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Edition 14a

CPA Program

Contemporary Business Issues

Module 1:

The accountant as business adviser

cpaaustralia.com.au Edition 14a CPA Program Contemporary Business Issues Module 1: The accountant as business adviser

Published by Deakin University, Geelong, Victoria 3217 on behalf of CPA Australia Ltd, ABN 64 008 392 452

First published July 2010, updated January 2011, July 2011, revised January 2012 Reprinted with amendments July 2012, revised January 2013 Reprinted with amendments July 2013, revised January 2014

© CPA Australia Ltd 2014. This is an electronic version of the printed study material. Apart from any fair dealing (e.g. for the purposes of private study) as permitted under the Copyright Act 1968 (Cwlth), no part of this material may be copied, scanned, transmitted, distributed or reproduced in part or in whole without the permission of CPA Australia Ltd.

Edited and designed by DeakinPrime Printed by Blue Star Print Group

ISBN 978 1 74156 139 5

Authors Courtney Clowes Keith De La Rue

Director, KnowledgEquity Independent consultant, speaker and director,

Dr Jane Hamilton Marina Kelman

AcKnowledge Consulting Independent consultant General Manager, Mergers and Acquisitions,

Dr Siri Terjesen

National Australia Bank Assistant Professor, Kelley School of Business,

Dr Julie Margret

Indiana University, USA Senior Lecturer, Department of Accounting,

Dr Hayat Khan

La Trobe Business School, Faculty of Business, Economics and Law, La Trobe University Lecturer, Department of Finance, La Trobe Business School, Faculty of Business, Economics and Law, La Trobe University

Advisory panel Geoff Crawford Dr Mary Dunkley Dianne Harvey Gavan Ord

Corinne Proske John Purcell Stephen Zigomanis

CPA Australia Professional Programs & Pathways staff

Janine Harper

Suzannah Andrews

Travis Pemberton

Richard Brown

Irwin Bushnell

Kylie Ross

Kristy Grady

Sarah Chinnick

Alisa Stephens

Desley Ward

Elise Literski John Ngiam

Belinda Zohrab-McConnell

Educational designer Alberto Gonzalez

DeakinPrime

The material used in this segment has been designed and prepared for the purpose of individual study and should not be used as a substitute for professional advice. The material is not, and is not intended to be, professional advice. The material may be updated and amended from time to time. Care has been taken in compiling the material but the material may not reflect the most recent developments and has been compiled to give a general overview only. Users of the material should not act on the basis of any of the material without first obtaining professional advice specific to their own situation. CPA Australia Ltd and Deakin University and the author(s) of the material expressly exclude themselves from any contractual, tortious or any other form of liability on whatever basis to any person, whether a participant in this segment or not, for any loss or damage sustained or for any consequence which may be thought to arise either directly or indirectly from reliance on statements made in this material.

Any opinions expressed in the study materials for this segment are those of the author(s) and not necessarily those of their affiliated organisations, CPA Australia Ltd or its members.

Module 1

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BUSINESS

ISSUES

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1.1

Module 1

The accountant as business adviser

COURTNEY

CLOWES

Contents

Preview

1.3

Introduction

Objectives

The need for advice

1.4

The quest for productivity Factors leading to demand for advice Accounting roles Providing strategic advice

Ethical interaction

1.26

Addressing conflicts between organisational stakeholders Accountants as facilitators of ethical business behaviour

Advising beyond traditional accounting areas

1.30

Physical accounting Management accounting and the environment Environmental costs and revenues Integrating environmental measures—Extending the balanced scorecard

Review

1.36

References

1.37

Suggested answers

Module 1

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CONTEMPORARY

Preview

BUSINESS

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1.3

Introduction

In this module, we introduce you to the Contemporary Business Issues (CBI) segment, and present you with opportunities to consider key business and ethical concepts. You will also 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 accounting office or finance department recording and reporting financial information. However, that is a very narrow view! Accountants also act as internal and external business advisers, carry significant ethical responsibilities, and have expanded their focus well beyond financial measures to consider physical and social areas as well. The focus of this segment therefore 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 fulfil a variety of different roles within organisations, they also perform different types of roles depending on the size of an organisation. For example, in small-to-medium enterprises, accountants are often responsible for the finance, information technology (IT) and human resources functions, as well as contributing strategic advice as part of the executive management team.

For many public practitioners offering accounting services, there is also 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.

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 now 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 as to the many issues that organisations face, as well as in shaping the debate within organisations about how to respond to those issues.

Module 1 attempts to broaden your understanding as to some of the many varied roles that will be important for accountants to fulfil. Specifically, it focuses on accountants as strategic business advisers. 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 segment 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 and environmental constraints, in order to successfully address such issues.

