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MAC UE ENTING

P U B L I S H E D B Y I N S T I T U T E O F M A N A G E M E N T A C C O U N T A N T S

The post office changes— thanks to ABC. 28

20 EXECUTING A SUCCESSFUL SPIN-OFFAND IPO TRANSACTIONBY ROBERT N. WEST, CPA, ANDJOSEPH A. GIRARDI, CMAA corporate spin -off and public offering has tobe as carefully planned as a military cam-paign. Based on a real -life experience, hereare detailed guidelines for managementaccountants and financial managers to fol-low —and pitfalls to avoid.Certificate of 9tent

28 HOW ABC CHANGED THE POST OFFICE19 BY TERRELL L. CARTER; ALI M.

SEDAGHAT, CMA; AND THOMAS D.WILLIAMSThe U.S. Postal Service may have a monopoly,but it is still faced with strong competition.That is why it commissioned an ABC study ofall its operations which led to the introductionof credit card and debit card service. It was asuccess that demonstrates again how an ABCanalysis can lead to process improvements, ulti-mately benefiting the customer.

38 WHAT AUTOMATED EXPENSE19 REPORTING MANAGEMENT

CAN DO FOR YOUBY DANA BR UTTIGThe average cost of processing an expensereport is $25, but an automated T &E systemcan pare that cost to as l i t t le as $1 .75. Manage-

ment accountants who plan to purchase such asystem should understand what other benefitsand returns are offered by T &E packages.

44 HOW NONFINANCIAL PERFORMANCE0 MEASURES ARE USED

BY BONNIE P. STIVERS, CPA, TERESAJOYCE COVIN; NANCY GREEN HALL;AND STEVEN W. SMALT, CPAWhat nonfinancial performance factors are com-panies measuring, and are they using the onesthey measure? This survey of Fortune 500 andCanadian Post 300 companies shows thatalthough firms may consider such factors impor-tant, often they do not use them in planning.Cert 6cate of Went

Authorization to photocopy items for internal or personal use, or the internal or personal use of specific clients, is granted by theIMA to libraries and other users registered with the Copyright Clearance Center (CCC) Transactional Reporting Service, provid-ed that the base fee of $3.00 per copy, plus 30c per page, is paid directly to CCC, 222 Rosewood Drive, Danvers, MA 01923.ISSN 0025 -1690, $3.00 + 30c.

2 MANAGEMENT ACCOUNTING FEBRUARY 1998

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8 GOVERNMENTSutton leaving.

10 CAREERSTo counteroffer or not to counteroffer.

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16 STRATEGIC COST MANAGEMENTThe scope of strategic cost management(Part 1).

55 STANDARDS OF ETHICAL CONDUCT

64 CONTINUING EDUCATIONAssess your competencies with IMA'sself - assessment tool.

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These articles will be included in IMA's quarterly self study quiz, which you can order by calling 1- 800 - 638.4427, ext. 278.

MANAGEMENT ACCOUNTING® Is Indexed Inthe Accountants' Index and also In the on-line database of the same name. This publication is available in other forms of mediathrough Information Access Company and through University Microfilms, Inc., andABIl1NFORM (313) 761 -4700. For more information call (800) 227 -8431. The full textOf MANAGEMENT ACCOUNTING® IS also available In the electronic versions of theBusiness Periodicals Index.

Permission is granted to reproduce any of the contents of this issue for use in cours-es of instruction, so long as the source and Institute of Management Accountants'copyright are indicated in any such reproductions. Written application must be madeto the Editor for permission to reproduce any of the contents of this issue for use in oth-er than courses of instruction —e.g., textbooks and books of readings or cases, Exceptas otherwise noted, the copyright has been transferred to the Institute of ManagementAccountants for all items appearing in this magazine. For those items for which thecopyright has not been transferred, permission to reproduce must be obtained direct-ly from the author or from the person or organization given at the end of the article.

Quantity reprints of any article in MANAGEMENT ACCOUNTINGS Or back Issues (subjectto availability) may be obtained from Circulation Department, IMA, 10 Paragon Drive,Montvale, NJ 07645 -1760.

Views expressed herein are authors' and do not represent Institute policy unless

M A N ENT so stated. Publication of paid advertising and new product and service information

ACC I NG does not constitute an endorsement by the Institute of the advertiser or the prod-uct or Service.


Registered the National Association of StateBoards of Accountancy as a sponsor of continu-ing professional education on the National Reg-

C P Eistry of CPE Sponsors. State boards of accoun-tancy have final authority on the acceptance ofIndividual courses. Complaints regarding regis- • • -tered sponsors may be addressed to NASBA,150 Fourth Avenue North, Suite 700, Nashville.TN 37219 -2417, 615- 880 -4200. IMA is registered with the North Caroli-na State Board of CPA Examiners as a sponsor of continuing profes-sional education. Complaints or comments regarding registered spon-sors may be addressed to the North Carolina State Board of CPAExaminers, P.O. Box 12827, Raleigh, NC 27605 -2827. The North Car-olina State Board of CPA Examiners does not accept CPE Credit forreading MANAGEMENT ACCOUNTING and taking a self study quiz. IMASponsor Numbers: Arizona 275; Delaware CS93; Florida 1 -229; Illinois158- 000574; Indiana CE92000121; Maryland 265; New Jersey 313;New York B96 -23; North Carolina 82 -0158; Pennsylvania PX- 437 -L;Texas 28; Washington 00319; West Virginia 93 -090 and NASBA 90-00005-98. Qualified sponsor of CPE for individuals enrolled to practicebefore the IRS (enrolled agents).

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NEED HELP IN KEEPING ABREAST OF CURRENT DEVELOPMENTS?The Institu te of Management Accountants sponsors a wide range

of educational programs and activities designed to keep financeprofessionals aware of the la test developments in the field of ac-

counting and finance and to earn CPE credits as part of theprocess. In addition to the various seminars and conferences

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grams, several of which are growing by leaps and bounds, that Iwant to be sure you are aware of.

L MSelf-study. This rapidly growing program is an a lternative to

participating in IMA s traditional group education programs.This alternative is particularly attractive for professionals whose

busy schedules make it difficult to attend an IMA seminar. The self -study area is divid-ed into two segments. The first is the Reading Management Accounting for Credit pro-gram. By reading selected articles in the magazine you can take a 50- question quiz atthe end of each quarter and earn six CPE credits at a low cost of $35 each quarter. Signup for all four quarters, and earn 24 credits at a cost of $129. The other self -study seg-ment is our print and CD /ROM courses included in the Expand Your Horizons catalog.This program features accounting, finance, management, and computer - related coursesand includes six Statements on Management Accounting that have been converted toself -study programs.

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In-House. Our In -House training programs are designed to meet the specific educationalneeds of your company's executives and their supporting staff members. These pro-gr am s , w h i ch e m p ha s i z e i s s ue s p e r t i n e n t t o yo ur co mp a ny , h av e r e s u l t e d i n i n c re a s e d

productivity and effectiveness. They can be arranged at a time and location most conve-nient to each company.

FMN. The Financial Management Network (FMN), a monthly video service on current fi-nancial topics, is IMA's most successful educational program. Subscribers include morethan 850 companies and organizations who collectively have more than 75,000 partici-pants per month earning NASBA - sponsored CPE. Of special interest to IMA chaptersand councils are two programs that make it easy to provide IMA members with the up-to -date material included in FMN. Through the chapter loan program, chapters can bor-row tapes for free and use them for a group study CPE session, and councils and chap-ters can subscribe to a special quarterly program, receiving a current four -hour CPEtape each quarter for only $495 per year.

How to find out more. To learn more about FMN or the other IMA educational programsdescribed here, call the IMA s Education Department at 1- 800 - 638 -4427, ext. 189.

WILLIAM J. IHLANFELDT, CPAIMA Former Chair


� L . l.XXIX, NO. 8 FEBRUARY 1998

ASSISTANT PUBLISHER Robert F. Randall

EDITOR Kathy Williams

ASSOCIATE EDITOR Michael Castelluccio

tODUCTION MANAGER Lisa Naauta

GRAPHICS Patricia L. Keeley

CIRCULATION Alice Schulman

PROOFREADER Janet LIl1rich

EDITORIAL ADVISORY BOARD1 .1 a e lh L. Benke, Jr. , CMA; Germain Boer;

Bohan, CMA, CPA; Robert Boyle, CMA,CPA, CFPIM; Anthony Joseph Cataldo, CMA.CPA; Anthony S. Cavalieri, CMA, CPA, CIA,

PIM; Anthony Curatola; Robert A. Czekanski,Rebecca Dillard, CMA, CPA; Donna For -

CPA; Julian Freedman, CMA, CPA, CPIM;Bette Hobart, CPA; Thomas J . Jordan,, FHFMA, CMPA; Alfred M. King, CMA;

ward J. McCracken; C. Mike Merz, CMA,CPA; John G. Mezquita, CPA; J.T. MartyO'Malley, CMA, CPA; Michael D. Osheroff;William L. Paladino; Susan Pierce, CMA, CPA;Grover L. Porter, CPA; William J. Rogers, CMA,CPA; Patrick Romano, CMA, CPA; AnnetteWest, CMA.

INSTITUTE ofMANAGEMENTACCOUNTANTSCERTIFIED MA.NA6EMEN-f ACCOI'Yr.AN-f PRIM.RAM04LTD HI:IN FINANCIAL. MANAGEM01 PROGRAM

ASSOCIATE PUBLISHERJames M. Hart

ADVERTISING REPRESENTATIVESIPC Enterprises

142 East 30th StreetNew York, NY 10016Tel: (212) 252 -0222Fax: (212) 252 -1020

Alice Schulman, Advertising CoordinatorTel: (800) 638 -4427, ext. 280;

Fax: (201) 573-0639

MANAGEMENT ACCOUNTING® (IS SN 0025 -1690) Is

publis hed month ly by the Inst itute of Ma na gementAccountants , 10 Par agon Dr. , Montva le , NJ 07645-

1760, (201) 573 -9000. Price $10.00 per copy, Sub-scr ipt ion ra tes , per year: $20 ( included in dues, nonde-duc t ible ); nonme mber s . $ 135. 00. Periodica ls pos tagepa i d a t Mo nt va l e , N.J , and add i t i o na l m a i l i ng o f f ic e s .To ensure uninterrupted mai l serv ice, send presentaddre ss la bel a nd ne w a ddres s inc luding ZIP numberto Data Entry Dept . , IMA, Montva le , NJ 07645 -1760.Allow s ix we eks for c ha nge. IMA' s t e lepho ne numberis 1- 800 - 638 -4427; IMA's facs imile numbe r is (201)573 -0639.

V�BPSCopyright ©1998 by the Institute of Management Att untants

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SUTTON LEAVINGAfter two and a half years as chief ac

countant, Mike Sutton is leaving theSecurities & Exchange Commission.Sutton gave "personal reasons" as theexplanation for his departure. ChrisUllman, the SEC spokesman, says Sut-ton will leave in early 1998, althoughno certain date had been set as of thefirst of the new year. Ullman says Sut-ton may be willing to talk about hisreasons for leaving after he has actual-ly left. SEC Chairman Arthur Levitt,Jr., is culling through the names ofpossible successors. Ullman declines toname any of them. At an AICPA confer-ence in December, Commissioner IsaacHunt, Jr., said Walter Schuetze "is aperson who comes to mind to me."Readers with good memories will re-member that Schuetze was Sutton'spredecessor. Schuetze left in March1995 complaining of burnout. He re-cently returned, though, as chief ac-countant in the division of corporationfinance.

SEC TRIES TO PLACATEAICPA ON YEAR 2000The SEC is backing off its previous

stance that its Staff Legal Bulletin 5 issufficient guidance for companies indetermining whether they need to dis-close anything in their 1997 MD &Ason Year 2000 costs. Brian Lane, direc-tor of the division of corporation fi-nance, says the Commission plans toissue an "update" on SLB 5. He hopesthat update will respond to some of thecriticism raised by the American Insti-tute of CPAs. But Lane is apparently

8 MANAGEMENTACCOUNTING FEBRUARY 1998

still sticking to his guns on not requir-ing companies to disclose Year 2000costs.

In a December 9, 1997, letter to SECChairman Arthur Levitt, Jr., and Com-missioner Isaac Hunt, Jr., the AICPA'sSEC Regulations Committee asked for"further, prompt clarification about thelevel of discussion expected in the 1997and 1998 annual reports." The commit-tee, chaired by Robert Herz of Coopers& Lybrand, pleaded with Levitt andHunt to issue additional guidance bymid - January 1998 so that companiescould use it as a basis for preparationof their 1997 annual reports.

(As MANAGEMENT ACCOUNTING® wentto press, we learned that the SEC hadpublished a revised SLB 5, and we willreport on this revision in the Marchissue.)

Chairman Levitt sent a letter onDecember 8 to all public utility holdingcompanies, reemphasizing "the impor-tance of providing investors withmeaningful disclosure concerning anymaterial effects that Year 2000 prob-lems may have on the company."

SLB 5 indicates that MD &A disclo-sure should be made when the cost ofaddressing the Year 2000 issue is ma-terial to future operating results or fi-nancial condition. But the AICPA ar-gues that many companies mayconclude that their future financial re-sults may not be materially affectedfor a variety of reasons. Nor will manyissuers conclude that, as of December31, 1997, unresolved Year 2000 issuesrepresent a "known material" uncer-tainty which is "reasonably likely" toaffect their future financial results."Accordingly, as matters now stand,we believe that registrants may inter-

pret SLB 5 as excusing any presentdiscussion of the Year 2000 issue," theAICPA letter said.

Brian Lane told a Senate bankingsubcommittee last October that theSLB 5 was the SEC's chief yardstickand will remain so. He explained SLB5 as requiring disclosure if either thecost of addressing the issue, or the costof failing to address it, in a completeand timely manner is likely to have amaterial financial impact on the

company.At that time, he said, "The Commis-

sion has considered whether specificrules are needed to require every com-pany to make a statement about thestatus of its Year 2000 compliance. Atthis time, the Commission does notthink such rules are needed." He saidthe SEC wants to see how companiescomply with SLB 5 in 1997 annualreports.

SEC COMMISSIONER SAYSISB ON SHORT LEASHSEC Commissioner Isaac Hunt, Jr.,

told an AICPA conference in Decemberthat he has high hopes the Indepen-dence Standards Board will developworkable solutions. But he impliedthat the SEC's patience was limited."The ISB's existence does not impairthe Commission's ability to exercise itsauthority including the authority tomaintain our current independenceregulations and to write new ones andto institute enforcement actions whereappropriate. Further, if ISB does notmeet its mission, the Commissionshould consider other alternatives."

As to whether the ISB would meetits mission, Hunt clearly has hisdoubts. He said he had looked at theWhite Paper submitted by the AICPAto the ISB. "I haven't read the entirereport yet, but I will go out on a limband make this point: I do not believethat the writers of the White Paper re-port see the core issues the same waythat I do, and they do not perceive thesame risks that I perceive from a fail-ure to maintain auditor independenceboth in fact and in appearance." ■

Stephen Barlas is a journal ist wi th morethan 16 years of experience report ing fromWashington, D.C.

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Circle No. 12

areersI'm an accounting manager with a large transportation firm. The hiring climate inmy region is very competitive right now, and I'm becoming increasingly concernedabout losing key employees to higher paying jobs elsewhere. What are your thoughtson making counteroffers?

Max Messmer, Editor

To counteroffer or not to counteroffer.Finding and keeping the best employ-ees can be a challenge for many com-panies in today's low unemploymentand job rich environment. And morefirms are realizing that if they don'thave the right talent in place, theymay be slowing their growth and prof-itability. In this context, what shouldyou do when one of your valued staffmembers tells you that he or she has ajob offer —with higher pay —fromanother company?

Many job seekers today receive coun-teroffers from their current employersafter they announce their decision toleave. Some employees pursue otheropportunities for precisely this rea-son—to have leverage when seeking apromotion or raise.

The natural response from a manag-er is to make a counteroffer. You mayhave several thoughts weighing heavi-ly on your mind, such as "I can't affordto lose another person when I alreadyhave other openings I'm trying to fill."Or you're concerned about how thedeparture of a key employee will affedtthe department's morale or your ownreputation.

However, counteroffers are risky.The following comments point up somekey considerations:

■ The fact that an employee is lookingfor a new position in the first placesuggests that he or she is probablydissatisfied with more than oneaspect of the job. It could be his orher relationships with managementor co- workers. It might also be aperception that growth opportuni-ties are limited —or even issueswith the corporate culture. If you


aren't able to make the long -termchanges the employee is looking for,you may end up with a short -termemployee no matter how hard youtry to keep this individual on theteam.

• Although money is rarely the pri-mary reason behind a job change,it's still an important factor when anew job offer is being evaluated bya candidate. If it turns out the othercompany is offering significantlymore money to your employee, don'trush to match it or you could riskupsetting your company's compen-sation scale. When other employeeshear of the counteroffer, the wheelsstart turning and you may haveseveral employees questioning theirjobs and compensation.

• In some cases, employees whoaccept a counteroffer will be work-ing under a cloud of doubt. They'llperceive — rightly or wrongly —thatmanagement is unsure of their loy-alty. As a result, the "trustexchange" between employer and

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employee and employee and peersmay be challenged.

Take the time to evaluate. Given thepotential risks, it is important that youevaluate the situation carefully beforemaking a counteroffer to an employeewho has an offer from another compa-ny. Assess whether the issues that ledthe employee to investigate otheropportunities can and should beaddressed and resolved. Sometimespoor or infrequent communications ormisunderstandings can lead employeesto believe it is necessary to changetheir job situation. The news that anemployee is looking for a job elsewherecan often be a wakeup call that thereare problems within a department or

company.Talk to other managers at your com-

pany to find out if there may be a pat-tern in recent employee turnover. Haveother employees who decided to leavecomplained of the same issue? If so, isthere a way to resolve the problem toprevent further turnover?

At the same time, you must deter-mine whether the employee truly is avaluable, contributing member of yourteam. How great an impact will his orher departure have on your depart-ment and company? Step back fromthe situation, and evaluate whetherthe employee's past performance war-rants the additional compensation andany special changes you may have tomake as part of the counteroffer.

Making a decision. Counteroffers canpresent a number of challenges andpotential problems, so be sure to lookat each situation cautiously.

If you do decide to let the employeego, conduct an exit interview so youcan determine if there are ways youmight prevent other staff membersfrom leaving in the future. And remem-ber that while you are losing a valuedemployee, you also now have the oppor-tunity to reassess this position andrestructure it before you fill it again. ■

Max Messmer is chairman and CEO ofRobert Half In rnational Inc. ,parent companyof Robert Halt AcKoun temps and RHI Man-

agement Resourcesw. RHI is the world's fi rstand largest special ized staffing firm placingaccounting and finance professionals on a ful l-time, temporary and project basis. Mr. Mess -mer's most recent books are 50 Ways to GetHired (William Morrow ) and Job Hunting ForD u m m i e s ' (IDG Books).

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Anthony P. Curatola, Editor

FRINGE BENEFITS - QUALIFIED DINING FACILITIESThere are many complicated business

transactions the Internal Revenue Ser-vice may review upon audit. Transferpricing, like -kind exchanges, and corpo-rate reorganizations are the more highlyvisible transactions that may be scruti-nized by the IRS. However, we shouldnot forget the rules which may not be alarge or complicated single issue butmay be a compliance nightmare andhave an adverse effect on employees'taxable income. Section 132 of the Inter-nal Revenue Code excludes certain inci-dental fringe benefits from an employ-ee's income if the requirements aresatisfied. Qualified Dining Facilities isone of those forgotten employee fringebenefits which should be reviewed everyonce in a while to ensure compliance.

An employer who provides a qualifieddining facility for its employees is al-lowed to exclude from an employee's in-come the value of the employee's mealsor the subsidized portion of the meals.There are two general requirements forthe exclusion of income: First, the din-ing facility must be an employer- operat-ed eating facility, and, second, revenuemust exceed direct operating costs onan annual basis. The first condition isspelled out in the Regulations (§ 1.132 -7(a)(2)). An employer- operated diningfacility must meet all of the followingrequirements:

• Facility is owned or leased by theemployer,

• Facil ity is operated by theemployer,

• Facili ty is located on or near thebusiness premises of the employer,and

• Meals funished at the facility areprovided during or immediatelybefore or after the employee'sworkday.

