The Ten-Day MBA 4th Ed. Page 12

  THE SKEPTICAL ACCOUNTING-INFORMATION CONSUMER

  As described in the “Ethics” chapter, the Sarbanes-Oxley Act of 2002 tried to make accountants more honest. As a Ten-Day MBA you should be aware of the major ways that accountants can “cook the books.” When big frauds or bankruptcies occur, “forensic” accountants try to discover how things went wrong and often find the problem in following areas:

  Ten Ways Accountants Can Misstate Earnings

  1. Misclassify expenses as assets. WorldCom classified its ordinary cost of purchasing local phone access as an investment in their network.

  2. Underestimate sales allowances for returns, discounts, and markdowns. Underestimating allowances raises profits.

  3. Underestimate bad-debt allowances on sales made on credit. If you underestimate the allowance for bad-debt expense, profits are increased.

  4. Create off-balance-sheet liabilities. Enron’s “special purpose entities” that were off the balance sheet created billions in liabilities that caused the company’s bankruptcy in 2002.

  5. Recognize phantom revenues. Qwest Communications recognized $1.1 billion in revenues for selling fiber-network use that was contingent on purchasing fiber services from other telecommunications firms. Both transactions never actually occurred, but both parties claimed revenues and the profits.

  6. Depreciate assets too slowly. Waste Management was caught in 1998 stretching out the depreciable lives of its landfills and underreported by $3.5 billion its annual depreciation expense.

  7. Modify adjustments to inventory. A company can underestimate how much inventory will become obsolete. Reducing obsolescence expense increases profits.

  8. Forecast unusual gains or losses. By underestimating the cost of restructuring or overestimating the proceeds from assets sales, an accountant can inflate profits. Under certain circumstances these items are segregated in the income statement and may not affect “operating earnings.”

  9. Create special reserves by overestimating future expenses and boost profits by revising those estimates downward later. Using the same adjustments referred to above to boost profits, a company can overestimate expense allowances to dampen profits when profits are high. This creates a “cookie jar” reserve to open when profits sag to “smooth” the fluctuations in earnings year to year. When companies need extra profits, accountants revise the previous expense estimates downward and record profits.

  10. Manipulate measures of performance that are tied to key executive bonus compensation. Depending on how bonuses are calculated, executives in collusion with financial accountants can manipulate the financial data to generate unearned bonuses and therefore reduce actual net income.

  ACCOUNTING OVERVIEW

  I hope you have not struggled too hard through this chapter, but in a few pages I have tried to give you the essentials of accounting from both my CPA background and the MBA curriculum. If the material in this chapter was totally new for you, most probably you have not completely absorbed it. You should have remembered that:

  Assets = Liabilities + Owners’ Equity

  There are three basic and interdependent financial statements: balance sheet, income statement, and cash flow statement.

  Accounting records and statements always balance.

  The statements can be interpreted by using ratios.

  Operating results can be analyzed and managed using variances.

  That’s the accounting game in a nutshell. At MBA school, accounting struck the most fear in the hearts of the liberal arts undergraduates. This chapter has given you, in a tidy predigested form, what kept them up late at night.

  KEY ACCOUNTING TAKEAWAYS

  Cash Basis Accounting—The method of recording transactions only when cash changes hands

  Accrual Basis Accounting—The method of recording transactions that matches revenues and expenses regardless of cash flow movements

  The Balance Sheet—The listing of what a company owns and owes at a point in time

  The Fundamental Accounting Equation—Assets = Liabilities + Owners’ Equity

  Net Working Capital—Short-term assets less short-term liabilities

  The Income Statement—The summary of profit-generating activities during a period of time

  Gross Margin—Revenues less the direct cost of goods sold

  The Statement of Cash Flows—The summary of how a company generates and uses its cash during a period of time

  Depreciation—The cost of using equipment allocated over its useful life

  The Eight Basic Ratios for Financial Statement Analysis—A method of analyzing statements and comparing them to industry standards

  Price and Volume Variances—A method of explaining operational results by isolating the effects of price and volume differences from budgeted amounts

  Activity-Based Costing (ABC)—The method of allocating overhead expenses based on actual usage, not on arbitrary measure

  Day 4

  ORGANIZATIONAL BEHAVIOR

  Organizational Behavior Topics

  Problem-Solving Model

  Psychology Lesson

  Motivation

  Leadership

  Creativity

  On-the-Job Office Procedure

  Power

  The Organizational Model and Structures

  Systems Theory

  Organizational Evolution and Revolution

  Resistance to Change

  NEW MBA GRADUATE: I have the answer! My Excel spreadsheet says that we should reorganize the company by geographic region rather than by product. We could save at least three million dollars a year by cutting unnecessary staff and travel. We hypothetically implemented a similar plan at the Brandon Lee Company in a class discussion. It worked real well.

  BOSS: Sounds great. You’ve been with the company seven months and you want to do a radical reorganization. I assume you already assembled a roster of redundant employees?

  NEW MBA GRADUATE: Well, I’ve not thought it through that far yet.