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Objectives

CONTEMPORARY

BUSINESS

ISSUES

After completing this module, you should be able to:

n

explain the changing role of the accountant and the type of strategic advice that business enterprises are increasingly requiring from accountants;

n

explain the key strategic issues of concern to small-to-medium enterprises and propose how the accountant can provide support in these areas;

n

determine what actions you would take to facilitate ethical behaviour in a given situation and why; and

n

evaluate how accountants can add value to organisations by enabling sustainable business decision-making.

The need for advice

Professional 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 & Radcliff 2006, p. 569):

n

selection of business entity structure;

n

intellectual property;

n

liability;

n

regulation;

n

contracts;

n

tax;

n

employment;

n

financing; and

n

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.

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The quest for productivity

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1.5

The 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.

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:

n

with employees (higher wages);

n

with customers (lower prices);

n

with suppliers (higher prices); and

n

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).

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Successfully achieving long-term productivity often requires investment in employee skills, training, development and culture, and combining this with new systems, technology and infrastructure. 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 web-based knowledge such as wikis and social network communication, which can also be powerful tools for improving productivity.

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 (The 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?

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Factors leading to demand for advice

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1.7

We 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).

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

n

Entrepreneurial leadership.

n

Entrepreneur less dominant,

n

Separation of capital and management.

n

Focused product/service range.

with small team of other professionals.

 

n

Wider product/service range

n

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

and multiple locations.

n

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

Strategy

n

Reacts quickly to business changes.

n

Intermediate reaction time to business changes.

n

Slower response time to business changes.

n

Managing is intuitive, often no business plan.

n

Market data and business planning beginning to

n

Formal planning process and business/strategic plan.

n

Growth is on a customer-by- customer basis.

be employed, often with outside help.

n

Growth is through merger and acquisition.

 

n

Growth is through new products, new markets and integration.

 

Customer/

n

Few customers account for large part of turnover.

n

Growth of customer base.

n

Large, international

community

n

Moving away from the direct

customer base.

n

Close to their customers and customers’ business plans.

proximity of their clients.

n

Success or failure of the enterprise 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

n

Private funding, family and/or employee owned.

n

External funding sought.

n

Capitalisation through public

n

Annual budget and

investors, exchange listing.

n

Often no formal budgeting process.

operating plan.

n

Detailed budgeting processes.

n

Often still weak in applying

n

n

Few conformance requirements—mostly from the tax authority.

accounting and tax matters with strong reliance on outside help.

 

Full finance and accounting function.

Governance

n

The entrepreneur manages and controls by observation.

n

Advisory board may be set up—mostly insiders.

n

Independent non-executive board.

n

Hands-on management and control.

n

Internal control becomes more formalised.

n

Formal and clear internal control and reporting structure.

n

No internal audit.

n

Internal audit function is likely to appear.

n

Full internal audit function.

Work force

n

Individuals are very important:

n

Employees still wearing several hats, though there is recognition that more formal functions and

n

Formal and specialised functions and roles.

Most support services brought in-house unless specific

multifunctional, cross-trained and loyal.

n

n

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

roles are needed.

n

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

decision to outsource.

IT processes

n

Technology implementation is as needed.

n

Using more automation as a means towards business leverage.

n

Internally self-sufficient (or function outsourced).

 

n

Has formal contingency plans

n

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

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 <http://web.ifac.org/media/publications/7/the-crucial-roles-of-pro/the-crucial-roles- of-pro.pdf> (accessed July 2012). Used with permission of IFAC.

Question 1.2

For 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—Global

In many cases, requests for advice are focused on improving operational performance, and the assessments are typically related or compared to ‘successful business’:

n

Do we have all our policies and processes in place and are they being followed?

n

Are we practising good cost control and cash flow management?

n

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:

n

Are we servicing the right markets and are these markets growing or declining?

n

What will our customers’ future needs be and are we positioned to fulfil those needs?

n

What are the likely future issues in our industry and are we prepared to face them?

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1.9

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:

n

after-effects of the Global Financial Crisis and Eurozone crisis;

n

human-induced climate change and sustainability;

n

harmonisation or convergence of accounting standards; and

n

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 segment.

Example 1.1: A business dilemma

Consider 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:

n

What do we stand for?

n

Do we move from oil to other forms of energy or into completely different product areas?

n

What is the perception of our brand (exploiter or good corporate citizen)?

n

What will our future customers look like?

Counterpoint

There 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.

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 1.3

Do 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.

