivery. The numbers will still need to be managed and the financial reports compiled, but accountants who make decisions and solve issues can provide additional value that will enhance profitability for the entire organisation.

Evaluating the impact of hard-to-measure initiativesA key challenge in business today is trying to determine return on investment for initiatives which promise intangible benefits that are difficult to measure. Such projects are often dropped because there may be no easy way to justify the measurement of expenditure.

A tool such as the ‘Most significant change technique’ (Callahan 2007; Dart & Davies 2003) can be readily used to provide decision-makers with the kind of feedback that validates their determination to take a chance on a hard-to-measure initiative. The process consists of:• collecting stories from the people affected by a particular initiative about the most significant

change it brought to them;• feeding those stories back to decision-makers who need to know the impacts of the initiative

and getting them to select the most significant change story; and• propagating the stories and the selection results back through the organisation.

Example 1.17: Accountants advising on human resourcesVoluntary turnover of employees in Australian small and medium-sized enterprises (SMEs) was 12.7 per cent in 2008. This decreased to 9 per cent in 2009 and 2010, which was understandable due to the difficult nature of the economy as a result of the Global Financial Crisis. The 2014 Sensis SME Business Index results places turnover at around 11 per cent, with employment expectations at a similar level (Sensis 2014).

Losing nearly one in 10 employees through voluntary turnover is a significant cost to any organisation. The intangible costs include the loss of institutional knowledge and intellectual property, and the risk that replacement employees may lack appropriate skills and the right cultural fit. Direct and indirect administrative costs also arise (e.g. holding exit interviews, making payroll adjustments, administering IT and office security accounts, as well as recruiting and induction processes).

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Accountants should be able to provide both an analysis of this situation and strategic advice about trying to improve the result. For example, nearly two-thirds of employees who left an employer cited the need for new challenges, while more than half desired better pay. This indicates that opportunities to reduce turnover abound, possibly starting with a focus on higher salaries and appropriate career planning and training opportunities. The costs of providing these additional benefits can then be weighed against the cost of doing nothing and continuing to operate with a high staff turnover. Remember though, the financial and other costs of replacing a new staff member can often be significant, so the savings from avoiding a bonus or an appropriate pay rise may be false gains (D’Angelo Fisher 2009, p. 41; AIM 2010).

Managing complexityOrganisations are complex adaptive systems. They are complex in that they are comprised of:• human beings, markets and industries;• customer expectations, products and services, partners, competitors, geographical and

legislative environments;• technologies, plans, strategies and tactics; • communications, assets and infrastructure;• policies and procedures; and• corporate societal and individual cultures.

They are adaptive in that their elements interact in combinations and directions that cannot be predicted, and these interactions in turn change the system itself—complex adaptive systems are self-modifying. When trying to make sense of organisational complexity, it is easy to be overwhelmed. The temptations then are to either drastically simplify one’s view of the organisation, attempt to simplify the organisation itself, or to simply guess or concentrate only on your own area. (Interestingly, simply guessing can be a good strategy if you have had lots of experience in the domain of guessing.)

if you are interested in finding out more about complex adaptive systems, watch the YouTube presentation by Dr Javier Livas, an expert in cybernetics, here: http://www.youtube.com/watch?v=3QrPxTUWt8A.

Please note that this resource is provided for additional information and is not examinable.

For the following discussion on complexity, complex adaptive systems will be referred to more briefly as ‘complex systems’.

A key challenge for organisations operating today is that relying on past experience and specific approaches may no longer offer the same assurance of success as they once may have. The trouble is that approaches must now be designed to account for an increasingly complex business environment (Klein 2009).

The next section looks at the issue of complexity as an increasingly prevalent feature of the modern organisational landscape, and offers some guidance for accountants about how they might not only deal with it, but also thrive on it.

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Addressing messy and wicked problemsBefore addressing complex systems directly, we explore some of the factors that cause systems to become complex. Probably the most basic notion of organisational complexity relates to ‘variety’, which describes the number of possible states in a situation. Variety is generated in many ways, especially as organisations try to differentiate themselves from their competitors. There is variety in the:• products or services that are developed and supplied to customers;• way each customer interacts with the organisation; • way leaders and managers respond to problems and opportunities; and • way that employees perform similar roles.

