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Circle No. 25

AUGUST 1996/VOL LXMI

MA E. ENTAC C U NGPUBLISHED BY INSTITUTE OF MANAGEMENT ACCOUNTANTS

Software supports eye hospital's treatment of Nepalese. 47

22 DOING BUSINESS IN CHINA: AMANAGEMENT ACCOUNTANT'SGUIDEBYANNE J. RICH, CMAThere are cultural and legal obstacles aswell as accounting regulations that makedoing business in China —the world'slargest market —a challenge. But under-standing the culture, rules, and regula-tions, as summarized here, can make suchinvestments very rewarding.Certijicate of 3ferit

Cover: A new, expandedworld market presentschallenges for managementaccountants. See p. 22. Article meets NASBA &Photo by Bob Grant, NYC. IMAICMA CPE requirements.

29 ACCOUNTING FOR PRODUCTTAKE-BACKBY MARC J. EPSTEINAs society moves toward holding companiesresponsible for the ultimate disposal of theproducts they produce, managementaccountants need to improve their identifi-cation and tracking of current and futureenvironmental costs.

34 MANAGING COMPLEXITY THROUGHPERFORMANCE MEASUREMENTBYFRANKA.J. GONSALVESAND ROBERT G. EILERComplexity factors are the biggest singledriver of cost and the single biggestinhibitor of throughput. That is why it isnecessary for managers to focus on thecauses of complexity and measure itsimpact through improved performancereporting systems.Certificateof94 vit

40 GAPV: A NEW APPROACH TOJOINT VENTURE INVESTMENTS 19BY CARLO PRINA DELLA TALLIA,MARK T. JUDD, ANDDIANE D. PATTISONWhen Fiat Avio, an aerospace companywithin the Fiat group in Turin, Italy, decid-ed to undertake a joint venture with aRussian company it needed a more precisemethod of analyzing the investment deci-sion. The technique, generalized adjustedpresent value method, proved more flexibleand more detailed.

✓ Article meets IMAI CMA CPE requirements.

These articles will be included in IMA's quarterly self -study quiz, which you can orderby calling 1- 800 - 638 -4427, ext. 278.

MANAGEMENT ACCOUNTING® (ISSN 0025- 1690) is published monthly by the Institute of Management Accountants, 10 Paragon Dr., Montvale, NJ07645 -1760, (201) 573 -9000. Price $10.00 per copy. Subscription rates, per year: $20 (included in dues, nondeductible); nonmembers, $130.00.Perio dical s pos tage paid at Mo ntval e, N.J., and additio nal mailing off ices. To e nsure uninterrupted mail servi ce, s end present address label andnew address including ZIP number to Data Entry Dept., IMA, Montval e, NJ 07646.1 760. Allow si x weeks for c hange. IMA's telephone number is1- 800 - 638 -4427; IMA's facsimile number is (201) 573 -0639. IMA Bulletin Board Service (modem required), 1- 800 - 229 -1268.

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47 A VISION FOR CHANGE V/BY SANDRA L. SMITH, CMAUsing off - the -shelf software, this CertifiedManagement Accountant helped an eyehospital in Nepal computerize the book-keeping process and build databasesof patient information. Her experiencehelped her see information in a differentlight, discovering ways to make lifebetter for coworkers, customers, andmanagement.Certificate of94erit

Columns6 PERSPECTIVES

Implementing our long-range strategy.

14 GOVERNMENTNext step on SEC deregulation ..even bigger one to come.

16 CAREERS`How do I rejoin the job market

after raising a child ?'

18 TAXESIndependent contractors:A look at the consequences.

"The cost of

complexity

is the single

biggest cost

driver."

51 CASE STUDIES — INTERNATIONALRUSSELL REYNOLDS FINDS SEAMLESS

INTERNATIONAL ACCOUNTING ... (page 51)

J.D. EDwARDs KEEPS INFORMATION FRESH

FOR GNB TECHNOLOGIES ... (page 51)

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. /

Departments8 LETTERS

20 NEWS

55 TECH FORUM

57 TRENDS IN FINANCIAL MANAGEMENT

59 CONTINUING EDUCATION

62 CLASSIFIED

62 ADVERTISERS' INDEX

E -mail: Editorial, marand @class.org; Advertising, ipceima @class.org.

Views expressed herein are authors' and do not represent Institute pol-icy unless so stated . Publ icat ion of paid advert isi ng and new productand s er vi ce i nf or mati on doe s no t co ns ti tute an endo rs ement by t heInstitute of the advertiser or the product or service.

MAN AGEMEN T ACCO UNT ING® is in d e x e d in t h e Ac c o u n t a n t s ' I n d e x a n d

also in the on-line database of the same name . This publication is avail-able in other farms of media through Information Access Company andthrough University Microfilms, Inc., and ABUINFORM (313) 761 -4700.For more i nformation call (800) 227 -6431. The full text of MANAGE -MENT ACCOUNTING® is also available in the electronic versions of the

MAN,� e ENT Business Periodicals Index.

ACC O U I N G Permission is granted to reproduce any of the contents of this issue for

( MANAGEMENT ACCOUNTING AUGUS T 1996

use in courses of instruction, so long as the source and Institute of Man-agement Ac countants ' copyr ight are i ndi cated i n any such re pr oduc-tions. Written application must be made to the Editor for permission toreproduce any of the contents of this issue for use in other than coursesof instruction- -e.g., textbooks and books of readings or cases. Except asotherwise noted, the co pyright has been t ransfe rred t o the Instit ute ofManagement Accountants for all items appearing in this magazine. Forthose i tems fo r which the co pyright has no t been transfe rred, permis-sion to reproduce must be obtained directly from the author or from theperson or organization given at the end of the article.

Quant ity repr ints of any artic le i n MANAGEMENT ACcoUNnNGO orback issues (subject to avail ability) may be obtained from CirculationDepartme nt, IMA, 10 Par agon Dr ive, Mo ntvale, NJ 0760 -1760.

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PerspectivesIMPLEMENTING OUR LONG -RANGE STRATEGY

t is a great honor to serve as President ofthis Institute for 1996 -97. This year, I be-lieve, is especially significant because we

will begin the implementation of the recom-mendations mapped out in the report of thead hoc Long Range Strategy Committee,which was approved by the National Board atthe Annual Conference in Las Vegas. ThisCommittee, which I had the honor to chair,was given a mandate to shape a new long -range strategy to take IMA into the 21st Cen-tury.

The vision statement that grew out of ourdiscussions is simple, bold, and far - reaching:

"Global leadership in education, certification, and practice of managementaccounting and financial management." To achieve this vision, the commit-tee of volunteers and staff members identified sixcritical issues which need to be addressed: t

■ Customers and future markets,■ Students,■ Alliances;■ Adapt to change,■ Broadening skill sets,■ Global challenges.

9alatototo fFMotototol

We have set goals to address each of these broad critical issuesand one or more objectives to achieve each of the goals. For a comprehen-sive review of the report of the ad hoc Committee on Long Range Strategy,see the May 1996 IMA Focus. During 1996 -97, my team's emphasis, "Har-nessing the Power of Change," is built around the vision statement andstrategic plan. Our operating committees will begin developing and imple-menting action strategies to accomplish these goals and objectives. ThePlanning Committe, chaired by President -elect Clark Johnson, will provideoverall coordination of the implementation of the Long Range Strategy. Iwill discuss the issues involved in this planning effort throughout the year.If you have any suggestions or ideas on implementing the recommends-tions, please address them to me at the IMA, Montvale, NJ 07645, or viae -mail, craubens @colybrand.com. Your input into this process will helpensure that our vision becomes reality.

CLAIR M. RAUBENSTINE, CMA, CPAPresident, 1996 -97

6 MANAGEMENT ACCOUNTING AUGUST 1996

Hobart; CPA, Thomas,J: dardan,CMA,FHFMA,C141PA; Alfred X Icing. CMX— Edward J. Nlc-Cracken; C, VTike Mers; CMA, CPA; John G.Merquita, CPA; J.T. Marty O'Malley, Ci11A,CPA; Michael D, Osheroff; William L. Paladlno;Susan Pierce, CNIA, CPA; Grover L. Porter,CI'A; William J. Rogora, CMA, CPA; Patrick Ro•alano, CMA, CPA: Annette West, CMA

INSTITUTE ofMANAGEMENTACCOUNT -ANTSCt :aT1ETF1J ALANMA $ST Al.Crt1n17;tiT P6 If, III A Si( ' Ei me r . : j - 6 w i A w w . MAYA:r11FYf FpI.H.iN

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ettersTO THE EDITOR

READERS RESPOND TO ROBIN COOPER'S WAKE -UP CALLRobin Coopers two-part article published in the May and June issues ofMANAGEMENTACCOUNTING® elicited more letters to the editor than we havereceived on any topic within recent memory. We publish excerpts from those let-ter on the following pages.— Editors

DRIVING THE PROCESSRobin Cooper's article "Look Out, Man-agement Accountants" is indeedthought provoking, as Bill Ihlanfeldtnotes in his monthly column. In today'sworld, I do believe successful manage-ment accountants have, in fact, alreadyincorporated many of Cooper's observa-tions.

In our own organization at PMI FoodEquipment Group, those accountantsthat understand both the marketplaceplus related engineering and manufac-turing processes are head and shoul-ders above their peers. [What] Cooperwrites, "Only highly trained manage-ment accountants with a broad generalbusiness background and excellent sys-tem design skills will be required," is agood synopsis of the new breed of man-agement accountants.

I understand Cooper's point: "engi-neers, not the accountants, drove theevolution of this system over time," butthere is a fine line in having users or"the customer" drive the process. Of-tentimes end users or customers do notreally know what they want, and theirsolution may not rely on breakthroughtechnology. Further, customers aresometimes the last to be able to devel-op new innovative processes.—John E.Camm, CPA, Troy, Ohio

SEEING THE LIGHTIt is often said that the darkest hour isjust before the dawn. Our IMA mem-bership numbers have sunk dramati-

8 MANAGEMENT ACCOUNMG AUGUST 1996

cally since the mid- 1980s. Our chapterattendance across the country is low.Corporations no longer pay the duesfor our membership as they have inthe past. Our leadership team is focus-ing on the "vision" thing.

Management accounting must acceptthe challenges presented to us by Dr.Cooper. Here's what I think we mustdo. First, the IMA must open its doorsto all people who are involved in costmanagement. This will include peoplefrom all functional areas of the compa-ny. Once inside the organization, wemust show them that we are the pre-miere professional organization fo-cused [toward] providing cost manage-ment learning experiences. Second, ourcertification process must include skillssuch as project leadership and changemanagement. Third, we must lead theway to insist that our colleges move tointegrated curriculums incorporatingsound cost management techniques.Fourth, the grassroots of our organiza-tion, the individual chapters, musttransform themselves into groups ofprofessional cost managers (not costaccountants) who learn more aboutcontrolling costs at every meeting. Yes,there will be fewer cost managementpositions opening in the future. But Iagree with Dr. Cooper that the need forpeople with cost management skillswill continue to grow. The IMA needsto respond quickly if we are to leadthis transformation. Are you ready towalk in the light? —Neal J. Hannon,CMA, Bryant College, Providence Chapter

president 1995 -96, Manville, R.I.

CONTINUOUS RENEWALIs Professor Cooper's article simply areminder of the basics? Did we as aprofession lose ourselves in the ac-counting because of its technical al-lure? I feel the professor has made asignificant contribution to remind usthat Management is the first part ofManagement Accounting!

In extending this concept I believethe challenge/recommendations in thearticle are missing a step. Specifically:Management accounting professional.The future involves continuous im-provement and renewal. Each of usmust manage his or her skill andknowledge resources to be able to pro-vide needed services where the serviceneeds are constantly changing.Certifying institutions.Their challengeis to accept and implement a processfor the continuous improvement of thecurriculum, standards, and operationsof the institutions themselves. That thesubsequent implementation of most ofProfessor Cooper's specific recommen-dations in one form or another wouldfollow is of little doubt.Aeadomits.A review of the Anet bibli-ography database for the technical top-ics covered by the article indicatesno—or few —entries for all but the sub-ject Activity -Based Costing for whichthere are about 50 entries dated from1987 through 1994. I submit that theacademic challenge is: Continuous im-provement is the norm each studentmust be prepared for, or restated: Toprepare the student to be a profession-al as stated above.—Charles R. Burke,

Charles R. Burke CPA & Associates,

Kankakee, Ill.

RIGHT ON TARGETRobin Cooper's previous articles on ac-tivity -based costing have played amajor role in my own ABC education. 1have yet to read any of his articleswithout being moved to a higher levelof understanding and appreciation forhis views on the practice of cost man-agement. His last two articles, whichexpound on the future challenges inmanagement accounting, are right ontarget with my own recent observa-tions and experience as an ABC con-sultant.—Bill G. Fahey, President Manu-facturing Management Systems, Inc.

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THE FUTURE IS IN OURHANDSManagement accounting used to besynonymous with "cost accounting."Prof. Cooper is now calling it "CostManagement" (politically correct, I amsure) and wants to segregate the costaccounting function from managementaccounting. As a practicing manage-ment accountant with an emphasis incost accounting, I take exception to hisarticle on the following points:

1. Cost management is a subset ofmanagement accounting. It is themanagement accountant whoshould have the knowledge andskill to define and install a cost sys-tem appropriate for the company.This is a leadership role which in-cludes understanding variances andhow to communicate the conse-quences to management. A manage-ment accountant who does not pos-sess this skill base will not be em-ployed for long.

2. Cost accounting skills have alwaysbeen important to management. Agood management accountant willdecentralize the cost system to theproduction floor and teach and trainthe operations people to take own-ership of the reporting and vari-ances. Nothing new here. Successfulmanagement accountants havebeen doing this for years.

3. Allowing engineers or productionmanagers to define product costswithout the approval of a manage-ment accountant is wrong. Remem-ber, if the management accountantis skilled in cost, the definitions aremade at the beginning of the designand have already been communicat-ed to the decision - making people onthe floor. Only the management ac-countant can bridge the gap be-tween variances, product cost, andfinancial presentation to manage-ment.

4. I do not agree that three- or four -way variance analysis will be down-graded. Again, an intelligent analy-sis and effective communication tomanagement of these variances isa very important function to man-aging profitability.—James M.Chamberlain, vice president finance,Consolidated Reprographics, Ina,Irvine, Calif.


AGENTS OF CHANGEThe collision of Lean Enterprises musthave distorted the vision of ProfessorCooper when he states that cost man-agement is broader than managementaccounting. While cost management isgrowing in importance, the recentlycompleted IMA Practice Analysis ofManagement Accounting suggests thatit is only a part of the knowledge, skill,and ability set that management ac-countants are expected to possess.

Professor Cooper inaccurately placestoo much emphasis on the "accounting"in management accounting, creatingthe impression that the managementaccounting that has been practiced atthe beginning of the century is stillbeing taught and practiced. Manage-ment accountants have and will con-tinue to undergo a metamorphosis tomeet the changing business needs.

Management accounting must be de-centralized! However, it is through thedissemination of this tool and manyothers that the management accoun-tant, through the empowerment of oth-ers, truly adds value to the organiza-tion. "Give them a fish —they eat for aday; teach them to fish —they eat for alifetime." Introducing the power ofmanagement accounting throughoutthe organization is tantamount to amissionary making religious converts.The belief (management accounting inthis case) prospers in practice aseveryone becomes a minister of thegospel. In this same context, we alsoneed to be wary of false prophets withtoo narrow a focus, such as ProfessorCooper.

The role of the management accoun-tant has undergone significant changeand will continue to do so. The profes-sion has not stagnated; however, someof those who call themselves manage-ment accountants have. A few laggardsdo not represent the mainstream man-agement accountant!

Management accountants are andwill continue to be agents of changeusing their organizational and processknowledge to continually improve.Functional power and status quo arenot the objectives of the true manage-ment accountant. They embracechange, not fear it, and they leadthrough example, not infrastructure.

Professor Cooper's views give an in-teresting. perspective much like

Charles Dickens' Ghost of ChristmasFuture. It is a glimpse of what could beif we don't continue to change ourways; it is not what must be.

The future is in our hands; as pro-fessionals, institutions, and academicswe have the ability and obligation tooptimize this change process for thebenefit of all, ensuring that we edu-cate, train, and certify individuals withthe knowledge, skills, and abilities tocontinually meet the changing de-mands in the world around us. —C.S."Bud" Kulesza, CMA, senior vice presidentand controller, ITT Automotive, AuburnHills, Mich.

A SECOND DIMENSIONIt seems to me that tomorrow's compe-tent managerial accountant will beprepared in a dual academic programor at least will be taught the strategyof becoming knowledgeable about anindustry. Just as there are journalistswho have studied law or education, ed-itors who studied art history or Ameri-can history, and now public accoun-tants who earlier worked in broker -dealer firms or hospitals, we mustbegin to educate managerial accoun-tants with a second dimension. Itwould seem to me that what our grad-uates in management accounting get isequivalent to the penmanship of [the]elementary school; they need a farmore rigorous and broader education.—Mary Ellen Oliverio, professor of ac-counting, Pace University, Newyork, N.Y.

AFEW NOTES TO THEWAKE -UP CALLKudos to Robin Cooper for sounding awake -up call for management accoun-tants, for academia, and for IMA aswell. May I add a few notes to hisbugle call as corroborating evidence?The April 1 issue of U.S.News andWorld Reportpredicted that in five toseven years 700/0 of all corporate ac-counting positions would be eliminat-ed! With that rather ominous predic-tion, which certainly supports Cooper'sthesis, what then is the future careerpath for controllers and other manage-ment accountants?

Although Prof. Cooper doesn't usethe word in his very perceptive arti-cles, I would suggest that proactivecontrollers and their other manage-

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ment accountant counterparts maywell become in -house consultants, of-fering advice and counsel to manage-ment in areas such as:

■ Cost management (as Cooper sug-gests),

■ Process analysis and improvement,without which cost managementand cost control won't succeed,

■ Plot of a strategic direction for theorganization,

■ Establishment of an appropriate

12 MANAGEMENT ACC01INTlN6 AUGUST 1996

controlled environment to this ageof employee empowerment,

■ Communication of plans, results,and the effects of decisions taken toall levels of the organization, espe-cially as we move more towardopen -book management.

Note that I see the challenges facingcontrollers and management accoun-tants somewhat broader than Cooper'scost management, vital though thatis. —Robert L. Shultis, Williamsburg, Va.

MANAGEMENTACCOUNTING —QUO VADIS?A couple of maxims that are relevantto the crisis presently facing accoun-tants in general and management ac-countants in particular are:

The only thing constant is change.Old professions never die; they just

fade away.The failure of accountants to recog-

nize the importance of the first maximand change with the times has con-tributed to the decay of the accountingprofession implied by the second maxim.

One particular statement in the two -part article in MANAGEMENT AC-COUNTING® on the state of manage-ment accounting illustrates the contin-uing nature of the mindset problem ac-countants have regarding recognizingand/or seizing opportunities to en-hance and expand the scope of the ac-counting profession. This article statedthat the foundation of management ac-counting is "rooted in management in-formation systems." As I stated in anarticle nearly three decades ago inFinancial Executive(April 1969), "Thecontroller is the logical executive tohold responsibility for the entire infor-mation system for an organization.Unfortunately, today, this function isbeginning to slip through his fingers."

As a result of the failure of accoun-tants to seize the opportunity to be thedominant profession in the then newfield of electronic data processing(EDP), the accounting profession en-couraged the people in this area of ex-pertise to create a separate profes-sion— management information sys-tems (MIS). As implied in the articleby Robin Cooper, therefore, manage-ment accounting is today considered asubset of MIS instead of MIS beingconsidered a subset of managementaccounting.

While a status quo mindset existedin the accounting profession threedecades ago, I hope that today theleaders of the profession in all fields ofaccounting (academic, government,management, public) will have the vi-sion necessary to become proactivechange agents rather than continuingto be the guardians of an old profes-sion that is rapidly fading away! –Grover L. Porter, CPA, professor of ac-

counting, the University of Alabama,

Huntsville, Ala.

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Circle No. 1

i

,

ils

over ment

Stephen Barlas, Editor

NEXT STEP ON SECDEREGULATION...EVENBIGGER ONE TO COMEThe Securities & Exchange Com-

mission finalized some proposedaccounting rule changes it madelast March (see MANAGEMENTACCOUNTING @, May 1996) andmade a number of new proposalson June 14. Both the final and pro-posed rules stem from recommenda-tions made by the Task Force onDisclosure Simplification thatArthur Levitt organized in August1995. In the final rule, the SECeliminated Rule 3 -16 of RegulationS -X, Rules 4 -05 and 4 -06 of S -X andparagraphs (b) -(h) of Rule 4 -10.

In the new proposal, the SEC ex-plains its rationale for wanting to getrid of Form SR, which is required un-der Rule 463 of the Securities Act. It isused to report the use of proceeds fol-lowing an initial public offering. Actu-ally, the form is not filed that frequent-ly. Two thousand filings were made in1994 and 1,600 the year after. Insteadof filing Form SR, first -time issuerswould have to report the use of pro-ceeds in their first periodic ExchangeAct report —be it the quarterly or an-nual report, whichever is filed first —after effectiveness, and thereafter intheir periodic Exchange Act reportssuch as 10 -Q, 10 -QSB, 10 -K, and 10-KSB. The good news is there would befewer forms to file. The bad news isthat fewer forms would have to be filedmore frequently, quarterly instead ofsemiannually.

The SEC also is considering raisingthe threshold for filing those periodicreports. Currently, it is 5% of the is-suer's total proceeds or $50,000,whichever is less. That may go to

14 MANAGEMENT ACCOUNTING AUGUST1996

$75,000 - $100,000. Also, the SEC maychange the language from "whicheveris less" to "whichever is greater."

TAX CUT BILLOn Capitol Hill, they call the tax cut

bill (H.R. 3448) waiting for Senatefloor action a "small business" bill be-cause that gives it some political al-lure. No congressman is likely to votefor "big business" tax cuts so close tothe 1996 elections. But the truth isthe Senate Finance Committeeadded some provisions to the bill al-ready passed by the House, provi-sions of interest to large corpora-tions. Chief among them is theextension of the research and experi-mentation tax credit. It expired onJuly 1, 1995. The Senate bill wouldressurrect it, but only for 13 months,between July 1, 1996, and July 30,1997. The Senate has some-thing for the petroleum in-dustry, more specifically itsconvenience store sector.The bill says those storescan depreciate their proper-ty over 15 years if either50% of a store's gross salesare in petroleum productsor 5% of the floor space isdedicated to petroleumproducts. The IRS has in-sisted on 39 -year deprecia-tion periods during audits,unless a petroleum mar-keter can satisfy both re-quirements. David More-head, spokesman for the PetroleumMarketers Association of America,thinks that provision "faces toughsledding on the Senate floor." That isbecause it loses the Treasury $1.3billion over eight years. The Housebill does not mention conveniencestore depreciation.