To expand on the second requirement

12 MANAGEMENT A((OUNTING FEBRUARY 1998

for an employer- operated dining facility,the regulations allow a facility to be op-erated by the employer even if the em-ployer contracts with an outside serviceto operate the eating facility. The facili-ty also may be owned in conjunctionwith another employer. Each employerwould have to meet the requirements,separately, in order for it to have an ex-cluded fringe benefit for its employees.

The second general requirement forqualified dining facilities is for revenueto exceed direct costs on an annual ba-sis (Reg. 1.132- 7(b)(1)). Direct costswould include the cost of the food andbeverages as well as the labor costs ofthose performing services on thepremises of the eating facility. If an em-ployee performs services both on thepremises and off, an allocation of thatemployee's wages would have to be com-puted and included in direct costs. Forexample, the compensation paid to a fa-cility manager who provides services forthe dining facility and the athletic facil-ity would have to be allocated based onthe amount of time required for each re-sponsibility. If we assume in this casethat the facility manager would providehis services equally, then 50% of hiscompensation would be added to the di-rect costs of the employer- operated din-ing facility.

In addition to the two general re-quirements, the qualified dining facilitymust meet the nondiscrimination re-quirement of Section 132. RegulationSection 1.132 -8(1) requires that a highlycompensated employee who receivesbenefits from a qualified dining facility,a no- additional cost service, or an em-ployee- discount may not be able to ex-clude the benefits from income unlessthe benefit is available on substantiallythe same terms to all employees or to agroup of employees that does not dis-criminate. If the qualified dining facilityis discriminatory, then only the highly

compensated employees would includethe value of the meal or subsidized por-tion into income. Nonhighly compensat-ed employees will still be able to ex-clude the benefit from income.

The definition of highly compensatedemployees was simplified by the SmallBusiness Job Protection Act of 1996.The Act redefined a highly compensatedemployee as an employee who was ei-ther a 5% owner at any time during thecurrent or preceding year, or had com-pensation in excess of $80,000, or hadcompensation in excess of $80,000 andwas in the top -paid group of employees.(The $80,000 will be indexed for infla-tion after September 30, 1996.)

In order for the nondiscriminationrules to be met, the benefit must bemade available on substantially thesame terms to all employees or a rea-sonable classification of employees. Ifthe dining facility is not open to all em-ployees and only allows executives tobenefit from the dining room, then thebenefit would not qualify under thenondiscrimination rules. An employerwho operates multiple dining facilitiescould review each facility separately asto the requirements for nondiscrimina-tion. Therefore, if a company operatestwo dining facilities, one could be dis-criminatory and the other nondiscrimi-natory. A highly compensated employeewould include the value of the meal orsubsidized portion in income if he dinedat the discriminatory facility. However,any meals received at the nondiscrimi-natory facility could be excluded fromincome.

In conclusion, qualified dining facili-ties may present a problem to employ-ers and employees if not in compliancewith the regulations. Will employeeshave to amend their individual tax re-turn to include an amount for the quali-fied dining facility? What if they neverused the facility? How much should beincluded for each employee? Will thecorporation be responsible for the tax?There are really no direct answers tothese questions. However, the questionsmay easily be eliminated as long as thefacility is meeting the requirements foran excludable fringe benefit.—Jennifer

Wright, CPA

Jennifer Wright, CPA, is instructor of account-ing, Drexel University. She can be reached at(215) 895 -6983.

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Kathy Williams, Editor

TOP 10 TECHNOLOGYISSUES FOR 1998What technologies will have the mostimpact on you in 1998? Here's the listthe AICPA compiled recently that willbe published in a book titled 1998 7bp10 Technology Opportunities: Tips and7bols.

1. Internet, intranets, privatenetworks, and extranets;

2. Year 2000 issues;3. Security and controls;4. Training and technology

competency;5. Electronic commerce;6. Communications technologies

that package and transmit data,text, voice and/or video informa-tion among users;

7. Telecommuting/the virtual office;8. Mail technology;9. Portable technology, such as note-

books and palmtops; and10. Remote connectivity, which en-

ables portable technology, mean-ing that notebook users can gainaccess to their office network/cor-porate intranet and conduct busi-ness from locations outside theiroffices.

The list was compiled based on howthe technologies would impact account-ing, auditing and assurance services,tax, management consulting, and fi-nancial and operational management.Some emerging technologies that alsomay have a great impact soon are in-telligent agents, push technologies,smart cards, voice recognition systems,and auditing electronic evidence.

KEEP CUSTOMERS INTHE SUPPLY CHAIN

Companies are losing millions of dol-lars every year because they don't in-volve customers in inventory manage-


ment or when planning manufacturingrequirements, KPMG Consulting, apart of KPMG Peat Marwick LLP, says.In two surveys it conducted recently incooperation with the J.L. KelloggGraduate School of Management andprofessors from MIT, several inefficien-cies in supply -chain management werehighlighted.

For example, many companies don'tknow the exact amount of goods theyneed to manufacture, transport, andstore, yet they are slow to adopt thetechniques and technologies thatwould solve the problem. While 96% ofretailers are sharing information withcustomers/suppliers, 79% are usingdated modes of communication such aspaper or fax instead of e-mail or othertechnologies. And they aren't using elec-tronic data interchange (EDI) to its fullpotential, still placing purchase ordersvia fax.

Also, 29% of the respondents saidsuppliers have no involvement in in-ventory management, and 22% saidthey don't involve customers whenthey are planning their manufacturingrequirements. In addition, practicessuch as just -in -time (JIT) manufactur-ing and total quality management(TQM) aren't being used.

Other findings:

■ 87% said information technologywas a critical strategic tool butadmitted their technological abil-ities were low.

■ Less than 50% had completedplanned supply -chain software ini-tiatives. Of those, 42% said imple-mentation took two years or longer

■ More than 60% said they outsourcesome part of transportation, manu-facturing, and information systems.

For more information about the sur-vey, contact Pam Snook at KPMG PeatMarwick LLP, (201) 505 -3584 orpsnook @kpmg.com. You also may con-

tact Allison Hyder or Patty Williams atthe Weber Group, (617) 661 -7900.

NOW DO YOUBUILDINTELLECTUAL CAPITAL?

How do companies compare whenbuilding lean, high- performance fi-nance teams? What development andlearning practices do they employwhen building this intellectual capital?To find out, the Schiff ConsultingGroup is conducting a confidential sur-vey (which should take under twohours to fill out) and is inviting IMAmembers to participate. Current par-ticipants are AT &T, Air Products, Bankof America, Cargill, Chrysler, GeneralElectric, GTE, Johnson & Johnson,NationsBank, Prudential, SNET, andTexas Instruments. All survey respon-dents will receive a complimentarycopy of the findings.

For information on how to partici-pate in the study, contact Schiff Con-sulting Group at (201) 476 -9250.

IFAC -NEW WEB SITE,NEW ADDRESS

The International Federation of Ac-countants (IFAC) has launched a newWeb site, www.ifac.org, that offers infor-mation about the federation, newsabout international accounting issues,lists of all IFAC standards and expo-sure drafts, and hyperlinks to IFAC's129 member bodies (such as IMA), re-gional accountancy organizations, andaccounting- related organizations.

IFAC also has a new address. It is535 Fifth Ave., 26th Floor, New York,NY 10017; phone: (212) 286 -9344; fax:(212) 286 -9570.

COMMUNICATIONSKILLS ARE KEY

Next to numbers crunching and ana-lytical skills, communication abilitiesare a key success factor for manage-ment accountants and financial man-agers, CFOs report. In fact, 96% of the1,400 financial executives surveyed byAccountemps emphasized this point.They want their staffs to give interpre-tations of numbers and data, not justhand out columns of figures, and to in-teract with other departments in aclear, cooperative, professionalmanner. ■

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Circle No. 28

trategoic CostManagement

Robin Cooper and Regine Slagmulder, Editors

THE SCOPE OF STRATEGICCOST MANAGEMENTThe objective of strategic cost manage-

ment is to reduce costs while simulta-neously strengthening the strategic po-sition of the firm (see last month'scolumn). Given this objective, strategiccost management cannot, like tradi-tional management accounting, limititself to either the four walls of the fac-tory or the boundaries of the firm.

The dominance of financial overmanagerial accounting for the majorityof the 20th Century led to an atrophyof cost management practices.' In par-ticular, traditional cost systems arelimited to the walls of the factory andare used to determine the cost of prod-ucts only. Other potential cost objectssuch as suppliers and customers aretreated either as general overhead andarbitrarily allocated to products or asperiod costs and assigned directly tothe income statement (Figure 1). Theproblem with this approachis that these nonmanufactur-ing costs cannot be managedeffectively because the un-derlying reasons for their oc-currence are masked by theway they are treated by thefirm's cost system.

COST MANAGEMENTBEYOND THEFACTORY WALLS

The implications of extend-ing cost management beyondthe factory walls means thatcosts are assigned to suppli-

ers and customers as well as products.2

Armed with the insights provided bythis extension of cost management, afirm can begin to manage these costsstrategically.

To enable these costs to be managedstrategically, they must be allocatedcausally (Figure 2). One of the primarytechniques for meaningfully assigningnonmanufacturing costs is activity -based cost management. The advan-tage of this technique over traditionalcosting methods lies in its ability to as-sign costs in a causal manner to abroad range of cost objects includingproducts, suppliers, and customers.3

Managing procurement costs. In tradi-tional cost systems, procurement costsare allocated to products arbitrarily.Without proper assignment of procure-ment costs, purchasing managers typi-cally select suppliers based on the pur-chase price of their products. Thispattern leads to a number of subopti-mal buying behaviors that weaken a

firm's strategic position, for example,purchasing components from supplierswhose quality, reliability, and deliveryperformance are below acceptablelevels.

These purchasing decisions hinderthe firm's ability to satisfy its cus-tomers and earn adequate profits. Howcan a product be high quality and de-livered on time if its components arelow quality and delivered late? The an-swer, of course, is that they cannot! Yetany attempt to improve the purchasingprocess appears to increase purchasingcosts as the so- called low -cost suppliersno longer are deemed satisfactory. Ifpurchasing managers are rewardedsolely on the purchase prices they ne-gotiate with their suppliers, it will bealmost impossible to change their ap-proach to supplier selection.

Strategic cost management resolvesthe conflict in two ways — first, by tak-ing a broader view of component costsand, second, by assigning procurementcosts to products causally. Instead of

just looking at the purchaseprice, strategic cost manage-ment includes the costs asso-ciated with low quality, relia-bility, and deliveryperformance. Purchasingmanagers now are expectedto evaluate suppliers on totalcost, not just purchase price.The resulting buying behav-ior leads to a strengtheningof the firm's strategic posi-tion because suppliers arechosen on the basis of theirability to help the firm pro-duce high - quality productstimed to customer demand.

Figure 1. Traditional Management Accounting View


Expenses

Period Costs

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In the next step of theprocess, supplier costs areassigned causally to prod-ucts using activity -basedprinciples. Now products Pare assigned their specificprocurement costs, not the

aw

average for all products.Consequently, reportedproduct costs are more accu- Surate. For example, productsthat contain large numbersof unique components thatrely upon specialty suppliers now willbe seen to be more expensive thanproducts that contain only standardcomponents. Product designers canbetter make the trade -off betweenfunctionality and cost as they designnew products. If the specialty compo-nents add value to the product and itis reflected in its selling price, then theuse of such components is justified.But if the selling price is not increasedsufficiently, then the market is tellingthe designers that simpler productsare preferable. Without strategic costmanagement to help them make thistrade -off, the designers are forced torely on their intuition. Thus assigningsupplier costs to products generates amore accurate view of product prof-itability and provides better insightsinto the design of new products.

Figure 2. Strategic Cost Management View

rocurement Manufacturing

Expenses Expenses

pplier Costs —► Product Costs —► Cu

Managing customer service costs. Intraditional cost systems, SG &A ex-penses are treated as period costs andare expensed to the income statement.Under this treatment, essentially theydisappear from view, but often they aretaken into account through rules ofthumb about how profitable productsshould be. For example, "SG &A costsare 200; therefore, we need to make35% profit margin (on product cost) tomake an adequate return." Essentiallythis rule of thumb spreads the SG &Acosts evenly over products based ontheir sales dollars. The outcome oftenis a totally distorted view of the cost ofserving customers. Either customersappear to cost nothing to serve, or theyall appear to cost the same percentageof their sales revenue. Without properassignment of customers' costs, salesrepresentatives are forced to select cus-tomers almost exclusively based uponthe way they are rewarded. Typically,this means either on the volume sold(if the representatives are evaluated on


revenue generated) or on the relation-ship between the selling price of theproducts and reported product costs(if they are evaluated on productprofitability).

If SG &A costs are insignificant,treating them as period costs createsfew problems. But if they are signifi-cant, the treatment can lead to astrategic weakening of the firm be-cause there is no way that individualcustomer profitability can be deter-mined accurately. Therefore, the salesrepresentatives are unable to managecustomer mix effectively. A customerthat places considerable demand onthe firm's SG &A resources can lookjust as attractive as one that placesvirtually no demands on them.

Strategic cost management providesa more balanced view of customer prof-itability by assigning customer - relatedcosts to the customers that cause themusing activity -based principles. For ex-ample, customers who order in small,unpredictable quantities and requireconsiderable post -sales support will beseen to be more costly than customerswho order in high, predictable quanti-ties and require little or no support.Consequently, a more accurate view ofcustomer costs and hence profitabilityis generated.

Using this enhanced knowledge ofcustomer profitability, sales represen-tatives can strengthen the strategic po-sition of the firm by attracting and re-taining high - profitability customers,even at the risk of losing low -prof-itability ones. There are two majorclasses of actions they can take. Thefirst relates to profitable customersand the second to unprofitable ones.

For profitable customers there arethree types of actions that can be tak-en. First, they can identify clusters ofhigh - profitability customers and setout to increase their satisfaction

through higher ser-vice levels. Second,they can lower sellingprices for customers

SG & A whose profits are highExpenses and where there is a

perceived risk of los-ing them to competi-tors. Third, they can

stonier Costs and should identifynew ways to servecustomers so thatwhile costs to serve

are low, satisfaction is high.For unprofitable customers, there

are also three types of action that canbe taken. First, they can try to deliverthe services that these customers re-quire more efficiently. Second, they canincrease prices to reflect the cost of theresources consumed. Third, they canreduce selling efforts to unprofitablecustomers. In the limit, this means re-fusing to serve unprofitable customers.The overall aim is to increase the ratioof profitable to unprofitable customers.

However, extending beyond the wallsof the factory is not sufficient. The nextstep in the strategic cost managementprocess is to extend the process beyondthe firm's organizational boundaries.This extension enables a firm to takeadvantage of cost management syner-gies between it and its suppliers andcustomers. In particular, the firm canactively seek to find ways to reducecosts across the value chain while si-multaneously strengthening its strate-gic position. It achieves these objec-tives by coordinating its costmanagement programs with those ofits suppliers and customers. This coor-dination is the focus of our nextcolumn. ■

Robin Cooper is professor of management,Pe ter F. Drucker Graduate ManagementCenter, Claremont Graduate University, andhonorary visiting professor of st rategic costmanagement at Manchester Business School .

Regine Slagmulder is professor of manage-ment accounting. T ilberg Universi ty (theNetherlands) and visi ting professor at theUniversity of Ghent (Belgium).

I See H. Thomas Johnson and Robert S. Kaplan,Relevance Lost. The Rise and Fall of ManagementAccounting, Boston, Mass., Harvard Business SchoolPress, 1987.

2 See Robert S. Kaplan and Robin Cooper, Cost andEffect, Boston, Mass., Harvard Business School Press,1997.

31n addition to supplier and customer costs, there arecorporate costs that can be treated in the samemanner.

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Circle No. 9

Executing a SuccessfulSpin -off and IPOTransaction

BY ROBERT N. WEST, CPA, ANDJOSEPH A. GIRARDI, CMA

pin -offs are becoming increasinglycommon in today's competitivebusiness environment. The spin -off

and ensuing initial public offering(IPO) require an enormous amount ofresources and effort. External auditors,investment bankers, and outside attor-neys all have defined roles in theprocess, but what is expected of theinternal accounting staff? Based on ourexperience in executing an IPO, thereare general guidelines that manage-ment accountants would do well tofollow.

Planning, strong organization, com-munication skills, and the necessaryresources are absolutely critical to asuccessful transaction, but timetablesfor executing a spin -off transactionvary. Some critical factors affecting thetime required to complete our spin -offwere: The entity was a decentralized,geographically dispersed business con-sisting of three foreign sites in the FarEast and Europe and five widely dis-persed U.S. locations. Most of thesesites were acquisitions, and each hadits own accounting systems and recordretention policies. Some key accountingissues were fixed assets, asset impair-ment, inventory cost systems, andintellectual property. These issuesrequired locating archived supportingdocumentation and making many valu-ation assessments.

20 MANAGEMENTACCOUNTING FEBRUARY 1998

PLANNING THE SPIN -OFF

P lanning is the key to a successfulspin -off and IPO. The first decision acorporation must make is how to struc-ture the transaction. The corporateoffice has to determine whether thespin -off should be conducted as a saleof assets or a stock deal. This corpora-tion elected to do a stock deal. Theinternal IPO team conducted its workwith a stock price mentality. After dis-cussion with its investment banker, theteam learned that similar IPOs typi-cally opened at a P/E ratio of 10. Inother words, each $10,000 (after -tax)error would impact stock issue pro-ceeds by $100,000. Materiality and riskassessments were made accordingly.

Operate the business independentlyfrom the parent company. When abusiness is going to be divested, con-sideration should be given to restruc-turing the operations so that it canfunction as an independent enterprisefor at least a year — developing its ownearnings history and cost structurethat can be disentangled more easilyfrom corporate allocations. The entiremindset of the business must be shift-ed from an internal strategic businessunit of a large corporation to an exter-nal, public company focus.

i

A fair amountof time mustbe spent"carving out" thebusiness operationsfrom the parentcompany — especially foritems such as, but not limitedto, corporate administrative ser-vices (such as legal, purchasing, \

receivables and payables, safety,health, and environmental), capitalexpenditures, payroll, and pension.This issue gets more complex when aglobal business is involved becausethere may be separation issues relatedto product transfer accounting (trans-fer pricing, revenue and cost recogni-tion), shared manufacturing sites,shared assets, and shared legal enti-ties. The business will need to incurthe incremental cost of having aninfrastructure (i.e., controller, purchas-ing, tax, investment accounting groups,independent accounting software) thatis duplicative of the corporate adminis-trative services it currently receivesfrom the parent. This will expedite thetransaction once a divestment decisionis reached. The benefit of a standalonebusiness obviously must be balancedagainst employee concerns /investmentcommunity speculation about such arestructuring move and the cost of

©1996 NEWMOON IMAGE LIBRARIES

making the businessindependent.

Crwte a realistic plan. A plan that isoverly aggressive or unrealistic demor-alizes the staff and is counterproduc-tive to the energy level and enthusi-asm required to complete thetransaction. Time- consuming items forany IPO transaction are staffing con-siderations, disentangling the businesscorporate - provided transaction systems(for example, accounts payable), andovercoming deficiencies in four key

areas:

■ Record keeping. SEC filings requirethree-year standalone financialresults plus interim results for thecurrent year. Proper cutoffs are

■

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ized the organization, the morechallenging the task. If the entity tobe spun off has grown by acquisi-tion, for example, it may have mul-tiple general ledgers using variousaccounting software packages. Datamay be classified differently acrossthe various entities within the enti-ty to be spun off.Data quality. The quality of theaccounting information system islikely to be a function of the size ofthe unit to be spun off. If the busi-ness to be spun off is an immaterialunit of a much larger parent compa-ny, its accounting systems and pro-cedures are likely to have receivedless scrutiny, and its accountingmay have to be reconsidered underthe new, much lower materiality

threshold. For example, capitalleases may have been accounted foras operating leases, but that may nolonger be acceptable. Inventory costaccounting may have used directcosting or some other internally ori-ented accounting method that willhave to be restated under GAAPusing absorption costing. Again,these restatements must go backthree years.