Some of these differences are helpful and lead to new and better ways of doing things. At other times, the variations indicate a lack of control and disorder, leading to unnecessary complexity.

Research by Beer found that ‘for a group of just seven people, there are in the order of 4.5 million possible states for their interactions in time’ (cited in Espejo 2000, p. 1). Ashby’s Law of Requisite Variety ‘states essentially that to control a situation … the variety of response actions must at least match the relevant variety of the situation’ (cited in Espejo 2000, p. 2).

In other words, it is a mathematical impossibility for any leader to have the requisite variety to control all the possible states of a large organisation.

Messy problemsOne particular example of organisational complexity is a phenomenon known as a ‘messy problem’ (Checkland 1981, p. A3)—a typically ill-structured managerial problem that resists logic-based attempts to solve it. Messy problems often look simple and straightforward initially but as they are investigated they reveal complex interrelationships and connections that defy both linear methods of investigation and logical solutions.

The idea of messy problems was developed as part of the discipline of systems thinking. Examples of messy problems can be seen in modern cities, where local government organisations attempt to cope with infrastructure degradation and urban and societal decay—issues they are ill-equipped to address (Watson & Hassett 2003, p. 344). A messy problem has the following eight attributes:

1 Its boundaries are unclear. Its beginning and end are not obvious.

2 The exact nature of the problem is ill-defined. There are many different perspectives and definitions of the problem.

3 Messy problems are comprised of a number of smaller, interrelated problems whose interactions are often fuzzy or unknown.

4 Actions to remedy a messy problem often have unforeseen consequences, some of which can be negative.

5 Messy problems overlap in obvious and in unknown ways with other messy problems.

6 Messy problems cannot be solved in isolation from other messy problems.

7 The solutions to messy problems require a mix of technological, social, economic, paradigm shift and value examination activities.

8 The solutions to messy problems require paradoxical solutions at micro and macro levels as well as redefinitions of institutional and personal responsibility. Messy problems cannot be solved from the inside, nor can they be solved unless individuals take responsibility for them (Watson & Hassett 2003, p. 344).

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Wicked problemsA different but related concept is that of ‘wicked problems’ as instances of organisational complexity. The concept of wicked problems was originally used in social planning, and is also often used in the field of design. Wicked problems have the following six attributes:

1 You don’t understand the problem until you have developed a solution …

2 Wicked problems have no stopping rule …

3 Solutions to wicked problems are not right or wrong …

4 Every wicked problem is essentially unique and novel …

5 Every solution to a wicked problem is a ‘one-shot operation’ …

6 Wicked problems have no given alternative solutions (Conklin 2003, pp. 7–8).

An example of a wicked problem is the development of a modified car design. Each change in the design will impact on other design elements; each change has cost trade-offs; not all end-results can be estimated; and success or failure cannot be known until the car is released to the market. The design also involves the expertise of a range of disciplines, including designers, engineers and marketers (Conklin 2003, pp. 8–9).

It is not necessary to be able to sharply distinguish between a wicked problem and a messy problem—these are different types of complex problems that require a different approach to solve than simpler problems. Solutions for wicked problems, like those for messy problems, are only evident and comprehensible when they emerge, and not before. This is obviously a challenge for leaders and managers faced with such situations. How does one show leadership? How does one maintain managerial control when there is no observable way to identify and work towards a selected future? As Satell (2013) observes, ‘in order to manage effectively in the modern world, we must not only hold ourselves responsible for those things that are within our control, but also account for that which is not’.

The answer lies in having judgment, experience and skill, not only for traditional problem-solving and decision-making approaches, but also for other possible approaches which are more likely to succeed in dealing with complexity.

identifying complexityManaging complexity is challenging. We can describe complexity in different ways to help understand it more clearly. Satell (2013) provides a useful description of three aspects of complexity:

1. The complexity of an entity The activities and processes within organisations are very complex and detailed. A significant

amount of information is required to describe particular events and support decisions within the organisation, and the volume of information required to do this is increasing.

Successful managers need to bring order to chaos. It is a task accountants are used to dealing with. As accountants operate with numbers and data that include complex and difficult-to-understand financial concepts (such as derivatives), the accountant must be able to take abstract terms and put them into concrete communications that others in the organisation can understand.

