The knowledge the accountant has acquired through his or her study and expe- rience is manifested in several ways. At the very least, the accountant knows the procedures for recording all accounting aspects of business transactions – doing so quickly, efficiently, accurately, and in a way that minimizes the opportunity for fraud or theft.
It is self-evident that the expert accountant does more than that. For instance, he or she knows a great deal about their own company, the type of data that is vital,
that information managers and professionals have found useful, the meaning of compliance, the way in which transactions must be recorded and retrieved, and so on. These are largely matters connected to world ‘experience’, for which books and classroom teaching are not satisfactory substitutes.
The expertise of a good accountant goes beyond techniques for summarizing, arranging, and presenting information so that it meets the needs of various requirements and types of users. For instance, he or she knows the legal prin- ciples that govern financial reporting. And because tax considerations play a major part in many decisions, they should be fully reflected in both financial and management accounting.
Moreover, the expert accountant knows, or can find by referring to texts and handbooks, generally accepted ways of handling different specialized types of transactions, of valuing inventory, searching for hidden costs, and diligently look- ing to detect fraud or abuse. For example, costs should be collected and measured only to the extent that they are material.
● Reporting a long list of cost elements, many of which have only minor impact, obscures the few really important ones.
● This can happen when the cost report is a standard form containing a long list of cost items that are reported uniformly for each responsibility centre.
The better way to proceed is that the company’s control system is tailor-made to reflect materiality in each profit centre, and for the company as a whole. For instance, for cost control reasons $1000 may not be material for the firm as a whole – but it is material for a small business unit. The proper organization work is done by keeping in mind the significance of every expense. (More on cost- findings in section 7.)
Costs must always be classified into controllable and uncontrollable. The term controllable costs refers to those under the responsibility of profit centres. All internalcosts are controllable by someone in the organization. This, however, is not true of costs like taxation, or bills or fees paid to third parties, which are mainly controllable at the time a purchasing contract is signed.
In principle, negotiating about procurement of goods and services is the respon- sibility of the purchasing department. It is not the expert accountant’s job, though he or she may help in the negotiation by providing facts and figures. Both purchasing and accounting, however, is management’s responsibility, and the same is true about:
● Assuring that deliverables follow the plan
● Abiding to agreements that have been made, or
● Providing appropriate coordination to capitalize on the synergy of differ- ent divisions in a joint effort.
An example of the aftermath of lack of coordination, particularly in connection to deliverables, is provided by the European Commission’s Financial Services Action Plan (FSAP). This was adopted with good intentions but poor manage- ment in 1999. The so-called Lisbon Agenda of the European Commission launched FSAP as the core of a programme to make Europe the world’s most competitive economy by 2010.
The FSAP initiative constituted a major overhaul of the European Union’s exist- ing regime for financial services, aiming to promote the development of a truly integrated financial market with homogeneous securities markets regulation. To meet that objective, FASP:
● Affects the corporate governance framework, and
● Pays particular attention to transparency and disclosure, tightening perio- dic information requirements for issuers.
When the FSAP agreement was originally made, those in its favour said it would be a big boost to realization of the single EU market for financial services, and also prove a strong impetus on other related issues. But the accounting criteria for judging the results have not been forthcoming. As the elapsed years document:
● Expert accountants cannot contribute to FASB’s success, because this is beyond their job description.
● Neither can expert accountants take any initiative in strengthening specific arrangements for financial stability, another FSAP goal.
Because of what it promised it would deliver, FSAP originally found consider- able support in the main European financial market. However, a few years down the line, in March 2005, financial experts expressed the opinion that it has become something of an orphan – and its deliverables have been both minimal and irrelevant.
The mood changed for several reasons. One is lack of clear initiatives able to pro- mote FSAP’s implementation. Another is cost. Companies have generally found the costs of change to be far higher than expected, partly because Europe’s regula- tory regimes are so different from one another. For instance, the UK’s code of mar- ket conduct had to be changed to take account of the EU market abuse directive.
Experts also say that the insurance mediation directive is the worst example of a measure that:
● Has imposed huge costs on British insurance brokers, and
● Has offered highly uncertain benefits in return.
Bureaucracy, too, made its contribution. In the hands of the European Commission, what began as a liberalizing initiative has turned into a mess of 42 directives or regulations, several among them contradicting one another. To make matters worse, most of these ‘42’ are characterized by impenetrable detail.
In fact, contradictions became unavoidable as there has been a shift:
● Away from an approach based on mutual recognition of each other’s regimes
● To a platform of ill-studied harmonization of incompatible regimes, which resulted in lots of friction.
Another lesson from FSAP’s failure is the simplicity required to characterize written instructions on inputs and outputs of the accounting system, down to the level of the most elementary accounting unit. If IFRS had been available when FSAP was set up, the need for homogeneous financial accounting and manage- ment reports might have been met.
Added to these problems is the fact that too much effort has been devoted to har- monizing small retail markets. Another reason for disillusionment with FSAP is the continuing parochial behaviour of many EU governments and central bankers. For instance, Dr Antonio Fazio, the governor of the Bank of Italy, has stood in the way of European banking consolidation by ruling out takeovers of Italian banks – but had no objection to the takeover of a major German bank by an Italian bank.
Let’s face it. The European union is totally lacking unity of command. Moreover, the success of any project greatly depends on the executive who will father it and see it through. Nobody was really in charge of FSAP, which depended largely on good intentions – but, as this real-life case study documents, good intentions wear out fast.