Accounting estimates will needreview. Reviews of warranties, baddebts, estimated useful lives of fixedassets, impairment of assets, and so onare necessary. Reclassifications mightbe required. For example, receivablesand payables categorized as "Other" or"Miscellaneous" might require cleanerdistinctions. Clerical errors that werepassed over due to immateriality mustnow be investigated —again going backthree years.

■ Internal controls. Adequate internalcontrols for a publicly held companyrequire that the risk of materialerror be minimized. Because themateriality threshold has changed,a revised risk analysis will be need-ed. Within the revised (lower) mate-riality levels, do the financial state-ments fairly present financialposition and results of operations?Have impaired assets been written

FEBRUARY 1998 MAMSEMENT ACCOUNTING 21

off or written down? Are cost sys-tems and allocations reasonablyaccurate? Are systems functioningproperly? For example, are all ship-ments billed? Are intercompanytransfers of assets such as invento-ry and equipment accounted forproperly?

Our IPO entity had significant inter-company transaction activity betweensites and with the parent company.None of the intercompany accountsreconciled. Many transactions con-tained relatively small dollar errors.The corporation decided to clean up theintercompany accounts and create poli-cies and procedures to reduce (elimi-nate) the causes of the errors. One sys-temic problem area was shipmentsfrom Asia. The Asian country's exportlaws required an invoice with ship-ment. The exact freight cost could notbe known prior to shipment; therefore,Asia included an estimated freight coston the invoice. The estimate alwaysvaried from actual, so adjustmentswere required. Working through thesedifferences over the phone was difficultdue to time zone differences. The inter-company accounts took staff - months toreconcile including designing andimplementing a better system.

Another consideration involves inte-grated consolidation accounting/finan -cial systems. If the parent companyoperates in a decentralized fashion,information systems may differ sub-stantially so integration for consolida-tion purposes may be challenging. Inter-faces for roll -up will have to be built.

IDENTIFY KEYACCOUNTING ISSUES

rixed assets was a highly material

account balance at the IPO candidate


Individual production equipment costup to $8 million. To get a handle onfixed assets, the accountants had toinvestigate the accuracy of the ledgers(do the fixed assets still exist ?), verifyhistorical cost, and assess their eco-nomic value (asset impairment). Oncethe ledgers were reconciled to the fixedasset physical inventory counts, workwas begun on verifying the costamounts.

More problems arose: Inconsistentaccounting was found across divisions.For example, most equipment purchas-es came with a one -year or two -yearwarranty. Some divisions capitalizedthat cost and were depreciating it overthe life of the asset for financial report-ing purposes. Because some equipmentpurchases were made five, 10, andeven 15 years prior, the original invoic-es and contracts had to be located toarrive at the correct capitalizable fig-ure. Verifying historical cost was noteasy! SFAS 121, "Accounting for theImpairment of Long -Lived Assets andfor Long -Lived Assets to Be Disposedof," required asset impairment assess-ments on the expensive, high -techequipment.

Programming and software costs forthe precision manufacturing equip-ment were capitalized properly. Somesites, however, then believed that allsoftware purchases should be capital-ized and, as a result, had capitalizedspreadsheet and word processing soft-ware purchases. The appropriateaccounts were reviewed and corrected.

Goodwill was evaluated, and write -offs were made in several cases. Somepatents had to be revalued and esti-mated useful lives reassessed. Signifi-cant writeoffs were required in severalcases. Legal work had to be performedto transfer the patents from the parentcorporation to the newly formed entity.

Regarding inventory, direct costingwas used at all immaterial divisionsbecause that is the method used forinternal analysis. The cost accountingsystems had to be converted at alleight sites. No significant problemswere encountered, but the changeovertook time.

OUTFIT THE TEAMWITH THE TOOLS

T here is a moderate amount of over-head required to complete the IPO.Many of the prerequisite tasks can bestarted before staffing is completed.The IPO team should be locatedtogether with business leadership andbusiness accounting operations. It willrequire additional office arrangements(space, equipment, communication con-nections, and furniture), accountingconsolidation software, and training asneeded. Training will be needed asteam members undoubtedly will usedifferent software. For example, ifExcel is chosen as the spreadsheetpackage for the IPO team, team mem-bers accustomed to other packagesmay require Excel training. The sameholds true for word processing soft-ware, presentation software, e-mail,and so on.

The IPO team will need corporateauthorization to engage outside consul-tants and procure supplies, computers,software, and supplementary supportstaff. The business leadership mustdemonstrate commitment consistentlyand frequently to the timely comple-tion of the transaction. When the IPOtransition is under way, the businessmust serve two "masters" —the busi-ness leadership and the IPO team —sometimes resulting in conflict. Forexample, the parent company may stillwant the unit to meet profit objectives

W

5 M M' }' °'"Hi Pro forma ---

3 Months 1 MontNew al -file prospectus

financials financials opinion _ with SECco oard available — Prepare l

ion meeting employee LSirvices, prior history Stub Exchange communication/11112111ill— I t information _completed_ period istration — press releasesi oyeea available Due diligence audits comp

ej

New companyProspectusecome meetings c e management

drafting prepares forros ectus drafts cortopues "road show"

and provide timely monthly closings,but the unit also will be required tosupply the IPO team with its datarequests.

ASSIGN STAFF PROMPTLYAND EXCLUSIVELY

O btaining competent, hard - workingteam players with strong communica-tion skills will greatly increase thelikelihood of a successful effort. Theimportant point in staffing is not "morebodies" but "better bodies." The IPOteam really needs knowledgeable, self -starting individuals. The team does nothave time to supervise inexperiencedpeople. An IPO timetable is illustratedabove, on this and facing page.

The management team must behired as quickly as possible becausesigning up a CEO, CFO, and controllerare critical decisions, and delays maybe encountered in trying to find theright individuals. (Our IPO experi-enced delays in placing all three posi-tions.) The transaction is time critical,and a core group must be selectedquickly to allow sufficient lead time sothat IPO team members can transitionsmoothly from prior assignments.Moreover, organizations losing IPOteam members must find replacementspromptly so that prior assignmentdemands on team members areminimized.

The IPO team must commit to thetask at hand —it cannot be a part -timeassignment for the core group. Thecore group likely will include at leastone person from each of the followingareas: accounting, tax, legal, treasury(shareholder services), and humanresources. Dedicated, competent exper-tise is required. A full-time SEC spe-cialist was assigned for the final six

months of the IPO, and he continuedwith the start -up company after thetransaction.

Define roles, responsibilities, andexpectations clearly. Tailor assign-ments to the individuals' strengths tomaximize team effectiveness. Recog-nize that the workload must be distrib-uted equitably to keep the team freshand content. Schedule regular staffmeetings to ensure coordination oftasks, track progress against workplan, and surface any new issues thatmay be encountered. The team mustunderstand that long hours, teamwork,and personal sacrifice will be requiredto accomplish these tasks. Team mem-bers must be flexible enough to movequickly among levels of thought thatcan range from very mechanical tovery strategic. There is no room ortime for individual egos or agendas.

Determine additional staff compe-tencies required; then go get them.Once a core team is selected, anassessment of competencies should beconducted immediately to fill out theremaining staff. For example, the IPOteam may require expertise in theaccounting areas of consolidation, actu-arial, tax, foreign currency, and capitalinvestment.

The resource assessment mustinclude the business to determine ifthere is enough capable staff to sup-port the IPO and ongoing businessneeds. If you will need outside consul-tants, be willing to pay what it takes toget highly competent personnel. Thebusiness controller and everyone elsewill be very busy. There won't be muchtime for hand holding an inexperiencedconsultant. The IPO team alwaysshould overstaff to meet the estimatedneeds.

Have a contingency staff plan pre-

pared. A variable workforce may benecessary to satisfy a specific IPOdeadline or task. The IPO team mustmaintain a contingency list of staffreserves and/or consulting arrange-ments (e.g., accounting, informationsystems, secretarial temporaries) tomeet the variable work requirements.Some "surprises" you might encounterare staff resignations, employees mov-ing to other assignments, and employ-ees who initially decide to go with thenew company but subsequently changetheir minds.

COMMUNICATE THE IPOORGANIZATIONAL STRUCTURE

T he IPO team membership should becommunicated broadly to introduce themembers to the business and financecommunity and to lay the foundationfor effective networks. The communica-tion lends credibility to the team mem-bers and contributes greatly to thetimely completion and prioritization ofa team member's work request to thebusiness.

Build the networks; then use them!Global networks must be built and arecritical to the overall success of theIPO. The IPO team cannot accomplishthe tasks at hand in a vacuum. Goodworking relationships within the net-work can greatly improve the qualityand turnaround response time for datarequests. Consideration must be givento language barriers and cultural/timedifferences when making data requestsor scheduling teleconferences. Valueand respect the individuals assigned tothe networks. Assuming the IPOprocess takes one year, you shouldbecome familiar with holidays aroundthe world. Europeans will likely not beavailable during the month of August.

FEBRUARY 1998 MANAGEMENT ACCOUNTING 23

Chinese will not be available for twoweeks during the Chinese New Year

celebrations. Religious holidays mustbe respected as well.

All network participants must bewilling to share home phone numbersand addresses in addition to the busi-ness ones. The IPO transactionrequires a 24 -hour commitment!

Data collection. The data collectionprocess is the foundation of the SECregistration statement. It begins thecommunication among the IPO team,the business, and the audit staff. Itconsists of two major subprocesses:

1. Collection of the financial statementtransactional data for the currentyear and for the past three years.

2. Collection of other business recordssupporting the statements (e.g.,lease contracts).

Even if IPO staffing plans areincomplete, make a preliminary datarequest immediately to accomplish twothings:

Provide the business contacts suffi-cient lead time to respond to therequest, andAllow the financial statements teamto make a preliminary assessmentof the state of the business'srecords.

Evaluate the data collection processand make adjustments. If the businesspartners have been unable to satisfythe preliminary request, it may be anindicator that there are potentialissues with:

1. Basic communication and under-standing of the request,

2. Inadequate staffing to respond tothe request, or

3. Larger "carve -out" issues whereparent company businesses aresharing sites and/or services.

Responses can be organized byfinancial statement components, andstewardship of the data can be spreadamong the IPO staff to establish "spe-cialty" areas. Examples of how datacan be organized are permanentinvestment, pension/OPEB accounting,exchange translations, intercompany,or geographic reporting. Some data


should be organized by footnote disclo-sures. The segment information foot-note, for example, must be reconsid-ered with the new, lower materialitythreshold, so the appropriate data canbe collected, analyzed, and summa-rized for the three years being present-ed. Discuss data requests with contactson a regular basis.

The preliminary data request setsthe expectations of the business part-ners for future requests in terms ofcontent, degree of accuracy, andurgency. Regular conference callsshould be scheduled to clarify therequests, establish priorities, and pro-vide an opportunity to exchange follow -up information. The conference callsbecome a channel to provide the part-ners with frequent, regular IPOprogress updates.

Our IPO experience taught us thatduring the last six months of theprocess, many data requests weremade. Again, because this entity con-sisted of eight sites with understaffedaccounting departments, collecting(including follow -up requests), logging,storing, analyzing, and summarizingthe data were not a trivial matter.

Establish a single focal pointthrough which all data requests aredistributed. This individual will act asa clearinghouse for all requests —coor-dinating similar requests, eliminatingredundant requests, and prioritizingdifferent requests. The clearinghouseapproach avoids any potential conflictsarising from variable demands onscarce resources and enables the busi-ness support staff to deal most effec-tively with requests that vary directlywith the level of IPO activity.

A schedule should be maintainedshowing requested data, date request-ed, date received. This process is simi-lar to dealing with informationrequests from external auditors on arecurring audit but on a much largerscale.

An IPO Data Room must be estab-lished to accumulate vital records ofthe business (in addition to those relat-ing to the financial statements). Accessto the documents must be strictly con-trolled. Working with the legal depart-ment, accountants should catalog docu-ments pertaining to:

1. Corporate organization of thebusiness,

2. Regulatory /intellectual propertymatters,

3. Employee relationships,4. Arrangements with major cus-

tomers/suppliers,5. Insurance agreements,6. Acquisition/divestiture activity of

the business,7. Litigation and similar proceedings,

and8. Public relations.

Outside legal research firms may beengaged to conduct the document"sweeps" and to organize the DataRoom efficiently. If this task is success-ful, the task of archiving records at theend of the IPO process becomes very

easy.

THE FINANCIAL STATEMENTPREPARATION AND AUDIT

T he financials are prepared on anexternal basis. The IPO filing is pre-pared in accordance with generallyaccepted accounting principles (GAAP).Team members and the business con-tacts must be grounded in GAAPbefore any productive work on finan-cial statement preparation has begun.Most of the data that your businessesprocess might be prepared on an inter-nal basis other than GAAP.

Because the SEC registration state-ment uses the financial statements asa basis for the filing, the financialstatements team must know somethingabout SEC disclosure and filingrequirements. You should obtain anSEC disclosure checklist from yourexternal auditors.

Maintain tight internal control overIPO workpapers. There will be numer-ous drafts of the financial statementsbefore the registration document canbe filed, resulting in large amounts ofsupporting documentation. The work -papers and the historical financialstatements are the property of the IPOfinancial statement team, and the orig-inals of these items should never leavethe team's possession. Maintainauditable files of all adjustments andcalculations that support the financialstatements presented.

Partner with external auditors andinvestment bankers. The external audi-tors and the investment bankers workfor you and are valuable resources tothe IPO team. The IPO team must set

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the direction, establish objectives, anddetermine deadlines with inputs fromthe business, the auditors, and thebankers. In many cases, the auditorsand bankers can offer valuable insightsinto a particular situation; use theirexperiences to make your decisions.

Schedule regular meetings with theaudit staff to review progress. Auditfindings must be reviewed with theaudit team on a regular (at least week-ly) basis so that the financial state-ments team can cover the breadth ofthe historical review effectively.

An IPO filing usually contains atleast three years of historical informa-tion plus interim ( "stub ") financialstatements. Audit requests must bemanaged closely like the IPO data col-lection requests (i.e., single contactpoint) to avoid redundant requests ormultiple explanations of a given issue.Never assume that a particular issuehas been resolved — always clear itwith the audit staff. The IPO processcovers a lengthy time period, and boththe audit staff and the internal IPOstaff members will change. Confusionand miscommunications can result.Ensure that someone from the auditteam signs off as issues are resolved.

TRANSITION PLANNING ANDSERVICE NEGOTIATION

Designate responsibilities for negoti-ations immediately. All transition plan-ning and services must be negotiatedbetween the parent company and thebusiness. One person cannot negotiatefor both parties. As the IPO transac-tion moves forward, it becomes moredifficult for the new business leader-ship to maintain the independence andobjectivity necessary to represent theparent's best interests. A clean cutoff ishighly desirable. For example, the newbusiness will want timely submissionof all vendor invoices and expensereports so that checks can be remittedprior to the actual split -off. However,checks should not be cut for goods orservices not yet received.

Assess the capabilities of the busi-ness to be self - sufficient. The financialsystems and internal controls neces-sary to meet the rigors of public lifemust be in place, tested, and evaluatedbefore the IPO transaction can be com-pleted. It is critical that the new com-pany's financial staff be recruited,


hired early, and assigned accountabili-ty for building the financial operatingand reporting infrastructure. If keypersonnel such as site controllers donot go with the new company, thisissue becomes more critical. The IPOplan must allow sufficient time to eval-uate the ability of the new infrastruc-ture to extend the capabilities of theIPO reporting process.

Allow sufficient time and resourcesto replace existing processes. Existingbusiness service providers must benotified of any immediate plans of thebusiness to replace the current level ofservice. Sufficient time and resourcesmust be dedicated to planning the ser-vice transition to the new provider,adjusting the staffing level of the cur-rent business service provider, and pro-viding historical files and records tothe business as necessary to allow it tooperate as an independent company.The business must allow a minimumlead time of three to six months for thetransition of major business functions(e.g., accounts payable, accounts receiv-able, cash management, procurement)from the parent to the new company.

Is the new business planning todevelop its own accounting softwareand e-mail systems, or will it continueto use the parent company's systems?If it is to be an independent entity, itshould pay a fee for the administrativeservice. Similar issues arise withshared sites. Can employees of ashared site use cafeteria, parking,medical, and other administrative ser-vices after the spin - off? Perhaps a con-tract needs to be drawn for theseadministrative services. Contracts forservices with the parent company willneed to be negotiated and drawn up.The parent may continue to providethe new entity's accounting system, taxreturn preparation, SEC filings, inter-nal audit, e-mail, voice mail, and othersupport systems. In fact, overhead sup-port services have to be split out (notallocated) once the decision is made tospin -off. For example, direct chargesshould be made for use of the corporateairplane, security, and top manage-ment services.

Fortunately, in the case of the IPO,contracts with outside suppliers didnot have to be renegotiated as the par-ent retained a majority interest, sofavorable volume discounts for invento-ry purchases and favorable rates for

air travel, auto rental, hotel rates, andso on were maintained.

A new business with new personneland new systems would likely benefitfrom an internal audit function, even ifit were only one person. In addition tobusiness processes, the new businessmust immediately consider major deci-sions such as establishing a new boardof directors and an audit committee.

Employees in all locations willexpect a benefits package consistentwith what they had previously receivedwith the parent corporation. Asia andEurope have more protective employeebenefit laws than in the United StatesPension and entitlement are treateddifferently than in the United Statesdue to cultural differences, and thesefactors should be taken intoconsideration.

COMPLETING THE IPOTRANSACTION

C reate an action plan to deactivatethe IPO team. After the SEC filing iscomplete, the financial statementsteam will begin to wind down its oper-ation. A plan should be created whichallows sufficient time to organize files.Major tasks that will be covered underthis plan include personnel reassign-ments, equipment redeployment, popu-lating the new company records reposi-tory, and parent company recordarchival. One caution, however: IPOpersonnel should not be reassignedprematurely.

Take time to document what theteam learned during the process. Docu-ment the experiences of the IPO team.There are many valuable lessons to belearned from an IPO transaction, andkeep in mind it may not be your lastone! ■

Robert N. West , CPA, Ph.D., is an assistantprofessor at Vil lanova University. He is theauthor of several art icles and an account ingsystems text. He is a member of the ValleyForge Chapter, through which this article wassubmit ted. He can he reached at (610) 519-4359.

Joseph A. Girardi current ly is a financialmanager for a Fortune 100 company and is anadjunct account ing facul ty member at Goldey-Beacom College in Wilmington, Del . He may bereached at (302) 239 -2817.

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HowABCChanged.thePostOff iceThe U.S. Postal Service is a unique

federal entity in several respects.First, the USPS, in essence, oper-

ates in a manner similar to many pri-vate sector companies. The USPS pro-vides a variety of services, generatesrevenue from these services, andincurs costs and expenses as a result ofits operations. Second, the USPS is

28 NUNAGF m AccounNG FEBRUARY 1998

JvITED STATES POSTAL SERVICE

To meet its competition, the U.S. Postal Service

credit /debit card service.

BY TERRELL L. CARTER;ALI M. SEDAGHAT, CMA; AND

THOMAS D. WILLIAMS

unique in that it is open to private sec-tor competition. Competition includescompanies such as Federal Express,United Parcel Service, Mail Boxes Etc.,and a host of other similar companies.Few other government agencies ordepartments operate in a similar busi-ness environment.

Retailers as well as USPS competi-tors have long accepted credit cards aspayment options for goods and ser-vices. Moreover, new technologies arebeginning to lead to a "cashless" world.Customers are seeking convenienceand value, while businesses are striv-ing for increased sales and guaranteedpayment. Given the competitive forces

facing the USPS and the rapid pace atwhich new technologies are becomingavailable, USPS management realizedthat it had to use innovative businessmethods to maintain and increase itsmarket share against its competitionand provide increased value to itscustomers while ensuring costeffectiveness.