ACCOUNTINGSTANDARDS AND BANKEQUITY INVESTMENTSA bill that would allow most bankholding companies —those with lessthan $1 billion in consolidated as-sets —to own a limited equity inter-est in smaller companies has pro-voked complaints about its provisiondealing with accounting standards.The bill (H.R. 2981) — sponsored byRep. Richard Baker (R. -La.)—wouldrequire Generally Accepted Account-ing Principles (GAAP) ---to determinewhether a bank holding company'sinvestments are within the 50% ofexcess capital limitation. That limita-tion mandates that the aggregateamount of all such equity invest-ments by the holding company andits subsidiaries not exceed 50% ofthe sum of the "excess" capital ofeach insured depository institutioncontrolled by the small bank holdingcompany. America's CommunityBankers, the trade association repre-senting 2,000 savings and communi-ty financial institutions, says GAAPaccounting is fine for financial state-ments, but it is not appropriate formeasuring a company's investment."For example, a holding company'sinvestment could gain substantially

in market value,even though theholding company'sfinancial commit-ment has not in-creased," explainsManuel Mehos,chairman and CEOof Coastal Banc inHouston, Texas."However, the in-crease in marketvalue could effective-ly use up a holdingcompany's invest-ment authority un-der this bill, and

even force untimely divestiture ofpreviously made investments." TheACB wants the bill to use the origi-nal cost to the holding companyrather than market value. ■

Rep. Baker

Stephen Barlas is a journalist with morethan 15 years of experience reporting fromWashington, D.C.

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areers

`How do I rejoin the job market afterraising a childT

Nine years ago 1 left my job as a management accountant for a major airline toraise my newborn son. Now that my child is older, I would like to resume my career.I know it won't be easy, but I'm determined to pick up where I leftoff.My skills weregood, and my supervisors always gave me high performance marks. I suppose whatI have to do is convince employers that my nine -year absence from the workplacedoesn't mean I'm not capable of being the same productive employee I was before myson was born. Any suggestions on how someone in my situation can ease the transi-tion from full -time parent to full -time accountant?

Robert Half, Editor

Research, volunteer, temp .. .

I admire your determination to returnto the accounting field as well as yourwillingness to reach out for advice onhow to best accomplish that goal.

No, it won't be easy to land a goodjob after your nine -year hiatus. Butthat doesn't mean you won't succeed.

What it will take is perseveranceand dedication to the task.

The first thing you should do is tostart viewing your nine years at homeas a plus for employers and present itin that positive light. You've gottenyour son off to a good start in life, andnow you're ready to return to workfull -time.

The years you spent as a manage-ment accountant were productive ones,judging from your letter, and I assumethe airline was sorry to see you go.Your former colleagues, of course, arethe first ones you should contact. Itrust you've kept in touch with themover the years.

Which brings up an important point.I can't ascertain from your letterwhether you remained active in profes-sional, civic, and fraternal groups dur-ing your nine years at home. I hopeyou did and that you volunteeredwhenever possible. Volunteer workkeeps skills and business judgmentsharp and makes for a valuable addi-tion to your resume.

If you didn't get involved very much


"Your resume is quite impressivebut could you explain this

great fondness for 3 martini lunches' ?"

outside the home, it isn't too late. Joinlocal business groups and professionalassociations in the accounting field.Subscribe to as many professional jour-nals as feasible and read them careful-ly to bring yourself up to speed onwhat's going on in your field. At thesame time, seek out opportunities towrite for these journals and to speakbefore professional groups. In a word,create maximum visibility for yourself.Read the business pages of your localnewspapers. Companies that have beenawarded new contracts or haveannounced plans for expansion shouldbe high on your list of those to contact.Chances are they'll need good people

but haven't had the opportunity yet toadvertise for new employees.

Have you taken courses during thosenine years at home to keep pace withthe many changes in the accountingprofession? If you have, you shouldmake prominent mention of your con-tinuing education on your resume. Ifyou haven't, now is the time to enroll.When choosing courses to take, consid-er those that focus upon a special areaof expertise that would be of uniquevalue to employers. Are you computerliterate? If not, you should enroll in acourse as soon as possible. Theaccounting profession is more relianton technology than ever before.Knowledge of electronic spreadsheetapplications is a requisite for goodaccounting positions today.

Are there skills and knowledge youmight acquire about the global econo-my in which we find ourselves?Perhaps developing a skill in a foreignlanguage would complement youralready acquired accounting skills.

Here is where some research intotoday's accounting profession can playhandsome dividends. If you're able todetermine employers' needs you'll bebetter equipped to prepare yourself tomeet those needs.

Earlier I mentioned volunteering asa way to keep your toe in the waterand to gain needed visibility. Chancesare much of the volunteering you didwhile bringing up your son was con-nected, in some way, with him andschool. Now's the time to volunteeryour professional services, perhapsoffering free accounting advice to localnonprofit groups. Remember, thosegroups often involve business leaders —potential employers.

Similarly, consider easing into theworkplace by doing accounting work ona temporary basis. It's an ideal way toshowcase your professional talents andproductive attitude to a variety ofemployers. Many professionals areoffered full -time positions by compa-nies for whom they worked on a tempo-rary basis.

I wish you all the best. ■

Robert Half, CPA, is the founder of RobertHalf International, Inc., the world's largeststaffing service firm specializing in the account-ing, finance, and information systems field. Hislatest book is Finding, Hiring, and Keeping theBest Employees (John Wiley & Sons).

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October Course Code01 Hartf o rd , CT area .. . . . . . 660401 Or l and o , F L . . . . . . . . . . . 660502 A t l an t a , G A . . . . . . . . . . . . 660602 Newar k, N1 . , , , . . . . . . . . 660702 S e a t t l e , W A . . . . . . . . . . . 660803 Nashvi l le, TN area... . . . . 661003 P o r t l and , O R . . . . . . . . . . . 661103 Garden City. NY . . . . . . . . 660904 Me m p h i s . T N . . . . . . . . . . 661304 Ne w Yo r k , NY .. . . . . . . . . 661404 San Francisco. CA area ... 661207 Balt imore , MD area... . . . 661507 Oakland , CA area .. . . . . . 661607 Om aha. NE . . , . . . . . . . . . 661708 Minneapo lis, MN area.... 661808 Reston, VA . . . . . . . . . . 662008 San Francisco. CA area ... 661909 Green Bay, W I .. . . . , . . . . 662109 Sunnyvale. CA . . . . . . . . . 662209 Washington, D.C, area . . . 662310 Milwaukee , W I area... .. . 662410 Ri chmo nd , V A .. . . . . . . . 662511 Ho no l u l u , H I . . . . . . . . . . . 662811 Char lo t t e , NC . . . . . . . . . . 662611 Ro s e m ont , I L . . . . . . . . . . 662714 Los Ange les , CA .. . . . . . . 663114 New Orleans, LA area .... 662914 Phi lade lphia. PA .. . . . . . . 663015 I r v i n e , C A . . . . . . . . . . . . . 663415 Houston, TX . . . . . . . . . . 663215 Pi t ts b ur g h. PA . .. . . . . . . . 663316 San A ntoni o . TX .. . . . . . . 663616 San D i eg o , CA . . . . . . . . . 663716 Columbus, OH . . . . . . . . . 663517 Me s a , A Z . . . . . . . . . . . . . 6 6 4 017 Dallas /Fort Worth, TX .... 663817 Indianapolis, IN . . . . . . . . 663918 Tu l s a , O K . . . . . . . . . . . . . 664318 St. Louis, MO , .. , , . , ... 664218 Albuquerque , NM .. . . . . . 664121 North L itt le Rock, AR..... 664621 Bos ton, MA area.. , .. . . . 664421 Ro s e m ont , I L . . . . . . . . . . 6645

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F o und e d b y the Americ a n P ayr o ll Ags to c h nlimi

NATIONAL PAYROLL WEEKSeptember 16 -20, 1996

"WORKING FOR AMERICA"

ATIONAL PAYROLL WEEK is a nati onwide public

awareness campaign that pays tribute to the 124

million men and women who work and pay taxes in the

United States and the payroll professionals who support

the American system by making the contributions on their

behalf. Look for NATIONAL PAYROLL WEEK in USA TODAY on

September 13 and 16. PLUS MORE!

he A mer i ca n P a yrol l A s so c ia t io n (APA ) is a no n-

p ro f i t p r o fe s s i o na l a s s o c i a t i o n f o r i nd i v i d u a l s

e nga ge d i n p a y ro l l m a na ge m e nt , i . e . , wa ge a nd

e m p l o y m e n t t a x wi t hh o l d i n g , r e p o r t i n g a n d

d e p o s i t i n g a nd a l l o t he r a u t o m a t e d a nd ma n u a l

processes involved in paying employees . Founded in 19 82.

A P A p ro v i d e s e d u c a t i o na l p ro gra ms , p u b l i c a t i o ns a nd

pro fe s s i o nal su p po r t t o i t s 1 3 ,00 0 + Pa y ro ll P rofe s s io na l

members na tionwide.

aMUST

for Payroll, Accounting,

Year -End ►s!. — ensatioW Professionals—

IN 1995Human Resource and Co OVER 6,000 ATTENDEDCircle No

e s

Anthony P. Curatolo, Editor

INDEPENDENT CONTRACTORS:A LOOK AT THE CONSEQUENCESThe Internal Revenue Service has been

aggressively challenging the indepen-dent contractor status of workers bytargeting companies with high num-bers of independent contractors. Still,many firms have increased their use ofindependent contractors because itmay decrease payroll tax liability, re-duce record keeping associated withpayroll taxes, and decrease liability re-lated to other employee benefits.

Potential costs of misclassification.TheIRS is actively pursuing worker classi-fication audits of firms with the follow-ing characteristics:

1. A high number of form 1099s filedin comparison to W 2s;

2. A current or former worker whofiled a Form SS -8;

3. A former worker (independentcontractor) who filed a claim forunemployment benefits againstthe company;

4. A competitor who believed thatthe reported firm had an unfairadvantage by using independentcontractors and reports it to theIRS; or

5. In an industry investigated by theIRS to verify that the use of inde-pendent contractors is an indus-try -wide practice.

One of the costs when workers arereclassified by the IRS is that the em-ployer must file and pay the relatedpayroll tax liabilities that should havebeen shown on all past payroll tax re-turns. This is the case even if theworkers filed as independent contrac-tors and paid the applicable taxesthemselves. However, with the coopera-tion of the employee, the employer mayqualify for a credit for the income taxespaid by the employee. At a minimum,

18 MANAGEMENT ACCOONTING AUGUST 1996

Errata

In the July 1996Taxes

column, the para-

graph on maturity ofSeries E bonds should

have read: Series E

bonds mature in 40

years, if issued before

December 1965, and

30 years, if issued

between December

1965and June 1980.

the employer must pay Social Securityand Medicare taxes and applicablepenalties and interest for failure to payon time even though the employee filedand paid these taxes himself (effective-ly double paying these taxes).

Another cost of misclassification isdisqualification of a firm's pensionplan(s). A qualifying pension plan un-der ERISA allows an employer to takean immediate tax deduction for fund-ing. As pension plan qualification re-volves around the definition of an em-ployee, reclassification of independentcontractors as employees could causedisqualification of the plan resulting inloss of current tax deductions andfunding problems.

In order to protect itself against IRSchallenge, a company must maintainadequate substantiation that the work-ers meet the IRS definition of an inde-pendent contractor. The table belowshows the 20 factors that the IRS usesto evaluate the status of workers,

These factors measure the degree ofcontrol maintained by the firm. Thehigher the degree of control, the morelikely a worker will be treated as anemployee.

Congress, in 1978, passed a law toprovide these four statutory safehavens for firms that treat workers asindependent contractors:

• A judicial precedent, publishedrulings, technical advice to thefirm, or a letter ruling to the firm;

• A past audit of the firm by theIRS in which there was no assess-ment attributable to the firm'streatment of workers;

• A long - standing, recognized prac-tice of treatment of workers as in-dependent contractors by a signifi-cant segment of the industry;

• Some other reasonable basis fornot treating workers as employees.

To be eligible for any of these safehavens, the company must have filedall required returns, including informa-tion returns (e.g., issued form 1099s toall independent contractors), and con-sistently classified all workers holdingsimilar positions as independent con-tractors. —John 8rozovsky, J. DavidMason, and Carol O'Neal

John Brozovsky, Ph.D., is assistant professor,Virginia Tech; J. David Mason, Ph.D., is assis-tant professor, department of accounting, EastCaro lina University; and Carol aNeal, MSA, isa staff accountant with Hutchins, Allen & Co.,PA, K ittyhawk, N.C.

Insnuctloa.Does the worker comply with instruction of 11.0mlor writtenreports7ls worker required to submit

others?

2. Training.Is training offered to the worker by the ser-

vice recipient?

3. Integration. Are worker's services integral to the recipi-

ent's business?

4. Services renderedpersonally.Does service recipient

require services be rendered personally?

5. Hiring, supervising, and paying assistants.Does ser-

vice recipient hire, supervise, and pay assistants for

worker?

6 Continuing relationship.Is there a continuing relation-

ship?

7. Sethours of work.Does service recipient set hours of

work?

8. Full time required? Does worker devote full -time to

work performed for service recipient?

9. Doing work on employer's premises?Is work per-

former) on service recipient's business premises?

10.Order or sequence set Does the service recipient des-

ignate the order or sequence of work to be performed?

reports?

12.Paymentby hour, week,month? Is payment by hour,

week, or month rather than job or straight commis -

sion?

13. Payment of business and/or traveling expense?Is

worker reimbursed for travel and business expenses?

14. Furnishingoftoolsand materials.Does service recipi-

ent provide tools and materials?

15. Significant investment?Does worker have a signifi-

cant investment in equipment and facilities?

16. Realization of profit or loss?Is worker in a position to

realize a profit or loss from the work?

17 Working for more than one firm?Does worker provide

services to more than one service recipient?

18. Making services available togeneral public?

Does worker make services available to the public?

19. Rightto discharge.Is worker subject to dismissal by

service recipient?

20. Rightto terminate.Does worker have right to terminate

relationship without incurring liability?

in Accounting& Finance

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September 11 -12, 1996

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JACK FOX,SCMS FORMER PRESIDENTJohn J. "Jack" Fox, IMA national vicepresident in 1970 -71 and StuartCameron McLeod Society president in1984 -85, died July 11 following heartsurgery.

A CPA, he was a partner with Ly-brand, Ross Bros. & Montgomery, nowCoopers & Lybrand. He joined IMA in1953 as a member of the Detroit Chap-ter, later serving as its president. Addi-tional national service included a two -year term as a national director in1968 -70 and membership on severalcommittees.

Mr. Fox was born in Flint, Mich., in1918. He was graduated from the Uni-versity of Detroit in 1940, summa cumlaude, with a B.S. degree in accounting,and received an MBA degree from thesame university in 1952. Other profes-sional affiliations included the Ameri-can Institute of CPAs and the Michi-gan Association of CPAs.

FINANCE HIRING IS STABLE,CFOS SAYFor the second consecutive quarter,chief financial officers participating inthe Robert Half International Finan-cial Hiring Index predicted a 5% netincrease in the hiring of accountingand finance professionals. Nine percentsaid their companies will hire more fi-nance and accounting staff during thethird quarter, 4% plan staff reductions,and 83% will remain the same.

Industries that will do the most hir-ing are transportation and public utili-ties, which anticipate a 15% increase;retail, with an 8% increase; and manu-facturing, which expects a 7% increase.

In regard to regions, the West SouthCentral (Arkansas, Louisiana, Okla-homa, Texas) expects the strongest hir-ing activity, followed by the East SouthCentral (Alabama, Kentucky, Missis-sippi, Tennessee), adding up to a 9% in-


crease in hiring. Close are the EastNorth Central (Illinois, Indiana, Michi-gan, Ohio, Wisconsin) and New Eng-land, Max Messmer, chairman ofRobert Half International, says hiringis high in the West South Centralstates "as information technology andtelecommunications companies expand,fueled by the relatively low cost of do-ing business in this region."

Approximately 1,000 CFOs fromrandomly selected U.S. companies withmore than 20 employees participatedin the survey.

GOVERNMENT ADOPTSGAAP

For the first time, the federal govern-ment has a body of generally acceptedaccounting principles (GAAP) that willgovern the preparation of financialstatements for departments and agen-cies. The standards were developedover five years and involved extensive"due process," which included publicdeliberation by members of the FederalAccounting Standards Advisory Board( FASAB), involvement of task forcesfrom all major agencies, issuance of ex-posure drafts, and extensive publichearings. They have been signed by thesecretary of the Treasury, the directorof the Office of Management and Bud-get (OMB), and the U.S. comptrollergeneral. OMB is proceeding to incorpo-rate the standards into form and con-tent guidance.

The FASAB says, "Not only does thissignal the beginning of the creation ofa reliable and meaningful database ofinformation to better report on the fi-nancial condition of government enti-ties, but it also marks the first timecost accounting requirements will beimposed to help measure the cost ofoutputs called for under the Govern-ment Performance and Results Act."

The FASAB established the stan-dards to accommodate a reportingframework designed to provide usefulinformation to persons interested in

analyzing and understanding the fi-nancial condition and cost of govern-ment programs.

Now it has compiled an agenda ofnew issues to work on, which includesprojects such as accounting for naturalresources, accounting for social insur-ance programs (social security,Medicare, black lung), a codification ofall accounting standards, guidelines fora management discussion and analy-sis, and guidance for implementing thestandards in the government -wide con-solidated financial statements.

Ron Young, executive director of theFASAB, explained that the chief finan-cial officers of federal departments andagencies now must take the responsi-bility of seeing that the standards be-come implemented into their agencysystems, and they must help analyzeand interpret the financial and cost in-formation to help agency executives,program managers, and members ofCongress assess the efficiency and ef-fectiveness of programs and service de-livery. He added that the FASAB willbe the clearinghouse for all substantiveinterpretations of the standards.

FAF, SEC AGREE ON CHANGES

TO FOUNDATION COMPOSITION

The Financial Accounting Foundation(FAF) and the Securities & ExchangeCommission (SEC) have reached agree-ment for a change in the compositionof the FAF's Board. Specifically, accord-ing to the FAF, the Foundation will addtwo new at -large positions, fill two ex-isting at -large vacancies, and reducethe number of members appointed bysponsoring organizations by two.

So far, three of the at -large memberswill be John Biggs, chairman and CEOof TIAA -CREF; Manuel Johnson, for-mer vice chairman of the Federal Re-serve (1986 -90); and David Ruder, for-mer chairman of the SEC (1987 -89).The FAF also will extend an invitationto Charles Bowsher, comptroller gener-al of the United States, to serve afterhe completes his government servicelater this year.

The FAF will amend its bylaws to in-corporate this composition change, re-flecting the fact that the American In-stitute of CPAs and the FinancialExecutives Institute have agreed to re-linquish one seat each. The IMA hasone seat on the Foundation. ■

Grant W. Newton, editorCMA, Ph.D., CPAPepperdine University

Andrew D. Balky, Jr., CMAPh.D.. CPAUniversity of Arizona

Roger N. Blakeney, Ph.D.University of Houston

Michael A. Diamond, Ph.D., CPAUniversity of Southern California

James B. Edwards, CMA, Ph.D.,CPA, CIA, CDPUniversity of South Carolina

William D. Gunther, Ph.D.The University of Alabama

John Kostolawky, Ph.D., CPALoyola University, Chicago

George C. Mend, Ph.D., CPAMichigan State University

tarry J. Merville, Ph.D.University of Texas at Dallas

Cynthia J. Rooney, Ph.D.. CPACollege of William and Mary

Arthur A. Thompson, Jr., Ph.D.The University of Alabama

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Circle No. 4

DOING BUSINESS IN CHINA:

A Management AIs it

because

the great

American

fortunes

have

traditionally

been made

on frontiers

that China

has become

such an

attract ive

new market?

Or is it

one billion

consumers?

BY ANNE J. RICH, CMA

Certificate of .Merit

merican companies have an opportunity tobecome part of the consumer revolution inthe People's Republic of China (PRC) as a

result of the market policies introduced in thelate 1980s by Deng Xiaoping. Chinese consumersare buying more goods and demanding betterquality in the most populous market on earth —amarket of 1.2 billion people.

Right now, American companies may sell toChina, buy from China, manufacture in China, orassemble productsin China. And thereis countertrade aswell —the reciprocalexchange involvinglittle or no transferof funds— transac-tions such as barter,counterpurchase,offset trade, andbuybacks. Manage-ment accountantsand financial man-agers, however, needto be aware that le-gal and accountingregulations arechanging constantlyin the PRC, so it isessential that com-panies get advicefrom local profes-sional sources beforethey undertake anybusiness. The guide-lines here are brief and include some discussionabout legislation in force.

China, personal relationships are the quintessen-tial basis for all business transactions. The Chi-nese do not do business with people they don'tknow and trust. Being impatient, demeaning, orcritical is counterproductive. Developing an effec-tive business relationship of mutual trust and ad-miration takes time. Yet, while slow to develop,business relationships in China can grow intofriendships that last a lifetime.

Management accountants must be aware of andrespect the vast differences that exist betweenAmerican and Chinese cultures, For instance,family always has been, and continues to be, a

The author tries a different medium —amaobi, or Chinese writing brush. Watchingare (I. to 0: Vice President Li Dianfu of the Beijing Institute of Business, Ms. KongYaping, and Wang Chun.

CULTURAL DIFFERENCES

B ut prior to the business initiatives, there mustbe an understanding of the Chinese style of doingbusiness. There are significant differences. In


central, celebrated institution in China. Adultchildren often live with their families and have aconstitutional responsibility to support their par-ents in their old age. Also, individuality has notbeen rewarded. The Chinese people are taught tobe humble and undemanding. Your Chinese busi-ness partners rarely will ask you for a favor, andthey will be hesitant to accept one from you.

c ountant's GuideWhen introductions take place, politeness and

formality are critical. Never insult or criticize apotential business partner. Good- natured jokingis best left until well after becoming acquainted.Jokes often depend on subtleties of language orirony and easily can be misunderstood whentranslated. Losing face is a terrible embarrass-ment for a Chinese person. The Chinese taketheir responsibilities very seriously and considermeeting your expectations very important. It iswise to show deep respect for their culture andfor their strong commitment to family and orga-nizations. Be very patient. Relationships take along time to develop.

SELECTING A BUSINESS PARTNER

B ecause personal relationships are so impor-tant, selecting a business partner is the first andmost critical step. The best way to meet prospec-tive partners is through personal introductions,which can be arranged by mutual acquaintances,trade shows sponsored by the U.S. Department ofCommerce, or connections through Chinese na-tionals. For advantages and disadvantages ofeach method see Table 1.

ENTRY STRATEGIES

T he most common ways of doing business arethrough representative offices (Chinese tradingcompanies), importing and exporting (directtrading rights), processing and compensationtrade, export and import licensing, joint ven-tures, and wholly foreign -owned enterprises.

Representative offices (Chinese trading corpora-tions). Representative offices are officially rec-ognized by the Chinese government. As theterm suggests, they can only represent your

business, performing liaison and promotionalfunctions. They are not allowed to conduct prof-it- making business activities. While previouslyscarce, now there are more than 8,000 Chinesetrading corporations that are allowed to engagedirectly in foreign trade. Representative offices

Very personal from the start. Easy Friends may overstate their abilityto build trust when friends intro- to cut through red tape.duce partners.

People's Republic of China spon- Invitation to attend is required. Nosored. Includes many comprehen- one organization to contact for fullsive as well as specific product list. Announced exhibitions are can -fairs. celled, dates and locations change

often. Costly to set up show.

Know Chinese laws and regulations May not have right connections toand are able to explain procedures gain necessary approvals.to Americans.

also handle Chinese enterprises interested inimport and export activity.

The central government of the People's Repub-lic requires all trade to be approved by licensedtrading companies. A government agency, theMinistry of Foreign Trade and Economic Cooper-ation (MOFTEC), issues import and export li-censes as well as business licenses to tradingcompanies. Because the PRC considers exportingmore desirable than importing, it is easier to ob-tain exporting licenses. Obtaining an import li-cense requires adherence to strict procedures.American management accountants who want touse Chinese trading companies must confirmthat a particular trading company actually has avalid import license for the specific products tobe imported.

