White Papers

Accounting is called "the language of business" because it is the process of identifying, measuring, and communicating financial information to many different groups of people, necessitating different types and uses of accounting, for instance, Managerial Accounting for managers, Tax Accounting for governments, and Forensic Accounting for litigants.  The focus of this paper is Financial Accounting, the preparation and issuance of financial statements to help external users, primarily the owners and creditors of a business, make informed investment decisions.  Surprisingly, most accountants know little about the history of financial accounting because it is not generally taught in accounting courses. However, everyone knows something about its current problems that affect the economy and their lives, the enormity of the accounting scandals since 2001– Enron, World Com, and Lehman Brothers, to name just a few.

The initial development of accounting is older than civilization itself and plays a key role in a number of important phases of history.  There is ample evidence showing that written language developed from early bookkeeping, the recording of assets.  As long as 10,000 years ago in Mesopotamia, alongside the development of agriculture, small clay cones, spheres, and other geometrical shapes or tokens, were sealed in hollow clay containers or balls and then baked, with the purpose of accounting for the amount of commodities owned or transacted: grain, cattle, wine, etc.  Two-dimensional outlines and later picture symbols, representing the tokens inside the balls, were drawn on the outside of the balls while the clay was still soft, before baking, until users eventually realized that neither the tokens nor the balls were needed – the symbols for the tokens could simply be drawn onto clay tablets.  This was a revolution in information technology.  The symbol representing the number one was a wedge (the impression made by the reed stalks used for drawing), and this early symbolic writing is now known as cuneiform, from the Latin word for wedge…

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One of the fastest growing segments in finance is the derivative’s markets. The Over the Counter (OTC) derivative markets are an unregulated segment of these markets.  A derivative is a security that derives its value from some other asset hence the term derivative.  These are in essence contracts on those underlying assets that trade in what is known as the cash or spot market.  The types of cash market instruments, which are the basis for derivative contracts, are extensive ranging from commodities to currencies to financial instruments. The main categories of derivatives are Forwards, Options, and Swaps.

These contracts are between individual entities and generally fall outside of a regulatory structure even thought there are usually some regulated equivalent. An example of this is that Forward Contracts are on not regulated while Futures Contracts (A refinement of the Forward Contract Concept) are regulated.  The need or existence of any derivative contract is driven by the need to reduce risk.  They are risk control instruments that allow the transfer of risk from those who wish to reduce risk (hedgers) to those who are able to bear that risk (speculators). The growth in the markets is directly related to the increase risk (volatility) in the global market in the past decades. As such derivatives are sometimes thought of as unregulated insurance markets.

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There are a variety of ways to introduce Six Sigma into a company, involving different levels of structure, time frames, costs and management commitments. But all agree on the basic steps of the improvement process, the five stages of the DMAIC process.  DMAIC is synonymous with Six Sigma when talking about the process to follow, the steps.

In recent years, however, new developments in Six Sigma have led to the amalgamation of the “lean” tools to bring about certain changes in the methodology and expedite the results. In this context “Lean Six Sigma” (LSS) has now become the industry flavor and many applications are being cited to show its popularity.

To date, however, the proponents of Lean Six Sigma have failed to develop a process to prescribe how to apply Lean Six Sigma.  Most articles and textbooks on LSS read like Six Sigma texts with the word “lean” added many times, especially in the title, and with some of the lean tools added to the tool kit.  But the process followed is DMAIC with no changes.  If that is all Lean Six Sigma is, then it is still just Six Sigma.

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Three elements: quality of opportunity (O), i.e., timely and favorable circumstances giving the firm high odds of doing well on a sustainable basis; management of resources (R), i.e., the way the entrepreneur and her team manage the bundles of assets and capabilities that can be used for productive purposes; and quality of team (T), including the entrepreneur and her team drive the performance of entrepreneurial firms. The three elements combine and jointly effect firm performance. In reality successful entrepreneurs take a rather holistic approach and manage O and R and T simultaneously as if the three elements are integral part of one large portfolio. Therefore the firm performance is better understood by looking at the entire portfolio rather than its parts.

To the extent that entrepreneur and his team have any managerial discretion, relative importance they assign to O and R and T reflect the choices that the management makes. And different combinations of O and R and T can be thought of as different approaches to the management of the firm.

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What could possibly be wrong with pay for performance?  Money is unquestionably a powerful motivator.  Pay can encourage desired employee behaviors and discourage undesired behaviors.  And there is justice in pay for performance.  While should lesser performers receive the same pay raise or bonus as your leading performers?