Based on this evaluation of its posi-tion in the marketplace, the USPSengaged Coopers & Lybrand (C &L) toconduct activity -based cost studies ofits key revenue collection processesand market strategy study for anational credit card and debit card pro-gram. (See p.34.) To obtain an under-standing of the cash, check, and cred-it/debit card activities, C &L reviewedUSPS data and procedure manuals,interviewed USPS headquarters staff,and conducted telephone surveys offront window supervisors and districtoffice accounting personnel. Using anactivity -based cost modeling approach,C &L defined the cash and check

offer customers

process in terms of the activities thatlink together to make the processes.C &L also identified unit, batch, andproduct sustaining activities; resourcesfor each of the activities; and the tran-saction volumes for each activity. Unitactivity was the acceptance and pro-cessing of a payment by item. Batchactivities involved close -out at the endof the day, consolidation, and supervi-sory review. Product activities includedmaintenance charges for bank accountsand deposit reconciliation (cash andchecks) and terminal maintenance andtraining (credit and debit cards).

After building the cash and checkcost models, C &L defined activity -based costs for the credit and debitcard activities similarly. The compo-nents of the cash, check, andcredit/debit card activities are shownin Table 1. The activity cost models forthe cash and check activities areshown in Table 2. The activity -basedcost models for the credit card and deb-it card activities are shown in Table 3.

also conduct-ed p

conduct-ed product pricingand profitabilityanalyses of thecredit/debit card test program.

In analyzing data from Phase I ofthe USPS credit card and debit cardtest market plan and the organization-al costs associated with serving USPScustomers through its 28,728 postoffices, 9,059 stations and branches,and 1,605 community postal units,C &L identified the following issuesaffecting costs, product pricing, com-petitiveness, and customer value.'

1. USPS provides a limited assortmentof payment options relative to thecompetition:

• Cash and check payments are pre-dominant USPS payment options,

• Competitors provide credit cardpayment options, and

• Most USPS transactions must occurat a post office.

2. USPS generates a large volume oflow -value cash transactions:

■ The majority of transactions are$20 or less, and

■ Transactions on a per - dollar basisare expensive to process.

3. USPS' check receipts processing iscostly:

• Extra steps are required,• Additional bank charges are

incurred, and• $3 -$4 million is lost to bad checks.

4. Policies and procedures are notconsistent.

5. Based on independent surveys,cash, check, and credit/debit cardprocesses are not uniform.


I . Receive cash 1. Process card transactions 1. Receive checks

2. Deposit cash 2. Close out point -of -sale 2. Deposit checks(POS) terminal

3. Maintain bank accounts 3. Reconcile credit and 3. Maintain bank accounts(including cash debit card receipts (including cashconcentration and concentration andfunds mobilization) funds mobilization)

4. Reconcile bank accounts 4. Process chargebacks 4. Reconcile bank accounts

5. Maintain POS and telecom-munications equipment

Note: Cash is handled by USPS employees four times: 1. By the clerk when accepting payment from a customer.2. By the clerk when counting the cash in the drawer daily. 3. By a supervisor when counting the cashbefore the bank deposit. 4. By another supervisor when counting the cash to verify before the deposit.

PROJECTED COST MODELFOR LISPSThe ABC study also revealed hidden

and indirect costs for each of the pay-ment activities. Combining all of thecosts resulted in the breakdown shown

in Table 4. C &L pointed out that "totalincremental costs for a national cred-it/debit card program are immaterialin relation to total USPS payment pro-cessing costs that exceed $1 billion peryear, based on the activity -based coststudy data collected through the

February/March 1994 time frame."2

The cost data showed that the net ben-efit of accepting credit and debit cardswould be negative through 1997. Pro-jections showed that from 1998through 2000, the net benefits of cardacceptance would be $5.2 million,$15.6 million, and $28.8 million,respectively (see Table 5).

In summarizing these findings, C &Lreported that, "Credit and debit cardprocessing costs are relatively high atthe moment due to the normal impactof process start -up, low initial volumeand high initial implementation costs.However, as volumes continue to grow,projected credit and debit card costscan become competitive with currentcash and check processing costs."3

C &L also reported that "credit anddebit card processing costs for retailwindow transactions becomes costeffective once total card revenueexceeds 3 % -4% of total revenues fromretail transactions. As card volumecontinues to displace cash and check

Accept cash Number of cash transactions $0.49 921,881,239 $451,173,288Processing of cash by bank Number of cash transactions 0.02 921,881,239 19,974,271

Close -out and supervisor review of clerk Number of close -outs 5.79 28,029,443 162,255,662Consolidation and deposit of unit's receipts Number of deposits 16.16 9,902,381 160,016,636Review and transfer funds -time Number of accounts 1,884.47 7,490 14,114,698

Maintenance charges for bank accounts Number of accounts 114.32 7,490 856,286Reconciling bank accounts Number of accounts 1,935.94 7,490 14,500,182

TOTAL COST 5822,891,023

Accept checks Number of checks $0.98 120,173,780 $117,627,298Processing of checks by bank Number of checks 0.06 120,173,780 7,335,089Processing of returned checks Number of bad checks 25.16 143,436 3,608,400

Batch Activities

Close -out and supervisor review of clerk Number of close -outs 2.67 28,029,443 74,887,229Consolidation and deposit of unit's receipts Number of deposits 2.07 9,902,381 20,505,861Review and transfer funds -time Number of accounts 250.20 7,490 1,873,980

Product Activities

Maintenance charges for bank accounts Number of accounts 14.91 7,490 111,641Reconciling bank accounts Number of accounts 251.80 7,490 1,185,971

TOTAL COST $227,135,469


transactions, card costs become evenmore advantageous. '14

COOPERS& LYBRAND'SRECOMMENDATION

B ased on its analysis of the markettest, a Gallup survey (see p.34), andmarket trends, C &L recommendedthat the USPS use a three -phase strat-egy to implement a national policy ofaccepting both credit and debit cards:Phase I— Market Test (which wasalready completed); Phase II— Mobilizeand Market; Phase III — Modify.

Mobilize and market. This two -stepphase began with an aggressive mobi-lization effort to implement nationwideacceptance of credit and debit cards forselected USPS products and services atretail windows beginning with largeroffices. The potential benefits wereidentified as increased customer satis-faction, increased sales, and improvedprocessing efficiency. The second step

was an aggressive targeted marketingcampaign designed to increase creditcard usage at USPS retail windows."Studies indicate that a targeted mar-keting campaign can have significantimpact on consumer use of debit and

PHOTOS COURTESY UNITED STATES POSTAL SERVICE

credit cards. A recent study concludedthat the value of increased sales morethan covered the additional expense ofadvertising."5 The potential benefitsidentified were increased credit,/debitcard volume, increased total sales, and

Process credit card Number of credit transactions $0.80 357,796 $287,217Payment of credit card fee $ size of transactions 0.01 18,512,365 252,474Processing chargebacks

Batch Activities

Number of chargebacks 23.87 120 2,865

1

Close -out terminal Number of close -outs 1.30 160,596 208,581Reconciling daily receipts— district Number of stations 65.84 1,500 98,767Process form 1908 Number of 1908s 9.04 2,884 26,072

Product

Maintain equipmentTraining

Process debit card

Close -out terminalReconciling daily receipts— districtProcess form 1908

Maintain equipmentTraining

Number of terminals 275.60Number of districts 22,311.84

TOTAL COST

Number of debit transactions $0.66

Number of close -outs 0.12Number of stations 6.24Number of 1908s 0.86

Number of terminals 26.11Number of districts 2,114.16

TOTAL COST

1,875 516,7545 111,559

$1,504,269

35,262 $30,260

160,596 19,7461,500 9,3592,884 2,470

1,875 48,9655 10,571

$121,371

FEBRUARY 1998 MANAGEMENT ACCOUNTING :i I

Cash $20 $.045 $.048

Checks $51 $.038 $.040

Credit Cards $52 $.081 $.027Debit Cards $49 $.071 $.015

reduced transaction costs.

Modify.This phase entailed imple-menting improved credit/debit cardprocessing technology and proceduresto increase the benefits and continue toreduce the costs of the national cardprogram. C &L recommended installingonline point -of -sale terminals and con-solidating all card authorization andtransaction processing. The nationalimplementation would use standalonecard verification terminals, and thisphase would replace them with inte-grated equipment. The potential bene-fits identified would be improved pro-cessing efficiency, reduced processingcosts, reduced transaction errors and

rejects, and improved managementinformation.

THE BOARD APPROVES CARDS

Senior postal management decided onthe basis of the C &L analysis and adecision analysis report (DAR.) pre-pared by USPS Finance to propose tothe USPS Board of Governors( "Board ") that credit and debit cards beaccepted nationally at USPS retailwindows. Management recommendedan aggressive two -year implementa-tion. By the end of the second year,33,000 post offices would be equippedwith 50,000 card terminals and trainedUSPS personnel.6 The DAR provided

the following breakdown:

Expense investment (50,000 card terminals)

$25,893,000Installation expense 3,825,000

Total investment (fiscal years 1995 and 1996)

$29,718,000Operating costs in first full year (FY 97) $30,327,000

Customer service initiative with no claimed ROI

Potential cost savings and revenue enhancements

not included.

It is important to note the last twopoints. The program, while virtuallyensuring an ROI and cost savings, wasnot being proposed for the financialbenefits. Instead, as USPS CFOMichael J. Riley said in his presenta-tion to the Board, "It is important tonote that this is a customer service ini-tiative which does not attempt to claima return on investment. This is in spiteof the fact that many retailers reportsavings from processing less currencyand checks, as well as increased rev-enue from offering this growing retail

Cash 822,856,044 879,004,435 938,710,365 1,003,001,968 1,071,923,013 1,145,819,941 1,225,066,230

Check 227,789,177 242,987,911 259,731,645 277,371,596 296,274,358 316,534,152 338,252,449

Total Cost 1,050,645,221 1,121,992,346 1,198,442,010 1,280,373,564 1,368,197,371 1,462,354,093 1,563,318,679

Cash 822,856,044 867,786,033 899,084,296 933,386,322 967,692,345 1,001,794,407 1,035,444,902

Check 227,789,177 238,356,354 250,021,816 259,526,699 269,039,899 278,505,217 287,864,197

Credit 1,511,405 18,948,017 46,924,315 69,641,084 96,614,272 127,254,140 161,339,635

Debit 125,709 3,112,999 13,839,778 21,074,881 29,567,163 39,187,991 49,833,387

Total Cost 1,052,282,335 1,128,203,403 1,209,870,205 1,283,628,986 1,362,913,679 1,446,741,755 1,534,482,121

Net Benefit (Cost) (1,637,114) (6,211,057) (11,428,195) (3,255,422) 5,283,692 15,612,338 28,836,558

Cash 0.045 0.042 0.044 0.043 0.042 0.042 0.042

Check 0.037 0.035 0.036 0.036 0.036 0.035 0.035

Cash 0.045 0.042 0.045 0.045 0.045 0.046 0.047

Check 0.037 0.036 0.037 0.038 0.038 0.039 0.039

Credit 0.082 0.035 0.033 0.029 0.028 0.027 0.027

Debit 0.073 0.023 0.021 0.017 0.016 0.015 0.015

Note: The 1994 Model Totals were higher than actual Phase I Cost Models due to the incremental start-up costs of the national program. C &L stressed that data for this model would be subject to changeas new data and information became available, and for the model to continue to be useful it would have to be updated on a periodic basis to reflect ongoing program management modification.


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For more than 200 yearslittle has changed in the waythe United States Postal Service(USPS) has allowed its customers topay for postage products and other ser-vices. During its first 150 years, cash wasthe only acceptable form of payment; next,checks and bank drafts also were accept-ed. But customers today demand enhancedservice at a higher quality and lower cost,and the USPS understands that it mustadapt its products and services to the"voice" of the customer. Thus, in the early1990s, the USPS began examining the pos-sibility of accepting electronic forms ofpayments— credit cards —from its retailcustomers.' With low profit margins andhigh volume, however, the USPS foundcredit card acceptance to be too costly.Most card transactions at that time wereoffline, so the process was more paperbased than automated.

With improvements in online transactionprocessing, credit card processing soonbecame economical, and the USPS againexamined the possibility of accepting creditcards but included debit cards as well. Thistime, in 1993, the USPS conducted a largermarket test at 550 locations in five USPSdistricts2located in Orlando, Dallas, FortWorth, Northern Virginia, and Washington,D.C. Upon learning of the market test, Sena-

tor David Pryor (D. -Ark.) became concernedthat "the Postal Service might proceed toohastily without adequate consideration ofcosts and benefits" and requested a reportfrom the General Accounting Office (GAO)3

The GAO concluded that credit cardacceptance made conceptual sense forfour main reasons:4

• Convenience to customers,• Cash management benefits,• Widespread card acceptance, and• Staying competitive.

Convenience to customers. Time andmotion studies showed that card transac-tions were processed more quickly than

34 MANAGEMENT ACCOUNTING FE BR UA R Y 1 99 8

Why USPS Needed toAdopt Credit (nrds

cash or check transac-tions. MasterCard con-

ducted a survey in 1993that showed 92% of postal

customers enjoyed the speedand ease of use of credit

cards. An Arthur D. Little studyevealed that card users pur-r

chased more per visit therebyreducing the number of post office

retail window visits they needed tomake. A Gallup study performed for theUSPS showed that71% of USPS customerswere in favor of the USPS accepting creditand debit cards. The reasons indicatedwere "don't need cash" (48 %), "conve-nience" (26 %), "keep track of spending/record keeping" (14%), and "quicker

service" (12 %).

Cash management benefits. In 1994, it was

estimated that the payment processingcosts associated with the more than one

billion cash and check transactions

processed by the USPS exceeded $1 billionper year. These costs were estimated togrow to more than $1.5 billion within 15

years.5The use of credit cards would makefunds available to the USPS faster, therebyreducing interest costs. Credit card trans-actions processed as late as 7 p.m. ESTwould be credited to the USPS the follow-ing business day. Besides not havingaccess to funds from checks due to collec-tion float,6in its 1993 fiscal year, the USPSturned over for collection about 49,000 badchecks valued at $5.1 million. The accep-tance of credit cards also could reduce therisk of cash losses by reducing employeefraud because credit card sales transac-tions do not involve cash and are controlledby the customer.

Widespread card acceptance. The phe-nomenal growth of the credit card marketattested to the public's growing preferencefor this form of payment. Credit cards giveconsumers added flexibility, reduce bankcosts of processing checks, and reducemerchant costs of handling checks.

Credit and debit cards are widelyaccepted at retail establishments through-out the country including the USPS main

competitors such as United Parcel Serviceand Federal Express. In 1994, 26% of retailsales were accounted for by credit cards,and in mature industries such as depart-ment stores, credit cards sales accountedfor as much as 55% of total revenue.?

Staying competitive. The acceptance ofcredit cards is becoming common in gov-ernment, and both debit and credit cardsnow are used in the private postal services.If the USPS were to adapt to an increasing-ly competitive environment and operate in abusinesslike fashion —hence ensure itslong -run sustainability— accepting creditand debit cards made sense. There was amarket demand for credit card acceptance,and this was one way for the USPS to makeits services more convenient for customers.

The market test would determine con-sumer acceptance of credit and debitcards, whether a national program wasadvisable, and the "lessons learned" wouldallow the USPS to improve its utilization ofresources during national implementation.During the market test, the USPS estab-lished a card processing system, whichwas effective in meeting customer require-ments. Customer acceptance of credit anddebit cards grew significantly during thefirst eight months of the test with morethan 280,000 transactions and $13 millionin sales. Even with limited marketingresources, the growth rate indicated latentconsumer demand for this paymentalternative. ■

1Retail customers are those who purchase postageand products at retail counters called "windows."

239,000 individual post offices report to the 85 dis-tricts, and districts report to 10 area offices. Thearea offices are headed by vice presidents whoreport to headquarters in Washington, D.C.

3"U. S. Postal Service Proposed Policy to AcceptCredit and Debit Cards Makes Sense Conceptual-ly," GAO Report to the Chairman, Subcommitteeon Federal Services, Post Office and Civil Service,Committee on Governmental Affairs, U.S. Senate,June 1994, p.1.

4GAO Report, pp.4 -8.5Coopers & Lybrand Cash /Check/Credit/Debit Card

Productivity Study, 1994.6 Collection float consists of delays due to mail float

while the check is in transit in the mail and pro-cessing float while the check is being processed bythe bank and check clearinghouses. Collection floattakes from one to five business days and some-times more.

7 Chain Store Executive, January 1994.

payment option. We base our DAR onincreased customer satisfaction. "7 InOctober 1994, the Board unanimouslyapproved the proposal without anymodifications.

THE ROLL -OUT

T he next step after Board approvalwas to get a contract in place for acredit card processor and a vendor tosupply the 50,000 card terminals. Acontract was competitively awardedthe following spring to NationsBankwith NaBanco, a national card proces-sor, as its subcontractors NaBanco alsowould supply the terminals under acontract it had with a manufacturer inAtlanta, Microbilt, Inc. In April 1995,the roll -out began.

Since April 1995, the program hasbroadened in scope to include phoneand mail orders for stamps includingphilately and vending machines.Because of demand, the contractrecent ly was modifi ed to increase the

number of card terminals shipped tomore than 67,000. From a customer

Credit Cards 26,494,680 $1,276,263,936 $48 $61,723Debit Cards 2,251,720 $ 118,529,332 $53 n/a

Chargebacks are charges that customers dispute, which, after investigating, the card companies reverse. This becomes anexpense to the merchant.

service perspective, credit and debitcard acceptance has been a runawaysuccess, and even with such an aggres-sive implementation schedule it hasbeen difficult to satisfy demand.

This project has been a very success-ful customer -driven initiative. Sincethe roll -out began, there have beenmore than 300 positive news articlescovering this program. Not only do cus-tomers enjoy the convenience and flexi-bility of not having to carry as muchcash, but USPS retail window clerks,who feel safer because there is lesscash in their drawers, benefit as well.USPS clerks also like card acceptancebecause card transactions are moreaccurate than counting cash, so their

liability is minimized.9The USPS benefits because it gets

funds the next day from card transac-tions at a very competitive discountrate. The payment infrastructure creat-ed by card acceptance has helped theUSPS launch new products and markettests more quickly. Starting credit cardacceptance later benefited the PostalService because it could add debit cardacceptance at the same time with oneroll -out rather than two. The USPS isnow the nation's largest debit cardacceptor. The program has been highlysuccessful in all of its aims, as theseimportant statistics show (see Table 6).See Figure 1 for the growth trends intransaction and dollar volume.

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a ct c¢ ' cn 0 Z C LL M Q 2 4 - Q W 0 Z G " U .

The popularity of activity -based costingand activity -based management is grow-ing. In the private sector, hundreds ofcompanies have adopted activity -basedcosting and management approaches tocost finding and cost accounting. Theserange from manufacturers such as JohnDeere to service firms such as AmericanExpress. Many have gone a step furtherand adopted activity -based managementapproaches.

Now, local and national public sectororganizations are beginning to applyactivity -based costing and activity -based management to the task of rein-venting government. These organiza-tions range from the road maintenancedepartment in Indianapolis to enor-mous federal agencies such as theUSPS as described here.

Earlier attempts at improving gov-ernment operations have been largelyunsuccessful. Activity -based costingand activity -based managementapproaches are allowing these govern-ment organizations to discover andtake advantage of four elements miss-ing from earlier performance improve-ment attempts. They include:

■ Financial and performance informa-


tion systems that enable andencourage managers to makestrategic process improvements thatmaximize value to customers andtaxpayers.

• A management and organizationalstructure built around processes orhow the work gets done in anorganization.

• A strategy for managing the humanaspects of changing from a staticbureaucracy to a dynamic, improve-ment- driven organization.

• A common financial and manageriallanguage for different parts of anorganization and all of a govern-ment's agencies.

Activity -based costing approachesare ever evolving. Nearly every organi-zation applying these approaches dis-covers new uses. They go far beyondABC's original purpose of calculatingaccurate product costs, all the way toactivity -based management, a compre-hensive management approach. Thecase of the USPS's national credit cardand debit card program provides anexcellent example of how effectiveactivity -based approaches can be infacilitating strategic process improve-ments that maximize value to cus-tomers while ensuring economic viabil-ity and cost effectiveness. ■

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Terre l l L. Carte r i s assistant t reasurer, pay-ment technologies, for the United States PostalService. A 28 -year career employee, Terry holdsa B.S. degree in Computer Informat ion Systemsfrom Strayer Col lege, Washington, D.C., and isan executive MBA fellow at Loyola College inMaryland. He is a member of the TreasuryManagement Associat ion. He can be reached at(202) 268 -2330.