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‘Operational excellence is strongly correlated to the ability to simplify complex entities’ (Satell 2013) and the key role of the accountant in providing clear information based on data and facts is therefore increasingly important. There are a range of accounting tools that are used to understand complexity and simplify activity, including: – business process analysis and redesign, which focuses on mapping, analysing and

simplifying the sequence of tasks and activities throughout the organisation; – balanced scorecard reporting, which highlights cause–effect relationships between

different facets of performance; and – activity-based costing, which focuses on providing more accurate costing data to

support understanding of the resources consumed by products, services, customers and departments.

2. Nonlinearity People often assume that the future will unfold in a linear and predictable manner based on

the results of the past. Examples of where this assumption is held is when predicting future financial results based on past performance, and forecasting industry growth trends based on historical data. Budgets and sales forecasts are often set in this manner, by just extrapolating the past.

In reality, most data and information does not follow a linear logic that is straight and predictable. Rather, there is a lot of variability over time and a wide range of factors and inputs need to be considered. Accounting tools that support nonlinear analysis include product life cycle and organisational life cycle analysis. These demonstrate that sales results will not follow a predictable straight-line path, but will involve periods of exponential growth followed by a plateau, and then decline. Budgets and performance targets that reflect this complex reality will be more reliable and accurate as a result.

Productivity improvement and innovation, both within the organisation and by competitors, is also nonlinear and may lead to an accelerating return or rapid decline. What is important to note here is the speed and size of change possible and the benefits or risks that will result from this. This is highlighted by the rapid ascent of the Apple iPhone and the equally fast decline of the Blackberry in the smart phone market. We need to ensure we are aware of both the people-focussed concepts, as well as the external influences, which featured in Figure 1.5.

3. Emergent complexity Activity and interactions between factors that are under our control can often lead to results

or phenomena that are difficult or even impossible to predict (Satell 2013). This complexity ‘emerges’ and while we may attempt to plan and ‘expect the unexpected’, the challenge of doing this is similar to wicked problems.

The challenge here for the accountant is moving from just presenting ‘facts’ in black and white to demonstrating that the information being presented may have a number of interpretations. The value of the accountant is in being able to convey the options and ideas to management clearly and in such a way that managers can see the bigger picture.

Working with complexityMessy and wicked problems, as well as the increasing complexity of the issues organisations face, mean traditional approaches to problem-solving and decision-making are unlikely to be consistently effective. Leaders and managers need to develop a broad understanding of complexity and also behave differently when confronted with complexity:

A deep understanding of context, the ability to embrace complexity and paradox, and a willingness to flexibly change leadership style will be required for leaders who want to make things happen in a time of increasing uncertainty (Snowden 2007).

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The need for people management skills becomes very important as leaders and managers must retain the trust and confidence of their employees when they start to behave differently from their established practice.

There are several approaches that can be considered in managing complexity in organisations. Accountants are in the position to provide information and advice that allows managers to apply their judgment and experience to determine which approach might best suit a given situation. An important contribution the accountant can make is to ensure that the data and information supplied deals with the nature of complexity in a way which means that a number of different approaches might be tried before any progress is made.

While a large variety of models and frameworks exist for dealing with complexity, common elements focus on the need of leaders to: • open up the discussion to generate ideas and additional perspectives;• set barriers to keep the situation within broad limits;• stimulate attractors—hints or suggestions or possibilities that resonate with people—

to provide confidence and momentum;• encourage dissent and diversity to build robust ideas; and• manage starting conditions and monitor for emergence.

As the author of one such model (the Cynefin framework), Snowden (2013) offers the cautionary advice that leaders and managers will need to resist the urge to take control and drive a solution as they might in another context. They will also have to set and manage expectations within the business about how and when a solution might emerge.

Online resources such as the Global Simplicity index provide organisations with quick and simple tools to benchmark their business against a set of complexity drivers. This allows them to identify good from bad complexity so that they may take action.

For an explanation of the Global Simplicity index, see the following link:http://www.simplicity-consulting.com/research_items/global-simplicity-index-2/.

You can access a simple explanation of the Cynefin framework at: http://www.youtube.com/watch?v=5mqNcs8mp74.

