Next to be Called Out – The Accountants

From the Game Theory in Management Blog
Modelling Business Decisions and their Consequences

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After excoriating the risk management types over the past couple of blog entries (they deserved it!) for asserting the efficacy of their techniques far, far beyond their legitimate limits, I’m now ready to do the same thing for a group of management information custodians who have dominated the best-decision-in-any-given-situation dialogue for hundreds of  years, and yet shouldn’t. That’s right – I’m talking about our friends, the accountants.

What we now know as double-entry bookkeeping and accounting first came into existence along about the time of Machiavelli (coincidence?), and has largely monopolized the executives’ information stream ever since.  So prevalent is the suspender-clad ones’ take on the management universe that leaders who have no idea how to read a profit-and-loss statement will make regular reference to the “bottom line.” For my readers who have had occasion to (or even regularly) attend high-level meetings within your organization, let me ask you this: have you ever seen your company’s top executive cede ultimate veto authority over any course of action – no matter how subtly – to the chief financial officer? I have, and I find it appalling. The accountants have successfully manipulated the management information debate into a narrative where the general ledger is the ultimate arbiter of information for high-level decision-making, a sort-of oracle at Delphi dressed in clip-on suspender-supported togas, and I think it stinks.

What kind of information can the general ledger provide? The set of valid general ledger-based management information consists of:

·         How the assets are doing.

…and that’s it.

Of course, how the assets are doing is the basis for such decisions as how much your organization pays in taxes, how much it owes or is owed, how much profit can be claimed, etc., etc. But it is undeniable that data pertaining to assets is the limit to general ledger information. Naturally, your organization’s CFO team will never, ever admit this, but it is undeniably true. Of the information streams they claim to be able to provide, but can’t, the more prominent include:

·         Project cost performance (their pretending to the contrary is one of the more egregious management science frauds perpetrated on board rooms everywhere)

·         Schedule performance (making a list of objectives with associated dates and person(s) responsible is to schedule management what alchemy is to nuclear physics)

·         Estimates at Completion (EACs)

·         Return on Investment!

Yes, I know that last one will make even the most timid CPA sputter with rage. After all, the claim to be able to calculate that variable on any particular asset (or group of assets) serves as the underpinnings for almost all of their subsequent assertions that they can generate the brass ring of information tidbits, the ultimate definer of good business decisions, or bad ones. And it’s all completely wrong.

The basic formula for calculating ROI is:

ROI = (Gain From Investment – Cost of Investment) / Cost of Investment

so that any asset’s ROI greater than 1.00 is assumed to be a good investment decision, appropriate for pursuing.

Do I have to say it? This is sophistry of Cecil B. DeMill proportions. Except in extremely rare cases, the Gain from Investment (better stated as the anticipated Gain from Investment) variable is impossible to calculate. What was the Gain from Investment on the Titanic’s lifeboats? They were assets to the White Star Line, were they not? Why can’t the suspender-and-bow-tie-clad ones calculate it, then? Because if the Titanic doesn’t sink, the lifeboats have zero value, or even negative value if you take the character Cal Hockley’s assertion from the movie that they were a “waste of deck space on board an unsinkable ship.” However, since the Titanic did sink, then the existing lifeboats were literally invaluable.

And yet, how many business decisions are based on this ROI calculation? Even the Project Management Institute® published books defending the need for creating a Project Management Office (PMO) based on … its Return on Investment! 

How many other allegedly useful information streams are out there that are, in fact, either stretched way past their nominal limits of efficacy, or are out-and-out fraudulent? To find out, you can either stay tuned to this blog, or, if you are impatient, then order my recently-released, must-have book, Game Theory in Management.

Posted on: December 24, 2012 04:00 PM | Permalink

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