Ali M. Sedaghat, CMA, DBA, KPMG FacultyAlumni Fel low, is an associate of account ing atLoyola Col lege in Maryland. He earned his B.A.degree from Abadan Inst itute of Technologyand MBA and DBA degrees from The GeorgeWashington Universi ty. He is a member ofIMA's Bal timore Chapter, through which thisarticle was submitted.

Thomas D. Wil liams is the financial manage-ment officer for the National Institute of Al ler-gy and Infectious Diseases at the Nat ionalInsti tutes of Health. A 15 -year career employeeof the federal government, Tom has extensiveexperience in domest ic and internat ional gov-ernmental budgeting, accounting, finance , andmanagement . Tom is also an execut ive MBAfellow at Loyola College in Maryland.

Authors acknowledge valuable contribut ionsby Jul ie Jack, Jul ie Moore , and Matthew Wong.

1 "United States Postal Service Credit/ Debit Card Strat-egy —Final Report," Coopers & Lybrand L.L.P., Wash-ington, D.C., April 19, 1994, p. B.

Zlbid., page 37.31bid., page 3.41bid., page 12.51bid., page 31.66,000 "contract" stations would not be included in

the two -year implementation.7 "Credit Debit Card Acceptance at the Retail W indow,"

presentation to the Board of Governors, October 3,1994.

aNaBanco is now First Data Merchant Services(FDMS).

9 USPS window clerks must compensate the USPS forshortages, so errors in cash handling are costly tothem.

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What Automated ExpenseReporting Management

Can Do For YouBY DANA BRUTTIG

' f you're typical, the people in your accounting departmentlaboriously re -key in expense reports week after week, lookup billing codes for various departments and cost centers,

check company policy, double -check the math, and cross -checkthe receipts. All this as the phone interrupts continuouslywith calls from salespeople and other travelers demandingtheir expense checks so they can pay their credit card bills. It'sa time - consuming, inefficient process —one with lots of roomfor errors.

You also have a gut feeling that more and more of your com-pany's travelers are choosing their own hotels and rental caragencies rather than going with the vendors that give you pre-ferred corporate rates. But short of checking each and everyexpense report and tabulating the findings, you have no wayto prove it. You figure there has to be a better way, and you


wonder about automation.You've read about automation in the press. You've heard the

vendor claims. You've heard its praises from your colleagues.Intuitively, you know it makes sense. But you want some tan-gible numbers. If you're going to make a substantial invest-ment in automating your company's travel and entertainment(T &E) reporting and reimbursement process, what are thebenefits, and what's the return?

WHY AUTOMATE?

A number of industry analysts say that the cost of processingan expense report ranges from less than $10 per report to morethan $60 or even $100. On average, it costs $25 to process oneexpense report from creation through reimbursement, with

Try this major benefit: It can reduce the cost of

processing one expense report from $25 to $1.75.

companies processing an average of 20,000 reimbursementsper $1 billion of revenue. In addition, according to the HackettGroup, a market research and benchmarking firm, companiespay each ME processor more than $40,373 per year on aver-age. Yet by adopting best practices that typically are centeredaround automating both the collection and the approvalprocess, the Hackett Group says, world -class companies canreduce the $25 to as little as $1.75 per expense report.

Other drivers of the growth in ME automation are the factthat inexpensive portable PCs and ubiquitous e-mail are mak-ing it easier to collect and distribute data on the road, andonline booking practices at travel agencies and credit carddata downloads make it easier to automate the entire travelprocess from pre- expense to post - expense.

Also, businesses are embracing the Internet and intranettechnology as communications tools because of the efficienciesof information sharing and simplicity of the networking mod-el. Intranets offer many of the benefits of client/server com-puting at a lower cost, which has provided much of the infra-structure for posting travel rules, submitting expense reportselectronically, and approving them online.

But perhaps the most important factor driving companies toautomate ME is the chaos that arises from the lack of controland consistency in applying corporate policies. Especially inthe case of mergers and acquisitions, multistate and globaloperations need a way to control travel expenses.

If a hotel offers a company a corporate rate, an automatedME program can generate reports that flag those travelersnot using that hotel chain and alert management who can inturn make sure that travelers are aware of the special rate. Ifa manager has to look up a corporate policy frequently, thelikelihood is that he or she will not do so, meaning that travelpolicy will not be adhered to nor enforced consistently. In addi-

tion, a good automated ME software program will have a toolthat allows you to swiftly and easily implement policy updateswhen needed (without using expensive technical consultants),again allowing travel policies to be enforced consistently.

FIGURE IN THE PEOPLE FACTOR

T he hard costs savings available through automation arejust the beginning. Automation also provides the less concretebut equally valuable advantages of getting everyone in thecompany to apply the same policies. For example, John Hig-gins, treasurer at Commercial Union Insurance Companies, iscommitted to the "best practices" model as a means of cost sav-ings. The "best practices" for managing ME include eliminat-ing cash advances, reducing audits, and reimbursing employ-ees electronically. By providing complete automation —fromincurrence of the expense through reimbursement —the com-pany's management expense software helps CommercialUnion in its ongoing efforts to remain in line with the indus-try best practices model.

Also, the people factor can't be overlooked. Anyone whotravels is familiar with this scenario: You sit down on Sundaynight after a week on the road, find and collate all yourreceipts, look up the billing codes for different departments,check the company policy on per diems in San Francisco orspending caps for client dinners, enter them all into anexpense report manually, copy all the pieces for your own file,put everything into separate envelopes, wait until you can goto the post office to have them weighed in case a 32 -cent stampisn't enough, and mail one copy to your manager and one toaccounting. It's frustrating. To add insult to injury, unless youhave a liberal cash advance policy, it often takes weeks to getreimbursed.


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Oil MANAGEMENT ACCOUNTING FEBRUARY 1998

Automated T &E software programs allow you sit down inyour hotel room with your laptop while watching 60 Minutesor a movie, check your e-mail, download any corporate creditcard�data�you�find�there,�enter�the�rest�of�your�expenses�—where they automatically are coded and charged to the correctdepartments�—then�connect�with�your�company�network�andsubmit them. (If you prefer, you can go through this sameprocess from the airplane on your way home.) Your report isapproved automatically if everything meets the company'spolicies.

According to Susan Lokker, president of Coda Enterprises,expense reports used to take two to three weeks to processbefore the company implemented T &E automation software.Now it takes two to three days. Karen Silva, controller atEG &G, another company that recently automated its T &E,says that travelers love the ease and convenience of submit-ting reports, and no one has to check the math, approvals areautomatic, and reimbursements are deposited directly intotravelers' checking accounts.

AND THE IRS?

A s you can see, a good T &E software program can save timeand money for the company, increase productivity, captureand analyze data, and make life easier and reduce paperworkfor the employee /traveler. But what does the Internal RevenueService say about all this?

In October 1995, the IRS ruled that businesses no longerneed to provide receipts for business travel and entertainmentexpenses under $75, although an expense report or diary mustbe maintained for documentation purposes. And in March1997, it issued Procedure 97 -22, stating that properly ware-housed electronic data were sufficient documentation. Practi-cally all the barriers to automating T &E procedures have beenremoved.

CHOOSING A GOOD T &E SOFTWARE PROGRAM

H ow do you start your software selection process, and whatshould you look for in T &E software? A good T &E manage-ment system provides the following functions:

Ensures corporate policy compliance. Look for software thatallows policies to be updated centrally and enforced through-out the enterprise. A good program should support separatetravel expense policies for different departments and groups(such as sales or executive management) within your organi-zation. Good programs also should allow expense reports to beaudited selectively or randomly for further compliance checks.

Automates the T&E approval process. Look for a system with acustomizable,�centralized�business�rules�engine�—one�that�willlet you put your travel expense policy online so you canapprove automatically the majority of expenses that meet cor-porate policy. A good program will highlight policy exceptionsand route them automatically to the appropriate manager forspecific authorization, replacing the costly, error -prone manu-al approval process.

A flexible architecture also will let you define virtually anycombination of rules and actions. For example, you should beable to tell the system to total all the expenses for each depart-

EG &G Sealol needed an efficiency toolthat would save time for travelers, man-agers, accountants, and administrators.The company got all that —and more —with Captura Software's EmployeePayables automated travel and entertain-ment (T &E) expense reporting system.Among other benefits, Employee Payableshas helped EG &G Sealol reduce overtime(paid attime- and -a -half) by about 40 hoursa week. That's an estimated hard cost sav-ings of $37,000 annually.

EG &G Sealol is a division of EG &G, aglobal technology company providingcomplete systems as well as componentsand skilled support services to govern-ment and industry. The Sealol IndustrialDivision is a world leader in the design andmanufacture of mechanical seals and bel-low devices. It offers hundreds of solu-tions to sealing problems including face,radial, split, segmented, contact, and non -contact custom design seals.

Headquartered in Cranston, R.I., Sealolhas 320 employees and 10 satellite officesnationwide. Travel is a big part of its busi-ness, and a minimum of 45 expensereports are filed weekly. Many employeeswork remotely, and before the companyinstalled Employee Payables they mailedtheir expense reports to their respectiveoffices. This step could lengthen theaccounting and reimbursement processthreUr four business days. Then it took

EG &G SEALOLfour to eight hours a week at each office toprocess all the expense reports the officesreceived. In addition to the time delays,this burden added up to an average of 40hours a week in overtime paid at time -and-a -half. Assuming an average base hourlyrate of $12, the overtime required toprocess expense reports cost the compa-ny an estimated $37,000 a year.

Another wrinkle was that travelers atbranch offices were reimbursed out ofpetty cash, which caused significantheadaches for financial analysts whowere forced to go through each petty cashfund and split out travel expenses for bud-get analysis and forecasting. It was time toreengineer.

Employee Payables brought user satis-faction, cost savings, and enhanced datacontrol. "With Employee Payables, every-thing is submitted electronically in aninstant. No one has to check the math,approvals are automatic using the rulesengine, and reimbursement is depositeddirectly into the traveler's checkingaccount," EG &G Controller Karen Silvasays. "Our travelers and managers loveit.'

The accounting department receivesreports in a much more timely fashionbecause travelers can submit them elec-tronically without waiting to get back tothe office. Once they are received, reportsspeed through the system, driven by the

ment once a week and, if the total exceeds a certain amount,have the system notify the department manager. Or you cantell the rules engine to regularly pull a random percentage ofexpense reports for an internal audit.

Enhances financial control. An automated T &E system willprovide a clear picture of reimbursable expenses, giving youdetailed real -time information for improved cash managementand expense control. Improved management reporting resultsin more efficient analysis of expenses, helping your companyidentify spending trends such as an upward trend in airfaresor spending in New York, thus enabling you to review yourpolicies. For example, is your per diem in New York adequate?It also can help identify problem areas: Maybe the upwardtrend in airfares is due to travelers buying expensive ticketsat the last minute and not taking advantage of advance -pur-chase airfares. Furthermore, knowing that the company trav-elers are spending more time at certain hotels or using a par-ticular rental car company can benefit you in areas such aspreferred- vendor negotiations. You also can find out who the

Employee Payables rules engine, whichputs company policy online and eliminatesthe need for manual review and approval.Expenses that fall within policy areapproved automatically; only those fewthat do not meet policy are forwarded tomanagers for approval. The result is .extremely rapid turnaround on processing,which provides financial managers quickaccess to accurate data. Ultimately, thisprocedure ensures a more timely financial"snapshot" of actual expenditures.

Employee Payables also allows man-agers to do a number of things they previ-ously couldn't, such as importing thedata — including credit card information —into their financial accounting systemwhere it can be used for more detailedfinancial analysis such as vendor negotia-tions, comparison of travel costs versusindustry norms, and whether per diemamounts need to change.

"Soft costs forced us to do this, but thehard costs were icing on the cake," Silvaexplains. For example, the card downloadfeature is delivering a dramatic time -sav-ings benefit. Says Silva, "The travelerslove this feature because they don't haveto deal with making sure the balance ispaid on time. It saves time for everyone —from submitting a report, to getting itprocessed and approved, to receivingreimbursement. And it makes life so mucheasier."

high and low spenders are in the organization and who is gen-erating the most compliance exceptions in the organization.And you should be able to schedule reports to run automati-cally and to be routed to the appropriate managers via e-mail.

Provides an easy way to update your expense policy. Look fora flexible system that maintains all expense policy informa-tion in a central location and enables you to implement policyupdates quickly and easily when needed without hiring costlytechnical consultants. Many T &E solutions on the market donot offer an easy -to- change rules engine and require exten-sive —and expensive — reengineering when corporate policychanges. A flexible, open architecture will integrate easilywith current hardware and systems, maximizing your compa-ny's existing investment in technology.

Offers both client /server and intranet solutions. Look for a sys-tem that offers the option of filing expense reports via a centralapplication on a company's intranet as well as via a client/serv-er application that allows a direct connection to a company's


The expense report process

Traveler opens expense application (intra-net version or client application).

Traveler opens expense register to find ithas been pre - populated with the travel-er's latest credit card transactions.

Traveler reviews credit card transactionsand adds necessary information. Forexample, the hotel expense is chargedentirely to the "lodging" category, but thebill contains some personal charges.Traveler breaks out the expenses to theproper categories.

Incurring some mileage, traveler selects themileage category and enters the numberof miles traveled. The system calculatesthe amount to be reimbursed based ona reimbursement rate supplied by thecompany.

Traveler hand - enters out -of- pocket cashexpenses —such as taxi fare —into ex-pense register.

Having finished reviewing the credit cardtransactions and entering out -of- pocketexpenses, the traveler creates a newexpense report.

Expense report number is assigned auto-matically. Traveler enters the expensereport description, e.g., "Texas sales trip,"then chooses the "select expenses"button.

"Select Expenses" form shows all expensesready for submission. As the companyrequires expense reports to be submittedweekly, the traveler only selects expens-es that fall in the current week.

Traveler previews the expense report onlineto make sure the expenses are accurate.

enterprise. Depending on an organization's IT setup, the optionof client/server or intranet gives optimum flexibility. The bestprograms offer a variety of technical combinations so that cor-porations can select an application or application combinationthat best suits their organizational needs.


Ready to submit the report, traveler press-es the "Submit" button, and the report issent to the central server, where it will beprocessed and checked for exceptions topolicy by the system's rules engine.

In compliance with IRS policy, traveler'scompany requires original receipts forexpenses over $75. Traveler prints a bar -coded expense report and includes it inan envelope with receipts from the trip.

Upon receiving the envelope, a member ofthe accounting department scans the barcode to record that the receipts havebeen received. The envelope doesn'tneed to be opened unless the expensereport is audited.

Rules engine compares the expense reportagainst the online corporate expense pol-icy and finds that the traveler paid $149 anight for lodging in Dallas, but the definedlimit is $140. - --

System sends an e -mail to the traveler'smanager requesting approval on theexception.

Manager receives the approval request,reviews the details, and decides toapprove the expense. Approval is submit-ted via e-mail.

Now that expense report has been submit-ted, reviewed, and approved, it's codedwith GL account numbers, entered intothe accounting system, and reimburse-ment is authorized.

A day or two later e-mail confirms that thereimbursement has been deposited elec-tronically in traveler's checking account.

Offers full-service technical support — including implementa-tion, training, and support. No system will help you achieveyour maximum potential without the right people to help con-figure, install, and implement it. Some systems require exten-sive open -ended consulting to install and set up and further

technical support when policies change. Other vendors willimplement their system for a predetermined, up -front price,with technical support included for at least a designated peri-od of time, giving you time to implement the T &E solution ful-ly across the organization. So, make sure you factor in a com-pany's service and support when choosing your T &E software.

Offers other best practices. In addit ion to automating theexpense reporting and reimbursement process, a good T &Eprogram supports a number of other travel reengineering bestpractices, including:

• Corporate credit card programs,• Negotiated rates with travel vendors,• Elimination of cash advances,• Elimination of pre -trip travel authorization,• Automated audit of expense reports in place of managerial

approval,• Automated T &E feed to general ledger, and• Direct payment to employees and charge card vendors.

WHAT RETURN ON INVESTMENTWILL YOU ACHIEVE?

N ow you know what to consider when selecting expensemanagement software. But how do you figure the return oninvestment (ROI) so that you have tangible numbers to makea business case for such a purchase?

Current T &E Processing CostsHow do you figure your present T &E processing costs? If youdon't know how many expense reports you process, divide yourannual revenue by 50,000. That will give you a conservativeestimate.

(1) Annual revenue /50,000 = # reports /yearFrom there, figure your annual cost of processingreports.

On average, it costs most companies $25 to process oneexpense report.

(2) # of reports per year x $25 = annual cost to process

Example: Assume your annual revenue is $250 million.(1) $250,000,000 / 50,000 = 5,000 expense reports(2) 5,000 x $25 = $125,000

You're probably spending $125,000 a year to processexpense reports.

Potential Hard Cost SavingsThe Hackett Group says that by employing best practices, youshould be able to process an expense report for $1.75. Ameri-can Express thinks that number is $2. IBM expects to reach$4 per report. Libbey -Owens Ford got it down to $1.29, EDSreduced it to $2.50, and Johnson and Johnson has hit a low of$2. A conservative estimate would be $3 per report, saving you$22 per report.

Multiply the number of reports you process annually by a

cost savings of $22 for total potential savings.

(1) # expense reports per year x $22 = annual savings

Example: multiply 5,000 expense reports /year x $22

(2) 5,000 x $22 = $110,000 per year.

You would save $110,000 per year. Or, as another way to lookat it, your expenditure is reduced from $125,000 to $15,000

per year.

Soft Cost Savings with Best PracticesYou say you don't know what your T &E budget is? Accordingto a study by Runzheimer International, the T &E expenditureis, on average, half a percent of annual revenue. Figure yourannual ME expenditure, and then multiply it by 10% for aconservative estimate of what you could save by implementingbest - practice procedures:

AnnualT &E expenditure x .10 = annual soft savings

Example: again assume an annual revenue of $250 million.

(1) $250,000,000 x .005 = $1,250,OOT &E expenditure

(2) $1,250,000 x .10 = $125,000 soft cost savings.

Hard + Soft Costs = Total Potential SavingsHard cost savings + soft cost savings = total annual savings

Example: again assuming revenue of $250 million, add thehard cost and soft cost savings from the previous equations.

$110,000 + $125,000 = $235,000 annual savings

According to the Hackett Group, the actual entire cost sav-ings can be five to 10 times more than the hard cost savingsbecause of the reduced employee time, improved cash flow,enhanced control of expenses, increased vendor leverage, andother factors.

IT'S EASY AND EFFECTIVE

A good T &E program lets you automate decisions, enhancefinancial control, and increase productivity. The best softwarewill have a highly flexible architecture that al lows you todefine virtually any combination of rules and actions— accord-ing to your company's practices —as well as make changes tocorporate policy simply and easily. It should be easy to config-ure, install, and implement so you can maximize your compa-ny's current technology investment. And, best of al l, it canhelp you save hundreds of thousands of dollars a year. ■

Dana Brut t ig is president and CEO of Captura Software , Inc. , based inBothe l l , Wash. Capture develops business solut ions that automate corpo-rate pol icies and capture data for report ing and analysis . For more infor-mation, contact Captura at 1 -800- 547 -2223 or visit its Web site at www.cap-tura.com.

FEBRUARY 1998 MANAGEMENT ACCOUNTING 4:1

How Nonfinancial PerformanceMeasures Are Used

-jome companieswaste resources

performancefactors but thendon't .use

them,


BY BONNIE P. STIVERS, CPA; TERESAJOYCE COVIN; NANCY GREENHALL; AND STEVEN W. SMALT, CPA

Cert ficateof914erit

ost executives agree that thereis no magic formula —or oneright measure —for evaluating

business performance. Therefore, in aneffort to capture the essence of busi-ness performance, many companies arecreating new performance measure-ment systems that include a broadrange of financial and nonfinancial

measures.Although we know much about the

use of financial measures in compa-nies, our knowledge of these new, non-financial performance measures is lim-ited. To determine the scope of currentpractice, we surveyed top executives inU.S. Fortune 500 firms and in Canadi-an Post 300 companies. The study wassponsored by the Michael J. Coles Col-lege of Business at Kennesaw StateUniversity and funded by the Canadi-an Institute of Chartered Accountants.Study results indicate that top execu-tives in both countries believe thatnonfinancial measures are important.But the study also identifies two seri-ous drawbacks: (1) Although nonfinan-cial factors are viewed as important,they may not be measured, and (2)Even when nonfinancial factors aremeasured, they may not be used. (Fora description of the study design andsurvey sample, see sidebar.)