Importing and exporting (direct trading rights).Until 1992, only certain companies were grantedthe authority to import and export. As China isopening its doors to the global market, however,some companies are being allowed direct trading

AUGUST 1996 MANAGEMENT ACCOUNTING _;i

rights. More than 900 Chinese manu-facturing companies have been grantedauthority to import and export productsdirectly. Hundreds of foreign invest-ment enterprises also have been givendirect trading rights. In March 1993, forexample, more than 100 science andtechnology institutes were grantedbusiness licenses to conduct their ownimporting and exporting. Direct tradingrights most likely will be granted forhigh -tech companies, whose productsare considered to be of great value toChina.

Processing and compensation trade.PRC enterprises often use a form oftrade called processing and compensa-tion trade, which involves the transferof machinery, equipment, raw materi-als, and/or technology to a Chinese en-terprise from a foreign exporter, withpayment made in installments only af-ter the products are produced. Thismethod of doing business allows Chi-nese companies to obtain equipment ortechnology for little or no cash outlay. Inthe case of the transfer of materials, theChinese factory can process quality for-eign raw materials and pay for themwith the goods created from the manu-facturing process.

Technology licensing.Because the PRCis eager to obtain new technology, Amer-ican entrepreneurs are allowed to li-cense Chinese partners to use theirAmerican technology. But Americancompanies receive only royalty pay-ments in this arrangement, and theycould lose control of the technology aswell as witness the creation of Chinesecompetitors.

Joint ventures.The most popular formsof foreign investment are equity jointventures and cooperative joint ven-tures. Most joint ventures must be ap-proved by MOFTEC, although local gov-ernments can approve the smaller ones.

Equity joint ventures are limited lia-bility companies whose profits and loss-es are shared according to the propor-tion of investment contributed by eachpartner. Foreign contributions must bemore than 25%n of the registered capital,which is defined by the Ministry of Fi-nance. Normally, foreign equity contri-butions must be in the form of hardworking capital currency. Technology orindustrial equipment desired by the

24 MANAGEMENT AMN1NN4 AUGUST 1996

The appetite for some American exports isworldwide.

Chinese government also is allowed.The American management accountantshould be aware that while profits areshared according to the percentage ofownership, business decisions are madeequally by all partners — regardless ofownership. Thus, a Chinese partnerwith less than a 50% legal ownershiphas an equal share with the Americancompany in many important businessdecisions. American companies benefitfrom a well - developed legal and ac-counting framework for equity jointventures. The Chinese governmentspecifies minimum debt - equity ratios.

Cooperative or contractual joint ven-tures may take any form agreed uponby the Chinese and foreign partners.These ventures provide the Americancompany with the greatest flexibility.But Chinese law in this area is less de-veloped, and there are some legal risksassociated with this form of doing busi-ness because the Chinese governmentis likely to issue regulations in thenear future concerning cooperative jointventures.

Wholly foreign -owned enterprises. Inthis form of business, capital is provid-ed totally by the foreign investor. Usu-ally this entity is a subsidiary of a for-eign company. Branches established byforeign enterprises in the PRC, howev-er, are not considered wholly foreign -owned enterprises. The PRC specifiesminimum debt - equity ratios.

As of July 1, 1994, the Company Lawallowed branches of wholly foreign -owned enterprises to be established, butMOFTEC has been reluctant to approveapplications. Company Law is a nation-al law that governs all investment enti-ties and oversees all provincial laws.Table 2 compares the forms of doingbusiness in China.

SPECIAL PROBLEMSAND ISSUES

Public ownership.The foundation of thePeople's Republic of China is built onpublic ownership, even ownership ofknowledge. Individuals who seek to usethe knowledge of others to improvethemselves are rewarded. There also isa lack of commercial culture and so-phisticated business transactions. Al-though the government is paying moreattention publicly to copyright andtrademark laws, it is hesitant to punishindividuals who violate these laws.

Language. Substantive problems alsoexist with the Chinese language. ThePRC's official language is MandarinChinese, but there are more than 900dialects. Differences in language andculture require the American manage-ment accountant to work closely withChinese nationals or with an Americanwho has current knowledge of Chineselanguage and culture to direct any mar-keting efforts.

Legal differences.China's legal systemis different from ours —especially in theextensive use of arbitration to settledisputes. The United States depends oncontractual law; China uses personalcontact and negotiations to resolve dis-putes. In China there is no private own-ership of land. Land is owned by thegovernment. American companies maylease land, but contracts often are unre-liable and published laws not followed.

Intellectual property. In 1991, Chinaand the United States reached anagreement concerning intellectual prop-erty under which China agreed to pro-tect intellectual property rights such astrademarks and copyrights. But thoselaws were not enforced, and illegal com-pact disks, videos, and software prolifer-ated. The United States and the PRCsigned another accord in February 1995to end the piracy of software, music

No initial investment. Limited obligation. Ameri-can company only provides guarantees andwarranties. Chinese nationals available toassist in obtaining licenses and approvals.

No initial investment. Limited obligation.

Quality goods assembled inexpensively.Overcomes hard currency problems for trade

partners.

Special tariffs (such as consumption taxes,duties, and quotas). Unwritten rules. Extensivewritten rules serve to frustrate Americaninvestors.

Special tariffs (such as consumption taxes,duties, and quotas). Unwritten rules. Extensivewritten rules often frustrate American in-vestors. Network of skilled professionals need-ed: insurance brokers, customshouse brokers,freight forwarders, and international bankers.

Obligates American investor to provide equip-ment that must remain in China. Quality consis-tency issues.

No obligation. Encouraged by government. American investor loses control of technology.Easy to penetrate market. Potential to create your own competition. Often

results in minimal income because revenue isthrough royalty arrangements.

Can cut through red tape. Easy access to mar-kets, resources (labor, materials). Well- devel-oped legal framework. Eligible for tax holidaysand other fiscal incentives.

No need to invest capital. No minimum capitalcommitment. May be a limited liability company.Maximizes tax planning opportunities. Moreflexible because less regulated. Flexible interms of profit sharing - percentage of profitsharing can change over time. Hard currencycan be taken out of China. No risk to American

company.

Total control of secrets and intellectual proper-ty. More efficient— American company doesnot have to negotiate with partners.

Legal framework often ties hands of investorsand reduces flexibility. American investor mustprovide at least 25% of registered capital.Majority ownership does not guarantee control.Profit is subject to ownership percentage —noflexibility for other arrangements. Americancompany must deal with different managementstyles and different objectives.

Generally not eligible for tax incentives. At endof venture, underlying assets must remain inChina. Currently little government regulation,butthat is likelyto change in nearfuture. Amer-ican investor must deal with different manage-ment style and different objectives. Intangibles,such as trade secrets and intellectual propertyare shared.

American investor's capital and property is atrisk. Facing higher performance requirement -for example, currently wholly foreign -ownedsubsidiaries must export at least 501/0 of pro- ,

duction. Generally approved only if Americaninvestor offers advanced technology.

recordings, and film. That agreementcreated at least 22 task forces to overseean antipiracy campaign in China. Chi-na has launched raids against retailoutlets and has inspected factories sus-pected to be engaged in piracy. In addi-tion, China has agreed to strengthenpenalties against enterprises violatingcopyright laws. Nevertheless, copyrightand other intellectual property protec-tion issues still exist. The Chinese gov-ernment engages in protectionist prac-tices and simply will not let foreignenterprises set up a business thatwill compete directly with local manu-facturers in either domestic or foreignmarkets.

Local [email protected] with localgovernments is another obstacle forAmerican companies because they cancreate special assessments. For exam-ple, local governments can impose ener-gy or environmental assessments atany time and for any amount. Govern-ments in special coastal areas havebeen granted authority to approve pro-jects with investments up to $30 mil-lion. Governments for inland provincesand autonomous regions can approveprojects with investments up to $10million.

Labor unions.Management accountantsalso must work with Chinese laborunions. Unlike American unions, Chi-nese unions are simply extensions ofthe government. A major difference be-tween U.S. law and Chinese businesspractice concerns who is able to makedecisions. In the PRC, all partners havean equal say in operations, regardless ofequity investment.

Currency. The PRC's currency has notbeen converted easily to American dol-lars. In the People's Republic only a fewbanks (mainly the Bank of China) areauthorized to exchange the Chineserenminbi (RMB), which is the people'smoney, or the Chinese yuan. Americancompanies who want to convert Chinesecurrency into dollars often find theswap market helpful but not without itscosts. While Chinese law allows foreignbusinesses to gain access to their prof-its, getting hard currency out of thePRC is difficult. On June 20, 1996,China announced that it will loosen itscontrol on currency. Effective July 1, allforeign - funded enterprises were able to

AUGUST 1996 MANAGEMENTACCOUNTING 25

buy and sell foreign exchange in banks.Many predict that this step will reduce,if not eliminate, the need for the swapmarket. In addition, this is just one ofseveral steps designed to allow China tomeet the convertibility conditions set bythe International Monetary Fund.

Politics.Political problems also abound.Many believe the political situation inthe PRC is unstable. In the UnitedStates, the PRC's most favored nation(MFN) status is in jeopardy. Worldwide,the PRC's membership in the WorldTrade Organization, an organizationthat governs the international tradingsystem, has not been approved yet. TheUnited States is seen as the primarybarrier to China's entry into this presti-gious organization.

Travel.One last note. Travelers cannotunderestimate the challenges caused byChina's underdeveloped communica-tions and transportation systems. Trav-eling through the PRC is extremely dif-ficult and slow compared to the UnitedStates. Just getting a round -trip trainor plane ticket is an experience!

ACCOUNTING, AUDITING,AND TAX RULES

C hina's accounting, auditing, and tagregulations are administered by theMinistry of Finance. Foreign capital isencouraged to flow first into the areas ofinfrastructure construction, then intocapital- and technology- intensive indus-tries such as energy and basic raw ma-terials, and finally into sectors such asfinance, banking, and commerce.

Accounting.The Ministry of Finance is-sues and administers all accountingregulations. Chinese accounting haschanged dramatically since 1992 whennew accounting standards were imple-mented. The new standards follow mostinternationally recognized generally ac-cepted accounting principles, such asaccrual accounting. Chinese financialstatements include a balance sheet, in-come statement, and a statement ofchanges in financial position.

Unlike the United States, however,the People's Republic has different reg-ulations for different types of organiza-tions. Chinese companies such as state -owned enterprises follow one set ofstandards, and domestic stock compa-


nies follow a different set of rules. For-eign -owned enterprises must followrules established for their type of own-ership. For example, equity joint ven-tures follow one set of standards, whilecooperative joint ventures and whollyforeign -owned enterprises are subject todifferent rules. There are no uniform ac-counting rules for consolidation proce-dures. In general, each company mustfile a separate tax return, but foreigninvestment enterprises and foreign en-terprises may adopt consolidated filingsfor units operating in different areas ofthe PRC.

Auditing considerations. The auditingprofession is new in the People's Repub-lic. Certified public accountants haveexisted for only a few years, and theprofession is not completely indepen-dent of the government. State -ownedentities are not required to be auditedby independent auditors. Only jointstock and foreign investor enterprisesare subject to annual audit by regis-tered CPA firms.

Ta :es. All US. businesses are subject toAmerican taxation on their worldwideincome. Foreign operations conductedby U.S. corporations, whether directly orthrough a branch operation or as a jointventure, can generate foreign and U.S.tax obligations. The form in which theydo business is a key tax issue. Dramati-cally different U.S. tax consequences ap-ply, depending on the U.S. tax classifica-tion of the foreign entity, but U.S.businesses can take advantage of theforeign tax credit to avoid double tax onthe same income.

In the People's Republic, the StateTaxation Bureau, a division within theMinistry of Finance, is responsible formanaging state tax revenues, formulat-ing tax laws, and supervising the finan-cial affairs of collective enterprises inurban and rural areas. It also has thepower to interpret China's tax laws.Taxable income is defined by the regu-lations. In the past, there was no differ-ence between tax and accounting in-come. More recently, China has createda distinction between the two.

Companies can reduce their taxes inthe PRC by taking advantage of specialenterprise zones, open enterprise zones,and free trade areas. The special enter-prise zones include Shenzhen, Zhuhai,and Shantou in the Guangdong

Province; the entire island Province ofHainan Island; Xiamen in the FujianProvince; and 14 additional open enter-prise zone coastal cities. The Pudongnew development zone is a 135- square-mile area located on the eastern bank ofthe Huangpu River opposite Shanghai.The free trade areas refer to 13 addi-tional sections. Businesses in thesezones and areas enjoy tax incentivesand relative independence. Imports en-ter duty free, exempt from commercialand industrial taxes, with simplified en-try and exit procedures.

In general, the corporate tax rate is30% plus a 3% local corporation tax fora total of 33%. Capital gains are taxedat the same 33% rate. Net operatinglosses can be carried forward for fiveyears only. The 33% begins when a com-pany shows profits, unless it is eligiblefor a special tax holiday. All companieshave two years after they become prof-itable before they begin to pay taxes.Then they have a reduced rate for thenext three years. After the fifth year, thefull 33% rate is in effect, unless thecompany is in one of the favored zones.Foreign investment enterprises en-gaged in production and manufacturingactivities with an operating period of 10years or more, as well as joint venturesthat are export - oriented or technologi-cally advanced, also are eligible for atax benefit. Additionally, businessesthat reinvest profits may be eligible forsome tax benefits.

The national rates are offered to for-eign enterprises in the special enter-prise zones, open enterprise zones, andfree trade areas in several combina-tions. The rate is 15% in special enter-prise zones. In the Shanghai Pudongnew area, production is taxed at 15%and nonproduction at 30%. The samerates hold in the economic and techno-logical development zones in 14 opencities, but within the coastal open eco-nomic region and within other areas ofthe 14 open cities production is taxed at24% and nonproduction at 30 %.

Other taxes include the value -addedtax; the land value appreciation tax; im-port- export duty; housing property tax;vehicles and vessels operation licensetax; education, environment, and ener-gy taxes (which may be imposed by localgovernments at any time). There is aconsumption tax on manufacturers andimporters of luxury goods, which canrange anywhere from 3% to 45 %. The

PRC has a tax treaty with the UnitedStates that allows companies to avoiddouble taxation on profits. The taxtreaty, however, does not contain someof the favorable features the UnitedStates has with other countries.

Raising capital. For management ac-countants and financial managers, oneof the biggest challenges is obtainingcapital and paying back creditors. Out-side the United States, the World Bankfinances major infrastructure projects.For major construction projects thereare the Asian Development Bank andthe Overseas Economic CooperationFund. Within the People's Republic, for-eign businesses are eligible for loansfrom the Bank of China and other na-tional institutions. These banks haverenminbi (RMB) to lend to joint ven-tures. Provinces and municipalities alsohave investment institutions that areable to finance joint ventures withAmericans.

Foreign producers also can establishjoint ventures with profitable Chinesecompanies engaged in similar activities.Many familiar U.S. companies, such asPepsi and Coca -Cola, have joint ven-tures with Chinese partners. Recently,Anheuser -Bush reported it will form ajoint venture with a brewery in Wuhanto produce Budweiser beer. General Mo-tors, which already has 12 GM- fundedjoint ventures and licensing projects inChina, has announced plans to join withthe Shanghai Automotive Industry Cor-poration to build a plant in Shanghai.Such arrangements can be mutuallybeneficial because domestic banksgive priority for funds to joint - venturepartners.

Inside the United States, companiescan use many traditional forms of fi-nancing such as local banks, venturecapitalists, and private investors. To en-courage foreign transactions, manystate economic development agencies,as well as the Small Business Adminis-tration, have special loan programs. TheExport/Import (Ex -Im) Bank of theUnited States can be a valuable re-source for American companies thatneed working capital loans for exportprojects and can assist in obtaining let-ters of credit. Another resource to mini-mize the risks of doing business in thePRC is the Overseas Private InsuranceCorporation (OPIC), a U.S. governmententity that protects U.S. investors in de-

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Circle No. 8

There are cultural differences, and then there are the products that build bridgeseverywhere.

veloping countries from expropriation,currency convertibility, and damagesfrom wars and revolutions.

FOREIGN EXCHANGE ANDIMPORT PRACTICES

F oreign exchange is controlled by theState Administration of Exchange Con-trol (SAEC), which is part of the Peo-ple's Bank of China. The SAEC man-ages foreign exchange funds and foreignloans, It also approves banks and finan-cial institutions that conduct foreign ex-change. Two other banks are helpful toAmerican companies: the Bank of Chi-na (BOC), which handles foreign ex-change transactions and manages for-eign exchange reserves, and the ChinaInternational Trust and InvestmentCorporation ( CITIC), which is a finan-cial organization established to smooththe influx of foreign funds. The CITICcompetes with the BOC for foreign ex-change business.

All foreign businesses mus t se t upbank accounts with either the BOC oranother foreign exchange authorizedbank. Foreign invested enterprises arerequired by law to ensure tha t the irforeign currency receipts cover theirhard currency expenses. Some jointventures are able to gain an exceptionto the requirement.

28 6UNAGEMENTACCOUNTING AUGUST 1996

The Chinese government allowsAmerican companies to distribute prof-its to American investors. To convert theChinese renminbi to dollars, the Chi-nese government has established swapcenters, which for a fee match buyersand sellers of dollars and RMB. Becausethe swap centers often are unable tomeet the needs of all foreign investors,other forms of "money" have developed.Countertrade and barter, for instance,many times are offered as an alterna-tive to cash.

Companies that import must obtainletters of credit (issued mainly by theBank of China and other specialized

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i cle I Jo_ 19

banks), import licenses, and approval tospend foreign exchange. American en-trepreneurs may experience delays inreceiving any payments due to the timerequired by Chinese banks to obtain ex-port documentation. Also, special prac-tices for the importation of large equip-ment and technology sales aremandated, and Chinese banks often re-quire cash or some other form of collat-eral from importers. (The PRC is not amember of the International Chamberof Commerce and does not necessarilyfollow Uniform Customs and Practices.)

Import documentation is a highlyregulated process. Standard contractsmust have price data, required packingand shipping marks, shipping documen-tation, technical specifications, pay-ment terms, and inspection and insur-ance arrangements. Commercial invoicerequirements must be followed to theletter. Bills of lading and air waybillsmust conform strictly to the conditionsand terms of the buyer's letter of credit.Packing lists must show weight andcontents of each package and certificateof origin. Local authorities will notapprove shipments that vary even inthe slightest form from the originalcontract.

IT'S WORTH CONSIDERING

Because conditions in the People'sRepublic of China are uncertain, Amer-ican companies should look for projectswith short paybacks. Expect legal, ac-counting, and tax rules to change —attimes, quickly. But China is a land filledwith people who like Western prod-ucts— witness the volume of piratedmusic, videos, and software that thegovernment is attempting to control. Asthe Chinese consumer's level of incomeincreases, so will the demand for prod-ucts. American companies definitelyshould consider doing business in Chi-na. The rewards will be worth any extraeffort. ■

Anne J. R ich, CMA, CP A, Ph.D. , is p rofess orof ac co unting at Quinnipiac College , Hamd en,Co nn. S he is a memb er and p ast p res id ent o fthe New Haven Chap ter, thro ugh whic h this ar-tic le was s ub mitted , and c an b e reac hed at(203) 281 -8787.

The autho r wis hes to exp ress her app recia-tion to Dr. Xiao ho ng He fo r her c omments andguidance.

Accountingfor

Another dimension

is added to the cost

of a product: accounting for the future disposal

cost o f products produced now and in the past.

Product TakemBackBY MARC J. EPSTEIN

enior corporate managers over-whelmingly agree that U.S. compa-nies will likely be held responsible

for the ultimate reuse, remanufactur-ing, recycling, or proper disposal of theproducts that they produce." This ac-ceptance of responsibility for postcon-sumer waste was one of the findings ofthe largest field research study everconducted on how companies can inte-grate environmental impacts into man-agement decisions. The IMA- sponsoredstudy, Measuring Corporate Environ-mental Performance: Best Practices forCosting and Managing an Effective En-vironmental Strategy, was released latelast year. But how will this responsibil-ity and its related cost affect financialreporting; product costing, pricing, anddesign; cost management; and capitalinvestment decisions in organizations?And how will it change the role of themanagement accountant?

To account for the effect of producttake -back on product costing and capi-tal investment, companies need to im-prove their identification and trackingof current and future environmentalcosts. A common hurdle is that currentenvironmental expenditures (for in-stance, for remediation) often concernproduction completed decades ago. Atthe time of production, future environ-mental costs typically were ignored,which often led corporate managers tobelieve that operations were profitable

Producer responsibility for product life -cycle impacts has arrived.

when, in reality, they were not. Now weunderstand that much of our prior pro-duction did not produce the profits wehad calculated when we include addi-tional future costs (including environ-mental costs). But analyses of productcosts must include any future costs: fu-ture environmental cleanup costs aswell as the benefits and costs relatedto product take -back (also referred toas producer responsibility, internaliza-tion, or dematerialization).

THE INTERNATIONAL ARENAADDS ANOTHER DIMENSION

Ad1 companies that produce or sellproducts in Europe must consider all

future environmental impacts of theirproducts and must assume the ulti-mate responsibility for the reuse, re-manufacturing, recycling, or properdisposal of the postconsumer waste. Inthe United States and Canada, compa-nies acknowledge that either throughregulations or competitive pressuresthey also will be responsible for prod-uct take -back within the next fewyears. As a result, automotive and of-fice equipment companies, for example,have been establishing disassemblyand recycling plants in both Europeand the United States. Manufacturersof appliances, cameras, paper, and elec-tronics also have become very active intake -back programs.

AUGUST 19% MANAGEMENT ACCOUNTING 29

WHAT IS PRODUCTTAKE -BACK?

T he basis of the current movementtoward product take -back is the "pol-luter pays" principle —those who pro-duce waste should be responsible forrecycling or disposal. The intent is tohave industry take back what it pro-duces after the consumer is finishedusing it —to accept responsibility "cra-dle to grave" from raw material acqui-sition to disposal or reuse. As withleasing, the company takes the respon-sibility for the disposal of the product.In both cases, companies have an in-centive to reduce production and theuse of materials by increasing the re-manufacturing of existing productsand the reuse of materials. Both effortswill reduce raw material, labor, energy,and other overhead. They also willpush the consideration of environmen-tal impacts to earlier in the designstages and will reduce environmentalimpacts substantially and increaseprofitability.

Another way to understand the take -back principle is to see manufacturingcompanies also as service companiesthat include the cost of product take -back and proper disposal in the priceof their service. The take -back princi-ple encourages companies to use fewermaterials and other resources in theproduction process, which reducescosts, energy usage, and environmentaldamage. From a societal perspective,as products are reused, remanufac-tured, or recycled, they become moreeco- efficient.

MOVING TOWARDPRODUCT TAKE -BACK

N ew regulations are being intro-duced that create corporate responsi-bility for the final disposal of productwaste. Management accountants andcorporate managers need to measureand report this information for betterinternal management and externalshareholder, regulator, and consumerdecisions.

The German Eco -Cycle Waste Lawgives the government powers to imposetake -back and other obligations onthose companies that manufacture orsell products in Germany. The Euro-pean Union's Priority Waste StreamsProject and the Waste from Electrical

30 MANAGEMENTACCOUNTING AUGUST 1996

and Electronic Equipment ProjectGroup are drawing specific proposalsand guidelines for both EU and nation-al action concerning product take -back.

