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Wednesday, April 22, 2009
Your Balance Sheet Is Different
There are very few experts who know how to read a balance sheet and tell you where you are going wrong with your strategy. I am training myself in this art for last 16 years. I have been into Internal Audits and reading balance sheets all through out.
I don't read balance sheets to manage an investment portfolio but to know how a company stands to perform in future and where a little tweaking can help it turnaround and produce breakthrough results for its shareholders.
It's a real fun to read a balance sheet if you connect it with the key decisions taken by the management. You can know how management is performing to create wealth for its shareholders.
Interesting aspect about reading a balance sheet and P&L is when you can spot the concern areas quickly that management doesn't know that it doesn't know.
Once you know that there is something fishy, its time to find answers and reasons. Informed enquiries with management along with knowledge of business and processes, helps you to get to the skin of the issues.
Second task is about communicating what you have read to the management and inspire them to do something about it. That 'something' which you suggest will bring forth new possibilities and higher value addition for the management.
My intense knowledge in Management Audits along with my ability to read financials helps me coach the management for creating higher value.
You talk about better corporate governance, controls, planning, resource utilization, revenue generation, revenue leakage, cost reduction, where you will look first? All involves a closer look into financials. Different people look at financials in a different way.
Auditors look at a balance sheet in a different way. When you do due diligence for M&A, you read balance sheet in a different way. When you read balance sheet from point of view of wealth generation, it's a different ball game. It's strategic and it's innovative.
SMEs can add great value if they get their balance sheet read by an expert. It's important they understand the game of wealth generation. The expert spends few hours with you, visit your facilities, factories, offices and of course your balance sheet and P&L and come out with value adding recommendations that can produce breakthrough results involving turnaround of your business, increased cash generation, increased revenue, reduced cost, reduced losses and introduction to new possibilities of growing.
Reading balance sheet in this economic recession is very important. Read yourself or ask for some help.
If business consultant tells you what you already know then kick him out and invite the one who tells you something that you don't already know.
One of our clients increased their revenue by 200 %. Cost reduction achieved 50%. Asset turnover doubled in just six months.
Increased focus on financial reporting has changed the way Internal Audit is being done nowadays. Hence, risk consulting firms like PWC and protiviti consulting have suggested adopting a balanced approach to Internal Audit, i.e. balancing the Internal Audit between Risk & Control Assessment focus and Business Performance Assessment focus so that Internal Audit resources are allocated appropriately between value protection and value enhancement objectives of the Internal Audit.
However question arises: Are these two focus or objectives, means to a same end? If so, do resources allocation between these would be amounting to duplication? Instead of a balancing act, I am in favour of hybrid approach just as a strategy to corroborate and substantiate various internal control/ risk assertions. Mind well, your cost of monitoring and cost of SOX or SARBOX compliance efforts are mainly driven by the kind of Risk Assessment you do and thus Control Activities you define within your business processes.
Many Internal Auditors who adopt risk based audit use following logic to reduce their monitoring cost. When they place higher reliance on Effectiveness of controls whether based on their subjective judgment or on basis of some kind of risk scoring, they reduce extent of testing Existence of control. Lesser the net risk score, lower it will be in the priority list. If we apply this logic in a situation where Internal Auditor has designed the controls, he will rely on Effectiveness of controls more and thus extent of testing Existence will be less. When the Management designs controls, IA test controls to provide assurance to the Management of its Existence and Effectiveness.
Now many would see a contradiction here and they may like to question as to how Existence of control is connected to its Effectiveness of control. Mind well, whether a control is Effective or not Effective, if a control exists on the list (List of Primary Controls), they have to be tested for its Existence to reduce the Audit Risk. In other words, there is no connection.
Now let's again turn to the main topic as to how we can reduce the cost of monitoring and achieve various objective of IA within available time and budget.