Please note that these resources are provided for additional information and are not examinable.

Weick modelThe concept of sense-making raised in Figure 1.5 has been developed by management researcher Karl Weick to provide for the practical application of complexity in everyday working life. The Weick model draws on the three aspects of complexity noted previously:• the increasing amounts of information required to describe a situation (complexity of an entity); • the nonlinear and increasingly wider range of factors and inputs to be considered; and• the need to expect and plan for the unexpected (emergent complexity).

The model then applies an approach of organised sense-making to deal with them.

Applying sense-making requires the accountant to look for explanations and answers in terms of how people see things rather than structures or systems. This adds an important dimension and understanding to the tools an accountant has available, as sense-making recognises that terms such as ‘strategies’, ‘change’ and ‘goals’ are intangible and that the source of these intangibles is people’s way of thinking. In other words, these intangibles are part of an individual’s thoughts, experiences and motivations, and the combination of these has joined to uniquely shape them. The notion of ‘sense-making’ attempts to capture these intangibles and explain how people give meaning to experiences. It explains that people make sense of things by seeing a world on which they have already imposed what they believe.

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The Weick sense-making model takes a step-by-step approach to understanding the way that humans respond to complex situations. Weick and Sutcliffe et al. (2005) describe a nurse responding to an uncommon medical condition in a child patient to illustrate the process of creating situational awareness (an awareness that something seems to be wrong) and understanding in situations of high complexity or uncertainty (confirming that something is wrong and what the options are) in order to make decisions (and select the best option).

The Weick model has been adapted as follows to provide guidance as to how an accountant can use it as a practical tool for addressing complexity. We will use the following scenario to outline the eight steps in the Weick sense-making model.

An organisation is experiencing a significant decline in revenues. People throughout the organisation are attempting to explain or make sense of the decline by blaming it on the actions of other areas and departments within the business.

1. Sense-making begins with chaos. The accountant must have some awareness of this greater pool of information that is

essentially raw data. It is from this that we may then become aware of certain cues within this stream of activity that need closer attention.

– Revenue decline example: Other than the information showing declining revenues, there is no clarity about what the underlying cause or problems are. The accountant will start developing ideas about which data to obtain and analyse to help identify the issue.

2. Sense-making starts to actively occur with noticing and bracketing. This is a natural way in which people simplify a situation. Some of the observed events

from the chaotic situation described previously are perceived as significant, and meaning is attributed to them, even if these events are not yet fully identifiable or named. The human brain tends to ignore much of the chaotic stream of events of everyday life in order to avoid being overwhelmed. Professional training, past experience and intuition allow us to filter or extract significant information and events out of this background noise (‘noticing’) and to then ‘search for other related or similar phenomena that may help make sense of these observations’ (‘bracketing’).

– Revenue decline example: Key considerations to be ‘noticed’ here will include understanding competitor behaviour and reviewing quality levels. Issues such as customer loyalty, customer satisfaction and employee engagement may be relevant but are not generally the domain of the accountant. However, when placed within the context of understanding the decline in sales, they can become important. These issues can then be ‘bracketed’—that is, thought of in relation to other similar current or past issues.

3. Sense-making then moves to labelling. Attaching a meaningful name to a phenomenon allows us to place it in our categories

of experience and refer back to it, and helps to give us clues about what to expect—and more importantly, what actions are possible. The accountant who has taken the human considerations into account in Steps 1 and 2 will be in a much stronger position to offer advice and recommendations.

– Revenue decline example: In our example of diagnosing the cause of declining revenues and identifying solutions to ‘restart growth’ the role of the accountant will include working with other areas, such as operations, HR and marketing. The ability to move the analysis away from ‘blaming’ to labelling provides a meaningful name to unite all participants in the exercise. Labelling in this case sees the analysis moving from an unknown cause of the decline to ‘naming’ the cause or causes (with a label); that is, the cause may be ‘increased warranty claims and customer dissatisfaction due to a faulty part’. Giving the cause a name makes it easier to develop strategies for improvement.

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4. Sense-making is retrospective. ‘How can I know what I’m seeing until I see what it was’ (Weick & Sutcliffe et al. 2005 p. 412).