To answer I will start with classic old story, or parable, which I will adapt:  The Parable of the Old Man and the Football Game.  There was once an old man who had recently retired from years working in the factory.  He was a proud and good worker and always felt that he had plenty of ideas he could contribute to management if only someone would ask.  But they never did.  Anyway, the highlight of his retirement was the nap he could take every afternoon.  For 40 years he would tire in the afternoon and wish he could take a nap.  Now he could…

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When considering the current economic crisis we can discern that variables of two different types contributed to its creation and magnitude. The first are the real variables that caused the initial imbalance in the economy. The second variables are the nominal ones, which are usually catalysts that accelerate situations. Metaphorically, the real variables can be compared to fire and the nominal ones to the fuel. Considering the way the crisis evolved, there is a clear view of the chief real variable that caused the crisis. This variable is the change in the savings rates, primarily in the US.

If we briefly review the history of the crisis, we see that the first signals of genuine economic instability began to appear in the first half of 2007, when a large wave of sub-prime mortgage lenders in the United States became insolvent. However, the seeds of the crisis were planted many years before. The United States created a deficit in its current account that grew steadily throughout the last decade. The deficit on one side of the ocean created surplus on the other side, especially in countries like China and Singapore. These countries then loaned the surplus back to the US so that it would be able to continue buying imports. Usually, a current account deficit is highly correlated with a government deficit, and the data from years before the crisis show that the US is no different. During this period, several bubbles were created in the American economy. The first bubble appeared in the lending market, led by the housing market where mortgages are granted to sub-prime borrowers and prime borrowers with low self-equity. These loans expanded beyond all reasonable proportions because of the financial system’s eagerness for short-term profits. This eagerness was ignited by short-term incentive contracts signed with managers of financial companies or what is known professionally as the “principal-agent problem.” Simultaneously, mortgages became securitized, which created an additional problem when rating companies granted these securities AAA ratings despite the high risk levels. The lack of supervision over the highly-influential rating companies working in an unregulated branch exacerbated the crisis.

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Can the Financial Accounting Standards Board and the International Accounting Standards Board Agree on One Set of Global Accounting Standards…and will the Securities Exchange Commission Agree to the Standards adopted?

The Securities and Exchange Commission (SEC) is on record as stating that they are responsible for the protection of American investors, and that they will never compromise that mission.  The SEC believes it has set the highest regulatory standards for the financial markets of any country on earth as it oversees the Financial Accounting Standards Board (FASB) and approves the FASB’s formulation of accounting principles for US companies. These principles are known as Generally Accepted Accounting Principles or GAAP.

Starting in 2001 the International Accounting Standards Board (IASB), a successor of the 1973 established International Accounting Standards Committee, has been issuing International Financial Reporting Standards (IFRS) for most of the rest of the world to follow when producing financial statements (over 100 accounting organizations and 80 countries and 9,000 companies are involved complying with the IFRS).

However, for many years the accounting profession, both within the US and internationally, has recognized the need for one set of high quality accounting standards on a global basis.  The accounting profession, as a whole, certainly is in agreement that investors require full and accurate information and that the data behind the information must be reliable and transparent.  The goal to set consistent accounting standards and disclosures, which would lead to comparable financial statements worldwide and, hence, aid globalization and development, has been in place for decades.

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One of the most important decisions at the time of a new product launch is selecting the brand.   Branding a product represents a promise made by the firm to the customer about the product’s value or quality.  Effective branding differentiates competing products and contributes to the mental image the customer has about the product and the firm.  It is easy to see the value in familiar brands such as Coca-Cola, Toyota, Nike, or Apple.  Marketing people refer to brand equity as the added brand value that results from careful investment in brand marketing by the firm, and is created over time by the relationship between the brand and customer.  Brand equity is valuable to the firm as it builds customer loyalty and repurchase and gets greater reseller support, thus making future marketing and product launch activities much more cost-efficient.

Branding for the domestic market is challenging enough.  Names must be chosen that communicate the physical or sensory qualities of the brand; that are clear, relevant, and not irritating or insulting; that might be transferable to a line of products in the future; and that support the overall new product strategy.  Few if any brands score high on all these dimensions.  But when developing a branding strategy for the global market, the branding decision becomes even more complicated.  In addition to all of the above, the firm must now consider whether it should standardize the brand name across all markets, or use two or more regional brand names.  And this decision in not made in a vacuum, but must be tied to the global management of the brand…

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Whether the presentations class is in Philadelphia…or Mumbai…or Cali…or Singapore…I hear the same universal and eerie refrain from  finance students.

“Finance is different.”
“We don’t do all of that soft-skill presentations stuff.”
“For us, the numbers tell the story.”

Numbers seem to enchant business-people in deep and mysterious ways, as if numerical constructs are somehow less malleable than the English language, less subject to manipulation.  In a chaotic world, a spreadsheet exudes familiarity, a firm valuation offers comfort, an income statement serves as anchor.

For some, numbers convey a certitude and precision unavailable to mere rhetoric.  And this illusion of certitude and precision exerts influence on finance folks to believe that, well … that the laws of human nature that stymie the rest of us do not apply to them in the coldness and hardness of objective numerical analysis.

But this is an illusion. And the result is 2D presenting, full of voodoo and bereft of nuance and subtle analysis…

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