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Providing and implementing advice

So 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

cause harm. Figure 1.1 Providing business advisory services Issue Requirement Request Investigation Review

Issue

Requirement Request Investigation
Requirement
Request
Investigation

Review

Implementation Decision
Implementation
Decision
Request Investigation Review Implementation Decision Advice Rather than disregard or hide from criticisms or

Advice

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.

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Table 1.2

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1.11

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

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

accountant

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

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.

recommendation

Implementation

Actually follow

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

recommendation

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 help

A 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:

n

valuing the business and therefore providing a value for each share;

n

determining who should purchase the shares to maintain appropriate balance of ownership;

n

evaluating the possibility of new shareholders; and

n

organisational structure of employee responsibilities (this includes considering hiring specialised personnel for the various operational roles filled by the MD and EDs).

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.

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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 roles

A broad range of roles that accountants perform is identified in the Ethics and Governance segment of the CPA Program. As business leaders in an international context, accountants can perform many diverse roles in the profession, including:

n

financial accountant;

n

financial executive supervising a team of accountants (chief financial officer (CFO), financial controller);

n

management or cost accountant;

n

internal auditor; and

n

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):

n

n

n

n

n

n

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’

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1.13

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 example below examines two types of specialist accounting roles and suggests ways in which they can lead to strategic adviser roles.

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Example 1.4: Specialist accounting roles

CONTEMPORARY

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ISSUES

Forensic accountants provide expert witness, investigative or consulting services (APES 215, APESB 2008). 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 2011b). 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.

Question 1.5

1 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 advice

Accounting 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 decision

The 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.

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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 & White 2009, p. 81).

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

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—Communication

Many 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.

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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.

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 below.

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 2 x% x% x% x%  

KPI 3

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%

 
KPI 8 x% x% x% x%  

Employees

KPI 9

x%

x%

x%

x%

 
KPI 9 x% x% x% x%  

KPI 10

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 business

There 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 segments 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 CEO, Independent directors Other directors
The roles and domain of the professional accountant in business
CEO,
Independent
directors
Other
directors
Educators
Business
Strategic
Shareholder
accounts
support
communications
Business
Financial
Business
assurance
reporting
strategy
Risk
Internal
management
Finance
Information
control
CFO
strategy
strategy
Corporate
Management
finance
information &
Enterprise
analysis
governance
IT
Stakeholder
Project
communications
management
Treasury
Consultants
Member in
other roles

Advisors

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 <http://www.ifac.org/sites/default/files/publications/files/the-roles-and- domain-of-the.pdf> (accessed October 2012). 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 enterprises

There 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 focus

CPA 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 resources

Voluntary 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 business

A 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 Organisation 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 activity

The 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 prototyping

Six 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 practice

The 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:

n

assessing entity structures and obligations;

n

developing manual and automated systems, processes and procedures coupled with strong internal controls, performance measurement and reporting; and

n

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 segment 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 partnering

Accounting 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 advice

When 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.

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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

Provision of strategic advice

Client behaviour

Potential approach

Aware of approaching issues but paralysed and unable

In

this situation the client may actually know the

to

make a decision

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.

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

A

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.

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.

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

A

away from ideas and opinions and instead relying on numerical data and forecasts should help remove emotion and move towards more disciplined action.

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

A

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 advising

The 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:

n

how and when invoicing is done;

n

how credit terms are established;

n

establishing whether statements are provided;

n

when and how reminders to customers are made; and

n

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 capital

The same type of approach can be taken throughout the organisation with issues such as:

n

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

n

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

The CPA Program Strategic Management Accounting segment 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.

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Refer 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.

Ethical interaction

We 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:

n

quantitative/financial factors;

n

qualitative/non-financial factors;

n

strategic and operational attributes; and

n

ethical, social and moral implications.

As members of CPA Australia, it is a mandatory requirement to comply with APES 110 The Code of Ethics for Professional Accountants (the Code) (APESB 2011a). The Code is examined in detail in the CPA Program Ethics and Governance segment, and requires that a member act in the public interest and maintain the following fundamental principles:

n

Integrity—to be straightforward and honest in all professional and business relationships.

n

Objectivity—to not allow bias, conflict of interest or undue influence of others to override professional or business judgments.

n

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.

n

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.

n

Professional behaviour—to comply with relevant laws and regulations and avoid any action that discredits the profession (s. 100.5, APESB 2011a).

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 2011a).

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‘The IT snag’ (adapted from Sexton 2010)

Dilemma: 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?

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 1.8

‘Fair dealings’ (adapted from Sexton 2009)

Dilemma: 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 the above course of action, which fundamental ethical principle would

you most likely breach?

Addressing conflicts between organisational stakeholders

In 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 need to 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.

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Example 1.11: 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 addition, there is the loss of jobs in the domestic country and the social and economic upheaval

for many individuals that follows. Use of raw materials and attitudes towards the environment, emissions and pollution may also be significantly different.