As we filter information, we look back at the preceding patterns to determine how things have changed and then attempt to re-categorise the phenomenon accordingly. The iterative nature of dealing with complexity is a feature of sense-making.

– Revenue decline example: Our example of declining revenues provides an illustration as to how an accountant can usefully draw on prior knowledge to identify cause–effect relationships between different parts of the business which may explain the decline. They can also provide metrics to help measure both the causes and the effects. This provides support to others performing an otherwise subjective exercise in trying to establish the reasons and impact of different activities within the organisation. It also provides an objective baseline to start measuring the results of any action taken to resolve the issue.

5. Sense-making is about presumption. The concrete action involved in the iterative nature of sense-making is explicitly acknowledged

in this step. Once we have an idea about something, sense-making requires that we connect it to an object of experience (a phenomenon in the real world), either to make sense of it or discard it.

– Revenue decline example: The dynamic nature of establishing and then measuring specific aspects of the business such as quality, customer satisfaction, competitor prices and employee engagement, and demonstrating the monetary value linked to this based on revenues, may see these items become an important part of the annual activities of the accountant. So in this case, you might use the ‘quality, customer satisfaction and employee engagement’ information, but discard the ‘competitor prices’ information.

6. Sense-making is social and systemic. The wider context, both human and those imposed by the structure an organisation operates

in, are part of the decision-making process. Social discussions with colleagues may inspire alternative solutions to business problems. The human brain works to a great extent by pattern-matching, and we can match patterns from any previous experience. Sense-making then allows us to include those unlikely personal influences in describing and understanding phenomena in our organisation.

– Revenue decline example: This step in the model provides for the accountant to keep an active view on the social inputs into the organisations—providing a proactive aspect to their role. Uncovering stories from the past where similar situations have arisen and been resolved is useful. In this case, you might talk to technical or customer service staff who are close to the issue and may be able shed further light on the cause of the quality problems. Other important factors here may include discussions with customers and analysis of external factors such as the state of the industry, broader economy and behaviour of competitors.

7. Sense-making is about action. Much of the focus of the previous steps has been on talk and recognising the human side

involved in decision-making. This is ‘because acting is an indistinguishable part of the swarm of flux until talk brackets it and gives it some meaning. Action is not inherently any more significant than talk, but it factors centrally into any understanding of sensemaking’ (Weick & Sutcliffe et al. 2005 p. 413). Action provides us with often incremental, often cyclic opportunities to hone our understanding of what is going on in a complex situation through trial and error.

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– Revenue decline example: Reporting the percentage decline and actual dollar figures provides an example of action. Further reporting on qualitative factors that may have influenced this result also describe action. Lists of tasks that are prepared to address the issue also become an opportunity to take action.

8. Sense-making is about organising through communication. Communication with the people in the organisation about the current interpretation of a

situation provides others with the opportunity to notice, bracket and label, and to gradually uncover the path through the complexity. The strong focus on the human dimension, and explicitly on the role of talk in this process, provides for a powerful alignment between individual ‘presumptions about the future, articulation concurrent with action, and projects that become increasingly clear as they unfold’ (Weick & Sutcliffe et al. 2005, p. 413).

– Revenue decline example: This would see the accountant providing a clear description of the decline in revenues in dollar and percentage terms. This would be followed by a detailed and objective simple explanation of the root causes of this event, including reporting on metrics in all relevant areas. The objective metrics underlying what many have traditionally seen as more subjective and intangible areas, such as customer satisfaction and quality, provides an increasingly important contribution that only those with professional accountancy training can make.

Figure 1.7: illustration of the Weick model

1. Chaos

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{ }

{ }

A {}

B {}

C

A

B

C{}

$

(discarded)

2. Bracketing 3. Labelling

4. Retrospective

5. Presumption

6. Social andsystemic

7. Action 8. Communication

Dysfunctional autonomyThe Weick model works well when organisations are functional but there are situations where this is not the case. Dysfunctional autonomy develops when an organisation becomes so complex that different business units are driven by conflicting goals. When this happens, autonomous units may self-organise. This self-organisation is often well-intentioned, as units try to contain the amount of variety or uncertainty they can deal with, but eventually they diverge in purpose from the overall organisation’s primary goals (Espejo 2000, p. 4). Leaders and managers faced with dysfunctional autonomy are encouraged to develop a framework of corporate values to reinforce the necessary common elements that support a single organisational purpose, while providing greater levels of flexibility and autonomy in areas that are not essential to the overall business purpose of the organisation (Espejo 2000, p. 5).

