Beware Misguided Accountants

Over the past few years I have discussed a paradox with Doug Hicks, President of D.T. Hicks & Co. ( www.dthicksco.com ), a performance improvement consulting firm in Farmington Hills, MI. The paradox, which continues to puzzle me, is how chief financial officers (CFOs) and controllers can be aware that their managerial accounting data is flawed and misleading, yet not take action to do anything about it.

Now, I’m not referring to the financial accounting data used for external reporting; that information passes strict audits by CPA firms. I’m referring to the managerial accounting used internally for analysis and decisions. For this data, there is no governmental regulatory agency enforcing rules, so the CFO can apply any accounting practice or cost allocation method that he or she likes.

Perils of poor navigation equipment
I speculated to Doug that I think some CFOs and controllers are simply lazy. They do not want to do any extra work or have two sets of books with potentially confusing product and service-line cost numbers. Doug explained this counterintuitive phenomenon using a fable:

Imagine that several centuries ago there was a navigator who served on a wooden sailing ship that regularly sailed through dangerous waters. It was the navigator’s job to make sure the captain safely and efficiently sailed the ship from one point to another. In the performance of his duties, the navigator relied on a set of sophisticated instruments. Without the effective functioning of these instruments, it would be impossible for him to chart the ship’s safest and most efficient course.

One day the navigator realized that one of his most important instruments was calibrated incorrectly. As a result, he provided the captain inaccurate navigational information. No one but the navigator knew of this calibration problem, and the navigator decided not to inform the captain. He was afraid that the captain would blame him for not detecting the problem sooner and then require him to find a way to report the measurements more accurately. That would require a lot of work.

As a result, the navigator always made sure he slept near a lifeboat so that if the erroneous navigational information led to a disaster, he wouldn’t go down with the ship. Eventually, the ship hit a reef that the captain believed to be miles away. The ship was lost, the cargo was lost, and many sailors lost their lives. The navigator, always in close proximity to the lifeboats, survived the sinking and later became the navigator on another ship.

Read on to see how this story can apply to today’s organizations.

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