A vendor organisation in Cambodia—Digital Divide Data (DDD)—has attempted to address the societal concerns raised by the outsourcing of jobs to the developing world.

DDD represents a new breed of international social enterprise that melds the merits of the private sector with the morality of non-profits. ‘DDD is a social enterprise that operates a bit like a co-op. Profits generated from data entry services are funneled into scholarships, healthcare and continued training … The problem with most non-profit organizations is that they require annual grant funding. At DDD we aim for a double bottom line—the first is to be operationally self-sustainable, which funds the second, the direct, tangible improvement of disadvantaged people’s lives and the communities they live in.’ Unlike similar companies in the developing world, DDD reserves jobs for only the most disadvantaged citizens, those who wouldn’t otherwise have a chance to work.

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 1.12: 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.)

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Example 1.13: 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:

n

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.

n

Apple iTunes routinely charging over 40 per cent more in Australia versus the US, as major competitors are either not currently distributing in the Australian market or do not have the same range and depth (Pascoe 2010).

n

The latest running shoes (e.g. Brooks, Nike) in Australia can cost more than double the price of those in the US (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.

Examples 1.11 to 1.13 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. As you continue to explore contemporary business issues in this segment, the challenge is for you to develop a robust framework that helps you to analyse and reach appropriate decisions.

Accountants as facilitators of ethical business behaviour

The 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.

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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 enterprise], 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:

n

n

n

n

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. In the remainder of this module we explore the expanding nature of this technical competence to include physical and environmental, as well as monetary inputs, outputs and costs. We will also explore a range of contemporary business issues in the following modules. By exposing future accountants to these issues and building related competencies, we increase the understanding of members and create new opportunities to provide valuable service and advice.

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 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 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.

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Example 1.14: Sustainable supply chain management

As 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 in which 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.

In 2012, the Global Reporting Initiative (GRI) released an exposure draft of its fourth generation of Sustainability Reporting Guidelines (‘G4 Developments’). The final version was released in May 2013. For more details on the G4 Guidelines refer to Module 4.

For specific actions related to the supply chain, the guidelines (GRI 2012, p. 45) suggest organisations explain practices for the following:

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:

n

how expectations are established and defined in contracts with suppliers to promote improvement in economic, environmental and social performance (including targets and objectives);

n

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

n

feedback and dialogue mechanisms for suppliers.

Product and service design

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.

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.

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.

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Physical accounting

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Physical 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 1.15. 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 1.15: Sustainable supply chains—From slaughter to shearing

The vicuña is an animal from Peru in South America that is very similar to a llama. Its hair or fleece

is regarded as being of the highest quality, even finer than the best cashmere. This led to excessive

hunting and slaughter of the animal, which in turn reduced the worldwide population to less than 5000. The species was endangered and an international trade embargo was put in place to protect it.

An Italian luxury-goods producer called Loro Piana wanted to use the material in its goods, and created

a sustainable solution to the problem. By working together with the Peruvian government and

developing a new way of harvesting the hair (shearing rather than killing the animal), the supply of raw material became sustainable. The animals are left to run wild on a large reserve and are only sheared once every two years. In this situation, everyone seems to be a winner—the local Peruvians get additional income, the vicuña population is now approaching 200 000, and the Italian firm is able to buy the raw material and sell its luxury clothing (Faris 2011).

We can see from this example that understanding the physical supply chain and environmental consequences, in addition to the monetary costs associated, was critical in creating a sustainable and profitable solution to a difficult problem.

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 often 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 provides 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, which is a useful example of how we can capture and report both physical and monetary results.

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Nitto Denko Corporation—Physical flows and volumes

Solvent vapors emitted into the air:

779 metric tons

Amount of materials recycled: Material recycling 18 186 metric tons Waste plastic recycled: 6240 metric
Amount of materials
recycled:
Material recycling
18 186 metric tons
Waste plastic recycled: 6240 metric tons
Solvents recycled: 11 946 metric tons
Raw materials purchased
(including solvents):
Products: 171 947 metric tons
202 026 metric tons
Manufacturing
process
Industrial waste dispossed outside the company: 45 983 metric tons
Final disposal: 673 metric tons
Energy purchased:
CO 2 emissions:
143 122 kl (in crude oil equivalent)
390 824 CO 2 metric tons
Energy recycling
Amount of energy
recycled: 43 865 kl
(in crude oil equivalent)
(thermal recycling)
Water consumed: 4 462 787 metric tons
Wastewater: 3 888 579 metric tons
INPUT
OUTPUT

Source: Nitto Denko Corporation (2011).