The Swedish Eco -Cycle Bill clearlyplaces responsibility for environmen-tally sensitive disposal on producers,regardless of the date of production.The disposal will be funded by a sur-charge on new products. Austria hasproposed placing take -back responsibil-ity on retailers, distributors, manufac-

"it is evidentthat somecompanieswill profit

substantiallyfrom

[take - back]."tuners, and importers whereby compa-nies would be able to set up an au-thorized collection or deposit system.Japan's 1990 Law for Promotion of Uti-lization of Recyclable Resources estab-lished take -back requirements for a va-riety of products including televisionsand appliances. The Dutch Environ-ment and Economics Ministries havestated that product take -back must bebased on a cost internalization that in-cludes the take -back costs in the initialpurchase price.

This movement toward producer re-sponsibility and product take -back islagging only slightly in the UnitedStates. Minnesota is moving forwardon a ban on landfills, forcing a recy-cling solution. New Jersey is looking atcreating a demanufacturing plant torecover reusable components from elec-tronic items. U.S. and European manu-facturers increasingly are designing fordisassembly, using bar coded parts, andare including instructions for quickdisassembly.

Many of the companies that havebeen active in product take -back havefound that, in addition to the signifi-cant environmental benefits, financial

benefits from reusing materials and re-ducing raw material purchases aresubstantial. Whether the companies dothe take -back themselves or outsourceto newly created take -back enterprises,it is evident that some companies willprofit substantially from it.

Note: Product take -back may not bemeant literally. Because cross - bordertransfers of waste often are prohibited,or because they want to reduce unnec-essary increased handling and ship-ping costs, many companies will nottake back their used products. Instead,they hire third parties (municipalitiesand private haulers) to manage thewaste. The responsibility for postcon-sumer waste and the prevention of en-vironmental impacts thus shifts fromthe government to industry. The finan-cial burden, however, ultimately getspassed on to the consumer throughprices that include these corporateenvironmental costs.

FULL ENVIRONMENTALCOST ACCOUNTING

W hile governments have been press-ing ahead with take -back regulations,many companies have been moving for-ward rapidly with voluntary programs.Most manufacturers are preparing tocalculate the costs of reuse, recycling,remanufacturing, or proper disposal(including transportation and handlingcosts); to offset the costs with potentialrevenues and reduced expenditures forraw material and other inputs; and toreflect all of these impacts in the pricesof new products. But which costsshould be included in product costs,product prices, and evaluations of theperformance of products and man-agers? Corporate environmental costsbasically fall into three categories.

1. Current costs related to previousproduction. They include Superfundcosts and other remediation coststhat often relate to the productionof decades ago. Current allocationsof these costs often cause incorrectcosting of products and poor costmanagement decisions.

2. Current costs related to current pro-duction. They cause the fewest ac-counting problems and most oftenare included in product costs, al-though they may not always be as-signed to products properly.

3. Future costs related to current pro-duction. They are the costs that areresponsible for significant under -costing of products. Costs related toproduct take -back and other life -cy-cle costs often fall into this categoryand traditionally have been ignoredProper cost management includesthese costs in the decision- making

process.

To account properly for environ-mental costs related to current pro-duction, companies first must identifyand track all of these costs. Then theymust examine the causes of the coststhrough a system like activity -basedcosting. Finally, companies must iden-

tify the impacts of all their products,services, and activities (through a life -cycle assessment) and report theseimpacts so management can makeproper decisions.

Full environmental and life -cyclecost accounting provides useful infor-mation for management decisions andtends to encourage earlier considera-tion of environmental costs and the re-design of products and processes to re-duce long -term costs. The results areproducts that are produced more effi-ciently and that use fewer raw materi-als, produce less waste, increase pro-duction yield, reduce environmentalimpacts, and increase profitability. Byincreasing the production yield, compa-

nies reduce raw material costs and alsoreduce the amount of costs required forcleaning up the waste that is produced.

IDENTIFYING AND TRACKINGENVIRONMENTAL COSTS

For current costs related to currentproduction, companies are not identify-ing the causes of the costs properly andoften are placing these costs in over-head or general and administrativecost categories rather than assigningthem to the products, facilities, or ac-tivities that are their cause. For cur-rent costs related to previous produc-tion, companies often are allocatingthose costs arbitrarily, and the costs

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AUGUST 1996 MANAGEMENT ACCOUNTING 31

z

42

then are borne by facilities, businessunits, and products that did not causethe costs and have no ability to reducethem. Future costs related to currentproduction usually are ignored in theaccounting system.

Most companies dolt even knowhow much their total environmentalcosts are! I have seen a number of com-panies where actual environmentalcosts were three or four times largerthan initial estimates. Improved infor-mation about the magnitude and thecauses of the costs plus the subsequent

related to current production.The accounting for take -back of pre-

viously produced products also must beconsidered. If these costs are assignedto products improperly, current productcosts and product profitability analyseswill be distorted. Current and futurecosts related to current productionmust be included in product cost con-siderations. Current costs related topast production must be segregated socurrent products will not be overcostedand will not impact performance evalu-ations of products, business units, and

3M provides its transparency filmcustomers with a convenient take-backprocess. Newtransparency film then is made with 50% recycled material, including 25% postconsumerwaste.

assignment of those costs to the prod-ucts, facilities, and activities thatcaused them has improved the man-agement and reduction of those costsdramatically.

ACCOUNTING FOR PRODUCTTAKE -BACKN ew regulations and competitivepressures are placing the primary re-sponsibility for product take -backsquarely on manufacturers and sell-ers rather than the consumer. Thisscenario has clear implications formanagement accountants. Cost man-agement and cost accounting needsystems to identify and track allpast, present, and likely future costs


managers improperly. Therefore, cur-rent take -back costs related to priorproduction should not be included incurrent product costs, but an estimateof future costs should be included forfull environmental cost accounting.Further, just as the costs for producttake -back (transportation, processing,handling, remanufacturing, and so on)must be tracked and included in prod-uct costs, so must the additional rev-enue received from the sale of remanu-factured goods offset those costs in theproduct profitability analyses.

The current movement by companiesto internalize products causes signifi-cant changes for the way accountingmust be done. At present, accountingdoes not fully cost products because

many environmental costs are ignoredin product cost, much of the cost is al-located arbitrarily, and future producttake -back costs are not included. Ignor-ing future costs related to the presentproduction undercoats products. I haveseen undercosting lead to impropercosting, pricing, and capital investmentdecisions.

There also are many barriers to ac-counting for product take -back. Ac-counting systems often are not orga-nized to track environmental costs.Adding future costs from environmen-tal impacts and product take -backcosts requires changes in systems andadditional training. Management in-centives often are focused on short -term cost avoidance instead of benefi-cial expenditures that will increaselong -term profitability. If future costsrelated to current production are ac-counted for only when the expendi-tures are made rather than when theyare caused, managerial performancemay seem better than it is becausebusiness units seem more profitablethan they actually are. Such account-ing, however, is improper for both in-ternal management decisions and forproducing a fair external report.

Product life -cycle assessment, life -cy-cle costing, and full environmental costaccounting are essential for the identi-fication, measurement, and manage-ment of environmental impacts. Man-agers need this information to measurecorporate profits and to make properdecisions related to managing productcosts and capital investments.

Whether through international, na-tional, or industry standards orthrough competitive pressures, itseems clear that product take -back isimminent in a wide spectrum of indus-tries and countries, and it possibly willimpact most major corporations. Evencompanies without major manufactur-ing operations in Europe probably willbe affected as they become responsiblefor the ultimate reuse, recycling, orproper disposal of all of the productsthey manufacture or sell. They need toprepare by including product take -backand life -cycle costs into product costsand product management so that theyare not undercosting (and maybe un-derpricing) their products. Only in thisway can companies move into leader-ship positions in both environmentaland cost management.

THE CHALLENGESFOR MANAGEMENTACCOUNTANTS

G overnment regulationsfor product take -back arenot fully developed. Butenough government andcorporate action has oc-curred that the direction ofproduct take -back is clear.Producer responsibility forproduct life -cycle impactshas arrived, and it is criti-cal that all companies de-velop measurement and re-porting systems to managethis responsibility.

After completing ananalysis of inputs and out-puts to the productionprocess at Monsanto, formerCEO Richard Mahoney saidthat the company foundthat it was "throwing away$150 -175 million worth ofraw materials and energy.Some of it was the laws ofphysics and chemistry, andsome of it was just badprocesses." Monsanto con-cluded that "the first compa-ny to get a handle on full -cost accounting, the first oneto learn how to expand theboundaries of traditional ac-counting into life cycle as-sessments, will be in a posi-tion to set critical worldwidestandards for sustainablegrowth ."1

waiting for take -back leg-islation but are design-ing for disassembly. Theyrecognize that this actioncan enhance consumerappeal, reduce produc-tion costs, reduce envi-ronmental impacts, andimprove long -term prof-itability. Those multina-tional companies that donot begin this integrationnow will incur more costsover the long term, willmiss out on potentialrevenues, and will losecompetitive advantage.

More companies thanever are recognizing thebenefits of internalizingtheir products. Reuse, re-manufacturing, and recy-cling can have beneficialenvironmental and finan-cial corporate impacts.But companies have notintegrated the measure-ment of these impactsinto their managementdecision making or ac-counting systems. With-out such integration, thebenefits cannot occur, andmanagement will makeimproper decisions. Cor-porate environmentalleadership cannot beachieved without an ex-amination of completeproduct life -cycle impacts.Through improved mea-

Companies must inte- surement and reportinggrate all of the impacts of their current into the capital investment decision of environmental impacts and the im-production into product cost and capi- process provides the information nec- pacts related to product take -back,tal investment decisions. Cost manage- essary to broaden the identification of management accountants can dramat-ment can be improved when all envi- stakeholders' and life -cycle costs and ically improve management decisionronmental costs are tracked and incorporate them into the investment making and corporate profitability. ■assigned to the products, activities, or decision. When companies ignorefacilities that cause those costs. They these future costs related to currentprovide the information that managers production, including the likely costs Marc J. Epstein, Ph.D., is visiting professor

need to incorporate the future costs of1'P of take -back, the are understatingY gm the Graduate SchoolCalif. Business a StanfordUniversity, Stanford, li He can be reached

current production in addition to the product costs. Net present value at (415) 725 -5179.

current costs. They also force the recog- analyses cannot be correct if all of thenition that current and future costs re- future (impacts) costs and benefits In September, Dr_ Epstein will become Price

lated to past production are incurred are not included. Product take -back isWaterhouse visiting professor at INSEAD(European Institute of Business Administra-

continually and that only present plan- one of those impacts that should be tion) in Fontainebleau, France. His number

ning and proactive environmental included. will be (33) 1 -64 69 4302.

management will provide assurance This integration of environmentalthat companies no longer will under- impacts into management decisions 'Te res a Ophe im, "Five Years Aft er the P ledge, ' The

cost and underprice products. is good for society and good for busi- Environmental Forum. November /December, 1995.

The integration of these same costs ness. Leading companies are not


ManagingThrough Control over complexity begins

D with a measurement

UJL UJL1116n ce of its influence

Measurement

Performance measurement should expose the direction that is within complexity.

BY FRANK A.J. GONSALVES AND ROBERT G. EILER

Cea ficate ofMerit

The traditional role of financial per -formance reporting has been tosatisfy external needs, primarily

regulatory and capital markets - related,rather than to focus on eliminatingcomplexity. As companies have evolvedfrom small, entrepreneurial organiza-tions to large, integrated multination-als, the basic structure of their perfor-mance reporting systems has notevolved to manage the complexitycaused by their growth.

Our purpose here is to examine com-plexity factors in today's business envi-ronment and recommend the use of awell- designed set of performance mea-sures to understand, control, and man-

34 MAKAGUAEKT ACCGONTNG AUGUST 1996

age complexity. We address fourquestions:

1. Why is it important to understandcomplexity?

2. What drives complexity into a busi-ness?

3. How should complexity bemeasured?

4. How can performance measureshelp you manage complexity?

WHY IS IT IMPORTANT TOUNDERSTAND COMPLEXITY?

R eporting to satisfy regulatory orga-nizations, banks, and the securities in-

in the business

environment.

dustry has focused on reporting finan-cial result measurements. Result mea-surements assess the historical out-come of a set of events after the fact.They do little to either predict futureoutcomes or identify the root causes ofpoor performance. Precedent measuresthat would measure the process, moni-tor complexity factors, and allow man-agement to fine -tune operations mid-stream are conspicuously absent fromthe set of metrics used by companiestoday. Without precedent measures, themanager is like a ship's captain at-tempting to maneuver the vessel bylooking only in the direction of thewake, analyzing the course just takenrather than looking out for the shoals,currents, and weather patterns ahead.

In this environment, decisions tendto be intuitive rather than based on in-formed performance analysis, which, ifcombined with managerial intuition,would be ideal. If results consistentlydo not meet stated objectives, the prob-lems are deeper than those a budgetreview meeting will uncover. A reasonfor underperforming operations may beunknown or hidden complexity.

Over the course of the 1980s and1990s, a majority of the largest U.S.corporations has undertaken changeinitiatives. Understanding the need forchange reveals the underlying need tosimplify modus operandi as it relatesto customers, employees, and suppliers.Reengineering, redesign of businessprocesses, restructuring, and reorgani-zation are directed at reducing process-or business -level complexity or at re-ducing organizational complexity, Inthese efforts, the drive to simplificationis always understood. However, it is

rarely the focus of change, and itshould be.

Controlling complexity through per-formance measures is possible onlywhen feedback on complexity factors isunderstood, disseminated, and consis-tently acted upon. What are complexityfactors? They are the drivers of non-standard resource consumption and ac-tivity expenditure that increase theburden of product or service delivery.Nonstandard resource consumptionand activity expenditure can be de-fined deterministically (number ofhamburger patties in a Big Mac) orstatistically (number of cold calls to ef-fect one telephone customer switchfrom AT&T to MCI). As it happens inmost cases, understanding nonstan-dard activity usage or resource con-sumption is heuristic.

One way to understand nonstandardbehavior patterns is to step back anddetermine how a process would operateif it were designed anew. This approachleads to "out of the box" thinking thatinitially may be considered too expen-sive or challenging to implement butthat, given adequate senior manage-ment support, can produce dramaticresults. Some companies have reengi-neered themselves by attacking com-plexity factors head -on. It follows thatan important way to address complexi-ty is to question the process continual-ly, however ingrained the process is inthe organization's culture.

For example, if a washing machineproduct line has one out of five prod-ucts that requires special reinforce-ment to meet industrial needs, is itmandatory to provide dimensions forsupport bars for this machine that dif-fer from all the others? If so, this re-quirement drives different procure-ment needs for the nonstandardproduct as well as specialized tooling,setup, and manufacturing operations.Would it not be simpler to strengthenthe support bars on all the machines?Too costly? How about using a materialwith different metallurgical character-istics but with the same dimensions?Too complex? Admittedly, in this case,the change causes initial complexity togo up. But it was demonstrated thatthe cost of designing the product andreconfiguring the factory was less thanthe benefits of improved throughput.This is the first complexity paradox: 7bachieve long -term simplification, it is

often necessary to undertake short -terminitiatives that increase organizationcomplexity.

Complexity factors are the biggestsingle driver of cost. They also are thesingle biggest inhibitors of throughput.Using activity -based costing tech-niques, we have found complexity costdrivers to drive between 20% and 50%of the cost in manufacturing organiza-tions and service organizations. Oftencomplexity factors are mandated bygovernment regulation or customer re-quirements. Regulatory demands es-tablish and proliferate whole corporatedepartments dealing with compliance,arbitration, and litigation issues. Cus-tomers are requiring radically differentmodes of operation. For example, Just-in -time manufacturing and efficientcustomer response initiatives often re-quire complex readjustment of existingsystems, policies. and procedures.

WHAT DRIVES COMPLEXITYINTO A BUSINESS?

M ost often it is the customer who isdriving the change. It was not too longago that withdrawing money from thebank required as much planning andtime as a visit to the grocery store.ATMs and electronic banking soon willvastly reduce the need for the humaninterface in retail banking. And thegrocery business? How long before gro-ceries will be ordered and delivered byway of the telephone or computerscreen? The simplicity of the customerinterface belies the level of effort re-quired to provide the service. Thesesystems require complex networks andcommunication links to provide cus-tomers with the service levels they aredemanding. And this is the secondcomplexity paradox. Customers wantsimplicity in their dealings with suppli-ers of products and services. Providingcustomers with this simplicity often re-quires immensely complex systems andinterfaces.

Customers are demanding easierways of dealing with service providers,large industrial clients are demandingEDI links with their suppliers, largeretailers are demanding cross- dockingor vendor - managed inventory pro-grams, and it is predicted that homeshopping will be worth several hun-dred billion dollars by the end of thedecade. With these demands, cus-

tomers are forcing a high degree ofcomplexity into the business environ-ment. Therefore, in addition to sub-scribing to the simplicity credo, morecommercial enterprises truly will haveto understand and be able to managethe new levels of complexity.

Managing customer- driven complexi-ty is accomplished best by understand-ing customer desires and by designingthe simplest customer - service deliverymechanisms. A case in point is the in-formation systems business. Until re-cently, programming estimates weredeveloped based upon the number oflines of programming code required toexecute a program. There was a built -in bias to expand the number of linesof code rather than to provide timely,cost - effective solutions. Now program-ming development estimates are basedinstead upon function points or screensand reports, thereby directing effort atproviding the best information technol-ogy solutions quickly and efficiently.

The response to customer - drivenneeds will impact organizational, oper-ational, marketing, information sys-tems, and supply -chain managementstrategies. Matching the organization'sresponse to customer needs is manda-tory. Fine - tuning and simplifying thisresponse requires the attention of acorporate complexity mechanic. Fourareas that should be monitoredinclude:

Organizational design, The number ofprofit centers, reporting layers, and ge-ographical segments that drive com-plexity into an organization. Measurethe percent of noncustomer- focused ac-counting entries to the total numberofaccounting entries.

Product and product line strategies.The questions to ask relate to how easi-ly the product can be delivered and ac-cepted by the customer while minimiz-ing the degree of after -sales support,warranty returns, and so on. Any timethe product or related information isreviewed or touched after initial deliv-ery adds to its complexity. Measure thecost or the time spent on these processes.

Future marketplace needs, includingresearch and development. Is the re-search and development communitydeveloping products that will meet fu-ture customer needs? Will the new


products require extensive negotiationswith vendors, extensive retraining ofthe workforce, or redesign of existingoperations? Measure the new product'spotential to disrupt routine operations.

Market, channel, and supply chainstrategies. The basic issues here relateto reducing the complexity in handlingand transporting goods from the timewhen the customer orders to the timeof delivery. This area has an extremelyhigh potential for simplification. Mea-sure cycle times from order generationto customer delivery.

HOW CHANGE DRIVES COMPLEXITY

C hange in itself is a complicatingphenomenon. Besides the obviousphysical manifestations of change,when change occurs, attitudes need tobe refocused, interpersonal dynamicsneed to be readdressed, and perfor-mance evaluation criteria need to beredesigned. The last is seldom done.Without the fine - tuning of performancecriteria, the change process becomeseven more complex. Imagine changingthe architectural design and landscap-ing of a new office complex without un-derstanding what the changed designwill create. And yet undertaking a re-structuring exercise without fully un-derstanding what the end state shouldlook like is no different from redesign-ing the office complex without blue-prints and changed sketches.

To guard against the effects of in-creasing complexity during change, itis vital to monitor and measure thepulse of the organization and the po-tential resistance to change continu-ously. As an organization goes throughthe process of change, organizationalstress increases. Initially due to uncer-tainty, this stress diminishes over timeas individuals settle into new or rede-fined roles and responsibilities. Thespeed with which change can be man-aged effectively depends on how theinitial change process was structuredand how effectively performance met-rics have been set for the changeprocess.

A large nonferrous metals companythat imports plate products for sale toU.S. defense manufacturers was con-cerned that three clients had terminat-ed their relationship within a nine-month period.


During the course of its investiga-tion, the marketing department foundthat the main reason why the relation-ships had been terminated was thatthe average on -time deliveries wereless than 20 %, and some lags were aslong as six weeks. During its restruc-turing, the company had eliminatedthe only people who could manage cus-tomer expectations effectively.

Higher cost for plate products hadnot been a factor. Customers were will-ing to pay the premium for high- quali-ty products. Initially, low order fillrates were tolerated because of long-standing relationships established be-tween buyers and customer servicerepresentatives, comfort with the prod-uct's configuration, and a lack of viablealternatives. When the customer ser-vice representatives were let go, theformula changed.

Restructuring and reengineering arehighly complex phenomena. Focusingon the wrong end - objectives, especiallywithout fully understanding all ramifi-cations, can be fatal. When there ischange, it is important to understandthe need for well - balanced end -stateperformance targets. The effects of thechange need to be mapped carefully tothese targets.

HOW SHOULD COMPLEXITY BEMEASURED?

D o not look only at the results ofcomplexity - driven problems. Look alsoat the root causes and then measurethem through precedent measures.Customer- driven requirements oftenidentify the problems to look for and tomeasure. In the previous section weoutlined several customer - driven com-plexity factors that need to be man-aged to make the customer interfacesimpler. Next to consider are culture(Why have you been doing this for solong ?), cost (How can you reduce eco-nomic outlays to execute the process ?),and time (How can you speed upprocess execution ?).

Cultural factors make complexity ac-ceptable. Consider the accounting closeprocess. Period -end numbers have sev-eral uses other than meeting statutoryobligations. In a vast majority of com-panies the accounting close producesreports and statistics that serve as thebackbone of their performance report-ing process. And yet often these num-

bers are produced days, or even weeks,after the period has ended. Antiquatedcomputer systems, late posting of salesnumbers, excessive approval proce-dures, and errors in datacompilation/transmission cause delaysand are costly. Each of these factorscauses late reporting.

Of these factors, two can be ad-dressed with quality- imposed localizedmetrics: number of late postings andnumber of errors (by reason code). Af-ter being reported for a few months,these measures may be eliminated.The idea is to correct a problem, not tocreate new performance reporting ca-reers. One problem, excessive approvallevels, is a cultural issue and will beaddressed best as part of a larger, fo-cused improvement process aimed atreducing bureaucracy. The last prob-lem, antiquated computer systems, canbe tackled only by demonstrating care-fully how system- related late reportingdistorts management decision making.

MEASURING COMPLEXITY WITHACTIVITY COSTING

T he cost of complexity is the singlebiggest cost driver. Activity -based cost-ing promises to uncover the cost ofcomplexity. The basic premise is sound,yet the benefits of ABC have boggeddown by companies focusing too muchon product cost, losing interest after aninitial PC -based modeling exercise, andby focusing too much on result -basedoutput measurements rather than dri-ver- related precedent measures.

Let's understand how activity costanalysis can help control complexity.The ABC process attempts to under-stand the activity consumption and re-sources needed to deliver products orservices to customers. It assigns cost toactivity pools and determines costingrates by dividing activity pools by someoutput measure, sometimes referred toas the cost driver. ABC uses the costingrates to build meaningful product,product line, customer, channel or busi-ness unit profitability, and, finally, ituses the activity -based cost informa-tion to manage cost.

All too often, the link between deter-mining costing rates and using them tomanage costs are unsound. The outputmeasurement is a result measure. Theroot cause of why activity cost is highis found elsewhere. For example, in a

manufacturing environment, setups ofmachines often are identified as an ac-tivity pool. The activity -based cost ofsetups is determined by attributingrelevant costs associated with setup la-bor, tooling, and ancillary materials,etc., to the setup pool. This cost then isdivided by an output measurement,typically the number of setups, todetermine the cost per setup.