More we under rely controls, our strategy will be for deploying more procedures and will entail more cost. If we over rely controls to reduce our costs, we are responsible for not exercising appropriate diligence. Controls and Risks are affected by the type of industry, location, volume of business, type and value of assets, segregation of duties, past performance and efficiency of risk or process owners, etc. These controls and risk are owned by the Business Managers and they can influence the Effectiveness and Existence of controls.
Management Accounting concept used in designing a Performance Measurement System suggests that one should not be made responsible for inefficiencies of others. Clearly, Internal Audit is made responsible for the higher costs of audit when controls are ineffective or not complied with due to delinquent Business Managers.
Second problem within the Industry is testing Existence entails more cost than testing Effectiveness assertion of Internal Control. However, introduction of technology have solved this problem to some extent, bigger leaps are still to be taken.
So how would we reduce cost of monitoring while achieving appropriate level of deterrence for ensuring compliance and how we can free up IA resources for extending IA program to other non attended priorities? How inefficiency of Business Managers which increases IA cost be reduced or taken care of.
Many have adopted balance scorecard incorporating control objectives with its framework but in reality this management method is just diversifying the risk of the business managers who may have personal objectives that may not be in sync with the business objectives. An another management method named Control Self Assessment proving to be an exercise which is just enhancing controlling skills of a business managers instead of helping them achieve the business objectives in an optimum way.
We are suggesting below an Innovative Method which is proposed to reduce the cost of monitoring while keeping the deterrence level among the auditees and assurance provided to the management at the same level. This will make the business managers more business oriented who will then serve the business as a separate business unit and their performance and efficiency will measured as if they are an outside professional service provider.
Monitoring cost mainly depends on no. of transactions (sources of risk) to be tested and frequency of testing to provide the required level of comfort or assurance to the management.
IA determines a control liability score on basis of no. of non-compliant sources found. Say if IA founds 1 unauthorized credit note, it will give a score (-1). Thus when 10 credit notes are found unauthorized, it will give a control liability score (-)10 to the process owner concerned.
These scores may be connected to KPI of the process owner under his due knowledge which may create required level of deterrence. Unit Score may differ based on the type of risk or transaction to produce desired deterrence or incentive to comply with the controls. The entire score system may be designed by the top management or audit committee.
How new method will work:
We will take retail industry example. Say there are 5 SKUs in a period which should be correctly coded and approved by the Warehouse Manager. Assume that IA imposes control liability score of (-)10 upon the Warehouse Manager for each incorrect coding or non- approval.
Let's say, there are 2 of the 5 SKUs not coded correctly and checked. The IA could choose to iteratively test all the SKU sheets to inspect each for the appropriate authorization and coding; given that 2 are incorrectly coded, it would assess total control liability score of (-)20, if IA were to do a 100 % testing.
Instead, under our proposed method, the IA could randomly select fewer samples to determine control liability score and apply that outcome to determine control liability score for all 5 SKUs.
If the IA randomly selected 1 SKU as a sample and found it be with incorrect coding, the auditee would bear total control liability score of (-) 50. And, if the selected SKU is correctly coded, then auditee would bear a control liability score 0(Zero). Notably, using this approach, the process owner would be subjected to the same aggregate expected control liability score of (-) 20. 40% probability of (-) 50 and 60% probability of 0 of total control liability score. Thus even testing 1 SKU, IA can generate the same level of deterrence for the process owner. Similarly, whether you test two or three or four or all the five, control liability would remain same when you apply average result of the sample so tested to the entire population.
Sample Size One Probability of sample selected with risk present: 2/5 = 0. 4 Probability of sample selected without risk present: 3/5 = 0.6 Control Liability Score: 2/5*(-50)+3/5*(0)= -20
Sample Size Two Probability of both samples selected with risk present: 2/5*1/4 = 0.1 Probability of one sample with risk present: 2/5*3/4 + 3/5*2/4 = 0.6 Probability of samples without risk present: 3/5*2/4 = 0.3 Control Liability Score: 0.1*(-50)+0.6*(-25)+0.3*(0)= -20
Sample Size Three Probability of two samples selected with risk present: 2/5*1/4*1+2/4*3/4*1/3+3/5*2/4*1/3 = 0.3 Probability of one sample with risk present: 2/5*3/4*2/3 + 3/5*2/4*2/3+ 3/5*2/4*2/3 = 0.6 Probability of samples without risk present: 3/5*2/4*1/3 = 0.1 Ctrl Liability Score:0.3*(-33.33)+0.6*(-16.67)+0.3*(0) = -20
Thus whatever may be the sample size 1 or 1000, the final control liability score will remain same.