  Organizational Behavior (OB) classes attempt to teach MBAs how to deal with the human challenges in the workplace. Quantitative skills may provide the magic theoretical pill in the classroom, but OB tries to instill in young MBA Turks the human sensitivity to apply their MBA skills in the real world.

  Many organizational theories are not unlike what you can find in books about self-awareness and sensitivity training at the local B. Dalton or Waldenbooks. The reason for the similarity is that many of those books are written by the same professors who propound the academic theories that appear in MBA curricula. The difference is that faddish books about the “new” corporate rejuvenation theory or the “one-second manager” make more money than articles that appear in obscure academic journals.

  Organizational behavior, the “touchy-feely” subject, is often where MBAs show their true colors. Sexism, prejudice, and greed rear their ugly heads in classes when seemingly open-minded students attempt to cope with the cases at hand. Regardless, the classes are a welcome relief to overworked MBAs. There is no need for intricate quantitative analysis or extensive reading. As with other MBA subjects, knowing the vocabulary and using it at the right moments goes a long way in establishing credibility on the job.

  What is taught in the OB classes, if internalized, are the lessons that well may be the most influential in the careers of MBAs. Without people skills, MBAs are equipped with the power tools but are without the electric cord to use them.

  THE OB PROBLEM-SOLVING MODEL

  Just as marketing offers seven steps to marketing strategy development, OB provides a three-step technique to solve organizational problems.

  Problem Definition

  Analysis

  Action Planning

  PROBLEM DEFINITION

  The first step to solving an organizational problem is to know the source of the difficulty. Real problems are often masked by symptoms. It is easy to be misled into solving the symptoms instead of their cause. Unless the cause is dealt with, fresh hea
daches will undoubtedly arise. MBAs are taught several analytical techniques to aid in flushing out the sources of trouble.

  Want Got Gaps. There is a problem when a gap or “deviation” exists between what a manager thinks “ought” to be occurring and what is “actually” occurring. Defining the problem entails viewing situations from the perspectives of all the participants and outlining their Want Got Gaps.

  In the wake of a failure to introduce a critical new computer technology, a large service organization hired a new vice president, Hank Helpful, to lead the computer department out of its trouble. In his judgment the problem was caused by interdepartmental rivalries. He felt that the computer department was isolated and always at odds with the rest of the company. Hank saw the gap as follows:

  I Want → Gap ← I Got

  Interdepartmental Cooperation → Gap ← Isolated Departmental Islands

  The VP felt that other gaps existed as well. The computer department believed it lacked the respect of the operational arm of the company. The people in the department felt that they were being treated as second-class citizens. Both perceptions were true. But the other sales and operating departments had their own gaps. They wanted timely computer services at an affordable cost.

  In many instances, organizational problems are less easily diagnosed. Often managers do not know exactly what the gap is. Is there a gap at all? A manager’s perceptions can cloud what is “actually” happening. That is often the cause of trouble in the first place.

  The Level of Problems. When you know what gaps exist, it is then important to understand the ways in which they affect the organization. Problems can affect a company in three ways:

  Within or between certain people

  Within or between groups

  Within the whole organization

  In the case of the computer department described above, the problem existed at all three of these levels. Each level had to be addressed to successfully “solve” it. The hard feelings between individuals occurred at a personal level. The interdepartmental squabbling was an intergroup problem. The company’s failure to adopt competitive new technologies occurred at the organizational level.

  Source Problems and Causal Chains. The goal of an effective MBA is to find the most important problems and solve those first. Those are called the source problems. Eliminate the source, eliminate the symptoms. Source problems, such as the lack of respect for the computer department, caused a multitude of other problems.

  A graphical method used to get at source problems is to draw a causal chain. Using a causal chain, the company’s interdepartmental problem would look like this:

  Contributing Problems → Source Problem → Business Problem

  Lack of Interaction Personality Differences → Lack of Respect for Techies → Project Failures

  ANALYSIS

  After defining the gaps and using causal chains, the MBA is taught to link the problems to their causes. In addition to drawing causal chains, during this analytical step you try to understand the causes. Why do they exist? What environmental factors play a role? By asking these types of questions you can begin to confront which causes can be corrected through management action. If one problem is insurmountable, different solutions have to be tried. In the example above, firing uncooperative people was an option for the vice president. Sensitivity training and interdepartmental discussions were other possibilities. As in a marketing plan, there are many possible avenues for action available to achieve a successful resolution to a problem.

  ACTION PLANNING

  MBAs are taught to be decisive and proactive—a frequently used MBA adjective. After a thorough analysis, MBAs should be able to formulate a plan. The action plan has six important steps.

  1. Set specific goals.

  2. Define activities, resources needed, responsibilities.

  3. Set a timetable for action.

  4. Forecast outcomes, develop contingencies.

  5. Formulate a detailed plan of action in time sequence.

  6. Implement, supervise execution, and evaluate based on goals in step one.

  As you can imagine, solving problems MBA-style is not simple. It requires time and effort. To add to your MBA vocabulary, you should refer to your menu of possible actions as action levers. This sounds forceful and progressive. An action lever may be a reward, a control, or a planning system.