THE STUDY OF NONFINANCIALPERFORMANCE MEASURES

A lthough much is being writtenabout nonfinancial performance mea-sures, very little is known about actualcurrent practices. The objective of thisstudy was to provide a comprehensive

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picture of the process of nonfinancialmeasurement. Specifically, the studyexamined the degree to which top exec-utives in Fortune 500 and Post 300firms identify particular nonfinancialperformance factors as important,whether firms are measuring impor-tant nonfinancial factors, and whetheror not companies actually are usingnonfinancial performance factor infor-mation in their planning processes.

The questionnaire asked study par-ticipants to indicate, using a five -pointscale, the importance of each of 21 non-financial performance factors in settingcompany goals. For discussion purpos-es, we have grouped the factors intofive general categories: customer ser-vice, market performance, innovation,goal achievement, and employeeinvolvement.

The five categories of nonfinancialperformance measures are illustratedin Figure 1. For each individual perfor-mance measure, the figure shows ofthe 253 firms in the total sample:(1) number of firms identifying thefactor as important, (2) number offirms actually measuring the factor,and (3) number of firms actually usingthe factor in the planning process.

An individual factor was identifiedas highly important if it received a rat-ing of four or greater on the five -pointscale of importance. Results of thestudy indicate that customer servicefactors are perceived to be the mostimportant measures. Of the 253responding firms, 235 (92.9%) rated"customer satisfaction" and "deliveryperformance /customer service" as high-ly impor ta nt. "Product /process qu al i ty"was rated as highly important by 206(81.4%) of the responding firms and"service quality" by 205 (81.0%) of the253 firms (Figure 1).

Market performance and goalachievement also are perceived to behighly important categories. "Marketshare" in the market performance cate-gory was rated highly important by200 (79.1%) of the responding firms,and "productivity" in the goal achieve-ment category was rated highly impor-tant by 211 (83.4%) of the firms(Figure 1).

Factors in the innovation andemployee involvement categories wereperceived to be less important in goalsetting. Looking at the individual mea-sures, we see that "R &D productivity"


Customer Service E Important M Measure M Use M

CustomerSatisfaction

Delivery Performance/Customer Service

Product/Process Quality

ServiceQuality

Market Performance

MarketingEffectiveness

MarketGrowth

MarketShare

Goal Achievment

Productivity

EnvironmentalCompliance I I N M W N W �

StrategicAchievement

Innovation

New ProductDevelopment

ManufacturingFlexibility

TechnologicalCapability

R &DProductivity

I n n o v a t i o n o w

Employee Involvement

EmployeeSatisfaction

EmployeeTurnover

Education/Training

CoreCompetencies

InternalRecognition

Morale/Corporate Culture

0 50 100 150 200

Number of Companies (total responding: 253)

250

in the innovation category was ratedas highly important by only 112(44.3%) of the 253 firms, and "employeeturnover" in the employee involvementcategory was rated as highly importantby only 122 (48.2%) of the 253 firms.

The results of the study have impor-tant implications for those in the posi-tion of designing effective performancemeasurement systems. The first step isto get the right mix of key factors. Ifwe were to develop a "hit" list of criti-cal, nonfinancial factors to include inany performance measurement systemby listening to Kaplanl, Drucker2, andReichheld3, we would include the fol-lowing: market standing, innovation,productivity, customer service, andemployee involvement. Although theresponding executives in this study dididentify market share, productivity,and customer service as highly impor-tant factors, they perceived innovationand employee involvement measures tobe less important. This is clearly anarea of concern if we believe whatmany business experts are sayingabout the increasing importance ofinnovation and human capital. It maywell be that in the coming decade,intellectual capital will impact the bot-tom line more than booked, tangibleassets. If this is the case, performancemeasurement systems must includeleading indicators that tap human cap-ital. This is one way managers will beable to manage and control knowledge.

THE IMPORTANCE-MEASUREMENT GAP

O ur results show a substantialimportance - measurement gap. That is,many companies that view nonfinan-cial performance factors as importantare not capturing data on these fac-tors. As one would expect, the impor-tance- measurement gap is greatest forfactors that are perceived to be unmea-surable or at best difficult to measure.For example, in the employee involve-ment category, although 192 (75.9 %)companies rated "morale and corporateculture" as highly important, only 72(37.5 %) are measuring this factor.There is a similar finding for "corecompetencies" -192 companies (75.9 %)rated the factor as highly important,but only 69 (35.9 %) are measuring thisfactor.

It is interesting to note that just as

the categories of innovation andemployee involvement received loweroverall ratings of importance, respond-ing firms indicated these two cate-gories also have a low incidence ofmeasurement. In particular, the nonfi-nancial performance factor least likelyto be measured is "innovation."Although 160 firms (63.2 %) rated thefactor as highly important, only 35firms (21.8 %) are measuring thisfactor.

On the other hand, a number ofother factors have a high rate ofmeasurement. In the market perfor-mance category, 200 companies(79.1 %) rated "market share" ashighly important, and 182 firms(91.0 %) are measuring this factor."Market growth" was rated as highlyimportant by 181 firms (71.5 %), and154 firms (85.1 %) are measuring thisfactor. In the customer service cate-gory, "customer satisfaction" and"delivery performance /customer ser-vice" have measurement rates of79.5 % and 83.8 %, respectively. Ingoal achievement, "productivity" hasa measurement rate of 82.9 %.

After a firm identifies the right mixof factors to include in the perfor-mance measurement system, it iscritical that these factors get mea-sured and reported. "What gets mea-sured gets done" implies that theorganization becomes what it mea-sures. If you cannot measure some-thing, you cannot control it, and con-trol is essential. The results of thisstudy show a substantial importance -measurement gap for a number ofhighly important factors, particularlyin the categories of innovation andemployee involvement. Many of thesefactors may be perceived to beunmeasurable or difficult to measure.However, the fact is that precise datacollection may not be possible; a col-lection effort that provides even crudedata can prove valuable. "What mat-ters... isnot the absolute magnitudein any area but the trend

...that themeasurements will give

...no matterhow crude and approximate the indi-vidual readings are by themselves."4

Companies may have to experimentwith measuring and interpreting dif-ferent factors. The objective is to pro-vide action - oriented information tomanagers —not to report balancesheet figures.

THE MEASUREMENT -USE GAP

The final step in the performancemeasurement process is the use ofmeasurements in developing and moni-toring strategic plans. In this study, wefound evidence that a large number ofbusinesses are collecting data that arenot being used to inform managers inthe planning process. We call this themeasurement -use gap. Of course, theunderlying assumption is that if com-panies are collecting the data onimportant factors, they intend to usethe data to make business decisions. Toillustrate the measurement -use gap,look at "delivery performance/customerservice" in the customer service catego-ry (Figure 1). While 197 (83.8 %) of 235study participants (who rated it highlyimportant) indicated that their compa-nies measure this factor, only 140(71.1 %) of 197 indicated that theirfirms actually use this information forplanning purposes. In practical terms,this means that 28.9% of the firms arecollecting information that serves nouseful purpose in the planning process.

The measurement -use gap appearsto be most pronounced in the categoryof employee involvement. Measuressuch as "employee satisfaction,""employee turnover," "internal recogni-tion," and "morale and corporate cul-ture" are not used in the planningprocess by more than 40% of the firmsthat collect data on these factors.

Study results show that the mea-surement -use gap is the smallest inthe market performance category. For"market growth," 132 (85.7 %) of 154responding firms measuring the factorare using the factor. Results are simi-lar for "market share" in that 161(88.5 %) of 182 responding firms mea-suring the factor report that they arealso using the data. These are mea-sures that have been around for awhile; hence, managers are able tointerpret the data and translate theinformation into action items.

The measurement -use gap appearsto be moderate for the factors in thecategories of customer service, innova-tion, and goal achievement. Roughly25% of the companies who measurethese factors do not use the results intheir planning process.

The underlying assumption isvalid —if companies collect data onimportant performance factors, they


intend to use the data to make busi-ness decisions. Why would companiesidentify factors as important, collectmeasurements on these factors, andthen not use the information in theplanning process? Certainly, in thecase of the employee involvement cate-gory, the measures are "softer" than incategories such as market perfor-mance. The measurements may bemore difficult to understand, and, forthis reason, managers may have trou-ble in translating the information intoaction items. If, for whatever reason, afirm finds that it is using resources tocollect data but fails to use the result-ing information, this is an inefficientuse of resources that must be checked.Either the information is not relevant,in which case the factor should bedeleted from the performance measure-ment system, or, if the information isperceived to be critical and managersdo not know how to use it, every effortmust be made to understand the sig-nificance of the information.

COMPARING U.S. ANDCANADIAN RESPONSES

W e also wanted to examine theextent to which perceptions of theimportance, measurement, and use ofnonfinancial performance measureswere similar across U.S. and Canadianfirms.

Both U.S. and Canadian respondentsindicate that customer service andmarket performance categories aremost important in setting companygoals and that the other categoriesexamined are at least moderatelyimportant. The only statistically signif-icant difference between U.S. andCanadian firms is in their perceptionof the importance of the innovationcategory. U.S. respondents indicate thatthese measures are more important inthe goalsetting process. U.S. andCanadian firms also show similar pat-terns in the measurement and use ofnonfinancial performance factors.

For both U.S. and Canadian firms,market performance, customer service,and goal achievement are shown to bethe most used and measured nonfinan-cial performance categories. However,consistent with U.S. firms' belief con-cerning the importance of the innova-tion category, the U.S. firms represent-ed in this sample indicate that they


are significantly more likely to bothmeasure and use factors in the innova-tion category. Although there are sever-al possible explanations for differencesbetween U.S. and Canadian firms asthey relate to innovation, it is likelythat differences are due, at least inpart, to competitive influences. Previ-ous research has shown that competi-

tive pressure often serves as a catalystfor innovation and forces firms toadopt creative internal structures to beresponsive to changing markets.5

GETTING PAST THREE RED FLAGSTO A DYNAMIC SYSTEM

T he performance measurementprocess involves: (1) the identificationof important financial and nonfinancialfactors, (2) measurement of these fac-tors, and (3) use of factors in develop-ing and monitoring strategic plans. Theresults of this study, based on respons-es from the top executives of Fortune500 and Post 300 firms, provide a com-prehensive picture of the process ofnonfinancial performance measure-ment —and show that U.S. and Canadi-an firms face similar challenges. Webelieve that study results highlightthree red flags.

First, measures of innovation andemployee involvement were not per-ceived to be as important as customerservice and market standing —this is aconcern. If we believe the businessexperts who are telling us that humancapital and other intangible assetsclassed as intellectual capital arebecoming the basis of competitiveadvantage and wealth creation, then itis imperative that measures of innova-tion and employee involvement beincluded in the performance measure-ment systems —that is, identified, mea-sured, and used to design and monitorstrategic plans. Although results showthat U.S. firms view measures of inno-vation as more important in the goal -setting process and are more likely tomeasure and use innovation factors,both U.S. and Canadian firms showsubstantial importance- measurementand measurement -use gaps.

Second, study results indicate astrong importance- measurement gapfor certain factors. That is, althoughtop executives believe that certain non-financial factors are highly important,a large number of firms are not captur-ing data on these measures. It is clearthat some factors are more difficult tomeasure than others. But, even crudemeasurements on critical factors canprovide valuable input to the controlframework. To close the importance -measurement gap, companies mayneed to experiment with different mea-surement methodologies.

Third, results of the study suggest asubstantial measurement -use gap.That is, a large number of companiesare collecting data that are not beingused by managers in the planningprocess. The reasons underlying themeasurement -use gap should be inves-tigated. If the firms are collecting datathat are not useful, these factorsshould be deleted from the perfor-mance measurement system. If thedata are on factors that are perceivedto be critical, however, it may be thatmanagers need help in learning how touse the information in the strategicplanning process.

To develop a successful performancemeasurement system, managers mustclearly understand the interests of thestakeholders (customers, employees,and investors), the strategic objectivesof the company, and every aspect of thecompany's business processes. Onlythen can they be assured that the per-formance measurement systemincludes the right factors, both finan-cial and nonfinancial. Long -term com-mitment to the system is required toassure that the factors are measured,understood, and used. The result canbe a performance measurement systemthat is clearly linked to strategy, isdynamic, and is action - oriented. ■

Bonnie P. Stivers, Ph.D., CPA, is professor ofaccounting; Teresa Joyce Covin, Ph.D., is chairof the department of management and entre-preneurship and associate professor of manage-ment ; Nancy Green Hall, Ph.D., is associateprofessor of decision sciences; and Steven W.Smalt, CPA, is assistant professor of account-ing. Al l the authors are wi th the Michael J.Coles College of Business at Kennesaw StateUniversity. This art icle was submitted throughthe Atlanta Chapter of which Bonnie P. Stiversis a member. She can be contacted [email protected].

I Robert S. Kaplan and David P. Norton, "The BalancedScorecard — Measures that Drive Performance,"Harvard Business Review, January- February, 1992,pp. 71 -79; Norton (1993); "Putting the BalancedScorecard to Work," Harvard Business Review, Sep-tember- October 1993, pp. 134 -147; "Using the Bal-anced Scorecard as a Strategic Management Sys-tem," Harvard Business Review, January- February1996, pp. 75 -85.

'Peter F. Drucker, Managing for the Future, New York:Truman Talley Books/Dutton,1992; Post - CapitalistSociety, Harper Business, New York, 1993; "The Ageof Social Transformation," The Atlantic Monthly,November 1994, pp. 53 -80.

3Frederick F. Reichheld, The Loyalty Effect, HarvardBusiness School Press, Boston, 1996.

4Drucker, Managing for the Future.

sRobert Simons, Levers of Control: How ManagersUse Innovative Control Systems to Drive StrategicRenewal, Harvard Business School Press, Boston,1995.

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"Cube" the Power ofYour Spreadsheetwith OLAPBY HUGH SCHEFFY, CPA

ive years ago at Lewis Homes we were spending too muchstaff time on financial statement preparation and notenough on process improvement. We needed to dramati-

cally improve our ability to report on the company's opera-tions, analyze those operations, and perform strategic andfinancial analysis. We accomplished our goal within 90 days bycombining online analytical processing (OLAP) and a standardspreadsheet program that we linked to our AS /400 computer.All the while, Lewis Homes' existing databases and transac-tion processing continued as usual (at least for the purpose ofaccommodating these new approaches).

It's hard to believe, but the power and productivity of ourreporting and analysis function were increased with almost nochange to the user interface. And our staff required little or notraining except to enhance their current spreadsheet knowl-edge. If they knew how to use Excel or Lotus, they knew howto use OLAP.

BUILDING IS OUR BUSINESS

T he Lewis Homes group of companies, known as LewisHomes, is a privately owned group of corporations and part-nerships headquartered in Upland, Calif. Founded in 1955,Lewis builds more than 3,000 single- family units a year in Cal-ifornia and Nevada. It also builds and manages for its ownaccount approximately three million square feet of retail andindustrial space and approximately 5,000 apartment units.Lewis has 850 employees, of whom about 600 are engaged inhomebuilding activities. Its primary operations are in southernCalifornia (Los Angeles, San Bernardino, Orange, and River-side counties), Sacramento, and Reno and Las Vegas, Nev.

In the homebuilding operations, the major functional areasand departments are land development, purchasing /construc-tion, marketing, sales, and customer service. Corporatedepartments include finance, accounting, and informationtechnology. Each region maintains its own functional depart-ments, which parallel the organization outlined above. Dataentry is localized, but management of the databases and


Managing the pieces of a giant homebuilding project like this onein California is easier with OLAP.

reporting are centralized. Property management also isregionalized but with reporting done at corporate headquar-ters. Preparation of financial reports is done exclusively by thecorporate accounting department. As vice president/controller,I'm in charge of the accounting and IT groups. The financedepartment, which does not report to me, handles treasuryfunctions (cash management, loan draws, project feasibilityanalysis, and pro formas) as well as the typical finance func-tions (bank lines and ventures).

OUR INITIAL BUSINESS PROBLEM

B efore we implemented OLAP, Lewis Homes' monthly finan-cial reports were being prepared with an AS /400 -based line ofbusiness software product that had a "statement generator" as

Lewis Homes builds more than 3,000 single-family houses like...

one of its modules. This approach had two limitations. Thefirst was the sheer processing time on the AS /400. If we had tomake a change or rerun a report, as much as a day would beadded to the closing process. This delay was caused by the waythe AS /400 system processed the data, building up accounttotals for time periods each time a report was run. The secondlimitation on the process was the extensive knowledge andtraining required to modify the "business rules" for the state-ment generator in order to produce finished reports. This lim-itation was compounded by our approach to the coding struc-ture in our original implementation of the system. We hadn'tcontemplated some of our current reporting requirements suchas departmental expense reporting, consolidation of venturesin our financial statements, and more detailed reporting of ourhomebuilding inventory and cost of sales —an inevitable con-sequence of growth and change in the business itself.

We wanted to reduce the elapsed time from the end of themonth to the release of internal financial statements. (I washoping to cut a couple of days.) Looking for the solutionthrough improvements to the AS/400 process didn't makemuch sense to us, particularly when the AS /400 strength istransaction processing, not analysis and presentation. Thebest tools for that purpose are PC -based spreadsheets. Thelink between these two environments that enabled us to usethe best of both worlds is the OLAP engine. We discovered aproduct (TMl) that linked its OLAP engine to Lotus 1 -2 -3,which we were using already. (Subsequently we migrated toExcel, and the transition to Excel, while not difficult, wasorders of magnitude more difficult than learning OLAP.)

Within a month we had developed the necessary linksbetween the AS /400 and the OLAP engine (TM 1) to allow us toproduce our internal reporting package using TM1 and aspreadsheet (Lotus 1 -2 -3 or Excel or both). Further, and per-haps most important, we had deployed the use of online ana-lytical processing and its power to accountants who were notprogrammers but who were competent spreadsheet users. As aresult of a very brief implementation process (about 90 days),we had cut two days out of a four -day process, with no reduc-

tion of quality and with an improvement in presentation andflexibility. (Bear in mind, we were learning as we went.)

Previously, our process had involved, first, running thestatement generators on the AS /400, typically an overnightexercise. Next, we analyzed the results, which often requiredus to rerun the AS /400 statements or create new statementgenerator "reports" to analyze a problem. Every time we madea change (an additional journal entry, for example), we werecommitted to another overnight run. Finally, the reports hadto be re -keyed into Lotus 1 -2 -3 for presentation.

After adopting the OLAP /spreadsheet process, we kept aseries of base statement generators to assure a consistentapproach and to establish "control totals," but we were able toavoid most reruns of the AS /400 statements. Analysis at themajor account level was a simple matter of "browsing" theOLAP database (or "cubes" as they are called in TMlese).Finally, the presentation was automatic because the spread-sheet used to create the financial statements was ready forpresentation. Nothing had to be re- keyed.

...this one in California and Nevada every year.

WHAT IS OLAP?

T hink of it as a multidimensional database or "cube" thatyou can "turn" or manipulate and from which you can extractseveral levels of data at one time (see sample spreadsheets andcubes on p. 52). A single spreadsheet is always two- dimension-al. If, for example, at the lowest level, a spreadsheet containstime, accounts, and product line, the "cube" will have threedimensions —time, accounts, and product line. The next sheetin the series would be for a second product line. If we were toadd another dimension— account type —we could have oneseries of spreadsheets for "actual" account type and a secondseries for "budget" account type. And so on. We have found thatmost business problems can be managed with five or sixdimensions, which means we stay well within the limitationsof the software. (Our current version allows up to 16 dimen-sions per cube.)