Size of sample may be determined based plan approved by the management or the audit committee to ensure adequate assurance within the available time and budget. The size of sample can be negotiated between the parties concerned before the audit period.
The method will also reduce the frequency of audit or monitoring as well. However, the method should only be applied for past transactions and not for prospective transactions. This method will reduce cost of testing Existence of Control so that IA can deploy resources freed up to other compelling IA priorities.
Remember, in real life scenario, the auditor may not know the exact no. of non-complied risk sources within a risk population but size of risk source population, sample size and degree of control liability score for the type of control risk would determine the action, discipline and efficiency of the concerned process owner even before the start of the audit. The method provides adequate incentive to the process owners to remain complied while optimizing the business results to be achieved. They should be trained with various risk reduction techniques to reduce their control liability score and optimize the business results. Thus IA can become proactive in coaching the process owners with controlling skills as well as help them improve the business performance.
The control liability scores should reflect the kind of assurance required and facilitate achievement of business objectives. The scores have to evolve for each industry or type of business or transaction so that they can be benchmarked across the industry or the business segments appropriately.
This new concept is at the idea incubation stage and thus any suggestion or critical comments are welcome from the IA community and members of management around the globe interested in reducing the cost of monitoring or SOX / J-SOX / Clause 49 Compliance while achieving increased value addition.
If you have any confusion with the new method suggested, let me know how you are positioned looking at the SERMON cartoon below.
Is audit committee adding any value or is just for statutory compliance? asked the furious chairman, who had been advised recently about the abnormal functioning of some of the non-financial performance measures. He said I know you all are really independent but, are you performing your oversight function as expected? Although the firm has been certified by the external auditors for effectiveness of its financial accounting controls during the past years, these controls have inherent limitations when looked at in silos. It is high time for the audit committee to look at non-financial performance measures as well.
He further said that the stakeholder expectations are very high nowadays. Not just the financial accounting controls but the entire gamut of management accounting controls needs to be looked at. Those who design and implement controls can also override or bypass these controls. The audit committee members began to wonder how they could have met the expectations better. Audit Committee members while justifying for their current way of functioning emphasized on having, a written code of conduct and its communication at all the levels of management to prevent overriding and bypassing of controls and a hotline programme. Though the chairman considered the importance of these steps, he wanted the audit committee to become more smart and business like. He wanted the audit committee to add value.
The board room conflict was in the open. Surely the members of the board and committee had failed to understand each other's expectations. Another problem was that expectations were not shared and reviewed periodically. The expectation from the audit committee had been changed over time. With their expanded responsibilities, the audit committee members were struggling to fully understand and embrace the scope of their duties, including oversight of risk management and internal controls.
To avoid surprises, the audit committees should understand the importance of defining and agreeing with the board of directors on the scope of their oversight of risk management and internal controls. This scope should be revisited on a periodic basis.
Audit committee members can meet increased expectation by demonstrating the appropriate level of skepticism, asking probing questions, having open discussions with the management and the auditors keeping business perspective in the mind. Audit committee should also target non-financial measures and various key success factors for monitoring. These key success factors for monitoring should be determined with extensive top management involvement.
The conventional financial accounting reports, both internal and external, are much like a scoreboard at a cricket game. The scoreboard tells players whether they are winning or loosing the game, but does not tell one about what is right or wrong about his batting, bowling or fielding. One must watch the ball in order to get a hit rather than just study the scoreboard. Conduct of the management cannot be monitored effectively just looking at the financials alone; one should see the non-financial performance measures too.