Complexity value matrixThere is also another perspective to complexity. Not all complexity can be seen as a problem to be solved. One approach to complexity has focused on advantageous complexity—that is, where the product or service offered by an organisation reduces the complexity being experienced by its customers (Mead 2006, p. 19).

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Understanding the problems that your customers are struggling to solve can be an advantageous market differentiator and value proposition for an organisation, providing it has the tools and the skills to deliver simplifying services to those customers. This is one of the major roles increasingly played by large accounting and consulting firms, where traditional services such as accountancy and management advice expand to include consulting and advice on enterprise-wide technology solutions and sustainability issues.

Role of the accountant in complexity issuesCreating order out of complexity is a natural role for the accountant. Managing the numbers and compiling the financial reports are organising activities that allow the remainder of the business to understand the visible measures of financial performance. However, these figures are a summary of the vast and complex detail which sits in accounts, depreciation schedules, fixed-asset registers and budgets.

Four areas in which accountants can assist their organisations in the management and resolution of complexity are outlined in the following sections.

ModellingOne of the approaches to complexity involves conducting experiments that are safe-to-fail, sensing what the results are indicating and cautiously responding. The notion of ‘safe-to-fail’ has become increasingly important to many organisations since the Global Financial Crisis (GFC). While an organisation cannot be made fail-safe, they can make elements of their operation safe-to-fail so that their failure does not disrupt or put at risk the entire organisation. This approach encourages a leader to move forward incrementally, conducting experiments that are ‘safe-to-fail’ (probing), sensing what the results are indicating and cautiously responding. In this way, the patient leader allows the path forward to emerge from the many possible states. In this approach, experiments that do not lead to desirable results can be shut down without major impact, and those that prove to be effective can be reinforced and expanded.

An accountant’s familiarity with financial and operational models can be seen by a leader as providing a safe basis with which to experiment. When building any model, skill is involved in identifying and representing the minimum necessary elements for the model to consistently simulate reality. This is the concept of bracketing noted in the Weick sense-making model. Modelling for complexity is no different.

Like the leader who must behave differently in the face of complexity, the accountant will also need to modify expectations in modelling for complexity:1. Models do not need to be completely accurate—they must just be able to support a decision

to make an incremental step forward.2. Models will need to change over time so they should be designed with modification in mind.3. Models will be more or less useful. Sometimes there will be no identifiable reasons for past

events; sometimes there will be equally probable future outcomes. The accountant should not get discouraged if the model is discarded, because getting to the stage where a model is discarded is a significant and progressive step when dealing with a complex problem.

Making decisionsOne of the challenges managers often face in complex situations is how best to make decisions when there are high degrees of uncertainty and unpredictability. While most managers and leaders are comfortable with some level of uncertainty, few enjoy making decisions without the necessary information. So, how do you develop the professional judgment necessary to make sound decisions in uncertain and unpredictable environments? The key is being able to recognise complexity and then use an appropriate approach for moving forward.

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Some of the ways to develop good professional judgment include: • seeking out and hearing the stories of how other accountants have encountered and

successfully dealt with a complex situation; • being an opportunistic learner from mistakes (Cialdini, cited in Ostergaard 2009); and • participating in or sponsoring decision games (Klein 2009, p. 281) where key leaders are

presented with a scenario or story of seemingly intractable problems and talk through what they might do.

All of these opportunities are about building a repertoire of patterns the accountant can sense and respond to.

Decision Games provide useful practice at considering what to do when there is no obvious way forward. For an overview, have a look at the article titled ‘Will Wright’s new game Spore and decision games’ here: http://www.anecdote.com.au/archives/2007/07/will_wrights_ne.html).

An interesting example of the use of decision games to help build experience and understanding in a challenging business environment can be found in the article ‘Complex learning online’ at Green Chameleon (Patrick Lambe’s website) here: http://www.greenchameleon.com/gc/blog_detail/complex_learning_online/.