Two Dimensions Ac c ount

Project RevenueCost of SalesGross Margin

Selling, General and Administrative

Project Net Income

Jan Feb Mar 1st -Qtr

100,000 125,000 95,000 320,00075,000 85,000 70,000 230,000

25,000 40,000 25,000 90,000

10,000 11,000 9,800 30,800

15,000 29,000 15,200 59,200

This is two dimensional as the spreadsheet would look

described earlier. My goal in implementing OLAP was torecapture staff hours to devote to process improvement. Thelonger the financial statement process took, the less time wasavailable for advancing our processes within the department.Although the project was self - motivated, the staff jumped onboard immediately, primarily because their lives suddenly goteasier, not because I wanted the implementation to go forward.For example, they were able to perform analysis directly with-out going to the statement generator "guru" to have a newstatement generator built.

IDEAL FORPRESENTATION " ' ' ' ' Account,

Project: ElmsP resentation is thePronemesis for IT depart- Project: Oaks

ments working with an Cos Pro

AS /400 or similar plat- Gro Cos Project:

forms. These systems Sal Gro Project Rewere not designed to Pro Cost of Sal

Selallow flexibility of fonts, Gross Mar

shading, comments, orPro

Selling, Gother manipulations. Project NoBut guess what: Theaudience doesn't care When the "Project" dimensio

how you're going to getit done. Spreadsheet programs are well suitedfor this functionality.

When using OLAP, the data store is externalto the spreadsheet, which results in a numberof advantages:

,tan ran mar isr -uir


Maples Jan Feb Mar 1st -0tr

venue 80,000 82,000 90,000 252,000es 62,000 61,000 64,000 187,000gin 18,000 21,000 26,000 65,000

eneral and Administrative 10,000 11,000 9,800 30,800t Income 8,000 10,000 16,200 34,200

n is added, the cube contains the data for all of these spreadsheets

• Through the spreadsheet, you access all thecubes (or databases), so performance prob-lems associated with large spreadsheet useare eliminated. You access literally thou-sands of t imes more data than is possibleusing just a spreadsheet.

• All data are stored in a central database (orcube) with security (access, read or write,and the like). When a change is made, every-one sees the new numbers in any report thatuses them. You'll never reconcile anotherspreadsheet as long as you live!

• The information from the "cube" may becombined with information entered directlyin the spreadsheet or used in formulas con-tained in the spreadsheet.

• Reports can be updated simply by changinga single reference in the spreadsheet, forexample, changing Type from Budget toActual.

LIFE AFTER OLAP

Our introduction to OLAP was a buyer profilesystem, which allowed us to analyze data aboutour home buyers from multiple sources. OurOLAP engine (TM1) became a part of our cul-ture with the financial reporting process I


DimensionsFour

Project: ElmsType: Budget Jan Feb

Projec Project: OaksCost o Type: Budget JanGross ProjecI Project: Maples

Selling Cost o Type: Budget

Projec GrossProject Revenue

Selling Cost of Sales

Projec Gross Margin

Selling, General and Administrative

Project Net Income

Mar 1st -Qtr

Feb Mar 1st -Qtr


100,000 125,000 95,000 320,00075,000 85,000 70,000 230,000

25,000 40,000 25,000 90,000

10,000 11,000 9,800 30,800

15,000 29,000 15,200 59,200

Now, having added the 'Type" dimension, the data in the cube are further defined as "Budget' or "Actual." I havetrouble thinking about the fourth dimension, so I think of It as two separate cubes, one for budget and one for actual inthis example. In actuality, all of the data "live" in one cube.

a`

e �

o ,a

ACTUAL

M o n t h s - - >Values are "actual" in this cube

� o�Q __.

c i

o ,a t

BUDGET

M o n t h s � - �Values are "budget' in this cube

Project Revenue $1,000,000 Roll -up ProjectRevenue $1,000,000TotalCost of Sales

- Historic 750,000 Roll -up TotalCost of Sales- Economic 800,000

Gross Margin - Historic 250,000 Roll -up Gross Margin- Economic 200,000

Selling, General and Administrative 100,000 Roll -up Selling, General and Administrative 100,000Interest Cost

- Historic 50,000 Major Account "EconomicCarry' 100,000Project Historic Net Income Before Tax 100,000 Roll -up ProjectEconomic Net Income Before Tax

—

Base Price Home Sales 950,000 Major Account Base Price HomeSales 950,000Options Revenue 50,000 Major Account Options Revenue 50,000

Project Revenue 1,000,000 Roll -up Project Revenue 1,000,000Cost of Sales

- Land - Historic 100,000 Major Account Costof Sales- Land - Economic 150,000

CostofSales- Other than Land 650,000 Major Account Cost of Sales

- Other than Land 650,000Total CostofSales

- Historic $ 750,000 Roll -up Total Cost of Sales -Economic $ 800,000

ADDITIONAL BENEFITS

H ere are some additional advantages of life with OLAP.

■

■

■

■

■

We think about 10 minutes of training can have a compe-tent spreadsheet user up and running. I was delighted byhow quickly our people caught on and became advocates ofthe approach.Analysis functions to locate unusual items, explain vari-ances, or perform similar tasks are easier because they typ-ically involve a browse of the data cube. "Browsing" is abuilt -in TM1 function, again using the look and feel of thespreadsheet. An example would be a spread by month of ayear -to -date total or a "drill-down" in a financial statementline item to see which major account contributed to thevariance.Updates are much simpler because references to the datacube can be in effect for the entire spreadsheet, so theupdate to a reference such as "Financial Statement Period"is a simple matter of selecting from a list of those periodsand "pasting" the one you want into the spreadsheet.Management questions can be addressed more quicklybecause an example can be built and then replicated forother items in the data set. For example, if we need to lookat the "Estimated Cost at Completion" for one project, wecan create the format to respond using TM1 and Excel.When complete, the same information for other projects canbe produced simply by reprinting the spreadsheet for addi-tional projects. (What's more, tools are available that canautomate this process.)In a single spreadsheet, the user can incorporate data frommultiple cubes as well as data keyed directly, which meansthere is no limit as to what can be produced. This ability isboth empowering and freeing for the user.

Data integrity. It is easy to maintain the integrity of data in acube because the owner of the data can develop the necessarycontrol totals and build them into the process that creates thecube in the first place. Another benefit of this approach is thatit has no fixed requirements for developing these controls. A

company can decide how and where to invoke the data integri-ty checks that it believes are necessary and cost effective.

Data normalization versus flat flies. Typically, data in mini- ormainframe files are "normalized" to improve processing per-formance and eliminate redundant information in the data-base. A simple example is customer purchase information.Typically, such information would be a series of invoices in adetail file accessible only by customer number. The customernumber would be the "key" to a customer name and addressfile containing the customer's address.

While normalization is wonderful for processing, frequentlyit's disastrous for reporting or analysis because the data arescattered among several different files. For analysis, dataorganized as they would be in a spreadsheet —one line perrecord —are much easier to use. OLAP provides a natural wayto "de- normalize" the data and put them into flat files that con-tain all the information required for the particular purpose athand. The "cubes" and "dimensions" can be named using"labels" that mean something in the user environment, andthey can be updated easily through the various tools providedby the OLAP product or by creative use of ODBC (the OpenData Base Connectivity standard) or "query" tools on the hostsystem.

What's important is that the controller or financial analystcan organize the data so that they are relevant to the businessproblem. He or she can operate outside the sometimes rigidlimitations imposed by a transaction -based processing systemwithout disturbing the transaction system or compromisingdata integrity. For example, we prepare financial statementson an "economic" as well as on an historic cost or GAAP basis.All of the differences are handled by defining roll -ups or con-solidations within TM1.

Table 1 depicts a simplified version of an income statementfor one project. In our general ledger, we maintain a "major"account for each caption labeled "major account." The roll -upsare combinations of major accounts or combinations of roll -ups. The roll-ups are defined in TM1 using a spreadsheet(what you see is what you get). In this example, it would takea relatively inexperienced user about 30 seconds to browse the

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cube and produce a comparison by pro-ject (for every project in the cube) of his-toric and economic net income beforetax.

Building the cube involves loadingthe major account data only. Thisprocess is simple, repeatable, and canbe audited. All the rest of the data arein the spreadsheet or in TM1. There aresome great tools (add -ins to TMU toautomate this process as well.

NOW DID WE USE OLAP?

H ere are several examples of LewisHomes' use of OLAP.

financial reporting. Financial report-ing, our first application, was discussedin the article. It saved us two days ofelapsed time in our closing process.

Project management and reporting. Avariant on the financial reporting appli-cation, this function uses separate datacubes for data that are needed only forthe reporting process and that do notneed to be maintained on the AS /400.

Business modeling and planning. Thisapplication relies heavily on the TM1processing worksheet. The processingworksheet allows a user to perform cal-culations on the input records as theyare processed and then send the resultsto an output data cube. Our first imple-

54 K4NAG1WNT ACCOUNTING FEBRUARY 1998

mentation was a payroll model. Theinput is basic payroll information suchas hourly rate or benefits selected. Theoutput is a budget number for payrollby employee, department, and the like.The power of OLAP here is that calcu-lations can be made during the processof building the data cube. The same for-

RE ABOUT OIf you want to learn more aboutOLAP, you may want to borrow orbuy OLAP Solutions, Building Multi- idimensional Information Systems,The book is a complete, practical,hands -on guide to mastering OLAPtechnology. Written by Erik Thom-sen, a leading expert in the OLAPfield, it takes you on a comprehen-sive, richly illustrated journey frombasic concepts to the mostadvanced OLAP technology. Thebook describes everything fromhypercubes and dimensions tostorage and access methods anduses real -life case studies to illus-trate the concepts. The accompa-nying CD -ROM contains 0software.

Published by John Wiley & Sons,Inc., it is sold in most bookstores.Wiley's Web site is www.wiley.com /compbooks/

mulas that work in the spreadsheetenvironment work in the process ofbuilding the cube.

10 -year financial analysis. For planningpurposes, we needed to prepare finan-cial statements for the previous 10years using our current consolidationrules. The solution: We created datacubes from the AS/400 using currentreporting rules, and then we ran Excelreports using each year's cube. Fre-quently we have commented that wecouldn't have done this project withoutExcel and TM1.

Prototyping. Modifying a database toaccommodate a transitory request forinformation can be tempting. But withOLAP, this kind of information can bemaintained in a cube and "joined" withother data without committing a per-manent change to the database. If, overtime, the data are still needed, they canbe added to the database in the trans-action processing environment, but onlyafter they have proven their long -termvalue. This flexibility allows prototyp-ing and responsiveness without creat-ing fire drills in the IT department.

EXPANDING OUR USE OF OLAP

TMl is an extremely powerful addi-tion to the tools we have available toreport on our operations effectively. Itplugs in seamlessly, and while it is notwithout a learning curve, the learningrequired is easy to come by. It hasenabled us to work around deficienciesin our line of business software and todo projects that were unimaginable inour previous environment. It servesmany of the purposes now being toutedfor data warehousing and does it at theright price. We are continuing to expandour use, a process that has beenenhanced by the developer and third -party add -ins to the product. It has tru-ly become a part of our culture. ■

TM1 is a product of Appl ix, Inc., 1-800-8 -APPLIX, www.appUx.com.

Hugh Scheffy, CPA, is vice president/con-troller of Lewis Homes in Upland, Cal if Heholds a B.S. degree from Harvard Co l lege , anMBA degree from Harvard Business School , andan AEMBA (advanced executive MBA) from thePeter Drucker Graduate Management Center atClaremont Graduate Universi ty. He has been inhomebuilding since 1974 and has been responsi-ble for the IT functions wherever he has worked.He can be reached at (909) 946 -7550 or a [email protected].

Standards of Ethical Conductfor Practitioners of Management Accounting and Financial Management

ractitioners of management accounting and financialmanagement have an obligation to the public, their pro-fession, the organization they serve, and themselves, to

maintain the highest standards of ethical conduct. In recogni-tion of this obligation, the Institute of Management Accoun-tants has promulgated the following standards of ethical con-duct for practitioners of management accounting and financialmanagement. Adherence to these standards, both domestical-ly and internationally, is integral to achieving the Objectivesof Management Accounting. Practitioners of managementaccounting and financial management shall not commit actscontrary to these standards nor shall they condone the com-mission of such acts by others within their organizations.

Competence. Practitioners of management accounting andfinancial management have a responsibility to:

■ Maintain an appropriate level of professional competenceby ongoing development of theirknowledge and skills.

■ Perform their professional duties in accordance with rele-vant laws, regulations, and technical standards.

■ Prepare complete and clear reports and recommendationsafter appropriate analysis of relevant and reliable informa-tion.

Confidentiality. Practitioners of management accounting andfinancial management have a responsibility to:

■ Refrain from disclosing confidential information acquiredin the course of their work except when authorized, unlesslegally obligated to do so.

• Inform subordinates as appropriate regarding the confiden-tiality of information acquired in the course of their workand monitor their activities to assure the maintenance ofthat confidentiality.

• Refrain from using or appearing to use confidential infor-mation acquired in the course of their work for unethical orillegal advantage either personally or through third parties.

Integrity. Practitioners of management accounting and finan-cial management have a responsibility to:

• Avoid actual or apparent conflicts of interest and advise allappropriate parties of any potential conflict.

• Refrain from engaging in any activity that would prejudicetheir ability to carry out their duties ethically.

• Refuse any gift, favor, or hospitality that would influence orwould appear to influence their actions.

■ Refrain from either actively or passively subverting theattainment of the organization's legitimate and ethicalobjectives.

■ Recognize and communicate professional limitations or oth-er constraints that would preclude responsible judgment orsuccessful performance of an activity.

• Communicate unfavorable as well as favorable informationand professional judgments or opinions.

• Refrain from engaging in or supporting any activity thatwould discredit the profession.

Objectivity. Practitioners of management accounting andfinancial management have a responsibility to:

■ Communicate information fairly and objectively.■ Disclose fully all relevant information that could reason-

ably be expected to influence an intended user's under-standing of the reports, comments, and recommendationspresented.

Resolution of Ethical Conflict. In applying the standards of eth-ical conduct, practitioners of management accounting andfinancial management may encounter problems in identifyingunethical behavior or in resolving an ethical conflict. Whenfaced with significant ethical issues, practitioners of manage-ment accounting and financial management should follow theestablished policies of the organization bearing on the resolu-tion of such conflict. If these policies do not resolve the ethicalconflict, such practitioner should consider the following cours-es of action:

■ Discuss such problems with the immediate superior exceptwhen it appears that the superior is involved, in which casethe problem should be presented initially to the next high-er managerial level. If a satisfactory resolution cannot beachieved when the problem is initially presented, submitthe issues to the next higher managerial level.

If the immediate superior is the chief executive officer, orequivalent, the acceptable reviewing authority may be agroup such as the audit committee, executive committee,board of directors, board of trustees, or owners. Contactwith levels above the immediate superior should be initiat-ed only with the superior's knowledge, assuming the supe-rior is not involved. Except where legally prescribed, com-munication of such problems to authorities or individualsnot employed or engaged by the organization is not consid-ered appropriate.

• Clarify relevant ethical issues by confidential discussionwith an objective advisor (e.g., IMA Ethics Counseling Ser-vice) to obtain a better understanding of possible courses ofaction.

• Consult your own attorney as to legal obligations and rightsconcerning the ethical conflict.

• If the ethical conflict still exists after exhausting all levelsof internal review, there may be no other recourse on sig-nificant matters than to resign from the organization and tosubmit an informative memorandum to an appropriate rep-resentative of the organization. After resignation, depend-ing on the nature of the ethical conflict, it may also beappropriate to notify other parties.


0

i l \ ► e c h F o r u m

Michael Castelluccio, Editor

THE FUTURE OF BOOKSYou have compiled the data, plotted

the trends, and now you are ready to fi-nalize your work. Everything so far hasexisted electronically; now you need toput the report in a binder. By printingthe information you somehow make itofficial or real, as though print were theonly way to externalize thought.

In the past , the suggestion that acomputer disk might replace the print-ed word inspired a lot of understatedanimosity. People dug their heels in,and wherever you heard the clicking ofkeyboards, the ripping sound of dot -ma-trix printers was sure to follow. If it wasimportant , you printed it.

Despite this loyalty to print, the com-puter has created changes, perhaps evena slow trend toward electronic publish-ing. To get a fix on the shift, we needonly look at one of the landmarks of thepublishing world —the encyclopedia.

A living tradition. For the longest time,the home library has been bu ilt a round

three essential works: the Bible, the dic-tionary,and the encyclopedia. The mon-arch of encyclopedias, the EncyclopaediaBrnsnnica,actually predates the consoli-dation of the 13 American colonies, havingbeen published first in 1768. It is the old-est continuously published reference workin the English language, so it should be agood indicator of how well the print worldhas weathered today's swirling storms ofdigital information.

The Britannica was the personalchoice of our first president (Washingtonpurchased his set from a Philadelphiaimporter), but he, no doubt, would havetrouble recognizing the new Encyclopae-dia Brittanica.The current edition ex-ists in three formats, two digital and


The "plastic" -back edition.

one print. The entire set of 32 volumesis available on a couple of CDs or direct-ly online on the Internet. What is sur-prising about the distribution of thework is the popularity of the digital for-mats. Last year, less than 25%of Bri-tannica sales were from the print divi-sion. The majority of readers chose theCD version or a subscription to the on-line set. There are several possible rea-sons for this shift from paper to monitor.

Price, portability, approval, and hyper-text. The print version of the Ency-clopaedia Brittanica represents a siz-able investment. The complete electron-ic edition, on the other hand, is onlyabout $125 on CD or $85 for an annualsubscription online. The add-ons to theelectronic forms make them even moreof a bargain. The CD version has all ofthe print version plus 7,000 additional

articles, multimedia, a copy of theMerriam- Webster Collegiate Dictionary,a natural language search engine,games, homework help, hypertext, andInternet links. The online version isequally packed. What makes this possi-ble is the amount of space on a singleCD (650 megabytes) and the negligiblecost of production of two disks.

Britannica alone did not discover CDpublishing. National Geographic Maga-zine, in print for 108 years, presently of-fers readers every issue (that's every ar-ticle, photo, map, ad, and cover) on astack of CDs that stands less than twoinches tall (30 CDs for $200). The origi-nal stack of 1,245 paper issues wouldstand several stories high. CD publish-ing not only is cheap, but the product isas portable as clothing.

Two other reasons for the success ofdigital publications are the accredita-tion of the medium and a device calledhypertext.

Electronic texts are now being takenseriously as sources. An example of thiscan be seen with one of the other homelibrary volumes, the dictionary. Yourfirst exposure to an electronic book like-ly was the dictionary built into yourfirst word processor. We now have ar-rived at the point where the most seri-ous of the research word books, the Ox-ford English Dictionary (OED), is beingdistributed on CD (all 290,000 entries,250,000 etymologies, and 2+ million il-lustrative quotations on one CD). Theelectronic book is legitimate because ofpublications like the digital OED.

The final reason for the success ofelectronic books may be the most signif-icant. Digital books have hypertext, andfixed print media does not.

The larger issue. Hypertext links showup in text as underlined, bold, or differ-ent color words. If you click on them,these words take you to another part ofthe document or to a different docu-ment somewhere else. These words, be-cause they connect you to other places,make a network of the current docu-ment. Steven Johnson calls this type oflink "the first significant new form ofpunctuation to emerge in centuries, butit is only a hint of things to come."(Interface Culture —How New Tech-nology Transforms the Way We Createand Communicate, HarperEdge)

What this new form of punctuationdoes is change the way you read. Flat

print on the white page is two dimen-sional, and we track its image in a lin-ear fashion. Watch a person skim thetext of an ordinary page. A reader slidesa finger (or just her gaze) from left toright, across the flat page, and thendrops down to the left and begins again.If, however, the reader's finger slidacross the page and then hit a pointthat caved in, and her finger pushedthrough the page and continued follow-ing another line on the back side and atan angle away from the original sur-face, you would be watching someoneskimming hypertext. It is multidimen-sional because once you leave the maintext, the hyperlinked text might holdyou, or it might slide you out along oth-er links to other pages. This is not onlya different way to read; it also presentsthe author with a different way towrite. For both reader and writer, it is adifferent way to think.

On the most basic level, hypertextpermits more information to be includ-ed on a page. Web pages often take ad-vantage of this economy. A single line oftext at the bottom of a page might linkthe reader to the home page, FAQs,download instructions, and so on withhot - linked hypertext.

