Flying by the Seat of Your Worn-out Pants

In my previous blog, we highlighted the deficiencies inherent in income statement and balance sheet information (i.e., financial accounting) for decision support. Surprisingly, this deficiency is widely acknowledged. For example, a 2003 Ernst & Young study into management accounting practices revealed that 68% of managers acknowledged that their management accounting information was deficient. The reason for this is the fact that the vast majority of companies use GAAP-based costing information from their financial accounting system for decision support. Moreover, in 2012 Alta Via together with SAP sponsored a parallel research project of the E&Y study, which used the same survey questions to be able to compare results. And, lo and behold, nine years later 65% of managers still acknowledge that their management accounting information was not up to par.

What is going on? How in the world can I admit that my airplane is not airworthy (i.e., the information that determines good decision making is bad), yet I am doing nothing about it?


 

Investors and shareholders that read in the introduction to this blog post that 68% of managers acknowledge their management accounting information is deficient will very likely respond with: Whaaaaaaat?  To which the management accountants among us would say: Exactly!  And, quite frankly, the situation is worse than what it seems at first.  In the 2003 E&Y study 83% of managers responded that they did not intend to spend any money rectifying the problem with their costing information.  And in the 2012 parallel study that percentage was 79%.  So, we are flying a skedonk of an aircraft and we are simply not interested in fixing it! 

I have spent almost two decades in the aviation industry and as with most industries, there are tales of high folklore that sticks with you.  One incident comes to mind, as reminiscent of what is going on in management accounting.  It goes like this: The pilot recorded on the snag sheet in the cockpit: “Aircraft rough on autopilot landing.”  On arrival at the destination airport, the technician collects the snag sheets and he must formally document and sign as to the steps he took to resolve the problem.  In this particular instance, the technician’s response read: “No autopilot installed on this aircraft.”  Now, that is what you call flying by the seat of your worn out pants!

Flying by the Seat of your pants

But guess what?  For the most part managers are not to blame for sticking with General Ledger information as their autopilot.  For them it is a case of once bitten twice shy.  After the advent of ABC, TOC, Lean Accounting and many more methods, management could never get a clear answer on what is right and what is wrong.  We documented as far back as the late 90’s instances of companies that got themselves into the fixed cost death spiral using ABC information.  Moreover, these management accounting methods often contradict each other over which option to choose in a particular decision scenario.  See for example this article in our document library (Debating the Principles).

The long and the short of it is that by the early 2000’s management accounting, with its sea of different methods and zealots to boot, managed to alienate their customers—the managers.  And this is the essence of the problem.  If your experience has been that the last time you turned your skedonk of an airframe over to the technicians—to fix it—and it crash landed on the first flight out (e.g., you ran into the fixed cost death spiral), why would you turn it over to them now?  So management would rather stick with what they are familiar with—standard costing for GAAP—than risk falling out of the sky.


Management accounting needed to get its house in order.  Something had to be done about the cacophony of contradictory methods that the snake-oil peddlers were trying shove down managers’ throats.  Help came from an unexpected source: philosophy.  In our next blog we will look at a movement that started in 2007, which has arguably cast the foundation to fix what ails management accounting and effective decision support.

If you enjoyed this article and the others before it I highly recommend my eBook for more information:

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Comments (1)

  1. Jason Jones:
    Aug 08, 2016 at 01:50 PM

    Given these odds against us:
    In the 2003 E&Y study 83% of managers responded that they did not intend to spend any money rectifying the problem with their costing information. And in the 2012 parallel study that percentage was 79%.

    Have you observed any successful methods line managers have used to get their company leaders to believe in and spend money on your new causal based epiphany?


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