A challenge for the accountant is that the mindset that might be useful in making decisions in a complex environment is not necessarily the one that is most useful in tackling normal accounting problems. The accountant must learn to deal comfortably with ambiguity, to deliberately propose an action which does not solve the problem completely: to ‘embrace the blur’ and make a decision based on little knowledge of the problem, let alone the solution, but make a decision anyway.

An entertaining exercise is to discuss sophisms and paradoxes with your friends and colleagues. Try the following websites: • http://www.buzzfeed.com/moerder/17-mind-bending-paradoxes-that-will-hurt-your-brain.• http://brainden.com/paradoxes.htm. Refer also to Sorensen (2003).

Please note that the online resources referred to are provided for additional information and are not examinable.

Skill developmentAs business becomes more and more complex, accountants need to learn new skills in order to cope, especially since the required skills may not be present in the organisation, even within the leadership team. Skills can be acquired through professional development and through specific skills training.

A good example of the type of specific skills training that accountants could undertake to prepare them for dealing with complexity is to learn to use a narrative technique known as ‘Three journeys’, which employs a journey metaphor in the conduct of incremental organisational change (Callahan & Drake 2008, pp. 3–5). This is shown in Table 1.7.

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Table 1.7: The ‘Three journeys’ technique

The First JourneyIn this first stage, leaders in an organisation develop a vision of what they would like to achieve and define this end-state in broad terms. It involves setting the destination, the crusade, and mapping out how to get there based on the available information—while recognising that detailed plans are unlikely to be achieved at this stage (the world is too unpredictable for a simple, linear view). It is critical to clearly articulate the mission, the criteria for success, and the leadership parameters in order to create a solid framework for thinking about the venture …

anywhere hereis good

Journey 1

The Second JourneyIn this stage, the rest of the organisation (or a representative subset) plans how they will get to the desired state, determines what may impede their progress, and prepares themselves for what they need to do. This journey involves understanding the current capacity, culture and business environment based on stories collected, and developing the best possible map based on current information and resources available to guide them on the trip … Journey 2

The Third JourneyIn this stage, the organisation embarks on the actual venture, implementing the planned (and unplanned) activities over a defined horizon. Through a combination of small initiatives and larger projects, new behaviours are encouraged and new opportunities are engaged in moving toward the vision. The third journey enables staff to sense and respond to change, persist and innovate as needed, and keep their eye on the desired goal.

planned routeactual routereflection point

Journey 3

Source: S. Callahan & D. B. Drake 2008, ‘Three journeys: A narrative approach to successful organisational change’, Anecdote, pp. 2–4, accessed May 2013,

http://www.anecdote.com.au/papers/Anecdote3JourneystoChange_v1s.pdf.

The ‘Three journeys’ technique was inspired by the story of Lewis and Clark, two early American explorers. Read the outline of their journey and lessons to be learned from their experiences here: http://www.anecdote.com.au/papers/Anecdote3JourneystoChange_v1s.pdf, then reflect on how your organisation undertakes change projects and initiatives.

Does your organisation jump straight to Journey 3? Do projects begin without having been envisioned by the leadership (Journey 1)? if so, how have such projects turned out? Develop a sense of how a ‘Three journeys’ approach to change could benefit your organisation, and share it with your manager or another change leader.

Policy and proceduresThe accountant’s final opportunity to assist in the organisation’s management of complexity is to get involved in the articulation of policy and procedures, bringing to that task an understanding of the organisational role of policy and procedures in coping with complexity.

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Organisational politics, power, influence, change, interpretation and interaction between people create increased complexity by expanding the possible options and outcomes from events within the organisation. Policy and procedures can restrict the possible states of the particular situation (variety attenuators) and increase the possible states of the leader’s response to the situation (variety amplifiers).

For example, accountants will be familiar with the type of procedure that requires employees to use a form to collect data. In these procedures, the range of data that can be used for each field in the form is usually defined and restricted in order to minimise errors. However, as the environment becomes more complex, the number of response types appropriate for the form might increase, so the procedure must be amended to allow for the increase in the number of possible states. If this does not occur, then the procedure is increasing complexity in the organisation, rather than allowing the organisation to manage complexity, because the system has to deal with a form that does not capture the distinctions required to deal with a variable environment.