Cost per setup can be reduced inthree ways: by reducing the activitycost of setups, by increasing the num-ber of setups, or by both reducing ac-tivity cost and increasing the numberof setups. Perfecting the setup processis accomplished by reducing theamount of time required to conduct thesetup. More setups imply quicker re-sponse time to customer needs whilesimultaneously reducing cost. Under-standing how it is done requires focusbeyond the result measure of cost persetup.

To control cost, companies need tounderstand why setups take longerthan they should. One reason could bethe lack of training for setup labor orthe additional time required to set upmachines for product line extensions.In this case, two measures tracking theroot cause of the problem will help.One measure is to track the number ofworker training hours (by predefinedcategories), and the other is to selectdesigns that ease the introduction ofnew products into the manufacturingprocess.

The longer it takes to execute a task,the more complex it becomes. Motorolaquality teams also have proven thatthe longer it takes to execute a task ordeliver a service, the more quality de-fects are observed. The proof is some-what ontological. If the task took lesstime and was executed properly, thennonvalue- adding activity will be re-duced and resource consumption opti-mized. Identifying ways to reduce timewill root out complexity factors thatwill, in themselves, add time to thetask.

The effect of time on complexity ismeasured first on the cycle time tocomplete a task and, second, on the re-sulting quality of task execution.

Measuring cycle time is a very effec-tive way of forcing cooperation. Jointperformance measurements can forceindependent, and sometimes adversari-al, functions to work as teams. Reduc-

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Evaluating cycle time results alsobuilds a de facto thought process fo-cused on quality. Reducing time im-plies eliminating unnecessary steps inthe process. The emphasis shifts to "getit right the first time."

Complex designs of products andservices exponentially drive down-stream complexity. A funeral productscompany wanted to understand thecost complexity relating to: What doesit cost to add a part number, and whatdoes it cost to add an end item configu-ration change?

The company was being asked by itscustomers in different ethnic communi-

ties to tailor its product to their mar-ket segments. The impact was to addcomponent part numbers and end itemnumbers into the business. The conse-quent impact on complexity can be un-derstood by tracing all the additionalactivities required to support the partnumber addition.

It is our experience that the cost of apart number addition may add 5% to30% of material cost to support thepart number. The higher range of costsis usually in products/parts that havecomplex materials. Complexity isadded through increased transactions(the new part needs to be ordered, re-ceived, inspected, stocked, picked, ac-crued to the payables system; checksneed to be issued; equipment needs tobe set up; and the end item needs to bescheduled if the part is produced).

In addition, accounting time is in-creased. First -time setup costs are in-creased for qualifying the vendor, writ-ing material specifications, andallowing for engineering time and mar-keting changes. As the design of prod-ucts and services changes and as cus-tomization is introduced, the company

AUGUST 1996 MANAGEMENT ACCOURNG 37

consumer soft goods manufacturer wanted to understand its complexity position after moving from a market

orientation that focused on department stores /speciality stores into mass merchandising in such outlets as

WalMart and K -Mart. To identify complexity through the supply chain —from procurement to production, distrib-

ution, marketing to the customer, and to its customer —using point of sales (POS) data, the company identified

a number of important complexity issues by process improvement and TOM initiative teams. After much strate-

gizing, the company found that its plethora of initiatives needed one,

coherent umbrella initiative to provide focus in reducing complexity.

The initiative chosen was a performance reporting and feedback system

to provide balance between management functions.

The supply chain issues contributingto complexity were listed to identifyspecific measurements that wouldhelp control them:

■ Certain procured items had asmany as 10 vendors.

■ Of customers, 98% made up only7% of the sales volume, or 2% ofcustomers made up 93% of thesales volume.

IN Five color combinations made up75% of the volume.

■ New colors/patterns had to gener-ate at least $300,000 of revenue tobreak even on start -up.

■ Inaccurate sales forecasting was amajor reason for excess inventory.

■ Pricing discounts and promotionalprograms added complexity to theaccounts receivable collectionprocess because of increaseddisputes over "correct" balances.

■ Just -in -time requirements ofcustomers have caused operationto produce smaller order sizes andthe requirements reduced setuptime.

■ Certain executives indicated thatcost reduction efforts in manufac-turing had not resulted in im-proved margins because of the


pressure from larger customers toreduce prices.

To address these complexity fac-tors, the company identified balancedsupply chain metrics to address eachcomplexity issue:

Procurement

■ Number of certified vendors for thetop 20 commodity raw materialitems.

■ Negotiated pricing reductions fromthe 1994 procurement cost base-line.

Build Products

■ Actual versus planned production.■ Percent items on JIT.■ Set -up reduction achieved.■ Days' supply of inventory.

Distributabie Products

■ Number and time of bad orders.■ Days' supply of finished goods in-

ventory.■ Percent excess and slow- moving

inventory.■ Percent of orders shipped same day.

Market and Service Products

■ Number of products, margins, andmargin improvements from baseperiod, for improved marginproducts.

■ How much the margin has deterio-rated in the time period.

■ Days' sales outstanding for receiv-ables.

■ Sales forecast accuracy.■ Profit and loss for new products

(less than one year) less start -uptooling and other expenses.

■ Customer profitability —top 2% ofcustomers.

■ Customer profitability —all others.■ Number of low -value customers

dropped.

■ Number and percentage of stan-dardized products for low -valuecustomers.

■ Profitability of mass merchandis-ers versus department stores ver-sus speciality stores.

The result of such a measurementset was to reduce the complexity ofstart- up/setup in operations as wellas to reduce the number of low -valuecustomers. Patterned products wereexamined more closely to ensure thata majority of new products met therequired demand percentage for thefirst year. Overall, margins improvedas products were required to standmore on their own in the company'sproduct rationalization program.

must be sensitive to the impact of com-plexity driven into the business. Mea-sures tracing root causes of designcomplexity (number of engineering/ser -vice change notices) as well as resultmeasures (number of parts, number ofpart numbers) are an important surro-gate to effective line proliferation man-agement.

Performance measures will help youmanage complexity by focusing on thefactors that cause it, thereby attackingroot causes rather than symptoms. Asecond example can be seen in the casestudy in the sidebar on page 38.

HOW CAN PERFORMANCEMEASURES HELP YOU MANAGECOMPLEXITY?

U ntil recently, product initiation inmajor U.S. automobile companies hasbeen driven by a multitiered decision -making process, lengthening develop-ment time and resulting in "design bycommittee" products that fell short ofcustomer expectations. Now the indus-try is using customer - focused productdevelopment teams that include repre-sentatives from design, engineering,product planning, procurement, and fi-nance. These teams have shortenedproduct development cycles and devel-oped products that appeal to distinctgroups of customers.

First the market, divided into dis-tinct segments, is analyzed to deter-mine the voice of the customer. Thefeedback is translated into a series ofdesign, engineering, procurement, andfinancial models to determine exactlyhow the end - product will look and sell.Complexity is managed by developinga Design for Manufacturability Index,which measures the degree to whichexisting systems, processes, parts, andsubassemblies will be used. This Indexwill not sacrifice the new product's in-tegrity because the organization alsowill constantly measure the degree ofproduct fit to customer expectations.Including procurement and financewill ensure easy product introductions.

People, culture, and the organiza-tion's response to a set of customerneeds have long - lasting effects on theeventual delivery of the product. Wehave found that because over threequarters of a product's total cost iscommitted during product develop-ment, the work of the product develop-

Authors Robert G. Eiler and Frank A.J. Gonsalves

ment team has the biggest impact onthe product's life cycle cost.

Two performance measurement cate-gories are particularly important. Onecategory requires a structured projectmanagement approach with timelinesand exit checkpoints. An exit check-point determines that all necessarysteps have been completed before thenext stage of product development. Forexample, in semiconductor manufac-turing, before product design sign -off, acalculation is required of the new prod-uct measured against existing productsto predict the degree to which the newproduct will cause process, product,testing, and customer acceptance com-plexity downstream. The exit check-point measurement is reported periodi-cally to a product development reviewcommittee, along with a subjectiveevaluation of the proposed product's fitwith anticipated needs.

The second performance category,design for process stability, focuses oncost minimization. It addresses the de-gree to which a new product or servicewill disrupt established systems. Thismeasurement also is called Design forManufacturability in the discrete man-ufacturing world. It calculates, throughan index, how different a new productwill be, based upon:

■ Design index —the extent to whichthe new product's design representsa departure from existing products(it needs to be evaluated differentlyfor product line extensions —such as

new packaging or new technology).■ Supplier interface —the degree to

which the organization's relationshipwith suppliers will change.

■ Operations process stability —the ex-tent of change in existing operatingpolicies, practices, and procedures.

■ Information technology fit—thechanges and customization to exist-ing information technologyinfrastructure.

■ Labor force acceptance —the retrain-ing or cross - training required to sup-port the new product.

Performance measurements drivemanagement behavior patterns. Theydirect action toward achieving resultsand are most effective when tied to re-ward or recognition. Focusing only onresult measurements (as in historicalreporting) masks business process inef-ficiencies. We recommend the use ofproactive, forward - looking precedentmeasurements that constantly monitorthe pulse of business development,product/service delivery, informationmanagement, and organizational dy-namics in order to drive complexity outof the organization. ■

Frank A.J. (Franco) Gonsalves is a principaland practiceleaderin Change Integration andCost Management Services in PriceWaterhouse'sManagement Consulting Services Division, Cleve-land, Ohio.

Robert G. (Bob) Eiler is a partner and the worlddomain leader in cost management services inPrice Waterhouse's Management Consulting Ser-vices Division, Cleveland, Ohio. Both can bereached at (216) 781 -5700.


GAPV:

A New Approach To JoiHow Fiat Avio

analy zed a

proposed joint

venture with

Russia to

produce parts

for gas turbines.Fiat Avio machine for a power generation plant.

BY CARLO PRINA DELLA TALLIA, MARK T. JUDD,AND DIANE D. PATTISON

ultinational corporations have been using a variety ofcapital budgeting techniques in their investment deci-sions. Net present value (NPV) and its derivatives, in-

ternal rate of return (IRR), payback period, and profitabilityindexes are some of the more common techniques. At FiatAvio, a partially new method —the general adjusted presentvalue (GAPV) —was used to evaluate an investment decisionin the Russian market.

Our main objective here is to introduce the GAPV modeland to describe the actual application of it in Fiat Avio'sinvestment decision.

Fiat Avio is the aerospace company within the Fiat group inTurin, Italy. Fiat Avio's primary operation is in the productionof jet engines and jet engine component parts for military air-craft, but it also is a major subcontractor for the world's lead-ing commercial jet engine manufacturers. In addition to thesetwo market segments, Fiat Avio produces industrial gasturbines used in the field of power generation.

In the industrial gas turbine segment, Fiat Avio producesaeroderivative gas turbines in partnership with General Elec-tric. The models produced by these two parties provide powerin the 15 -50 megawatt power range. Fiat Avio also producesheavy duty gas turbines (over 50 megawatts) in partnershipwith Westinghouse and Mitsubishi Heavy Industries. Thisbusiness alliance, known as "The Trilateral Agreement," isdeveloping a new 230 megawatt gas turbine.

Our project entailed the market feasibility of Fiat Avioentering into a joint venture with a Russian manufacturing


company to produce compo-nent parts for Fiat Avio'sheavy duty gas turbine mod-els. Fiat Avio's primary moti-vation was the possibility ofexpanding into Eastern Eu-ropean markets for its prod-ucts and for the need to finda low cost producer for someof its component parts. Thisjoint venture accord alsowould benefit the Russiancompany, allowing it to di-versify its production as wellas gain access to much need-ed hard currency markets.

The joint venture betweenFiat Avio and the Russiancompany concerns the pro-duction of forged turbineblades. This is a very impor-tant component part ofheavy duty gas turbines be-

cause they must be strong enough to carry large centrifugalloads to resist fatigue, thermal shock, corrosion, and oxidation.This joint venture already had a guaranteed customer basethat paid in hard currency, and the production of gas turbineblades is for both new gas turbines as well as for replacementparts for gas turbines already in operation.

Under the capital structure of the joint venture, Fiat Avio'sshare was determined to be 60% and that of the Russian firm,40 %. Total capital amounted to approximately $30 millionwith the Russian company's contribution being made in land,buildings, and some equipment. Fiat Avio's contribution wasin knowhow and cash, which was to be used primarily for newmachinery and working capital. Fiat Avio would finance its eq-uity share through a complex financial scheme using Italiangovernment investment banks. The joint venture also neededto borrow an additional amount with the possible source offinancing being an Italian governmental export agency.

We assumed constant 1994 dollars as the base currency. Todetermine the amount of production, we forecast both thesales for future years and spare part requirements of existingplants based on past experience. From the information sup-plied by Fiat Avio's production department, we assumed a con-stant inventory level of 33 % of yearly production. Prices wereset at an agreed upon price plus the cost of raw materials. Thejoint venture's total number of employees was based upon Fi-at Avio's estimate for this kind of project, and it included fourcategories of workers broken up into direct, indirect, other em-ployees, and management. The wages of these employees werebased on wages paid by other multinational companies withoperations in Russia.

nt Venture InvestmentsIn our calculations we used the laws in place from the Russ-

ian Federation, other information provided by internationalorganizations, internal information from within the Fiatgroup, and forecasts made with the assistance of managementfrom Fiat Avio.

The capital investment was divided into two years. Theequipment expenditures were based on Fiat Avio's productiondepartment forecast. General and administrative expenseswere calculated as a percentage of sales, and machinery andequipment were depreciated by the straight -line method overa 10 -year period. Our business plan used two types of loans,but both had a grace period of one year with a five -year pay-back period commencing at the end of the grace period. Taxeson income, fixed assets, and labor contributions were consis-tent with the rates in force in the Russian Federation at thetime of this study. Any gains or losses due to revenue conver-sion also were considered, and receivables were assumed re-ceived after 90 days with payables paid in 60 days. We used aconservative approach regarding terminal value with it beingas low as possible at the end of the 10 -year period.

THE GENERAL ADJUSTED PRESENT VALUE MODEL

Generally the basic net present value model is the theoreti-cally preferred model over payback, accounting rate of return,and internal rate of return models. It recognizes the time val-ue of money using the opportunity cost of capital to project fu-ture cash flows into today 's dollars, and it includes an addi-tional feature in which the NPVs of separate projects can beevaluated individually when those projects are combined.'

Aero engine in a test cell.

The net present value (NPV) is defined as the present valueof future cash flows discounted at an appropriate rate minusthe initial net cash outlay for the project. Projects with apositive NPV should be accepted.' The NPV model is

NPV = I at 1t

t =o(1+ i)

where a t = the net cash flow at ti = the opportunity cost of equity

capital invested in the projectn = the investment horizon

The interpretation of the NPV model requires a thoroughunderstanding of what the discount rate i is . This discountrate is in fact the opportunity cost of capital. The cash flowsfrom the project also are assumed to be reinvested at thisrate.' According to Peccati, this requirement that the discountrate should characterize investments that are similar undertheir risk profile is misleading because:

■ It is not guaranteed that similar risk profiles do in fact exist;■ "Similar risk profiles" need to be clearly defined especially

when thinking about multiperiod horizons;■ Even if the theory of finance easily accepts this point, it is

far from clear how to convey in the discount rate both therelevance of the time value of money and the risk concern-ing the random cash flow to be evaluated. It is easierto take account of risk through a worst -case, best -casescenario analysis.'

There are two assumptions implicit in the concept of NPV.The first one states that the project's cost of capital is constantthroughout time, and, second, there is a unique financingsource for the investment. Myers took the NPV formula a stepfurther and also considers the fiscal side effects of a given in-vestment policy.' The same procedure can be used to appreci-ate the effect of external funding.' The whole approach is sim-ply adding to the cash flows generated by the project, the fiscalcash movements, and debt cash movements.' This adjustedpresent value (APV) reflects deviations from the firm's typicalinvestment.

Under the assumption of constant opportunity cost ofcapital, the NPV "after financing," or the APV, is given by thefollowing formula:

APV = (at + ft) 1= L at

t =o (1�+i� t

where a t = the cash flow of the investment at time tft = the cash flow of the financing at time ta t = a t + ft = the total cash flow at time t

Peccati suggests using Myers' approach not only with refer-ence to fiscal cash flows, but also to address the cash flows


generated by any funding policy. From the viewpoint of a com-pany, there is no substantial difference between payments duefrom taxes and payments due from financing. In any case,it is money that has to be paid. To evaluate an investmentproperly, the correct approach must:

■ Consider the fact that the opportunity cost of capital mayvary in time, which affects the discounting procedure;

■ Recognize the fact that both financing and taxes affect thenet cash flow produced by the investment.'

The Generalized Adjusted Present Value (GAPV) uses time -variable interest rates and discounts the net cash flows pro-duced by the investment where net refers to after funding andafter taxes. The formula for GAPV is as follows

GAPV (at + f t +zt )

r =o F(O,t)

Where at = the cash flow of the investment at time tft = the cash flow of the financing at time tzt = the cash flow from taxes at time t

F A A = the discount factor = -(1 +i1)• ••(1 +it )

In order to have a better understanding of the period break-down of GAPV, we must clarify two concepts. The first is theconcept of the outstanding capital of the total investment forany period t. Outstanding capital is the sum of all workingcapital accounts excluding cash, and it includes the net fixedassets either purchased in the joint venture or contributed byeither partner. The outstanding capital at different periods isgiven by the following sequence:

V= (Vo,V1, ... V.)

These values come from outside the model an d can b edetermined using standard accounting procedures. Of course,Vo = --co. The folllowing equation implicitly defines periodyield rates xi,x2 .... x;,combining the outstanding capitals withthe period's cash flows.

Vl = Vo(1 +xi) -a l

V„ = Vt_1(1 + xi) -at = 0

whereas before Vt = the outstanding capital at time ta t = the cash flow at time t

Finally , the outstanding capital at the time n is equal to 0.

The sequence of yield rates xi, x2,...xn,which turn out to be

. = at +Vt - Vt .,xt V t • 1

has a property which shows that it is a straightforward gen-eralization of the IRR. In fact, the present value of the cashflows generated by the investment and computed throughthese rates is 0, exactly as in the case of the IR.R.:

ao+ a1y+ � a2 # +...+ * an * 01 +x1 (1 +x1)(1 + x2) (1 +x1)•••(1 +xn)


For this reason it seems natural to say that xi, x2,...x;,define an Internal Financial Law for the investment. A furtherimportant characteristic of GAPV is that it can be additivelydecomposed into period components with a rather interestingstructure. The period quota of the GAPV appears as thepresent value of the sum of three components:

• A virtual financial margin on equity funds determined bythe spread the period yield rate xi and the opportunity costof equity capital for that period;

• And effective financial margin of debt funds determined bythe spread between xa, and the cost of debt;

• The tax payment for that period. This is explained in thefollowing formula.1D

Vt- 1[(1- 6t)(x* - it) +i9(xt - St )] - Zt

Gt F(O,t)

where Vt_1= Et-1+ Dt_1= the outstanding capital of thetotal investment at time t -1

6t = Dt-1= the percentage of the invest -Vt-1 ment financed by loans

(1- 6d = f t-1 = the percentage of the invest -V t - 1

ment financed by equityDt.l = the outstanding capital of the

loan at time t -1Et_1 = the outstanding equity capital

at time t -1it = the outstanding cost of equity

capital during the period attime t -1 to t

St = the interest of the loan duringthe period t -1 to t

Zt = taxes paid in the period t

xi = the yield of the project duringthe period from t -1 to t

It is also possible to decompose the period quota by thefunding sources that produce that quota. This decompositionby funding source shows the internal and external direct con-tributions of the investment for any period. While the break-down by funding source shows the contribution of equity anddebt to the formation of GAPV, the breakdown by time is im-portant to evaluate the risk associated with the investment.High period quotas from the beginning of the investment sig-nify low risk because the investor recovers his initial capitalin a shorter period of time.

The following formula shows those sources by period:

Gt = G(Et ) + G(Dt)) + G(Zt )

where G(Et ) = r9t)lxtF(O,t)

Vt-10 ,(xt -8 t )G(Dt)= F(O,t)

G(Zt)= ZtF(O,t)

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INSTITUTE ofM A N A G E M E N TACCOUNTANTS

Data Needed Advantages Disadvantages• Cash flows of the investment • Most frequently used. • IRR assumes constant rates of

and • Easy to calculate. return.• Time horizon. • If IRR is greater than opportunity • Multiple IRRs.

Documents Required cost of capital (OCC), accept • For mutually exclusive projects,Cash flow statement is suffi- project. may accept projects with thecient to compute IRR. highest IRR even though NPV for

other project is greater.• Failure to examine period results.

Net Present Value JNPV)

Data Needed Advantages Disadvantages• Cash flows of the investment, • If NPV is positive, accept project. • NPV assumes constant rates of• Time horizon, and• Discount rate.

Documents RequiredCash flow statement is suffi-cient to compute NPV.

• Easy to calculate.• Currently theoretically preferred

return.• Complex projects reduced to a

single number.• Failure to examine period results.

Data Needed Advantages Disadvantages• Cash flows of the investment • GAPV is positive; accept project. • New method.including financing and taxes, • Considers time - variable interest

• Discount rate, rates.• Outstanding capital for each • Analyzes risk by looking at periodperiod, and results.

• Internal financial law (IFL) for • Proves in a clear way whethereach period. any external funding sources are

Documents Required profitable.Business plan with the follow- • Sensitivity analysis providesing components: further review of the important

• Statement of cash flows, assumptions included in any• Breakdown of GAPV investment.by period, and • Allows for management review

• Sensitivity analysis. consistent with modelformulation.

• Flexible.

In order to better understand the difference between IRR,NPV, and GAPV, it is important for us to first distinguish thelimits of IRR. and NPV. IRR is simply a discounted cash flowrate of return that makes NPV = 0. IRR is a widely used andaccepted method in corporate finance, but it presents prob-lems in its application and interpretation. For example, ifthere is a change in the sign of cash flows, the project mayhave several IRRs or no IRR at all. In addition, the IRR rulemay give the wrong ranking to mutually exclusive projectsthat may differ in economic life or in the scale of the requiredinvestment."

The main pitfall of NPV is the fact that the whole businessevaluation under consideration is reduced to a single number.Peccati asserts that this viewpoint has serious shortcomingsfor two reasons. First, many managers are accustomed toaccounting periods that show the results of the activity by


• More complex analysis,

period. Second, NPV is merelythe final result of the sum ofmany periods in the total lifeof the investment."

The especially importantcharacteristic of GAPV decom-position by period breaksdown the present value of theinvestment by each period ofthe investment. It is clear thatthe early period returns haverelatively lower risk than thelater time period cash flows.Decomposition by time periodthen implicitly impounds therisk associated with the periodcash flows. Time - variable in-terest rates permit furtherrisk assessment.

GAPV also is important ininvestment analysis because itallows for greater flexibilitywhen it is used as a manage-ment information tool. Fur-ther, it is most consistent withthe "real world." In addition,Peccati has shown us that it ispossible to provide anotherrepresentation for the periodquota Gt of the GAPV in termsof return on equity (ROE). Infact it can be shown that:

_ Et_1(ROEt�—�� r)Qt F(O,t)

The meaning of the formula iseasy to understand. The periodquota of the GAPV is given bythe outstanding equity capitaltimes the difference betweenthe period ROE and the periodo p p o r t u ni t y cos t of ca p i ta l ,

discounted with the perioddiscount factor.