On another level entirely, hypertextlinks take the reader out of a linearmodel and into a connected network ofthought. Traditional encyclopedia infor-mation is linear- -cause precedes effect;time lines read from left to right, pastto future; a paragraph transitions itselfinto the next paragraph; and pages arenumbered consecutively. Effectively con-structed hypertext encourages the read-er to form connections outside of thelines. It encourages lateral thinking(stepping back and taking an entirelynew approach to the subject); it encour-ages metaphoric comparisons (compar-ing two things that are not usuallyidentified with each other). Perhapswhen Johnson says that hypertext "isonly a hint of the things to come" he isreferring to the new research that de-scribes the brain "[as] an intricate as-semblage of neurons connected by trailsof electrical energy, generating informa-tion out of connections rather than fixedidentity."

Hypertext that forces one to thinkabout the way things are connected isperhaps modeling the brain of the read-er and encouraging that reader to moveoff the level of information and into a

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knowledge of how things fit in and why.The hypertext links in the electronic

Britannica are not just scattered every-where throughout; they seem to weigh itdown. In the Britannica CD98 there aremore than 1.4 million hypertext linksand an additional 15,000 related Inter-net links. What is especially ironicabout this is that encyclopedias havebeen the sacred keepers of linear infor-mation from time immemorial (that'sthe age of Pliny the Elder, in our tradi-tion, A.D. 23 -79). We think of encyclope-dias as books full of short factual arti-

cles that are disconnected from subjectand chronology by their alphabetical ar-rangement. Now we have the new ver-sions of the oldest living encyclopedia inEnglish, and the emphasis has shiftedto linked articles, linked searches, andlinked browsing. Perhaps hypertext andits future descendants will be the meansby which we can evolve the InformationAge into the Age of Knowledge. ■

Information about the new EncyclopaediaBrittanica is available online at www.eb.com


1i

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FA= rendsIN F INANCIAL MANAGEMENT

MANAGEMENTACCOUNTING PRACTICESTerri Funk, CMA, CFM, Editor

The IMA Financial Reporting Com-mittee (FRC) recently responded tofive exposure drafts from the Interna-tional Accounting Standards Commit-tee (1ASC). The 1ASC will consider theFRC's comments for incorporation intothe final draft of the IASC's Core Setof Standards.

INTANGIBLE ASSETS

he FRC commented on the IASCExposure Draft (E60), "Intangible As-sets," a revision to its 1995 ExposureDraft on the same topic. The Commit-tee agrees with the ED that costs ofinternally developed software may becapitalized and believes this would beone of the major benefits of the finalstandard, as many companies arespending a great deal of money ondeveloping software. Although it has aconcern about the high degree ofjudgment and subjectivity inherent indetermining when to recognize as anasset other types of internally devel-oped intangible assets, such as devel-opment costs, the Committee supportsthe overall conclusion that intangibleassets should be recognized when(a) it is probable that future economicbenefits specifically attributable tothe asset will flow to the enterpriseand (b) the cost can be measured reli-ably. The Committee also agrees thatcertain expenditures, such as start -upcosts, should be expensed as incurred.

On the other hand, the Committeeagain expressed certain concerns that


it had included in its 1995 commentletter. The Committee believes thatthe alternative in the ED to reevalu-ate intangible assets to fair valueconfuses users in their comparativereview of financial statements, and itis difficult to see any benefits that as-set reevaluations provide to investors.To help achieve greater harmoniza-tion throughout the world, the IASCshould address this issue for bothtangible and intangible assets as aseparate project. Also, the Committeeis disappointed that the revised EDdoes not address the initial FRC'sconcern with the excessive disclosuresbeing proposed because these require-ments far exceed shareholders' andanalysts' needs. The Committee alsosuggested that a summary flowchartbe added to help users of the finalStandard in implementation and un-derstanding. ■

PROVISIONS, CONTINGENTLIABILITIES AND ASSETSThe FRC commented on the IASC

Exposure Draft (E59), "Provisions,Contingent Liabilities and ContingentAssets." The Committee believes thatthis ED needs significant revision be-fore issuance. One of the main con-cerns is that its scope should be nar-rowed; currently it addresses toobroad a range of issues. The ED at-tempts to define a standard set ofprinciples to fit all situations relatedto warranties, environmental liabili-ties, reorganizations, future operatinglosses, self - insurance, and litigation.Although general recognition criteriaare covered by this ED, the Commit-tee believes the additional character-

istics of certain situations, such asenvironmental liabilities and siterestoration costs, require supplemen-tal guidance. Also, this ED briefly ad-dresses the use of discounting tech-niques, and the Committee sees aneed for more explicative guidance onimplementing present value -basedmeasurements. The IASC may wishto consider adding a separate projectabout the effects of present value -based measurements after it has com-pleted its Core Set of Standardsproject.

On the recognition procedures, theCommittee disagrees with the ED andbelieves that a company's board deci-sion based on a formal plan in cer-tain situations creates a constructiveobligation, and therefore a provisionshould be provided at that time. Also,these same events should allow forrecognition of a restructuring provi-sion. In the case of the sale of an op-eration, a provision should be record-ed at the time of management 'sdecision. The Committee does notagree with the use of the expectedvalue concept because it does not ap-ply to many situations. The Commit-tee supports retaining the measure-ment requirements of IAS 10,"Contingencies and Events Occurringafter the Balance Sheet Date," in theevent a contingent loss is to be recog-nized when it becomes probable. ■

BUSINESS COMBINATIONS

I he FRC commented on the IASCExposure Draft (E61), "Business Com-binations." For this comprehensivetopic, the FRC's response integratesthe comments indicated above for "In-tangible Assets" and `Provisions, Con-tingent Liabilities and Contingent As-sets." The Committee believes that, ingeneral, the required disclosures aretoo extensive. Other standard settersaround the world are revisiting theirstandards on business combinations,including accounting for intangiblesand goodwill. One is the project ofthe Financial Accounting StandardsBoard (FASB) as reflected in the 1997"Special Report— Issues Associatedwith the FASB Project on BusinessCombinations." The Committee sug-gests that the IASC participate inany international harmonization ef-forts, including a willingness to revis-

it IAS 22, "Business Combinations,"and its view on intangibles as otherstandard setters make progress ontheir projects. The FRC is particularlyinterested in accounting for goodwilland various alternatives being consid-ered in this ED, including immediatewrite -off, no amortization (only im-pairment reviews), and amortizationto "other comprehensive income." ■

DISCONTINUING OPERATIONS

The FRC disagrees with the two -event approach for a discontinued op-eration in the IASC Exposure Draft(E58), "Discontinuing Operations."The two -event approach for the criti-cal events relating to a discontinuingoperation described in this ED com-prises the following: (a) the initialdisclosure event, which causes a firmto disclose initial information about aplanned discontinuance in the notesto its financial statements, and (b)the segregation event, which causes

the firm to segregate in its financialstatements its assets, liabilities, in-come, expenses, and cash flows fromi t s cont inu in g opera t ions. Consequ ent -

ly, this approach defers reporting thefinancial impact of a discontinuanceuntil the segregation date.

The Committee's preference is for aone -event approach focusing on whenthe enterprise seems "demonstrablycommitted" to the discontinuance. Atthat time, there would be a publicannouncement of a formal plan todiscontinue an operation, the detailsof which have been approved by thefirm's board of directors. This oneevent then triggers disclosure of boththe fact that an operation is to bediscontinued and the estimated finan-cial impact of that discontinuance. Al-so, segregated financial statementpresentation of the operation(s) to bediscontinued should begin on thatdate. As the estimated financial im-pact is known, deferring this disclo-sure until the segregation date mightresult in more precise financial esti-mates but at the expense of lesstimely disclosure. Also, the two -eventapproach in this ED, as to when re-structuring should be recorded, is in-consistent with the IASC ExposureDraft, "Provisions, Contingent Liabili-ties and Contingent Assets," discussedabove. ■

INTERIM REPORTING

The FRC commented on the IASCExposure Draft (E57), "Interim Finan-cial Reporting." The Committee ispleased that this Exposure Draft re-flects some of the changes suggestedby the FRC in its earlier response onthe related Draft Statement of Princi-ples. However, the Committee contin-ues to disagree with the discrete ap-proach to interim reporting.

Based on the Committee members'experience with the integral approachthrough the application of the ac-counting guidance contained in Ac-counting Principles Board (APB) Opin-ion No. 28, "Interim FinancialReporting," this is the most useful andpractical approach for dealing with in-terim accounting. The Committee be-lieves that an interim period is an in-tegral part of the annual period andthat the accounting guidance shouldallow for the allocation of certaincost s w i th i n a n a n nu a l pe r io d ba sed

on an estimate of time expired, bene-fit received, or activity associated with

that period. The Committee doesagree that determination of whatneeds to be included in the notes tothe interim financial statements aboutunusual events should be based onthe standalone interim data. However,as users of financial statements, theCommittee would find the "accordioneffect" associated with the discrete ap-proach both disruptive and confusing.Moreover, the administrative effort re-quired to review the annual disclosurechecklist based on a quarterly materi-ality threshold would not appear tomeet a cost - benefit test. The Commit-tee could not support issuance of a fi-nal Statement based on this ED.

If members would like furtherIASC information, contact IASC, 166Fleet Street, London EC4A 2DY,United Kingdom; fax (011) 44 -171-353 -0562, or visit its Web site at www.iasc.org.uk. The FRC comment lettersare available by request to Nora Al-tavilla, IMA, 10 Paragon Drive, Mont-va le , N J 0 7 64 5 ; fax: (201) 573 -0639and are also available on the IMA'sWeb site at www.imanet.org. ■

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A Classified Section

INTERNAL AUDITORS ' 1 CONTROLLER SENIOR COST ACCOUNTANT

High -level position now available toprofessional with three plus years ofinvestment banking audit experience.This individual must be a leader as wellas team oriented. Solid interpersonalskills are required to handle all levelsof management. Great opportunityfor advancement. Travel up to 60%and excellent supervisory skills arerequired; MBA is a plus. Salary to$70,000.

Broker/Dealer seeks individual withtwo plus years' experience in securitiesand futures. Responsibilities includeperforming financial and operationalaudits as well as special projects. Sometravel (15 -25 %) is required. Salary to$60,000.

Large office building company is look-ing for analytical individual. Positionwill be involved with operational andcorporate audits as well as qualityassurance related projects. At least oneyear of experience is required. Salary to$34,000 plus benefits.

Finance company seeks a professionalwith three plus years' treasury experi-ence. Candidate must have provenanalytical skills including workingknowledge of financial instrumentapplications. Individual must also havethe abil ity to understand, implement,and effectively communicate complexfinancial and legal concepts. CMA is aplus. Compensation includes salary to$50,000.

Fast - growing, publicly held softwaredeveloper seeks an individual to handlerevenue forecasting and varianceanalysis. CPA is preferred, and Big 5experience is a plus. Prior industryexperience is preferred, but not a must.Salary to $50,000 plus benefits.

Expanding service company needs aRegional Controller for the WesternUnited States. This company is experi-encing rapid growth. Ideal candidatewill have supervisory experience andan entrepreneurial attitude. Great ben-efits and salary to $60,000.

ACCOUNTING MANAGERS

Dynamic entertainment company seeksan individual with strong accountingand analytical skills. Responsibilitiesinclude monthly close, financial report-ing, variance analysis and overseeing ofaccounts payable, accounts receivableand payroll. Requirements include anaccounting degree, over four years'experience, and related industry orpublic background is preferred.CMA/MBA a plus. Salary to $50,000

plus bonus.

Construction firm seeks a professionalto supervise the accounting staff as wellas handle financial statements andfixed assets. Experience with AS400systems and internal control implemen-tation is helpful. CMA a plus. Salary to

$45,000 plus benefits.

PROPERTY ACCOUNTANTS

The nation's largest publicly tradedoffice building company seeks RegionalProperty Accountants due to extraordi-nary growth and recent promotions.Responsibilities include all accountingfunctions for five to seven buildings,preparation of GAAP -based financialstatements, budget review, escalationbilling and variance reports. BS inaccounting or finance and strong PCand spreadsheet skills required. Twoplus years' real estate accounting is pre-ferred. Salary to $40,000 plus benefits.

Privately held electronics manufactur-ing company seeks a seasoned profes-sional with strong standard costingand GIL experience. Candidate will beworking with the accounts receivabledepartment and be responsible fortraining several staff members. Greatopportunity and salary to $40,000.

International consulting firm seeks aprofessional for their corporate office.The ideal candidate will have over fouryears of tax experience and a CPA ispreferred. This newly created positionwill be responsible for foreign taxresearch, expatriate taxes and limitedliability returns. Excellent verbal andwritten communications skills are aplus. Compensation package includes

salary to $70,000.

STAFFACCOUNTANT

$200 million manufacturing companyseeks a professional to prepare monthlyfinancial statements and account recon-ciliations, as well as participate inmonth -end close and light analysis.Must have at least one year of experi-ence with a heavy general ledger focus.Great long -term advancement poten-tial. Benefits include salary to $37,000.

Rapidly growing manufacturing compa-ny seeks an individual with strongmanufacturing accounting experience.Responsibilities include preparing andanalyzing consolidated financial state-ments and performing acquisitionanalysis. Good benefits and salary to$45,000.

A Claeaified Section

FINANCE SUPERVISOR BUDGET „ SENIOR ACCOUNTANTS

NYSE- listed company is seeking anexperienced professional. Ideal candi-date will have REIT experience, anda CPA is preferred. Responsibilitiesinclude researching complex GAAPissues as well as supervising theaccounting and financial operations.Competitive salary plus great benefits.

Regional office of health care corpora-tion seeks a qualified individual. Idealcandidate will have strong spreadsheetskills, budget preparation and varianceanalysis experience. This is a dynamiccompany that will provide opportunityfor career development. CMA a plus.Salary to $50,000 plus benefits.

CORPORATE" 1 ' 1 MUTUAL 1 ACCOUNTANT

Large oil and gas company seeks aCMA to handle all its financial report-ing. Ideal candidate will have five plusyears' oil and gas exploration and pro-duction experience including jointinterest billing. Great opportunity andsalary to $60,000 plus benefits.

Publicly traded communications firmseeks an experienced professional.International and domestic reportingand regulatory experience is required.SEC reporting is a plus. MBA or CMA ispreferred for this challenging position.Benefits include salary to $85,000.

Privately held transportation servicescompany has a newly created position.Must have five plus years of experiencewith a heavy emphasis on AP, AR,credit and collections. Ideal candidatewill be "hands on" and have the abilityto initiate and implement processimprovements, as well as assist execu-tive management in key decisions.Salary to $65,000 plus great benefits.

Great opportunity with a growing com-pany that needs a strong financialleader with experience in treasury, SECreporting, acquisitions and internation-al transactions. This firm has a strongmarket share in its industry and plansto grow significantly both domesticallyand internationally. Salary to $150,000plus benefits.

Billion - dollar mutual fund firm seeks aprofessional with five plus years' expe-rience to handle all facets of investmentaccounting. CMA and/or MBA are aplus. A dynamic and energetic individ-ual with a solid work ethic is preferred.Salary to $47,000 plus good benefits.

National nonprofit drug rehabilita-tion organization seeks a Director ofFinance to oversee its West Coastoperations. Position reports directlyto the CFO and includes managementof the accounting and finance depart-ments. Nonprofit and/or health careexperience is a must. Salary to$100,000 plus benefits.

$900 million advertising companyseeks a professional with seven plusyears' Big 5 experience. The ideal can-didate will be responsible for worldwideconsolidations, forecasts, budgets, andmonthly and quarterly financialreports. This individual will also handleits worldwide leasing program as wellas the financial reporting for a majorColombian coffee client. This managerwill supervise a small staff; solid com-puter skills are required. Salary to$100,000 plus bonus.

$500 million health care companyis looking for a qualified professionalto join its office. Ideal candidate willhave at least two years of experiencein cash management. Responsibilitiesinclude financial statement prepara-tion, account analysis and staff supervi-sion. Health care experience is a plus;CMA is preferred. Salary to $45,000.

Local construction company is in searchof an accounting professional to handleall financial reporting. Individualshould have two plus years' experiencein cost accounting; construction back-ground is a plus. Must possess excellentspreadsheet skills. Salary to $36,000plus benefits.

Fast - growing, publicly traded realestate company seeks an accountingprofessional. Ideal candidate will haveat least two years of public accountingand/or industry experience. Strong writ-ten and verbal communications skillsare a must. CPA or CPA - seeking is pre-ferred. Salary to $50,000 plus benefits.

Exciting investment management firmseeks a fast -track individual to overseeall aspects of the general accounting aswell as budgeting/forecasting and vari-ous investment related reporting. Can-didate should be a CPA or CPA - seekingwith industry experience. Excellentgrowth potential and salary to $45,000.

This division of a fast - growing nationalcompany seeks a hands -on professional.The ideal candidate will have at leastseven years of public accounting as wellas private industry experience. Thisindividual will be responsible for theaccounting and finance operations andwill report directly to the corporateCFO. CMA is preferred. Compensationincludes salary to $85,000.

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FE BR U AR Y 1998 MANAGEMENT ACCOUNTING 63

Jd4gAO4

ontinuii4i9Education

Charles "Chuck" Fazzi, Editor

ASSESS YOUR COMPETENCIES WITHIMAMS SELF-ASSESSMENT TOOLIn today's rapidly changing workplace,

financial professionals like us need toconstantly assess and upgrade ourskills. There's nothing worse than try-ing to do today's or tomorrow's job withyesterday's skill sets. But what are theskill sets employers are demandingboth now and in the future?

Last month, polybagged with thismagazine, you received a comprehen-sive assessment tool developed throughIMA's extensive research of employersand financial professionals. Completionof the tool will help you answer severalquestions which are critical to the suc-cess of every management accountant:

1. What are the competencies of to-day's and tomorrow's managementaccountant?

2. How do I rate myself on thesecompetencies, and where are thegaps in my skill sets?

3. What steps can I take to addressthese gaps?

In constructing the tool, IMA identi-fied the competencies of the manage-ment accountant by analyzing past re-search including an earlier PracticeAnalysis Survey and a study by ourManagement Accounting PracticesCommittee. We also did an analysis ofour own CMA and CFM exams for thecompetencies tested.

Approximately 60 competencies for


today's "complete management accoun-tant" were identified. To validate thesecompetencies, we sent them to a sam-ple of our membership asking them todelete competencies they thought wereunimportant and to add any we mighthave overlooked. We revised the compe-tencies based on members' feedbackand then drafted a Self- AssessmentTool which was tested with another

Beta group.The beneficiary of this painstaking,

thorough research is you but only if youtake the time to complete and returnthe self - assessment. The final assess-ment tool contains 56 competencies andasks you to rate your need for improve-ment on each. You are then asked toidentify the competencies in which yourneed to improve was greatest. Once youhave identified these, you can call theIMA or visit our Web page for a listingof courses that can help you developthese competencies.

If you're like many people, you're alittle sensitive about revealing gaps inyour knowledge to employers, peers,and (gasp!) subordinates. That's whywe made this a self - assessment tool.No one else needs to see it but you andus. And you can submit it to usanonymously.

Your responses are important to usand to your education. We will use thedata gathered to help us decide whichmember development needs are most

pressing so we can offer new courses in

these areas.Perhaps you saved your self- assess-

ment from last month's issue, glancingat it and putting it to the side. If you'veread this far, we hope you will be moti-vated to pick it up again, complete it,and return it to us.

But if you have misplaced it orthrown it away, don't panic. You can ob-tain another copy simply by callingLorin Woolfe, IMA's director of courseand program development, at 1 -800-638 -4427, ext. 302, or e- mailing him atIwoolfe @imanet.org. By completing andreturning the tool, you invest in yourown development, pinpoint your educa-tional needs, and help the IMA meetthose needs.

We believe the self - assessment is anessential tool for all financial profes-sionals to develop the competenciesthat will help them make a maximumcontribution in the workplace. We planto design our educational curriculumaround those competencies to help cre-ate the management accountant of thefuture. Each of you who responds con-tributes significantly to that effort andalso reaps the benefits. ■

Charles "Chuck" Fazz i i s professor of account-ing at Robert Morris College , Pit tsburgh, Pa.,and a member of the IMA's Commit tee onEducat ion. He can be reached by phone at(412) 262 -8489, fax at (412) 262 -8672, and e-mail at fazzi@robert- morris.edu.

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