  The idea behind OB is to train MBAs to avoid tactical errors because they failed to take into consideration the people involved. With a framework to tackle challenges, the MBA curriculum inculcates in its students the theories and methods of the day so that they can use them.

  INDIVIDUAL AND ORGANIZATIONAL LEVEL OB TOPICS

  The previous discussion covered the frameworks used to analyze a problem and implement a solution. The next sections deal with the topics that provide the background for that process. The MBA curriculum logically starts with the theories and topics that deal with the individual, then builds to larger organizational issues that become progressively complex with the addition of more people. Along the way, students are asked to apply their newly acquired skills to analyze and plan solutions to increasingly complex and challenging case situations.

  THE MBA PSYCHOLOGY LESSON: THE APCFB MODEL

  In the effort to gain an insight into why people act the way they do at work, the MBA curriculum includes some form of the APCFB model pictured here. This model attempts to explain the cognitive process of linking external events to employee behavior. Assumptions affect the perceptions people have. Those perceptions affect the conclusions. And those conclusions prompt feelings. Ultimately those feelings drive behaviors that managers observe. By trying to understand this process, MBAs may have a chance to influence positive behaviors in themselves as well as in their coworkers. The model looks like that below.

  THE APCFB PSYCHOLOGY MODEL

  “Why People Behave the Way They Do,” Case UVA-OB-183, Figure 5. Copyright © 1986 by the Darden Graduate Business School Foundation, Charlottesville, Virginia.

  Given an analytical tool, MBAs are made to believe that they can understand anything. However, confounding forces within people prevent perfect communication and understanding. We all see through filters that often prevent us from perceiving events accurately. Filters also prevent us from acting out our true desires. We all have internal defense mechanisms that act as additional filters to protect us from psychological damage. They also prevent an accurate psychological reading of other people. For example, if an insecure supervisor has a poor aptitude for numbers, then by way of defense, he may find fault with an analyst’s technical presentation. That would help him avoid confronting his own ineptitude with numbers.

  MBAs have a chance to affect assumptions, the beliefs we hold about the way the world or other people or ourselves should or ought to be. These assumptions make up our value system. Listed in order of ease of accessibility, assumptions include:

  Expectations

  Beliefs

  Values

  Expectations and to some extent beliefs can be changed through clear management intent and action. Values are deeply held assumptions that may be altered, if at all, only in time.

  When a manager is able to tap into the values of subordinates, then real productivity may result. Personally, I place a high value on creativity and freedom. When my manager taps into that well inside me, he elicits my best work. For example, when my boss seeks an insightful marketing analysis, he presents me with an opportunity to express my creativity. Our goals are said to be congruent or equivalent because we are both aiming at the same thing. The desired behavior is produced. Goal congruence among the individuals of an organization makes the group productive. Goal congruence is a popular MBA phrase—it sounds great, and it is in fact meaningful.

  Let’s take the example of a strategic planning manager. He wanted to tap his team’s creativity in developing plans to compete in an evolving marketplace. In the past, he had done all the creative work himself. His staff members
were simply used to crunch numbers. To elicit a change in their behavior, he had to learn to tolerate the trial and error that are part of the creative process. Because staff failures in the past had been met with firings and ridicule, the team would understandably be slow to comply with his wishes. The staff’s assumptions stood in the way. To effect the desired change, he needed to build trust by rewarding creative behavior consistently.

  The bottom line is that understanding a bit of psychology is useful if you wish to motivate people.

  EXPECTANCY THEORY OF MOTIVATION

  Motivation is an elusive animal that all organizations want to capture. Expectancy theory outlines the factors that produce motivation with individuals. Managers, staff, and even you can use expectancy theory to attempt to understand employees’ behavior.

  Motivation = Expectation of Work will lead to Performance × Expectation Performance will lead to Reward × Value of Reward

  This equation may be helpful in isolating the source of a problem. Each of the equation’s components can explain some aspect of motivation. If a marketing manager of a declining make of automobile has been losing market share to a better-manufactured and better-promoted competitor, he might feel that no matter what he does he will fail. That would naturally decrease his motivation. If the company never rewarded superior performance, that would also lead to discontent. And finally, if the reward were simply a set of keys to the executive washroom, then a manager might think of working elsewhere.

  Three academic heavyweights, Hertzberg, Maslow, and McClelland, believe that behavior is motivated by the urge to satisfy needs. Fred Hertzberg posits that motivation will be enhanced by maximizing the motivators or satisfiers on the job and minimizing the dissatisfiers or maintenance factors. A promotion or an award can be a satisfier. Maintenance factors don’t necessarily bring happiness, but they are expected. A safe place to work and a living wage are typical maintenance factors. Abraham Maslow sees employee motivation as a function of meeting an employee’s hierarchy of needs. The hierarchy is frequently depicted as a pyramid. The need for food and water is at the bottom of the pyramid, followed by the need for safety, the need to belong, and the need for status, while self-actualization needs are seen as the highest order of needs. These needs are met when a person experiences a sense of personal growth and self-fulfillment by accomplishing a challenging goal.