When presented in terms ofIRR, if the investment rate of return is greater than the debtcost of capital, increasing leverage determines increasingROE. Peccati suggests caution here, however, because the in-creasing ROE has to be applied to a decreasing principal (as-suming the total scale of the investment is fixed). Increasingleverage may have either a positive or negative effect onGAPV. The profitability of the project is evaluated with a long-term decision- making model on a period -by -period basis ratherthan with a short -term profitability method. Table 1 illustratesthe advantages and disadvantages of the three models.

Finally, as can be seen in the next section, GAPV is a high-ly flexible model in providing management with important in-formation. Because we built our model on a standard spread-sheet, it was very easy to determine how GAPV changes basedon changes in any of the assumptions built into it.

WHAT THE MODEL ACHIEVED

B ecause most of the informa-tion is the property of Fiat Avio,all of the amounts mentioned 7have been disguised. The GAPVarising from the project was 6high. We have to consider thatwe would expect to receive high 5returns from a politically riskyenvironment typically found in 4a country like Russia. The „GAPV breakdown by time is °o_ 3shown in Figure 1.

The GAPV profile presents2high period quotas from the be-

ginning of the investment, Iwhich allowed the investment tobe recovered quickly. We have 0high period returns in the earlylife of the investment. We con-sidered this investment to be -1

less risky especially in the high---

ly uncertain Russian environ-ment. For those interested in payback period, we would beable to recover our initial investment in less than four yearson this 10 -year period. For discounted payback, the recoverytime would be less than six years after taxes.

Both the IRR and the NPV suggested that thisjoint venture should be pursued, as did the GAPVThe GAPV, however, demonstrated a far less favor-able suggested return. Clearly, this is only one casestudy. Other investment opportunities might notproduce the same results. A significant benefit to 7this more sophisticated analysis highlights thehigh early period returns that reduce the risk of theproject. The greatest benefit provides for periodic 6management evaluation directly linked to theoriginal project analysis.

Figure 2 shows GAPV composition by time and 5source. Further, it gives the breakdown of prof-itability from both equity and debt. Note that in thefirst three years the debt constitutes a significantproportion of the annual quota of the GAPV. This 4suggests that the joint venture earns money not on-ly from equity capital but also from debt. In the ear- e

ly years of this investment, debt capital comprises 3a large portion of total profits. But as the principalon the debt is paid off, almost all of the profit comesfrom equity capital. In addition, the most critical 2factor is the leverage effect. Our rate of return fromdebt funding must be, and is, greater than our costof that debt. This figure clearly shows that this Ijoint venture is earning money from the loansestablished to undertake this project.

Finally, in Figure 3, a careful sensitivity analysisassessed the impact on the GAPV before and after 0taxes due to any changes in the most critical vari-ables included in our assumptions. By holding all 1other variables constant, this table shows the per-centage change of GAPV before and after taxes

AD GAPV + TAXES with a 20% plus or minusvariance on each variable.

quota We discovered that thelargest change in GAPV

GAPV took place with changesin production volume, unitprices, and opportunitycost. The biggest changesin GAPV took place if unitprices increased or de-creased by 20%. We foundthat if unit prices in-creased by 20 %, GAPVand GAPV after taxes in-creased by 30%. The nextmost important factor wasproduction volume. If pro-duction volume increasedby 20%, GAPV before andafter taxes increased byabout 25 %.

2002 2003 2004 2005 Other important variables- -_ -- — - -- in our sensitivity analysis

are opportunity cost ofcapital, capital expenditures, and income taxes. With a 20%increase in opportunity cost, there would be a 10% decrease inGAPV. Capital expenditures react in the same way with 20%increase, and GAPV would decrease by 10 %.

1995 1996 1997 1998 1999 2000 2001

0 GAPVLoan 2

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005


InventoryJProduction Volume ,

Unit Prices

Wage Annual Increase . % GAPVchange due

to +20% variance ■General Expenditures % GAPV change due

to -20%variance ■,

InvestmentsGAPV + Taxes

Income Tax Rate - change due to+20 °/°

Opportunity % GACost of Capital - Chang

-20%Average Interest Rate fm

-35% -25 -15 -5 5 15

The effect of income tax variations is particularly interest-ing. An increase (decrease) of 20% on the income tax rate caus-es a 3% increase (decrease) on GAPV and an 8% decrease Gn-crease) on GAPV + taxes. The positive correlation between taxrate and GAPV before taxes is due to the fact that labor con-tributions are calculated as a percentage of profit after taxes.This increase in the income tax rate causes a reduction on thebasis on which the labor contributions are calculated with apositive impact on GAPV before taxes.

GAPV MODEL IS SUPERIOR

T he most critical factor for Fiat Avio wanting to do a jointventure rather than a direct investment in Russia was the de-termination of how much capital to invest there. Fiat Aviowanted to keep the investment capital as low as possible inconsidering an investment in such a risky environment. TheRussian partner provided the land and buildings, which in adirect investment Fiat Avio would have had to provide for thepurchase of these assets. In addition, it was easier for FiatAvio to establish itself in this new market by having a localpartner. Beside access to the Eastern European market,another advantage was the low manufacturing cost in thishighly competitive and emerging global economy.

But joint ventures are complicated as well. First was theproblem of finding a Russian partner with the capability toperform this type of manufacturing easily. Fortunately, FiatAvio found a Russian partner that operated in the same in-dustry. In fact, it was a main supplier of commercial and mili-tary jet engines in the former Soviet Union. Making the tran-sition to produce component parts for industrial gas turbinesconcerned Fiat Avio though because of the lack of quality con-trol. This is why Western managers would have to beemployed.

Further, in any new business, assurance of a customer baseis a complication. This joint venture already had customers

46 MANAGEMENT AMNTING AUGUST 1996

2

because all of the gas turbine blades wouldbe purchased by members to the TrilateralAgreement and all parts purchased would bepaid for in hard currency.

One also must be concerned about the ac-quisition of raw materials. All raw materialswould be supplied from the West, whichwould ensure a constantand steady supplyof these inputs.

No one could quantify the political risk as-sociated with a joint venture in Russia. Theforeign investment climate was still very un-certain. To compensate for this factor it wasnecessary to consider requiring higher ratesof return than one would expect from invest-ing in this highly uncertain political envi-

variance 1 ronment,PV + Taxes Another complicating factor is revenuee due to conversion.It was a major issue in this in-variance vestment analysis because the laws of the

Russian Federation required that 50% saleshad to be converted into rubles. Many com-

5 35% panes operating in Russia keep bank_ accounts outside of Russia to collect sales

receipts. Foreign accounts are used to pur-chase many input supplies and to pay off loans denominatedin hard currency.

Joint ventures can be very profitable and in many marketsthe most logical means of entry. The GAPV model explicitlyrecognizes many factors previously only implicitly consideredin investment analyses. GAPV is the most superior method inany investment evaluation. It is rational, the hypothesis at thebase of the model is realistic, and it containsanalytical infor-mation where the others do not. Even though the methodolo-gy of GAPV presented is quite objective, clearly many factorsdefy analytical consideration and must be incorporated in amore subjective fashion. ■

Carlo Prins. detla Tallia received his economic and commerce degree at theUniversity of Turin, I taly, in 1991. He received his MBA degree at the Scuola diAmministrazione Aziendale, University of Turin, I taly. He interned at Fiat Aviofor six months. He is currently a financial analyst for Banca Sella.

Mark T. Judd received his master's degree in international business at theUniversity of San Diego. He attended Scuola di Amministrazione Aziendale,University of Turin, Italy, and also interned at Fiat Avio.

Diane D. Pattison is an associate professor of accountancy at the Universityof San Diego. She has an MBA degree from California State University -Hay-ward, and her Ph.D. degree from the University ofWashington. She is a mem-ber of the San Diego Area Chapter, through which this article was submitted.

'Richard A. Brealey and Stewart C. Myers. Principles of Corporate Finance. 41h ad.,Prentice -Heil, Englewood Cliffs, N.J., 1991.

'Alan C. Shapiro,Multinational Financial Management, 4th ed., Allyn and Bacon, NeedhamHeights, Mass., 1992.

'Lorenzo Peccati, "Multiperiod Analysis of a Leveraged Portfolio," Modeling for FinancialDecisions, Springer - Verlag, Berlin, 1991.

'Lorenzo Peccati, "Financial Calculus for the Appraisal of Investments,' Contribution to theUniversity di Torino - Scuola di Amministrazione Aziendsle and the University of SanDiego, 1994.

'Stewart C. Myers, "Interactions of Corporate Financing and Investment Decisions —Implications for Capital Budgeting,' Journal of Finance,March 1974, pp. 1 -25.

'Peccati, Multiperiod Analysis...' Myers.'Peccati, "Multiperiod Analysis..."'Paccati, "Multiperiod Analysis...""Peccati, "Multiperiod Analysis...""Brealey and Myers."Lorenzo Peccati "Valutozione analitica a sintetica di attivitii finanziarie," Quademi delta

rivista milanese di economia,n. 21, 1992.

A Visionfor ChangeManagement accountants are using

computer technology to help transform

people's lives.BY SANDRA L. SMITH, CMA

CerttfwateofWerit

ow often do management accoun-tants get to use information fromtheir accounting systems to trans-

form others' lives? The ones on the staffof the Lumbini Rana - Ambika Eye Hos-pital in Bhairahawa, Nepal, are doingthat daily. With one PC and some off -the -shelf accounting and database soft-ware, they are creating informationbanks that will help the medical stafftreat patients more effectively in the fu-ture. I know because in March 1995 Ihad the privilege of becoming the firstforeign volunteer to work with the ac-counting staff and get the project underway.

CONDITIONS ARE CRITICAL

N epal and northern India make up apocket of the world where millions ofpeople are suffering from blindness butwhere 80% could be treated with a 15-minute, sight - restoring cataract opera-tion.' Nepal is home to nearly 20 mil-lion people with an annual per capitaincome of $170, one of the lowest in theworld.2

The country is composed of three dis-tinct regions: the Himalayas, where sev-eral of the highest mountains in theworld stand; the hills and valleys,where a majority of the people live; andthe flat, dusty Terai, where the eye hos-pital is located. What few roads exist

are mostly unimproved and flood hope-lessly during the monsoons. Most peo-ple live without electricity, sanitation,or health care. Watches are found inonly 18% of households, and radios in14 %; both items are considered earlysigns of prosperity here. The life ex-pectancy of a Nepali is age 52.

Fifteen years ago the entire countryhad only eight ophthalmologists, a ratioof one in 2.4 million people. Today thereare 55, which improves the ratio to onein 400,000. In Dallas, where I live, theratio is one in 14,500. Only one univer-sity in Kathmandu trains ophthalmolo-gists, and it graduates three a year.

Of the 82 employees at the LumbiniRana - Ambika Eye Hospital, 10 are onthe administrative staff while the restare technicians, doctors, ophthalmic as-sistants, nurses, pharmacists, opticians,drivers, and maintenance personnel.Working six days a week with Saturdayoff, the staff treats 100,000 patients ayear, of which 8,000 receive the cataract

Sumita Thapa, junior record keeper, worksSaturday, normally a day off, to manuallyprepare demographic reports from ac-counting journals and ledgers.

operation. During my visit, however, Isaw many workers (including myself) atthe hospital on Saturday, too. The staffdoes not go home until the last patientis seen, which can be well into theevening hours in the busy season ofOctober through April.

STREAMLINING THE BOOKS

M y job was to help the hospital's ac-counting staff computerize the book-keeping process and build databases ofpatient information. I worked with theaccounting manager, Mr. Karn (pro-nounced Kar'na), who was fluent inEnglish as well as several native lan-guages. The accounting records werekept in a combination of English andNepalese, written with the Sanskrit al-phabet. Although I had to drop much ofmy conversational slang, language wasnot a barrier when the ledger bookswere opened. Mr. Karn kept well -orga-nized, easy -to- follow ledgers and jour-nals that were part of a British -de-signed, manual bookkeeping system.Several journals tracked cash receiptsfor each service counter: admissions,spectacles, drugs, and the general cashcounter. A book of vouchers served asthe authorized documentation fromwhich to generate handwritten checks.To record transactions, the hospital's ac-countants posted the vouchers and re-ceipts to the cash book and to the ap-propriate ledger page of the incomestatement or balance sheet account.

We started our computerization byinstalling Quickens, one of the softwarepackages that I had brought with mefrom the States. After deleting all ofQuicken's default categories, Mr. Karnset up custom categories using the hos-pital's income and expense account de-scriptions. The chief accountant, Mr.


Ganesh (pronounced Gun'ess),learned the register featureright away and entered threemonths of vouchers in three sdays. As we mastered thepackage's features, we createdassets such as employee ad-vances. We used Quicken'sclasses to track off -site expens-es by location of care, whichwould enable the staff to calcu-late costs for each of the re-mote eye camps locatedthroughout the country. A fewof the software's features pro-voked extra smiles from thestaff, namely, when the "splits"feature in the register computed thetransaction remainder, when a previ-ously entered payee name displayed af-ter we keyed in only the first letters,and when the calculator popped up on-screen.

The challenge that remained for theaccounting staff after I leftwas to stop producing pa-per ledgers and to rely onQuicken's reports formonthly results. They

Inpatient tspent a few months "paral- Outpatieleling" the two systems— Inpatientcomparing the automated Locationreports with the manualledgers —which built trustbetween the staff and thenew system, but, more im-portant, which provideddocumentation to sway theauditors to this new book-keeping system. Mr. Karnand his staff also had toconvince the auditors andbank personnel that thehospital's automated sys-tem could replace the paperjournals and ledgers. It wasnot an easy sell because theuse of technology in theTerai was far from com-mon.

manage information now.The key is a database of pa-

tient information. Before wecreated one, the hospital staffspent much of its time manual-ly preparing demographic re-ports about inpatients (theovernight surgery patients)and outpatients (the day pa-tients needing minor servicesor procedures). But the staffwanted to learn more about thepatients and their needs. Howmany surgeries were congenl-

Dr. Dhital, hospital director; Mr. Karn, hospital controller; tal cataracts? How many wereMr. Ganesh, assistant controller; and the author discuss design is- trauma injuries? Were patientssues about the patient database.

coming from more than 30 kilo-meters away? How many patients hadbeen blind in both eyes and could nowsee in at least one? How could the hos-pital serve the people with the highestneed? It was time to set up the data-base.

We installed another software pack-age, this time a databasepackage called Paradox4,

which I also had broughtwith me. During the instal-lation, we experienced ourfirst growing pains. Para-dox required more than 20megabytes of hard diskspace, so we had to trans-fer some of the data on thehard disk to diskettes. Ihad brought several blankdiskettes with me, but theywere consumed before wefreed up 20 megabytes ofhard disk. After a fewrestarts, we progressedpast the logic that checkedfor disk space by choosing

up an abridged installation.The installation proceedednormally until the seventhdiskette.

On the seventh and lastinstallation diskette, amessage suddenly ap-peared: "Can't read file."The diskette must havegotten damaged during my9,000 -mile journey. Lucki-ly, the installation contin-ued without aborting, butthe message displayedtwice again before we werefinished. We tried to exe-cute Paradox, but we re-ceived an error message

SEEKING RELEVANTINFORMATION

Quicken was just the eye -opener. Like many othersoftware tools on the mar-ket, it released the account-ing staff from its record -keeping function so it couldmove from information

gatherer to information analyst. Themanagement accountants at LumbiniEye Hospital have a gold mine of infor-mation available to them from the pa-tients they serve, and they are makinga difference in the quality of life for mil-lions in this region just. in the way they

ablent numbernumberof care

Name of patientAgeSexOccupationVillageVOC la local geographic classification)DistrictBill typePre - operative visual acuity right eyePre - operative visual acuity left eyeDiagnosis right eyeDiagnosis left eyeAdmission dateOperation dateDischarge dateSurgeonTreatment number operated eyeRight eye or left eyeSuture typeSuture numberLocal or general anestheticVisual acuity at dischargeVisual acuity at first follow -upVisual acuity at second follow-upVisual acuity at third fallow -upRemarks

Age group tableAgeAge groupAdult or child


Diagnosis tableDiagnosis IICDIDiagnosis sub groupDiagnosis super group

Treatment tableTreatment number ICU)Treatment sub groupTreatment super group

District tableDistrictZoneCountry

Location of care tableLocation of careLocation of care sub groupLocation of care super gro

Occupation tableOccupation

Surgeon tableSurgeon initialsSurgeon name

Bill type tableBill type

Suture tableSuture type

Visual acuity tableVisual acuity

AnesthesiaAnesthesia type

Seeing the PatientsAt 7 every morning, a long queue of pa-tients already waits at the gate of Lumbi-ni Rana - Ambika Eye Hospital. A guardhands out slips of paper to the first 500 touse as tickets into the hospital for thatday. If a person doesn't get one, he orshe must try again the next day. For ser-vice, patients pay an initial fee of 5 or 10rupees — equivalent to 10 or 20 cents —depending on whether they are a previ-ous patient or a new one. Returning pa-tients keep their records at home andbring them each visit. New patients re-ceive a pink outpatient card. The staffwrites the patient cards because manyNepalese are illiterate.

After patient information is recorded, atechnician checks the patient's vision,and an ophthalmic assistant makes a di-agnosis, determining the appropriatenext procedure: refraction, laser, drugs,spectacles, or surgery. Additional feesare required for these procedures. (Themost expensive service, at $70, issurgery with a stay in the private wardequipped with a kitchen and an extra cotfor a family member.) After they pay theadditional fees at the appropriatecounter, patients join the waiting line for

about a missing file. What aplace to bewithout a backup set of installationdiskettes! I couldn't exactly drive to myneighborhood software store and ex-change the seventh one.

Mr. Ganesh performed surgery on thediskette with a diskette- repair package,but it did not restore the bad sectors. Iinstalled Paradox from scratch twomore times before it finally executed.Needless to say, all of us were relieved.

But we weren't quite finished withthe growing pains. Our 386 had onlyfour megabytes of memory. A hardwaretechnician from 100 kilometers awayrode the local bus on Saturday to installan additional eight. Now we were upand running, or at least limping.At anytime we could cross the paths of themodules containing the three bad files.It was anybody's guess as to how thesoftware would react if that happened,

BUILDING THE DATABASEOur first priority with the Paradox

s

r

that procedure. Patients with difficultcases wait until late afternoon to see anophthalmologist, after all the day's surg-eries are complete.

Meanwhile, surgery candidates line upon a bench outside the operating roomwhere they are examined by a physician.After the ophthalmologists scrub, thesurgery begins. When they are ready forthe operation, patients don surgical garbover their street clothes and are given alocal anesthetic via an injection near theeye. Each patient waits for surgery bysquatting at the end of one of the operat-ing tables, then taking his or her place inturn. A surgeon removes the cataractand implants an intra - ocular lens. When

software was to build a database of in-formation about the inpatients. The in-patient card, which contained details oneach patient such as age, sex, and vil-lage as well as diagnosis, treatment,and anesthesia, provided agood starterlist of potential data elements. To enterdiagnosis data we used existing inter-national standard coding schemeswhere possible so medical personnelanywhere in the world could pick up thehospital's reports and understand thesecodes.

Mr. Kam gathered samples of exist-ing demographic reports, whichprovid-ed additional data elements, andconversations with members of man-agement generated a few more. For ex-ample, Dr. Dhital, theprogram director,wanted to know how many surgerieswere being subsidized by the hospital.We added a field called "bill type," withfour possibilities: private ward stay,general ward, free to patient, and freeimplant. Dr. Dhital was worried thatthe verypoor people who came from the

the surgery is complete, patients go to apostoperative ward for recovery, whichmay be a tent with a straw roof, dirt floor,and row after row of filled wooden cots.

Surgeons can perform an operationevery 12 to 20 minutes. They do notchange clothes, gloves, or table drapesbetween patients. Despite these meth-ods, there are virtually no cases of infec-tion spread between patients. The hospi-tal averages 60 surgeries a day; therecord is 82. These figures translate to 15to 20 operations per surgeon per day.

This system maximizes the productivityof the scarcest resource, the ophthalmol-ogist. The Lumbini program has benefitedfrom the use of ophthalmic assistants be-cause as much of the technical work aspossible can be delegated to these high-ly trained associates. Ophthalmologistsfrom the United States and Canada whohave donated their time have extendedthe volume of surgery cases possibleand have provided valuable training onthe latest techniques to the existing staff.The program quality and success rateare very high, due mostly to one local,very talented ophthalmologist who runsthe hospital. The reputation is outPatients come to the hospital seekingcare, and they go home seeing.

hills were selling their only livestock topay for the operation. A cross check be-tween "occupation" and "bill type" en-sured that the very poor could be of-fered free care.

At this point we had compiled a com-plete list of data elements (see Table 1)from which we could design the data-base. This step determined how manytables there would be and which dataelements would be placed in which ta-bles. The relationships between the ele-ments determined the arrangements.We ended up with table for age, geo-graphical district, diagnosis, treatment,and location of care.

Populating the tables was next. Westarted with inpatients and added out-patients later. Mr. Ganesh entered pa-tient record data in the inpatient table,using the inpatient card as a data entryform. After he finished this task, wewere ready to begin the most fruitfulpart of the project: the development ofqueries and reports.

An unlimited number of questions


could be asked by querying thedata. How many surgeries dideach surgeon do last year?Were we treating more men Datethan women? What were thechildren's primary problems,and are any preventable witheducation? Age

This last question drew me Sexto the project. A disease called Distxerophthalmia robs children oftheir sight at an early age. Ne

Caused by vitamin A deficiency, Blindit can be prevented by eatingmore fruits and vegetables andby keeping a clean living environment.But, first, someone had to educate theparents so they could change the condi-tions. The Lumbini hospital staff couldhelp by providing answers to questionssuch as: In what villages were we seeingthe highest incidence of xerophthalmia?Where could we put posters or spreadthe word to be most effective? At whatages were children at greatest risk? Forme, this was the quintessential exampleof the power of information. A simpledatabase would do the trick.

Because we keep information on100,000 outpatients per year, it was im-portant to design the most efficienttable that would meet the reporting re-quirements with the least amount of in-put. By following a path similar to theone we took in creating our inpatientdatabase, we quickly developed the out-patient tables on my last day in Bhaira-hawa (see Table 2).

Diagnosis right eye (can connect to diagnosis table for groups)

Diagnosis left eye (can connect to diagnosis table for groups)

WHAT WILL THEFUTURE BRING?

T he eye hospital is in the early stagesof becoming self- sufficient. The Seva(which means "service to humanity" inSanskrit) Foundation in California hassupported the hospital since 1985 andcontinues to support it on a limited ba-sis, both in funds and volunteers. Actingas the link between Nepal and partiesin the United States that are interestedin this project, the Foundation coordi-nates the U.S. ophthalmologists —andone certified management accountant(CMA) —who volunteer their services tothe hospital. It also funds such items astechnology purchases and services forpoor patients.

In addition, Lumbini is supported bythe local eye foundation, the govern-ment of Nepal, and many international


(can connect to age table for groups)

rict (can connectto district table for groups)

New or existing patientness code (right, left, both, or neither)

health groups and is a wonderful exam-ple of what can be accomplishedthrough international cooperation. Infact, it is a model for its part of theworld, serving as host to visiting doctorsand administrators from nearby coun-tries who want to get a firsthand look atthe hospital's work.