This figure 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:

n

McDonalds moved away from polystyrene to recyclable packaging for its hamburgers.

n

Dulux and other paint companies create water-based paints that have low or zero volatile organic compounds.

n

MonoSol has developed soluble and even edible packing films that replace plastic.

n

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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Management accounting and the environment

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We are aiming to improve outcomes for all stakeholders and our 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 financial accountant 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:

n

capturing the total energy usage for the period and comparing to budget;

n

identifying the usage between peak and off-peak times and maximising off-peak usage;

n

assessing the emissions from the energy used and identifying ways to reduce emissions; and

n

retrofitting high-use machinery with meters to assess energy usage and look for efficiencies.

Monetary Environmental Management Accounting (MEMA)

According to a United Nations research report (UN 2001), the Pareto 80:20 rule applies to environmental costs. That is, 20 per cent of production activities account for 80 per cent of environmental costs. However, 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 segment of the CPA Program.

Areas where EMA may be used are very similar to traditional accounting roles, and include:

n

budgeting;

n

pricing

n

capital investment reviews;

n

cost reduction strategies;

n

performance measurement and reporting; and

n

inputs into the financial reporting and regulatory audit process (UN 2001).

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Along with the actual volumes of physical items that are used, consumed or wasted, we are able to attach costs to these items. In many instances, these costs may well be ‘externalities’. These are discussed in detail in the Ethics and Governance segment of 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: 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. It was able

to reduce printing waste by 2000 pages per person per annum. 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).

Integrating environmental measures—Extending the balanced scorecard

With 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:

n

volume or percentage of waste;

n

number or percentage of suppliers certified;

n

percentage of waste recycled/re-used;

n

volume of output per input;

n

volume or percentage reduction in emissions; and

n

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.

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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.

Review

In this module we provided an introduction to the CBI segment 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 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 considering 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.

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References

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Accounting Professional and Ethical Standards Board (APESB) (2008) APES 215 Forensic Accounting Services APESB, Melbourne, December.

Accounting Professional and Ethical Standards Board (APESB) (2011a) APES 110 Code of Ethics for Professional Accountants APESB, Melbourne, December.

Accounting Professional and Ethical Standards Board (APESB) (2011b) APES 220 Taxation Services APESB, Melbourne, October.

Andy (2011) ‘Aircraft parts manufactured on a 3D Printer’ 3D Future, 19 July

<http://www.3dfuture.com.au/2011/07/aircraft-parts-manufactured-on-a-3d-printer/>

(accessed July 2012).

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Bowen, John J. Jr (2009) ‘Culture clash’ Financial Planning, June, vol. 39, no. 6, pp. 25–6

<http://proquest.umi.com/pqdweb?index=1&did=1750903021&SrchMode=1&sid=2&

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CPA Australia (2010) ‘Asia–Pacific survey shows small business confidence on the rise’ Media release, 9 November

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(accessed August 2013).

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CPA Australia (2013) ‘Where CPA Australia can take you: Be in demand’ <cpaaustralia.com.au/cps/rde/xchg/cpa-site/hs.xsl/become-where-demand.html> (accessed September 2013).

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Faris, S. (2011) ‘Self-serving stewardship: How manufacturers help the planet’ TIME, 6 June

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(accessed July 2012).

Hall, D. (2010) ‘It all adds up’ Business Review Weekly, 1016 June, p. 39

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LER5FUDZN> (accessed November 2011).

Hertz, G. T., Beasley, F. & White, R. J. (2009) ‘Selecting a legal structure: Revisiting the strategic issues and views of small and micro business owners’ Journal of Small Business Strategy, vol. 20, no. 1, Spring/Summer, pp. 81–101.

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 <http://www.ifac.org/sites/default/files/publications/files/the-roles-and-domain-of-the. pdf> (accessed July 2012).

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International Federation of Accountants (IFAC) (2008) The Crucial Roles of Professional Accountants in Business in Mid-Sized Enterprises IFAC Professional Accountants in Business Committee, New York, September <http://www.ifac.org/sites/default/files/publications/files/the-crucial-roles-of-pro.pdf> (accessed July 2012).

Kuratko, D. F. & Hodgetts, R. M. (2004) Entrepreneurship: Theory, Process, Practice South-Western Publishers, Mason, Ohio.

Malach, S., Robinson, P. & Radcliff, T. (2006) ‘Differentiating legal issues by business type’ Journal of Small Business Management October, vol. 44, no. 4, pp. 563–76.

Nitto Denko Corporation (2011) ‘Material flow in business activities (non-consolidated)’ Environmental Conservation Activities

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

(accessed July 2012).