Accountants should start with their own policies and procedures to ensure that the needs of all stakeholders are balanced in the current environment.

Watch the video ‘How to organise a children’s party’ on YouTube here: http://www.youtube.com/watch?v=Miwb92eZaJg. in the video, Snowden characterises the complexity approach to this situation as comprising boundaries and catalytic probes to create attractors. Attractors may be positive or negative. Positive attractors can be stabilised and amplified, and negative attractors can be dampened (Snowden 2009).

Please note that this resource is provided for additional information and is not examinable.

With the approach presented in Snowden’s video in mind, and given what you have now learned about complexity, read the following business case.

Example 1.18: QNH LtdQNH Ltd is a large Australian high-technology manufacturer. Historically, it has been a market leader in its field, but as newer technologies have been developed, QNH has started to lag. New, smaller competitors have begun to outstrip it in a number of niche technology areas.

Some of QNH’s product managers have been able to make some headway in developing competitive products for the emerging market, but the sales force has not been able to keep pace. Product management staff are frustrated that sales staff do not seem to be paying attention to the new products or to be showing any understanding of the newer technologies.

The systems and processes that product managers use to keep sales staff informed of product developments are running on legacy platforms, and have not been updated for some time. Content on the management product information database is out of date, and the system does not adequately represent the newer products.

Sales staff receive little training or communication on the newer products, and they struggle to find the information they need on the database. The information that they do receive is usually written in technical jargon, and they have difficulty explaining the products to their customers. However, they do hear a lot of questions from their customers about the new technologies and suggestions for improvements to products that they feel unable to act upon.

The product managers’ performance-based salaries reward them for delivering low-cost products. Sales staff are paid commissions based on number and value of sales.

Some traditional management approaches to this situation may include setting higher targets for the sales force to increase sales, commencing a major IT project to replace the product information system, or rolling out a detailed technology training course for sales.

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➤ Question 1.11What alternative approaches would complexity theory suggest that may lead to a more effective result in the case of QNH Ltd?

SummaryThe traditional role of the accountant has tended to operate outside of people management concerns. The reality today is that the human resources of an organisation often provide both the greatest resource as well as the greatest challenge. Cultivating people management qualities in the accounting profession is critical to the ongoing viability and success of organisations.

Part D has revealed that the people management skills and knowledge of the professional accountant can be adapted to provide organisations with enhanced insight and ability into managing their human resources and to successfully deal with the complex and dynamic business environment of the 21st century.

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ReviewIn this module we provided an introduction to the CBI subject by outlining the various roles of accountants and the ways in which they can provide strategic advice. The opportunities to provide advice are not limited to external providers of accounting services, and we have seen that accountants within organisations should be expanding their areas of influence well beyond the traditional finance function.

With the broadening role of accountants there is a need to demonstrate a much broader set of skills than ever before. In addition to the technical skills and knowledge that are required to perform this role, it is important to demonstrate a wide range of soft skills as well. The importance of effective communication skills cannot be overstated.

We considered strategic advice outside traditional areas, including physical accounting and environmental management accounting. There is a growing focus on sustainability whereby reducing the environmental and social costs of business is a key priority. Accountants are well placed to provide services in these areas, including the recording and reporting of physical information, identifying cost and waste reduction opportunities and expanding performance measurement frameworks to capture environmental and social outcomes.

We also considered the ethical dimensions involved in providing strategic advice. While members of CPA Australia are expected to adhere to the Code in providing services to clients and employers, the need to consider broader ethical issues arises. The need to evaluate business decisions concerning products, services, location, staffing and the use of raw materials raises commercial and ethical considerations. Giving advice in this area must extend beyond an analysis of the financial implications of a business decision to include the impact on various stakeholders, long-term sustainability and the brand and reputation of the organisation.

The module concluded by exploring the ways in which people management is relevant to the viability and profitability of an organisation. Providing advice in this area has created a need to understand terms such as human and corporate social capital as well as examining the issue of complexity. People management sees the role of the professional accountant increasing moving into more innovative, dynamic and people-orientated areas where the demand requires the need for qualities related to being a multiskilled business partner and advisor, a leader, a change agent and a decision-maker.

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