Mr. Rao, the Chief Internal Auditor of a five star hotel chain was stunned to hear Anil, a young audit executive, who wanted to expose various incorrect practices that were being carried out by the chef-in-charge of one of the hotel properties of the chain. The Chief Internal Auditor and General Manager of the property told him to shun the findings as the chef had been selected as best chef of the year for achieving record favorable food cost percentage. The chef-in-charge's performance was evaluated based on food cost percentage, a relative measure of Food & Beverage (F&B) cost and F&B revenue
Disappointed Anil from the co-sourcing IA firm finally decided to make a note of these findings in the permanent audit file for future reference when he found out that there was no way he could blow a whistle.
The inventory system of the chain provided for outlet-wise ordering and food costing. The chef-in-charge ordered for the high food cost items in name of the outlet, where sales margins were higher. In such cases no accounting had been done for inter outlet transfers and thus benefit of incorrect indenting were transferred to inefficient outlet so as to meet the targeted outlet-wise food cost percentage.
Many times chef-in-charge had been issued with high value raw materials on basis of post dated requisition by the storekeeper to be charged in subsequent periods to avoid reporting of adverse food cost percentage during current appraisal period.
Calculation of food cost was being done after adjusting cost of hospitality checks i.e. check raised for free food served. Thus, food cost percentage was calculated incorrectly, measuring efficiency of the operations of the outlet. Evidences were found of incorrect adjustment of wastage, spoilage and leakage in food cost through hospitality checks. This was done to keep these costs out of the books to achieve a better food cost percentage.
Thus, a non deserving chef had been selected for the award based on the KPI which was manipulated and miscalculated.
Many hospitality players nowadays are implementing latest POS and material management system but they lack proper management accounting practices. With increased empowerment they have achieved innovation but gaps exist in understanding of evolution of control system. It is not enough that the management just sees, touches, smells, tastes and hears the relationship between input and output or oversees the behavior of various personnel. A structured monitoring, end-to-end analysis of completeness, activity based management is a must to add value.
The key employees started disobeying orders of CEO and this clearly implied leadership failure for one of the Japanese Multinational. There is a saying that employees don't quit companies, they quit bosses!
When leadership failure is at the CEO level, it is common for various senior executives to try to fill the vacuum. Without a clear decision on direction by the CEO, the Japanese Organization was facing protracted power struggles and a further deterioration in competitive market position as the senior executives blocked or undermined each other's initiatives.
Key employees got frustrated with this lack of proper, needed action and left the company, degrading its strengths even more. Also, various incorrect habits were formed in the organization which made it much harder to lead in the future.
The leadership at this Japanese Multinational in India always failed to provide proper direction, inspiration and vision for their company from the start. The Controlling Management at Japan just kept on changing its strategy and the leadership except the consulting firm with which it had entered into a long term contract. Continuous consulting interventions by the Japan were faulty and unwarranted, which made the local leaders to think that inaction is a viable choice.
Unfortunately, they believed that they can continue to do what they like. They were comfortable with status-quo irrespective of what market conditions demanded. They did implement some changes, but at a rate or time that was convenient.
The Controlling Management at Japan then thought of carrying a 360 Review just to find a death spiral.
Implementing a 360 degree review process can either be a destructive and devastating experience, or a developmental epiphany for those involved, depending entirely on how the process is structured and the level of preparedness.
Although it is required that leaders should seek-out candid feedback from colleagues and subordinates using a 360-degree review in order to discover blind spots that reduced the performance but success lies in taking stock of their personal strengths and weaknesses and the commitment to take necessary steps to achieve personal as well as organizational change.
The 360, is only a tool that provides quantitative and qualitative evidence of the causal link between management behavior and business outcomes. If any one agrees that managerial behavior significantly impacts productivity, employee attitudes, morale, retention, teaming, and therefore the quality of customer interaction and overall business results, then one must exert the same level of scrutiny upon behavior as is traditionally imposed upon the functions. Unless and until top management is willing to exert that level of scrutiny, the impact of management behaviors on organizational performance will not be measurable, and will therefore remain invisible, free to impede business results with impunity.