Organisation for Economic Co-operation and Development (OECD) (2003) ‘White paper on corporate governance in Asia’ OECD, France <http://www.oecd.org/dataoecd/48/55/25778905.pdf> (accessed July 2012).

Pascoe, M. (2010) ‘Apple bites Australia for profit’ The Age, 27 January

<http://www.theage.com.au/business/apple-bites-australia-for-profit-20100127-mwkn.

html> (accessed July 2012).

Schlemmer, D. (2004) ‘The outsourcing dilemma: In Cambodia, Digital Divide Data exemplifies the social enterprise alternative’ The Harbus, 15 November

<http://media.www.harbus.org/media/storage/paper343/news/2004/11/15/News/

TheOutsourcing.Dilemma-806504.shtml> (accessed May 2010).

Sexton, T-L. (2009) ‘Fair dealing’ INTHEBLACK CPA Australia Ltd, November, p. 63.

Sexton, T-L. (2010) ‘The IT snag’ INTHEBLACK CPA Australia Ltd, April, pp. 60–1.

Takahashi, D. (2011) ‘Apartment-sharing startup Airbnb raises $112m at $1.3b valuation’, 25 July

<http://venturebeat.com/2011/07/25/apartment-sharing-startup-airbnb-raises-112m-at-

1-3b-valuation/> (accessed July 2012).

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United Nations (2001) ‘Environmental management accounting procedures and principles’ New York <www.un.org/esa/sustdev/publications/proceduresandprinciples.pdf> (accessed July 2012).

Xiao, J. & Fu, H. (2009) ‘An empirical study of usage of external business services by Chinese SMEs’ Journal of Enterprise Information Management, Bradford, vol. 22, no. 4, p. 423

<http://proquest.umi.com/pqdweb?index=0&did=1882714001&SrchMode=1&sid=2&

Fmt=2&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1265174102&client

Id=6298> (accessed July 2012).

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1.1

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Suggested answers

Question 1.1

Professional accountants can provide several roles in improving productivity, including:

Data capture

Both of physical and monetary flows, to enable an accurate view of current operations

Analysis

Both of financial and non-financial information, to enable identification of activity drivers

Performance measurement

Includes establishing benchmarks and measuring progress towards goals and targets

Process redesign

By applying process improvement tools to identify inefficiencies and bottlenecks, and reconfiguring activities

Resource control

Through budgeting and forecasting, as well as designing and implementing internal controls

Question 1.2

There is a wide range of business advisory services that professional accountants may be able to provide, including:

Organisation

n

Legal structure (sole trader, partnership, trust, company).

n

Succession planning.

Strategy

n

Business planning process, including linking budgets to organisational objectives.

n

External environment information and analysis.

n

Specific growth strategies (acquisition, joint venture, partnership).

n

Performance measurement systems design, evaluation and implementation.

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1.2 SUGGESTED

ANSWERS

Customer/Community

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n

Customer profitability and segmentation.

n

Sustainability improvements and reporting.

Financial

n

Capital structures and sources of funding.

n

Wealth maximisation strategies (dividends, buy-backs, reinvestment).

n

Finance function (budgeting, payroll, accounts payable/receivable, inventory, taxation, reporting).

n

Costing and pricing, and leasing versus purchasing of assets.

Governance

n

Governance structures (board composition, committees).

n

Independent director role.

n

Risk management and internal controls.

Work force

n

Organisational structures (in-house, outsource).

n

Performance measures and links to remuneration.

IT processes

n

Management information systems (reviews, scoping, implementation, testing).

n

Project management services.

Question 1.3

Professional accountants, both internal and external to organisations, are well placed to provide strategic advisory services to organisations for a number of reasons, including the following:

n

The professional approach of the accountant—such as having a service ideal, honesty, integrity and not acting in their own self-interest.

n

The technical abilities of accountants are based on a systematic body of theory and knowledge. They have gone through rigorous education and training, which provides a base level of knowledge that leads to competence in delivery of services.

n

Many technical skills are transferable—for example, the technical requirements of an audit (including setting the scope, determining the approach to sampling, and obtaining and reviewing data) are often similar, despite the reviewed data being of a different nature (i.e. physical measures instead of financial measures).

n

Accountants are often exposed to the whole of an organisation—finance, sales, marketing, human resources, IT, legal, production, logistics and after-sales services. This knowledge is invaluable when assessing the impact of potential decisions across different parts of an organisation, as well as its industry supply chain.

n

Accountants are often exposed to several industries, and similar problems that arise in different organisations. The ability to transfer their knowledge of how similar problems have been resolved provides a valuable resource to clients who may have never experienced such problems.