Despite everyone's best efforts, how-ever, blindness keeps increasing eachyear. The impending challenge for thestaff at Lumbini will be to grow with

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the enlarged patient demand.As members of the accountingstaff become more efficient,they will learn new databaseanalysis techniques and willbecome more sophisticated intheir use of technology. Thehospital will need more com-puters. Future informationabout number of beds, volumeof patients, training rateof ophthalmologists, and effec-tiveness of prevention pro-

mmmA will lead to more sophis-ticated planning and man-

agement decisions and better access toeye care for the people in the area. Itwill be up to the staff at Lumbini to useinformation technology to reach asmany patients in need as possible withits scarce resources.

A note to CAUL After participating inmany volunteer efforts, I have conclud-ed that all CMAs can unlock the powerof information for customers andcoworkers. If you are spending most ofyour time gathering information in-stead of analyzing it, you may want toupdate your technology tool kit. If youare working with databases, ask your-self if you are using your company's in-formation in the most powerful way youcan. Are you reaching all the customersyou can? Are you maximizing yourscarcest resources? Sometimes "seeinginformation in a different light" willhelp you discover ways to make life bet-ter for your coworkers, customers, andmanagement. What vision can you cre-ate for your part of the world? ■

Sandra L. Smith, CMA, CPA, CDP, is a tech-nology trainer and consultant based in Dallas,Texas. She has participated in several interna-tional accounting volunteer projects like the onedepicted in her article. In fact, she recently re-turned from a three -week assignment in Yeka-terinburg, Russia. She is a member of the DallasChapter, through which this article was submit-ted, and can be reached at (214) 248 -8378 or e-mail [email protected].

'G.E. Brilliant, The Epidemiology of Blindness in Nepal,Sava Foundation, Chelsea, Mich., 1988.

rrony Wheeler and Richard Ever ist, Nepal —A travelsurvival kit, Lonely Planet Publications, Hawthorn, Vic-toria, Australia, August 1993, p. 38.

'Quicken is a registered trademark of Intuit, Inc.'Paradox is a registered trademark of Borland Interna-

tional.

Note: For more information about this projector other blindness prevention projects, contactthe Seva Foundation, 8 N. San Pedro Road, SanRafael, CA 94903, (415) 492 -1829.

CASE STUDIESRUSSELL REYNOLDS FINDS SEAMLESSINTERNATIONAL ACCOUN'T'INGC ompanies expanding inter-nationally need seamless re-porting and a financial func-tion that accounts for individ-ual country differences.Russell Reynolds Associates,Inc., a prestigious executivesearch firm, discovered howto fill both needs through its15 years of experience open-ing new offices in Asia andEurope. Based in New YorkCity, the privately held com-pany now has offices in Lon-don, Frankfurt, Milan, Brus-sels, Hong Kong, Singapore,Tokyo, Sydney, Melbourne,and other international sites.

While the company's inter-national growth was greatnews for management, it pre-sented new problems. RussellReynolds's managers knewthey needed clear under-standing of financial resultsfrom the various sites. Theirtask was complicated,though, by the often Byzan-tine differences in the varioushost country accounting sys-tems. The complexities madeit difficult for the accountingstaff to help Russell Reynoldsput in place financial controlsthat could integrate the over-seas offices with the domesticbusiness.

Russell Reynolds's interna-tional issues are common tomany companies today. Takecurrency translation. All theoverseas offices record trans-actions in the host countrycurrency. Translating backto U.S. dollars at precise ex-change rates is laborious and

time - consuming, especially ifthe task is performed manu-ally, as it was at RussellReynolds throughout the1980s,

Other reporting conflictsrange from the dramatic tothe mundane. For instance,a transaction in one countrycan be considered compensa-tion, while in the UnitedStates it may be considered amarketing cost. Depreciationof assets is different as well.The London office may take10 years to depreciate a com-puter or desk, while in Chica-go it takes only five. Liabili-ties are recorded differentlyas well, in every area fromvendor payables to pensionplans to office rent.

Because of numerous suchobstacles, Russell Reynolds'sfinancial reporting mecha-nisms were somewhat impre-cise. International office re-ports lacked the detailed in-formation supplied by U.S.offices, so it was difficult toperform consolidations andobtain an accurate picture ofoverseas office performance.Also, managers were con-cerned that each of the com-pany's profit centers were notbeing compared on an "applesto apples" basis —with gener-ally understood reportingdefinitions and standards.

To help create the seamlessaccounting system manage-ment required, RussellReynolds purchased SunSys-tems financial software fromSystems Union. With the help

of Systems Union, RussellReynolds built a reportingsystem that responds to boththe needs of host country au-thorities and senior corporatemanagement. The SunSys-tems software consists of anintegrated ledger accountingprogram with instantaneousmulticurrency translation. Itis a complete suite of interna-tional financial managementsoftware available in a rangeof environments, includingleading client/server architec-tures such as MS SQL Server,Oracle, and Sybase. SunSys-tems runs on a number ofplatforms, most prominentamong them UNIX, WindowsNT, Novell, and Windows 95.The software is available in22 languages including Ger-man, Spanish, Japanese, Ara-bic, and two forms of Chinese.

Installed in the firm'shome office in New York City,the software can automatical-ly convert French balances toUS. formats, and the text forthe chart of accounts is avail-able in both English andFrench. Any data entered in-to the system will be sent toboth a database for the hostcountry reporting authoritiesand Russell Reynolds's corpo-rate system, which eliminatesany potential double billingproblems. The accounting de-partment can receive infor-mation that is understand-able instantly and then canuse it to construct a picture ofhow each office is performing.

"We've used SunSystems tostandardize our internationalaccounting system," explainsRoger Pierce, the Russell

Reynolds executive whohelped install the software."This has allowed us to elimi-nate duplicate reporting inthe host country and at ourU.S. headquarters.

"With SunSystems, we cannow enter transactions at thesource, once, to meet hostcountry reporting require-ments and automatically ex-port them to the home office,"Pierce says.

In effect, Russell Reynoldshas created a truly integratedinternational accounting sys-tem with detailed financialinformation that allows man-agement to oversee each of-fire and to make organiza-tional decisions and changesbased on that information.— Michael Gold

J.D. EDWARDSSEEPSINFORMATIONFRESH FOR GNBTECHNOLOGIESAsanyone stuck in a snow-storm with a dead batteryknows, batteries are perish-able. If unsold after sixmonths, they have to berecharged at the factory. Ifthey sit on store shelves foranother nine months, thenthey are destroyed. This factof life poses global challengesfor Atlanta -based GNB Tech-nologies, the world's largestindependent manufacturer ofindustrial and automotivebatteries. GNB manufacturesand ships more than 20 mil-


lion car batteries annually tocustomers like Walmart andFord.

For the past few years,GNB has been transformingitself from an American com-pany doing business aroundthe world to a truly globalcompany. Part of Pacific Dun-lap Limited, a $7- billion con-glomerate in Melbourne, Aus-tralia, GNB employs 6,000people at 200 locations on sixcontinents.

Global coordination of pro-duction, distribution, andmarketing required trulycompatible, reliable informa-tion— something GNB did nothave. Instead, each of GNB'sseven business units had itsown information system.Software came from manydifferent vendors.

"When I came to GNB twoyears ago, I knew we couldn'tsupport finance globally with-out one system, and gettingthose seven systems to talk toeach other would be impossi-ble," says Chief Financial Of-ficer Tom Smith. "We neededto move to a single integratedplatform, worldwide, to havethe information available torun a truly global business."

The task of finding such aglobal information system fellto Adrienne Bodor, vice presi-dent of information services."What GNB needed —imme-diately —was an integratedsolution that could be rolledout all over the world andthat covered all the function-ality: multicurrency, multilin-gual, multiplant," she recalls.

GNB began its softwaresearch with an open mind.The initial field included 104candidates. GNB chose inte-grated software from J.D. Ed-wards. Because the softwareruns on IBM AS /400 mid-range systems, GNB was ableto leverage its installedequipment, merely addingthe midrange systems whereneeded.

GNB chose J.D. Edwardssoftware because of its com-

plete functionality and its ca-pacity for integration. "Wewere also looking for softwarethat could handle differenttypes of manufacturing. J.D.Edwards has all that," Boderrecalls.

"What they also have is adatabase that is very cleanand very flexible. It allowsyou later to build on anythingyou need later.

"The key to the J.D. Ed-wards integration is the un-derlying technical structure,"she continues. "Integrationhappens on the most logical,lowest level: the data."

She points to the multicur-rency and multilingual capa-bility as examples of thisbuilt -in flexibility. "It's onecore software, and the multi -currency and multilingualismare just attached on the out-side. So I don't need fivepieces of software for five lan-guages. That reduces mymaintenance costs. It alsosaves me money on machinecapacity."

GNB and J.D. Edwardsconsultants began to imple-ment the new system in mid -1994. The massive worldwideproject is well under way.

Installation has been soeasy and quick that Bodorand her project managerscompletely installed NewZealand —two plants, 11 dis-tribution centers, sales of-fices, everything —in threemonths.

"My job really is to providethe business managers withinformation to make deci-sions," Tom Smith notes."What J.D. Edwards gives meis one database in which thekey information about thecompany is stored. I put myenergies into making surethat the information thatgoes into that one database isright at the source. Then Ican spend more of my timeworking on the financialanalysis."

Everyone who is autho-rized has access to the same


information, no matter wherehe or she is situated. "I cantalk to another controller andwe can look at the same infor-mation and really talk busi-ness," says Arlene Collins,controller at GNB's City ofIndustry plant, east of LosAngeles. "We get real -time in-formation at multiple levels.We can see from very detailedto high -level data, online."

One reason information ismore accurate is that much ofthe data entry now is done byusers with the most currentknowledge.

"Every single shift supervi-sor is doing his or her owndata entry for the shift pro-duction. In certain areas, wehave automated the data col-lection from scales or barcode printers so there's oneset of data entry," says GerryFullbrook- Hanna, one ofGNB's project leaders.

David Wesley, regional di-rector of operations with re-sponsibility for three Califor-nia plants, praises the region-alization of data. He says thesystem has made his jobmuch easier because he nolonger has to sort throughthree different systems thatwere presenting informationthree different ways.

From a financial perspec-tive, Smith applauds GNB'sinvestment in a long -term re-lationship with J.D. Edwards.He already is seeing returnsand expects pay -back willcontinue.

"Our parent company con-tinues to want our monthlyresults faster and faster. WithJ.D. Edwards, we expect to re-duce our six -day close to atwo -day close, in every busi-ness unit. That's taking fourdays a month where we aregetting no value and allottingit to other things. In an orga-nization of our size, that's alot of freed -up resource thatcan be focused on giving outbetter information to all ourusers and managers."

Smith also points to pay-

backs in reducing GNB'sworking capital investment.Having all the plants —plas-tics, lead, smelters, automo-tive and manufacturing —onone system will reduce inven-tory lead times creating realsavings. In fact, he calculatesthat the money saved shouldpay for the worldwide systemin as little as two years.— Hellena Smejda

TRAVERSE,DREAMERSG u u . D ,

AND THE GAMESPEOPLE PLAYIn the five years since

Dreamers Guild started itsbusiness, there have beenmany changes in technology.There also have been changesat Dreamers Guild. Locatedin Chatsworth, Calif, thecompany develops interactivecomputer games for both theCD -ROM and multiplayer on-line arenas. Begun with eightpeople, today the companyhas 97 employees. Also, itsclient list includes such nota-bles as Turner Interactive,IBM, America Online, ViacomInteractive, Electronic Arts,and Virgin Interactive. Thesecompanies often come toDreamers Guild with a gameconcept in mind. Dreamersthen designs the game anddevelops it to a finishedproduct.

"Our revenue has grown atleast 100% every year," saysCFO Dave Walit. In order tokeep up with the growth andthe changes, Dreamerssought a new accounting soft-ware package. The companywanted a Windows -based sys-tem that was easy to learnand use and that would allowthe company to better utilizethe capabilities of MicrosoftOffice products. "We're heavyusers of Word, Excel, and Ac-cess, so we wanted the flexi-bility to import and export.

We also use PowerPoint andMicrosoft Project." In addi-tion, Dreamers was lookingfor a good interface betweenapplications, particularly be-tween general ledger and ac-counts payable. "We hadproblems with our previoussystem; in fact, we really did-n't use the AP or AR mod-ules," Dave says. "We don'thave a very large volume forthat, so it was more of a prob-lem to use [them] than to doit manually."

Dreamers found its solu-tion through Cindy Walker atJ.B. Systems in ShermanOaks, Calif. TRAVERSETMAccounting Business Soft-ware for Windows® met allneeds. TRAVERSE is a prod-uct of Open Systems Hold-ings Corp., a leader in devel-oping and marketing ac-counting and businessmanagement software forcompanies worldwide. TRA-VERSE is based on the sameaward - winning feature set asOPEN SYSTEMS® Account-ing Software (OSAS), a 20-year veteran of the industry.TRAVERSE was built on theMicrosoft Access 2.0 engine,and it offers a seamless inte-gration with Microsoft Officefor Windows, as well as inter-national features such asmultilingual and multicur-rency capabilities. Sourcecode is provided so that userscan customize the software tomeet their unique needs.

Dreamers Guild uses gener-al ledger, accounts receivable,and accounts payable. Theyare running on Novell, andthey also have an NT serverfor other departments in thecompany. "Currently, we'rejust using TRAVERSE on asingle -user workstation," saysDave. "We haven't expandedto multiuser yet, but I envi-sion that for the future. We'regoing to be moving, so the in-tent is to get it set up then."

For now, the creative staffat Dreamers is not napping.It continues to produce

games such as Dinatopiaand the 1996 adventuregame of the year accordingto Computer GamingWorld —I Have No Mouthand I Must Scream. Obvi-ously, good things are hap-pening at Dreamers Guild.—Ann Wickstrom

FOR MULTINATION-AL SOFTWARELOOK TO EUROPEAND PAY ATTEN-TION To FOUR KEYAREASAmerican companies consid-

ering expansion into interna-tional markets are going toface some critical decisionsregarding the selection of ac-counting and business man-agement software. In manycases, the process will be ex-pensive and frustrating.

When shopping for multi-national accounting software,companies must keep in mindthat four key differences sep-arate the needs of companiesthat operate solely in theUnited States and those thatconduct business in othercountries. They are the VAT,or value -added taxes collect-ed in Europe; INTRASTATrequirements in Europe, orthe strict standards that areimposed on accounting forthe flow of goods betweencountries; the regulatory re-quirements regarding payrollfunctions; and the U.S. checkwriting system and the sys-tem of electronic transfers ofmoney in Europe.

VALUE -ADDED TAXESAND INTRASTATLarge companies have be-come adept at dealing withthe differences between theU.S. sales tax system and thevalue -added tax system inEurope. For companies newto non -U.S. markets, the dif-

ferences can be imposing. Inmany cases, accounting solu-tions that were created in theUS. will not hold up in the in-ternational marketplace. Afar better choice is to select asoftware solution that hascountry- specific versions.

Country- specific versionsenable organizations to meetthe business requirements ofanother country, such as VATor INTRASTAT, while stillproviding U.S. operationswith the necessary details re-quired to monitor businessoverseas.

Consider, for example, Hu-Friedy, a Chicago -based man-ufacturer and reseller of den-tal equipment. Hu- Friedy re-cently changed from an older,proprietary accounting solu-tion to a client/server multi-national accounting solutionthat serves its headquartersand manufacturing facility inChicago and a sales and dis-tribution center in Germany.Hu- Friedy selected Navisionas its accounting and busi-ness management solutionbecause the software was de-signed for both countries. Ac-cording to David H. Susalla,controller and director of fi-nance and accounting, nowthat Hu- Friedy has a single,integrated solution, he caneasily consolidate all the nec-

EU currency, which will be ineffect from 1999. The newcurrency will be used in par-allel with national currenciesfor a while so companies willneed to run their ledgers inseveral currencies simultane-ously.

The package also shouldprovide companies with theinformation they need beyondcurrency and taxes. A goodexample is the Adidas compa-ny. Its inventories are verycomplex. In the East, Adidasis liable for every pair ofshoes and every shirt untilthe end customer, the con-sumer, has paid for them. Thenumber of different productnumbers is colossal becausesizes vary the world over. Ashoe in Denmark that is asize 40 is a size seven inGreat Britain and a nine inthe United States.

"Misunderstandings can-not be allowed," says DieterSchonegger, international ITdirector. "The systems in pro-ducing and ordering coun-tries must be able to handle`translations' quickly and cor-rectly; otherwise the wrongproducts will be producedand delivered."

Adidas had a total of 40subsidiaries when it decidedto convert to a new account-ing system. Navision was in-

stalled as a com-plete businessmanagement so-lution, which in-cludes logistics,purchasing, andsales in morethan a dozen sub -sidiaries."InLebanon, whichwe've just fin-

ished, it took four weeks. Mygoal is to get it down to twoweeks," said Schonegger.

Part of the reason Adidashas been able to implementits solution so quickly is thetechnology underlying thesoftware. Navision's develop-ment environment is object.oriented and has a powerful,

essary financial informationthat is required in the UnitedStates while allowing theGerman office to perform itsown VAT calculations andINTRASTAT reporting.

This localized, country-spe-cific functionality will becomeeven more important as com-panies adjust to the new joint


relational database that isfully integrated with thedatabase management sys-tem, giving the application anice, clean look. In addition,the development tools thatNavision provides are thesame tools the applicationprogrammers and developersused to create the code thatoperates the system. Formore sophisticated users, thisaccess to the source code en-ables companies to add newfunctionality.

PAYROLLA third area with different ac-counting practices is payroll.Vast differences exist in regu-latory requirements, and inthe United States alone, theregulatory requirements cancause numerous headaches.

In the United States, Navi-sion chose to write its ownpayroll module as part of itsaccounting solution, but in

Europe, Navision partneredwith companies that had al-ready done country-specificversions of a payroll software.

CHECK WRITING

The most interesting adjust-ment for companies new toaccounting practices in inter-national markets is in checkwriting. Whereas the U.S.system of bill presentmentand payment is largely paper -based, in Europe, only thevery large invoices are paidby paper checks.The majorityof payments are done by elec-tronic transfers.

Because electronic transferis the preferred method, theaccounting systems that havebeen developed to handlethose transactions are verydifferent from those found inthe United States.

It is very important forcompanies to choose an ac-counting system that is capa-

ble of being updated to meetthose standards.

LOOK TO EUROPEAN

SOFTWARE PROVIDERS

Although the United States isa major producer of software,in the future, most interna-tionally oriented accountingsolutions might come fromEurope.

In the past, many Ameri-can suppliers of business andmanagement accounting so-lutions have focused re-sources on the specific needsof niche markets because al-most any niche in the UnitedStates provides plenty of cus-tomers to keep a companyprofitable. While this maywork for the short term, aniche supplier of softwarewill not be able to stay aheadand neither will the companythat uses it.

European companies, onthe other hand, have at a

much earlier stage beenforced to look outside theirown borders for growth dueto the small potential in theirhome markets. This fact istrue of all European compa-nies, and, as a result, theyhave demanded that their ac-counting solutions be capableof handling the various busi-ness requirements of eachcountry in which they dobusiness.

That is the primary reasonthat many of the changes andtrends now being reflected ininternational accounting sys-tems will come from Euro-pean software providers. Thechallenge for American busi-nesses, and subsidiaries ofmultinational firms, is to se-lect an accounting solutionthat provides the flexibilityand the technology to meetcurrent and future require-ments. —Bill Sanders andKristian Thyregod

e

This program

qualifies for continuing

education credit for

Certified Management

Accountants (CMA).

A P I C S INTERNATIONAL CONFERENCE & EXHIBITION

October 13716N ew Or leans , Lo u i s i a na

It's big news for your profits and productivity.Learn how to work smarter —not harder —at the1996 APICS International Conference and Exhibition.

Choose from more than 130 educational sessionson all aspects of your business, including:

• Supplier partnerships• Logistics• Financial interfaces• Integrated enterprise management• Materials management

Plus 24 presentations focusing on accounting and

finance topics.

Circle No. 10


The extraordinary lineup of speakers includes

General Colin Powell. And more than 175exhibitors will offer hands -on demos of new

technologies, too. It's all good news for your

organization. Register today!

Call APICS Customer Service at (800) 444 -2742OF (703) 237 -8344 and request a conferenceregistration brochure (item # 04093).

Sponsored by APICS --The Educational Society for Resource Management

An international, not -for -profit society and leader in individual andorganizational education.

Bch ForumMichael Castelluccio, Editor

ANOTHER CLIENT, ANOTHERLANGUAGE? THOUGHT ABOUTMACHINE TRANSLATION?

Unless your foreign office is in a place

like London, you probably require theservices of a professional translator.Contract language has to be clear,manufacturing specifications had bet-ter be exact, and two years of 20 -year-old high school French or German justwon't make it.

But what about e-mail that arrivesafter the translator has gone home, orbrochures that you need only look overto gather a general impression? Thereshould be a computer program thatcan provide quick, functional transla-tions. For that matter, shouldn't therebe larger programs that can producerapid, machine perfect translations? Aquick look at the nature and history ofmachine translation will explain whythe research has been slow to developin this area of information processing.

The number one task for computersis still word processing. Computers aremath machines, and they handle thisjob so well because the words are han-dled as strings of numbers, not words.Language, however, is another story.

Research in human language pro-cessing goes back to the end of WorldWar II. The Cold War created massivetranslation projects for the intelligenceservices, and, for 20 years, millionswere spent in machine translation re-search. In 1966, the National ResearchCouncil gave up in despair, endingtheir funding for the projects. Fortu-nately, several academic centers hereand abroad continued their research.

There are several problems thatmake designing translation programsdifficult. The first is that word forword translation (word swapping) isnot enough. This may work for num-bers (eight in 8 + 4 and in 8 * 4 is still

eight), but in language, context oftenchanges the very meaning of the word.A bark is sometimes a noise, some-times a boat, the covering of a tree,and an injury to one's shin. What thenis a computer supposed to do with aphrase like "barking up the wrongtree "? One comical translation fromEnglish to Russian (a language ofgreat interest to the government in thesixties) illustrates the problem. Whenthe expression "The spirit is willing,but the flesh is weak" was machinetranslated, the result in Russian was"The vodka is strong, but the meat isspoiled."

FOREIGN LANGUAGE SOURCES

World Language Resources.Largest single source of language soft-ware. Language systems, dedicatedword processors, machine translators,dictionaries, tools, OCR, and languagelearning systems. 2130 Sawtelle Blvd.,Suite 304, Los Angeles, CA 90025.Telephone (800) 900 -8803.

SeiTech Language Partners, Inc.Translation software and consultingservices. Twenty -eight language com-binations including Japanese, Korean,Arabic, Russian, French, Italian, Ger-man, Dutch, and so on. 2525 North El-ston Avenue, Chicago, 11 60647. Tele-phone (800) 898 -9043.

TwinBridge Software Corp. Pro-vides advanced interface programs forAsian languages utilizing applicationssuch as word processing, desktop pub-lishing, graphics, and spreadsheets.Chinese dictionary and pronuncia-tion application. 1055 Corporate Cen-ter Drive, Suite 400, Monterey Park,CA 91754. Telephone (800) 894 -6114.

A literal, word by word translationis rendered completely useless whenyou are struggling with idioms. The

Spanish Echar sapos y culebras trans-lates as "to toss out toads and snakes."What it actually means is to "swear ablue streak."