More people would learn from their mistakes if they weren't busy denying they made them.
The Purchase Manager of a manufacturing plant was very unhappy with the unfavorable price variance although not very significant. He then expressed his uneasiness to VP-Operations saying that price variance does not measure the purchasing department's performance any longer. He said that his department has worked hard to obtain price concessions and purchase discount from the suppliers. He pointed out that engineering changes have been made in several parts, increasing their prices whereas part identification remaining same.
Similarly, the Manufacturing Manager also had approached VP-Operations saying that responsibility for unfavorable quantity variance should be shared. He was of the opinion that his department should not be made liable for quality problems associated with the use of obsolete or less expensive parts. He said that they had to use substitute materials of low quality to make up with engineering changes and to use up obsolete stock. In spite of all these problems he has reduced his other assembly costs and improved efficiency of the department.
The VP-Operation then approached Accounts Manager worried about the cost of investigating these not-so-significant variances to understand the problems more clearly. The Accounts Manager was smart Management Accounting Graduate; he first wanted to review the standards before investigating these not-so-significant variances. He was clear that the problems are due to incorrect management accounting practices.
He found out that the evaluation of the purchase manager was based on direct materials price variances. This created incentive for him to build inventory. Price discounts were granted for large purchases. Thus, one way to generate favorable variance was to purchase raw materials in lot sizes larger than necessary for production and to hold these inventories until they are needed. However, it was proving costly to hold inventory due to warehousing, material handling, and obsolescence etc.
Accounts Manager found that firm is purchasing in excess of production requirement to get a huge price discounts and the Purchase Manager had taken necessary permission from VP-Operations for this. He thought that to curb these practices, the purchase department should be charged with the hidden cost of holding inventories.
He thought that instead of sharing the quantity variance as suggested by the Manufacturing Manager, to offset the purchasing manager's incentive to purchase low quality raw materials, purchases should be inspected when received thus purchasing should not be allowed to buy materials that deviate from the engineering specifications.
Frequent engineering design changes should properly be incorporated in the variance analysis to identify the actual performances.
He thought that new Key Performance Indicators and Standards will recognize the existence of all these problems, so the managers will no longer be responsible for the variance that is considered too costly to fix or investigate.
Standard costing method although traditional is still used by many organizations. One needs to understand the issues pertaining to the system in its entirety to discover any cost saving advantage.
Accounts Manager then calculated the impact of changes in the management accounting system and found out that the organization can save up to Rs. 20 Million in each period.
A newly appointed Managing Director of a Biotech Company, who believed in participative leadership, wanted to increase organizational efficiency of his organization and save costs. So, he invited all the departmental managers for generating ideas but the brain storming session turned into a heated debate and counter firing. Disappointed Managing Director was puzzled as to how all the negative interactions and other hidden ego issues between these managers should be solved or otherwise the work environment and the business will suffer hugely.
He shared his worries with his old friend who was a risk consultant and he immediately spotted the role of management accounting which plays a powerful role in encouraging or discouraging such interactions. The management accounting system recognizes the interactions of different responsibility centers through Transfer Pricing, a system of pricing product or services transferred within the same organization.
The Managing Director said that Transfer Pricing is not a big issue as he has appointed a renowned tax advisory firm. His friend told him that Transfer Prices are much more rooted than this and are prevalent in organization than most managers realize. Consider the charge which the advertisement department receives from maintenance department for janitorial services or a monthly charge for telephones, security services, data processing, or legal and personnel services. This cost distribution is internal Transfer Prices. There are three main reasons for Transfer Pricing within the firm. These are control purpose i.e. setting incentives and performance measures, decentralized planning decisions and international tax etc reasons. All these factors should be considered in setting Transfer Prices.