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Question 1.4

SUGGESTED

ANSWERS

1.3

In periods of change and hardship, many organisations realise that they cannot continue operating as they have done previously. Business models that worked in the good times may not be relevant when times get tougher. Many organisations find that, in difficult times, there are additional pressures from:

n

shareholders—to continue generating sufficient returns;

n

employees—to provide tolerable working conditions and guarantee security of work;

n

suppliers—to increase/maintain orders and margins; and

n

customers—who are buying less, and on reduced margins.

In addition, regulatory changes (e.g. new licensing regimes or new taxes) and changes in community expectations (e.g. relating to the environment) can also have a significant impact on organisations.

Organisations may not have sufficient resources or expertise to solve the underlying issues, or make the required changes, and so typically request assistance from external sources. By obtaining that expertise externally, both the adviser and the organisation should benefit.

Question 1.5

1 There are two main ways of perceiving the CFO role. One is that it is a management role, which oversees a technical function. The key skills involved would focus on managing a team of people and difficult deadlines, making significant financial decisions and being able to interact with both internal and external stakeholders, including banks, regulators, shareholders, consumers and employees. People and project management skills could be seen as equally important as technical competence.

However, the second (and more appropriate) view is that, in most situations, it is likely that the CFO needs to be technically qualified. While the technical specialists within the function would provide the technical skill, there is still a need for the CFO to be knowledgeable and competent. A technical understanding of what is being performed by subordinates is essential to properly managing the function. If you do not know what is expected of your team in terms of technical requirements, time, and regulations, then it will be difficult for you to properly understand and manage the area.

2 Along with the benefits of acting in an advisory role, there are also some potential pitfalls. Hitting tight deadlines for important issues (and possibly across multiple clients) can lead to difficulties in finding time and balance with non-work activities. Such deadlines were traditionally compliance-based and reflected the end-of-month/ year processes. Being locked in well in advance, and being somewhat repetitive, these activities could be planned for. However, strategic advisory services can take place at any time through the course of the year, and the volume or extent of the workload may not be as easily planned. Important areas of consideration to maintain work–life balance include:

n

n

n

n

n

planning and booking leave in advance;

planning work schedules and work pipelines into the future;

maintaining a time log and reviewing hours worked to monitor fatigue;

not overcommitting (either with the number of clients or the number/size of engagements); and

having access to temporary support services and backup personnel as needed.

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3 The CFO has a dual role of manager with technical expertise. The purely technical role of ensuring the correct recording, reporting and communicating of results must be combined with the broader ‘manager’ role. Where the CFO is

providing strategic advice as to products, services, prices, organisational structure, business planning and overall strategy, it is important for the CFO to be both knowledgeable about the inner workings of the organisation and also a proud supporter of the product offering. What may be more important than passion for

a specific product or service is that the needs of the customer are properly satisfied and the financial position of the organisation is strong and under control.

Question 1.6

Potential opportunities for strategic advice in relation to customers include the following:

n

Customer profitability analysis—Using activity-based analysis to determine the full cost of each customer (including cost of goods sold, sales time, customer service, delivery, logistics and after-sales service). This can determine the real profit that

is

generated by each customer, which can allow customers to be segmented

into groups according to profitability, and also how demanding they are on organisational resources (e.g. sales personnel and after-sales service). The least profitable customers can then be highlighted and strategies for dealing with them can be created. These may include educating the customer on the costs incurred to service them and charging for the services provided (menu-based pricing).

n

Customer performance ratings and satisfaction—Developing reporting systems that capture important measurements (like delivery in full and on-time statistics), which should help influence customer satisfaction levels. Where ratings are not satisfactory, strategies may be implemented to make improvements.

n

Customer pricing analysis—Advice may be provided based on analysis from tools such as cost-volume-profit analysis and sales mix analysis, which may be used to identify the most suitable pricing structures and profitable mix of sales offering.

n

Customer needs analysis—Advice on providing products and services that customers actually need or desire. This may involve survey generation, the use of focus groups, or the use of social media to canvass customer feedback. It also links into other customer-related areas of satisfaction and pricing analysis, such that product/ service features can be reviewed and priced appropriately to satisfy customers and generate maximum value for the organisation.

The advice will probably vary depending on the size of the organisation for several reasons. Table 1.1 identified the following stereotypical characteristics of different-sized organisations.

 

Small enterprise

Mid-sized enterprise

Large enterprise

Customer/

n

Few customers account for large part of turnover.

n

Growth of customer base.

n

Large, international

community

n

Moving away

customer base.

n

Close to their customers and customers’ business plans.

from the direct proximity of their clients.

n

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

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1.5

A smaller organisation may not have the computer systems, records or personnel

to conduct a detailed customer profitability analysis, performance measurement or scenario testing using pricing and sales mix tools. The advice may include support in setting up the systems and putting processes in place to conduct this type of work. Medium to larger-sized organisations are more likely to have accounting staff and systems in place, so efforts may be more focused on fine-tuning systems, advising on current best practice, and providing an independent review and verification of current methods.

