Since the late 1990s the better managed financial institutions have started fair valuing their assets and liabilities on a daily basis. Financial statements based on fair value became a ‘must’ with IFRS, but in this section we are concerned with management accounting done intraday at an acceptable level of accu- racy. Both B/S position and P&L become more transparent with fair value accounting.
An interactive virtual balance sheet needs be no different from the classical B/S, unless, for reasons of greater effectiveness in enterprise management, it is provided in a personalized form. Basically, as a policy it is wise to use the stan- dard format which is understood by everybody and required by regulations. As an example, Box 15.1 presents the A&L reporting format according to the European Union Accounts Directive. This, however, may be the pivotal point around which real-time customized versions are built. For instance, a customized version may provide a more detailed and closer look at fair value at the assets side of the balance sheet. This can be most instructive in a managerial sense. Both the balance sheet and profit and loss statement carry valuable information, and knowledgeable executives and professionals know that in order to get a full mes- sage they must:
● Read between the lines, and
● Correlate information elements to make useful inferences.
Modelling makes balance sheet information available much more frequently in an updated form, accessible on-line as often as necessary. Its contents must be made to reflect an instantaneous picture of the condition of the enterprise as of some particular day. They must also show how, within the ⫾4% level of accu- racy mentioned in the Introduction, the company positions itself in terms of assets and liabilities.
Within this perspective of computational financial analysis comes the process of experimentation discussed in section 2, as well as the need for a polyvalent methodology explained in section 3. Notice that precisely the same principles of steady control that are applicable to the balance sheet are also valid with budg- ets (see Chapter 9) and with standard costs.
Budgetary compliance, and the functions of controllership associated to it, must be executed on-line interactively. No effective solution to management control
Box 15.1 Reporting format on assets and liabilities according to the EU Bank Accounts Directive
Assets
● Cash in hand
● Treasury bills
● Loans and advances to credit institutions
● Loans and advances to other customers
● Debt securities
● Equities in portfolio
● Participating interests
● Shares in affiliates
● Other assets (derivatives) Liabilities
● Amounts owed to credit institutions
● Amounts owed to customers
● Debts evidenced by certificates
● Subordinate liabilities
● Equity
● Other liabilities (derivatives)
can take figures on faith. General statements never get further than the surface.
Good governance requires knowing what is behind the figures.
● Fast answers through guesswork, are deprived of documentation, and
● The way to bet is that in the large majority of cases even educated guesses stand a good chance of being wrong.
My favoured dictum in budgeting and budgetary control is that you don’t make money – you save it. This is more true of a non-profit foundation than of a profit- making organization, but it applies to corporations as well. If the budget is over- run and the CEO takes no immediate corrective measures, this means he or she:
● Lacks the decisive force to impose a regime of cost-effectiveness, or
● Has no clues about how expenditures can be rationalized.
Every well-managed firm tracks its expenses, because its management appreci- ates that under no conditions can they be left to run wild. A practical example from manufacturing companies is the control of inventories. Sales and produc- tion always favour rich inventories; their job is easier with full stock on hand.
But from the viewpoint of cost-effectiveness:
● Large inventories have negative effect on profits
● Therefore, production planning must be tuned to using sales forecasts, and sales management should be eager to contribute such forecasts rather than resisting them.
Another reason behind budget overruns is that in many cases the existence of a standard cost system is looked at as an impedance rather than as an opportunity.
From a good governance viewpoint, however, after having established a cost standard senior management should be eager to hold everybody responsible for upholding the financial plan:
● Budgeted levels must be compared with actuals, and
Woe to the department manager, or section head, who exceeds cost limits.
Abiding to budgets and cost standards should be part of the company culture. It is also a matter of personal ability that one can accomplish one’s mission in an able manner; being over budget and over standard cost limits indicates a person elevated beyond his or her capacity.
One of the 21st century reasons why steady and focused cost control is so impor- tant is that with globalization most products and services, including banking,
have become a commodity in regard to their functionality, quality, price, and delivery. While markets mean more than just budgets and balance sheets, it is no less true that:
● A company that does not watch its bottomline would not be around for long, and
● The position of those who don’t care for budgets and cost standards is not merely wrong-headed obstructionism; it is the manifestation of a destruc- tive force.
The message of the foregoing paragraphs, reading between the lines, is that exec- utives and companies who have been fighting against IFRS should appreciate that, apart from all the other reasons already explained, the observance of stan- dards is a matter of culture and of self-discipline. The fair value of assets and fair value of liabilities serves not only in regulatory compliance but also in sound corporate governance. This is the very reason for implementation of a real-time balance sheet as well as on-line budget vsactual solutions.