"What does that mean?" asked immediately the Managing Director as he had thought that Transfer Pricing issue was already taken care of in his organization. His friend then told him that Transfer Pricing is used for control and planning purposes in a decentralized organization. To determine performance of a manager and his profit and investment centre requires use of Transfer Pricing when goods or services are transferred within the organization.
Transfer Pricing should lead to performance measures that discriminate between good and bad managers. In other words, manager's responsibility centre should not be penalized by Transfer Prices that are affected by the performance of the manager of other responsibility centre. For e.g. manager of engineering department should not be able to charge the manager of production department for cost overrun due mistake the engineering department made.
Similarly, in case of planning decisions, the managers of a responsibility centre make certain input and output decisions. But many a times he is not allowed to go outside the organization for sourcing or selling. In such a situation manager can resort to such decisions or maintain same level of efficiency in absence of any competitive pressure which are not consistent with the entire organization's goal. Thus Transfer Price should be less subject to managerial discretion to encourage operational efficiency and organizational harmony.
He immediately asked his friend to look into the controls related to performance measures and existing transfer pricing practices within his organization.
A blue chip Company into consumer goods having various brands found that as per recent market survey its products' brand expectations in the market were shifted unexpectedly during the last year. The Managing Director of the company called for an urgent meeting of its senior managers to seek an explanation but failed to find any major problems with the current management of the business which may have caused it.
The confused Managing Director approached a boutique business advisory firm for the solution. The boutique business advisory firm started with analysis of its business performance and the factors attributing. After few weeks of analysis, the initial hypothesis set by the advisors proved correct that one of its investment centers was not working on multiple performance measures causing the problem for the entire business.
An organization having multiple goals cannot motivate the manager to consider those goals with a single performance measurement. It was found out that the Company had entered into business of an ancillary product two years back, which was facing quality problems.
The managers of this business had been evaluated on basis of their profit and ROI targets and thus to reduce cost, the managers had reduced the quality of the product compared to the quality expectation of the customer. Over time, consumers came to learn of the lower-than-expected-quality of the ancillary product. The business managers of the ancillary product although had exceeded their short term target profits, but the market had lowered its expectation of quality for all the products of the Company.
To control any future problems, the senior managers were advised to continually monitor the quality of all the products including ancillary products to ensure that they meet the Company's quality standards. The investment centre managers should be constrained in terms of quality of products that they can sell and the market niches that they can enter. The reasons for these constraints prevent these managers from demeaning the firm's brand reputation.
It was further advised that the firm should disassociate itself from the disreputed ancillary brand to reduce the impact on its other major brands. It was an eye opener and The Managing Director had realized the strategic connection of business performance with the management accounting and importance of having multiple performance measurement. Eventually, the Company sold the business of the said ancillary product to some private investors.
A telecom company adapted not only its product offerings but also its organization structure due to rapid technological changes and change in customer demands. Due to increased pressure of these market enablers, it decided to change its organization structure which eliminated several levels of management and introduced business segment and market region wise management teams. More empowerment and greater decentralization of decision making have been introduced.
Along with its reorganization, it also changed its accounting system. It eliminated its use of annual budgets, replacing them with a system of rolling financial plans and forecasts. The focus was now on activities and how cost-centers consumed financial resources on various activities. Along with rolling forecast, it started to report profit & sales per business segment on a quarterly basis. Local authority levels were increased for financial transactions and spending.
It has broadened its reporting to include a series of Key Performance Indicators (KPIs) that provided non financial measure on customer, finance, employees, internal efficiency, and innovation. The forecasts and KPIs were to form basis of performance evaluation of the business units to be compared with the pre-specified targets as agreed.
The company wanted its risk management efforts to align with above re-organization and adaptations and to answer the following questions: Whether execution is aligned to its new strategy and the changing environment? Whether its management accounting system is functioning and evolving with the change and what risk and trade-off exist within its new reporting & MIS environment. Also, how best it can monitor and track its KPIs.