Question 1.7

(Adapted from Sexton 2010)

There are many valid reasons to outsource business activities, including risk mitigation, improved cost efficiency and access to technology and skilled staff not available in your own organisation. Yet while outsourcing information technology (IT) may reduce certain risks, such as continued reliance on legacy systems, there are also risks associated with having a third party provide services. These risks include failure to offer services to an appropriate standard (which could harm the reputation of your business), possible breaches in security or an inability to comply with legal and regulatory requirements. There are also additional risks associated with the loss of control over the information source and its security.

Apart from undertaking due diligence to ensure that any identified risks are addressed,

it is also necessary to determine that the outsource provider has the appropriate

experience and expertise to handle your IT operations, that it is a viable and financially secure organisation with good governance, and that the outsourcing arrangements are appropriate to your business strategy. It is also important to ensure that you are engaging with an ethical service provider whom you are able to trust with your organisation’s sensitive and confidential data.

It is essential that the board fully understands the corporation’s ethical obligations

before any decision is made to outsource IT offshore. As well, any decision needs to be in accordance with stated corporate social responsibility policies and obligations.

As CFO and a member of a professional accounting body, you also have personal ethical obligations as outlined in the Code. Although the Code does not specifically address outsourcing, it does contain some fundamental ethical principles relevant to this situation. Foremost is the principle of confidentiality. This requires members to refrain from disclosing outside the organisation confidential information acquired as a result of professional and business relationships without proper and specific authority from the client or employer. This extends to refraining from using confidential information to your personal advantage or to the advantage of third parties.

You need to ensure that the board specifically addresses the confidentiality issues that arise from any outsourcing arrangement and formally documents its consideration of these issues together with the authority for any disclosure of confidential information.

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1.6 SUGGESTED

ANSWERS

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ISSUES

The conceptual framework in the Code can also be applied in this situation:

a Identify threats to compliance with the fundamental principles: As the CIO has his

annual bonus hinging on this decision, there is an appearance that his objectivity

is compromised. This situation would therefore create a self-interest threat—

that is, a ‘threat that a financial or other interest will inappropriately influence

the member‘s judgment or behaviour’ (APESB 2011a).

b Evaluate the significance of the threats identified: The CIO has the potential to earn

a ‘substantial’ end-of-year bonus. Being in a decision-making position for the

organisation, and being a direct benefactor of the decision to outsource (as an individual employee), suggests that the significance of the threat is high.

c Apply safeguards, when necessary, to eliminate the threats or reduce them to an

acceptable level: As the CIO has a conflict of interest in the outsourcing decision,

it would be prudent to seek external independent advice on the outsourcing

option. This advice may require an analysis of the outsourcing arrangement (functionality of IT systems, pricing, support, etc.), as well as any proposals received from other outsourcing providers.

It is important that the ethical dimension of any outsourcing decision is given the same weighting as any financial considerations and is not obscured by perceived increases in profitability.

Question 1.8

(Adapted from Sexton 2009)

As CFO you have an obligation to act with integrity and therefore be straightforward

and honest in professional and business relationships. Integrity also implies fair

dealing and truthfulness. Further, paragraph 110.2 of the Code requires that a member of CPA Australia:

shall not knowingly be associated with reports, returns, communications or other information where they believe that the information:

a Contains a materially false or misleading statement;

b Contains statements or information furnished recklessly; or

Omits or obscures information required to be included where such omission or obscurity would be misleading.

It is therefore important that you fully disclose to the board any key assumptions and

how they were assessed, as well as highlighting any limitations in the business plan.

As a member in the business you hold a senior position within your organisation.

The more senior the position, the greater will be the ability and opportunity to

influence events, practices and attitudes. It is therefore expected that you have a

role in encouraging an ethics-based culture in your organisation that emphasises

the importance that senior management places on ethical behaviour. Accordingly,

you should not proceed with your planned actions and you will need to fully consider

your ethical obligations.

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ANSWERS

1.7

It is important for members to always act with integrity and to make sure that any report or communication does not omit or obscure information which could render the report or communication misleading.

Reports presented to the board by management, particularly those which accompany the approval of significant transactions, should clearly state the scope of any expert opinions used to support or reject a board decision, the underlying assumptions and any material risks and limitations.

Note also that the fundamental principles of ‘professional competence and due care’ and ‘professional behaviour’ would likely be breached in this scenario. However, the specific threat to the principle of ‘integrity’ is more prevalent.

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