Risk Management System must support firm's new decision-making and control system instead of adding negative value by thinking in an orthodox way. Internal Audit (IA) function should ensure that the new system is providing quick and accurate information for decentralized decision making. IA should now emphasize on controls related to activities, business segments and KPIs.
Internal Auditor should understand that short term budgets are both planning and control tools. Long term budgets which were used earlier reduce managers' focus on short term performance and primarily used for planning purpose. Line item budget restricts the responsibility of a manager by forcing the manager to make purchases in prescribed amounts. The budget lapsing has benefit of greater control on short term spending. Manager who can control the size of operations should be evaluated based on static budgets; manager who does not control size of operations should be evaluated based on flexible budgets. These understanding will reduce any possible dispute with auditees.
Auditor should understand process of determining values of reporting KPIs and should have knowledge as to who is processing this information, possible conflicts of interests, and inter-dependence & trade-off possibility between various KPIs. It is also a good idea to develop Key Success Factors (KSFs).
Internal Auditor should ensure that the management accounting is facilitating regular follow-up on non-performing activities and management team is diagnosing the root causes and taking appropriate actions on a timely basis.
In other words, Internal Audit function has to think differently in this era of rapid change.
A Japanese multinational agro chemical company had launched its premium product in India. It could not perform well on account of incorrect strategy and management accounting system.
At first, the sales & marketing team was given a target to increase the sales and distributorship on a pan India basis. Business Managers entered into a big sales contract with other company for selling its premium product to them after packaging in their brand name. Distributorships were increased without proper background checking. Amount of expenses incurred on all distributorship a like without considering performance levels. Production was based on faulty sales forecasts to accumulate inventory and it was not based on confirmed orders in spite of possibility of less throughput time.
The Company started to increase its sales but incurred a huge amount on sales commissions and sales schemes to the distributors. Later on the company was facing huge sales returns from these distributors as product was not proving successful in the market. There were also dispute within the business heads and there were various schemes of misappropriation involved.
Consultants had been called from all renowned accounting companies who mainly reported on the accumulation of inventory and expired inventory, lack of approvals for sales returns, incorrect commission or scheme benefit paid, lack of approval for cash transactions, non calling of proper quotations etc. They suggested change in authorization levels and new standard operating procedures etc.
With top management pressure, the business managers now had been given a target to reduce inventory. The business managers now were devoting their huge time in selling near expiry stocks instead of fresh stocks. The product was sold in various sizes. Few big sizes which were over produced, the business managers had decided repack these into smaller sizes to reduced inventory although which only added to cost of re-packaging.
Also, there was incorrect decision with respect to product positioning and product pricing. The Company was competing with its own product on many occasions. The premium product was not successful and they had to change usage method instructions several times. There was problem with product costing and cost allocations too.
Management accounting must adapt to dynamic environments and organizations. Warning signals indicate that the management accounting system is not working and needs a change. It is clear that the consultants were not able to reach to the correct root causes to give solutions to the problems due to faulty frame of mind and approach.
One sign of management accounting system not working is dysfunctional behavior of the on part of the business managers due to inappropriate performance measures. Managers make decision to influence performance measure. If these performance measures are not consistent with the organisation's goals, management might make decisions that do not coincide with organizational goals. When organizational mangers are acting at cross-purposes with each other, the management accounting system is not working and should be changed.
Organisations must think about changing its management accounting system based on organization's non-ability to correctly forecast or to win a bid or gain competitive advantage in terms of effectiveness, efficiency and value chain benefit.
Organization should not look necessarily to the latest management accounting buzzwords to give them direction for changing their management accounting system. TQM, Six Sigma, JIT and activity based costing ( ABC) for example are appropriate to certain type of organizations and in particular environments. Some features of these concepts might be beneficial, while other might not contribute for creating value for the organization.
There are very few experts who know how to read a balance sheet and tell you where you are going wrong with your strategy. I am training myself in this art for last 16 years. I have been into Internal Audits and reading balance sheets all through out. 