Another level of processing beyondmemorized definitions was required.This next level was artificial intelli-gence (AD, and it added programmingrules that involved grammatical struc-ture in an attempt to create machinetranslations that could be trusted. H.P.Newquist (The Brain Makers) pointsout that today, "Europe has literallyhundreds of machine translation pro-jects under way, [and] the Japaneseroutinely list fully automatic machinetranslation as one of their primary com-puter based goals for the next decade."

Where are we now, in late 1996?There are tools and translators for pro-fessional translators and nonspeakersalike in three categories: wordbooksand tools, machine translators (MT),and machine assisted human transla-tion (MART).

Wordbooks and tools. Because cer-tain professions and scientific disci-plines have such extensive vocabular-ies, industry - specific dictionaries in theform of programs are very useful forlookups and text insertion. Also, gener-al dictionaries for a wide variety oflanguages are available. Proofing toolsfor specific languages will checkspelling, grammar, and find synonymsand antonyms. Dedicated word proces-sors will get you past the problem ofwriting in foreign alphabets that aredifferent from ours. OCR scanning pro-grams in language specific formats al-so deal with the problem of alphabets.

Machine translators (MTs) rangefrom the inexpensive that producequick, and very rough translations, tosophisticated PC programs (recentlyfound only on mainframes) that pro-vide reliable results. MTs can be usedfor getting the general meaning of adocument ( "gisting"), for quickly get-ting through a lot of material, or forcreating text in another language thatis simple and direct in its construction.Mts can be one -way, or bi- directional(as in English to Japanese andJapanese to English).

Machine assisted human transla-tors (MAHTs) are designed for profes-sional translators. In an interactiveprocess, the machine and the humanco- translate and edit to create consis-tency across an entire document, and


to speed the process.Of course, if you believe that English

is, and will continue to be, the de factolanguage of international commerce,then the research and these productsare moot. Others, though, point outthat there is writing on the wall to thecontrary, and not all the script is inEnglish. There have been expressionsof displeasure at the the universal us-age of English on the Internet. Just re-cently, the de facto Web browser (Net -scape Navigator) has offered a choiceof home pages. You can now boot uptheir home page in English, French,German, or Japanese.

For total number of native speakersof the language, English ranks fourthin the world behind Mandarin, Hindi,and Spanish. If numbers mean any-thing, as they once did when Latin wasthe world's official language, even ifyou add the number of people whospeak English as a second language, itis still behind Chinese by a factor oftwo times as many. And as the centuryends, China is emerging out into theworld again.

The search for international marketswill, no doubt, boost the interest inlanguage translation software. Andthere is much left to do because thereare about 5,000 languages spoken inthe world today. ■

PRODUCTS MARKET

IXAT, Inc.offers two different transla-tion tools for business on CD -ROM.Dictionnaire Des Af faires English/FS ench- French l English includes 25,000words and expressions in each lan-guage and is designed for executives,accountants, bankers, lawyers, consul-tants, and investors. The InternationalBusiness Dictionary offers a businessword -book in English- French - Russian-Czech. Circle No. 50.

DNL WorldwWo Expresshas announcedVoiceShip for its air express shipping.VoiceShip links the shipment with aprivate voice mail message that can berecorded up until the time of delivery.Last minute instructions, highlights ofpertinent information, and changescan accompany the package. In coun-tries where voice mail does not exist,an 800 number is used by the shipperto get a personal identification numberto record a message. Circle No. 51


Warroa Gorham Lamonthas publishedU.S.International Estate Planning, aone - volume resource covering everyfeasible U.S./international personal taxplanning problem. Written by WilliamR Streng, former advisor to the U.S.Department of the Treasury, it coversthe most current income tax treatiesand their jurisdictions, along withchanges in the tax code and forecastsof anticiptated changes. Circle No. 52

Corporate VAT Management (CVM)hasreleased AUTO VAT, the first fully au-tomated value -added tax refund sys-tem for corporate users. The Windows®based system enables U.S. companiesto reduce their European travel ex-penses by making it easy to obtainVAT refunds. AUTO VAT automaticallygenerates all the necessary forms inthe appropriate languages, fully com-pleted, along with instructions on howto submit the VAT refund application.Circle No. 53

EastGato Servicesoffers the largest da-ta bank on Chinese businesses in Eng-lish. The three volume set providesdetailed information on more than500,000 Chinese firms and businessrelated organizations. The data providesignificant information on the type ofownership, state or private. Productsare classified using both the U.S. Stan-dard Industrial Code and the CIC,China Industrial Code. Circle No. 54

Group 1 Software will provideOBIMD's award - winning UniversalMailing software that allows business-es to manage foreign lists and preparemailings. The software does addressstandardization, correction, and postalcoding, where available, for more than190 countries, including all United Na-tions member countries. Circle No. 55

KONEXX® (Unlimited Systems Corp.,Inc.) provides high -speed data connec-tions between laptop, portable, or note-book computers and virtually any tele-phone in the world. Users can sendfaxes, check e-mail, and access the In-ternet from anywhere without theneed for a phone jack or workingknowledge of the phone system. TheKonexx Koupler uses a strap -on devicefor the telephone receiver for itsconnection. Circle No. 56

Software 2000's Infinium: HumanResources 1.2 is a client/server humanresource application that manages allof a corporation's HR tasks. The soft-ware incorporates customizable busi-ness objects that model the way an HRdepartment works and streamline ad-ministration of flexible benefits, train-ing, payroll processing, and wage andsalary administration. Circle No. 57

J.D.Edwards& CompanyoffersOneWorld, a software suite that deliv-ers platform independent, network-centric technology to the multination-al, enterprise -wide applications mar-ket. With CNC (Configurable NetworkComputing), the new architecturebuilds on an object -based foundationand includes event -driven objects anddynamic partitioning. OneWorld appli-cations are built by linking businessobjects with event rules. The objectsare reused to build and tailor applica-tions. Circle No. 58

NeiNEWS _ #

Concepts Dynamic, Inc.which providesaccounting software for open systems,has launched its Web site. The siteoffers extensive information on CDIand its client/server financial applica-tion software, CDI's innovative useof clientlserver technology, andthe client service offerings.http: / /www conceptadyn.com

User Solutions, Inc. has created a sitedesigned to facilitate the search formanufacturing software solutions.Included are product samples withdownloading instructions, what'snew, and cross reference links.http:/ /www.usersol.com

EAS Technologies, Inc.has informationabout its state -of -the -art automatedtime attendance and workforce man-agement software. A number of otherassociated sites are linked to the EASsite. httpl /wwweastech.com

Monarch Bay Software, Inc.has aworking demo of its new help desksoftware HelpTrac 5.0 on its Web site.HelpTrac features alpha paging capa-bility, customizable levels of security,department grouping of technicians,and so on. httpl /wwwhelptrac.com

I_� k� AAT p1hNA

6 6M

rendsIN F I NA NCI A L MA NAGE ME NT

RESEARCHJulian M. Freedman, CMA, Editor

ENVIRONMENTAL METRICS STUDYIN FORMATIVE STAGE

Ways to communicate the benefitsassociated with merging environmen-tal values into business practiceshave been noticeably lacking. Account-ing systems ignore environmental im-pacts while engineers plead innocentto the consequences of their manufac-turing activities and product designs.Management accountants and engi-neers need a common set of environ-mental metrics decision making.

The College of Engineering at theUniversity of Wisconsin - Madison withFAR and others is exploring the ideaof reporting metrics using CIC's Glob-al Benchmarking System data collec-tion software. Dr. Patrick Eagan, P.E.,of the Department of EngineeringProfessional Development, is coordi-nating this initiative. For more infor-mation, call Dr. Eagan at (608) 273-8937. ■

LESSONS FROM PROJECT RENEWAL

In light of the ongoing interest inenvironmental issues, the followingsummary of an article by William G.Russell in Total Quality Environmen-tal Management, Winter 1995196, isrelevant. The article is about a coop-erative business project to investigateand promote the linkages betweenecology, technology, and business eco-nomics. The project, called RENEWAL(Resource Efficiency Network to Elim-inate Waste and Liability), focused onequipment and inventory assets, ex-ploring how better capital asset man-agement can increase profitabilityand improve environmental protec-tion. Participants in the project in-cluded representatives from industry,consulting, local and state govern-

ment, environmental agencies, tradegroups, and academia.

The article describes three specificactivities conducted by the RENEW-AL participants and suggests ways toimprove the success of future projectsaimed at improving the investmentrecovery of "impaired" capital assets.

Project RENEWAL has three com-ponents:

■ Material or resource life -cyclethinking to reduce the environmen-tal impact and cost of an item forits entire lifetime.

■ Information technology, the devel-opment of environmental cost ac-counting and inventory control in-formation systems that are part ofa total decision support system.

■ Investment recovery of impairedcapital assets, which has thelargest and fastest potential payoff.

The project's primary objective wasto identify a corporation willing totest a methodology model that wouldlead to improved environmental andbusiness performance.

After several meetings to define thescope of a pilot project, BASF spon-sored a multidisciplinary workshop ofits internal corporate decision makers,with a view toward promoting the ef-fort. Although interest and enthusi-asm for Project RENEWAL had beenhigh, implementation of the projectwas slowed by barriers created withinthe organizational culture. A couple ofmeetings later, attempts to solicit apilot project corporation had failed.

In the end, the Project RENEWALpilot test failed to gain acceptance asa business imperative. Good ideasalone do not warrant management at-tention and investment priority overurgent needs. The efforts with ProjectRENEWAL found an uninformed andunaware management embroiled in

environmental litigation, perplexed byintrusive and confusing regulations,and trying to understand its competi-tive position in a global economy. Fora proposed change to be accepted, en-vironmental changes must be inte-grated into other complementarychange initiatives. The argumentsmust be articulated in the one lan-guage business understands: money!

Project RENEWAL also failed tofind a committed change agent totake ownership of the effort.

The conclusion was that sustainabledevelopment, the goal for environmen-tal achievement, must be attacked asan effort of steps and milestones. Pro-ject RENEWAL was a success to thedegree that it met the goal of promot-ing its environmental performancemetrics related to reduced emissionsand wastes.

For information about Project RE-NEWAL, contact Carl L. Henn (Rari-tan Valley), Concord Energy Inc.,(908) 766 -1020. Measuring CorporateEnvironmental Performance: BestPractices for Costing and Managingan Effective Environmental Strategy(#95301/$40) by Marc J. Epstein canbe ordered from IMA Order Depart-ment, (800) 638 -4427 ext. 278. The en-vironmental cost accounting video isavailable from AFTN, Westcott Com-munications, Inc., (800) 622 -1140. ■

MANAGEMENT ACCOUNTINGPRACTICESLouis Bisgoy, CPA, Editor

FRC MEETS WITH FASB;COMMENTS ON PROPOSALSOn J une 14, IMAs Fin ancial Re-

porting Committee held its annualjoint meeting in Norwalk with mem-bers and staff of the Financial Ac-counting Standards Board. During theportion of the meeting in which FRCmembers engaged in dialogue withFASB representatives, participantsexplored the fine (or not so fine, de-pending on one's perspective) pointsof the various current or potentialFASB agenda projects. The benefitsof such dialogue go both ways: FRCmembers become more aware of aproject's status and FASB people getfeedback that helps them shape finalStatements likely to be better re-


ceived by its constituency.As a result of FRC's "action" agenda

at that meeting, a number of commentletters subsequently were issued:

Accounting for Certain Liabilities Re-lated to Closure or Removal ofLong -Lived Assets(FASB)—We support theBoard's effort to develop guidancewith respect to certain liabilities re-lated to closure or removal of long -lived assets. As noted below, we be-lieve the scope of the Statementshould be clarified, guidance with re-spect to the interaction of this State-ment with Statement 121 needs to beadded, and certain of the guidanceneeds to be expanded. Although wegenerally support the approach takenin the ED, we would not be opposedto retaining a negative salvage valueapproach for obligations for closure orremoval, with disclosure of the esti-mated obligation. We agree that (a)measurement of the obligation shouldbe based on the present value ap-proach; (b) the obligation should takeinto account the technology that willbe used; and (c) the discount rateused should be the risk -free rate.

Definition and Recognitionof Rev-enues (InternationalFederation of Ac-countants)—We support the move-ment toward a full accrual basis ofaccounting for revenues. We agreethat the concept of "revenue" shouldinclude both revenues and gains, butwould prefer the term "income" asused by the IASC Framework for thePreparation and Presentation of Fi-nancial Statements. We believe that"tax expenditures" are not revenuesbut tax revenue forgone and that dis-closure of such amounts is appropri-ate in supplemental information to fi-nancial statements. We recommendthat financing transactions be distin-guished from other transactions notonly in the statement of cash flowsbut also in the operating statement.

Reporting Disaggregated Informationabout a Business Enterprise (FASB)—Generally, we are supportive of theBoard's approach to segment report-ing; we believe that the managementapproach is preferable to the businesssegment approach. Notwithstandingour support for the management ap-proach, given that the IASC has pro-

58 MANAGEMENT ACCOUNTIMG AUGUST 1996

posed a different approach to segmentreporting, we suggest that the Boardattempt to reconcile the differenceswith the IASC prior to issuing any fi-nal standard. We believe the manage-ment approach, despite the possiblelack of comparability with otherswithin an industry, would produce themost relevant information about anenterprise. It would enable users tobetter understand an entity's busi-ness, especially how the business isoperated from the perspective of com-pany management. We agree with theBoard that nonpublic business enter-prises and not - for -profit organizationsshould continue to be exempt fromsegment reporting standards. We dobelieve, however, that the Board hasinappropriately downplayed the con-cern about competitive harm. We rec-ommend the FASB be particularlysensitive to comments received fromother respondents on this matter.

Reporting Financial Information bySegment (IASC) —The Financial Re-porting Committee acknowledges thatthe International Accounting Stan-dards Committee has made a numberof significant improvements in thedocument since it was exposed as aStatement of Principles. However, theFRC continues to have significantconcerns with the use of differentialrisks and returns to define segmentsand therefore cannot support thedraft standard in its present form. Al-though we have specific concerns withregard to the management approachas defined in the FASB- British Ac-counting Standards Board ExposureDraft, Reporting Disaggregated Infor-mation by Business Enterprises, wecontinue to believe it offers the betterframework for providing segment in-formation. We believe (a) the two -stepapproach in your document is nottechnically feasible; (b) risks and re-turns is not an operational basis forsegmenting a business enterprise; and(c) the ED's disclosure requirementsfar exceed analysts' needs for infor-mation.

Interim Financial Reporting (1ASC)—Although our committee did not havenearly enough time to address the is-sues in the IASC paper, we want youto know that, in general, our mem-bers are inclined to be supportive of

an integral approach as noted in APBOpinion No. 28, which differs in cer-tain respects from the integral ap-proach described in the Issues Paper.

For copies of any FRC comment let-ter, contact Nora Altavilla in the Mont-vale office at (800) 638 -4427, ext. 227. ■

FASB ISSUES TWO EDsThe FASB has published two Expo-

sure Drafts on proposed Statements,"Reporting Comprehensive Income,"and "Accounting for Derivative andSimilar Financial Instruments and forHedging Activities."

The former would establish stan-dards for reporting and display ofcomprehensive income in a full set ofgeneral- purpose financial statements.If adopted, the Statement would re-quire an enterprise to display as apart of comprehensive income in astatement of financial performanceitems that now are reported directlyas changes in equity. Common itemsthat would be included in comprehen-sive income are foreign currencytranslation adjustments, minimumpension liability adjustments, and un-realized gains and losses on securitiesheld.

The ED on hedging and derivativesessentially would require all deriva-tives to be carried on the balancesheet as assets or liabilities at fair(or market) value. Accounting for thegain or loss on a derivative would de-pend on how it is used. The gain orloss on a derivative that hedges aforecasted transaction would be de-ferred and recognized in "other com-prehensive income" outside earnings,but included in earnings when thetransaction is projected to occur. Theaccounting would differ for a deriva-tive (a) that hedges an asset, liability,or firm commitment, (b) that hedgesthe foreign currency exposure of acompany's net investment in a foreignoperation, or (c) for those derivativesnot designated as hedges.

Copies of either ED are availablewithout charge until October 11 fromFASB Order Dept., 401 Merritt 7,P.O. Box 5116, Norwalk, CT 06856-5116; Tel: (201) 847 -0700, ext. 555.Comments on either or both of theproposals are requested by October11; public hearings on both will beheld on November 15, 18, and 19. ■

l

ontinuingEducation

Robert Rizzitello, CMA, Editor

NEW CD-ROMCOURSE AVAILABLE

In the March issue of MANAGEMENT

ACCOUNTING ®, we surveyed you, ourreaders, about your receptivity tocourses on CD -ROM and topics you'dlike to see. The result: The IMA hasconverted one of its highest qualityrated regional education courses, Per-formance Measurement: PracticalStrategies and Information Systems atWork, into a self study course on CD-ROM. Under this delivery method youcan learn about performance measure-ment wherever you can bring yourcomputer or print out sections of thecourse and study them anywhere. TheCD -ROM contains music, video, andinteractive screens, making it a newand enjoyable way to learn.

You will learn how to:

• Launch or improve a performancemeasurement initiative.

• Function as the owner of the per-formance measurement processand as your organization 's changeagent,

• Use a comprehensive practicalframework for performance mea-surement development, and

• Effectively work and coordinatewith information systems andother key departments.

The course reviews performancemeasurement methodology but empha-sizes developing practical financial andnonfinancial performance measure-ments. Therefore, the theoretical con-cept is carried forward into a practicaland deliverable product or service.

Why should 1 take the course? Accord-ing to a 1995 survey published in theIMA's Cost Management Update, only37% of the survey respondents ratedtheir performance measurement sys-tems as "excellent," "very good," or"good." Addressing this improvementopportunity may be a good way to pro-vide value to your organization.

The course will demonstrate how tocreate awareness of the need to modifythe existing measurement system; gaintop management and cross - functionalsupport; organize the appropriate levelof resources; assure information istimely, accurate, and useful; and linkperformance indicators to economicvalue. The course will provide you oryour project team the Just -in -Timetraining that is necessary to conduct a

successful project. Because failure toaddress these issues is one of the topreasons performance measurementprojects fail during startup or imple-mentation, learning how to addressthem will help assure success of yourimprovement initiative.

Obtaining CPE credit. At the completionof the program you can earn eighthours of continuing professional educa-tion credit. Accreditation is simple:You complete an on- screen final examand forward the exam to the IMA'sMontvale office for grading. Upon yoursuccessful completion of the exam, theIMA will mail a certificate ofcompletion to you.

System requirements. You will need a486 DX/33 runnin g Windows 3.1 (orhigher version) or Windows 95, witheight megabytes of RAM, a minimumof a 2X CD -ROM drive, and an SVGAdisplay. If you do not understand allthat, have someone in your technologygroup look over the requirements andyour computer. The program installseasily and quickly. We think you'll findour CD -ROM to be user - friendly aswell as educational. ■

Ro b ert Rizzitello is a s enio r manager withthe management c o nsult ing gro up o f Erns t &Young LLP . He c an b e reac hed by p ho ne (216)448 -4070, o r Internet: bob [email protected] om.

r - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - I 1

Order your Performance Measurement course today!1 Send this order form and payment to: Institute of Management Accountants, 10 Paragon Drive1

Montvale, NJ 07645 -1760, Attn: Lorin Woolfe, Phone: 1-800-638-4427, ext. 302.

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StreetI I City & State Zip

II IMA Member No. (if applicable)I

1 11

Price of the program $99.951 N.J. residents add 6% sales taxI Shipping and handling S 3.00

Total I1 1 Payment enclosed:1

0 Check payable to: Institute of Management AccountantsIi Mastercard 0 Visa 0 Amex 1I

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AUGUST 1996 MANAGEMENT ACCOUN11NG 59

A Classified Section

The largest law firm in the UnitedStates with worldwide presence seeksan experienced professional to managethe Accounting Department. Responsi-bilities include the general ledger, ac-counts payable and receivable and fi-nancial reporting. You are required tohave excellent presentation skills to bethe liaison for Accounting, the Informa-tion Systems group, and users world-wide. Prior supervisory experience is amust including at least eight years ofprior experience in both the PublicAccounting and Private industry envi-ronments. CMA or CPA is highly pre-ferred. Salary to $80,000 with excellentbenefits.

Video equipment manufacturer with aneye to the future seeks a professional tohandle a diverse array of cost account-ing issues. This exciting position re-quires candidates with a CMA, at leastfour years of manufacturing/cost expe-rience and knowledge of Ask MANMANto make you the "right answer" for thisvisionary firm. Salary to $60,000 withgreat benefits.

NASDAQ traded biotech/pharmaceuti-cal company seeks a hands -on profes-sional. The proven track record andgrowth prospects of this company re-quires someone who can handle com-plex accounting and finance issues andreports. Exposure to venture capitalistsand financing sources considered aplus. This position could "fast - track"you into the Controllership, with theright background. If you have morethan three years' experience, a CMA orMBA, and strong systems skills , youhave what it takes to qualify. Salary to$50,000 with 401(K) and stock optionsincluded in your benefits package.

Exciting entertainment company seeksan experienced professional to establishand build the Tax Department. In thishighly visible position, you will be in-volved in tax compilations as well astax research and planning. If you havea BSBA in Accounting and six years 'prior experience, you might be justwhat this company is looking for. MSTor MET preferred. Salary to $50,000including excellent benefits.

A thirty- two - year -old, $30 million man-ufacturing company seeks a hands -on,team- oriented individual. This profes-sional must have at least five yearsof industry experience. Responsible formanaging accounts receivable andpayable, credit and collections, billing,general ledger maintenance and finan-cial statement preparation. Salary to$42,000 with benefits.

International multimillion dollar jewel-ry manufacturer seeks a four -plus yearprofessional to supervise three clericalstaff while handling all general ac-counting functions. This highly visiblerole reports to the Controller. A BS/BAin Accounting /Finance is desired, CPAis a plus. Join this fast -paced environ-ment! Salary to $45,000 including goodbenefits.

A ground floor opportunity with anexplosive growth biotech corporation. Ifyou have a strong public accountingbackground with a minimum of twoyears' experience and the drive to suc-ceed, then you have the "winning com-bination" for this dynamic position.This is an excellent choice for a "go-getter"! Salary to $35,000 with goodbenefits.

$200 million company specializing inthe telecommunications trading indus-try requires a truly talented profession-al to manager the department. Respon-sibilities include financial statements,reporting, budgeting, forecasting, auditcompliance and inventory analysis. Ifyou have four or more years' experienceand strong supervisory skills, you maynot need to look any further! Prior jobcosting experience and a CMA/CPApreferred. Excellent benefits include asalary to $52,000.

$300 million division of a leading me-dia/publishing/specialized advertisingorganization seeks a highly skilledleader possessing a minimum of eightyears of progressive accounting experi-ence. Duties include supervision of staffprocessing transactions for a multi -unitcenter. Responsibilities include internalcontrol monitoring, multi -unit generalledger maintenance including financialstatements, consolidations and report-ing package. Requirements include aCPA, BS/BA in Accounting or Finance,at least five years as a corporate con-troller or in a similar capacity, and ini-tial experience in a "Big 6" or a Nation-al CPA firm. Strong PC spreadsheetskills a plus. Compensation to $70,000with excellent benefits.

The World's leading food commoditiescompany seeks a professional accoun-tant with at least two years of generalaccounting experience. The Companyseeks a polished professional with astable work history. Duties will includejournal entry preparation, account/gen-eral ledger analysis, monthly closingand reports and financial statements.BS/BA in Accounting, general computerliteracy and experience in Excel orLotus preferred. Salary to $36,000 withgreat benefits.

Major trade association seeks an expe-rienced hands -on professional to man-age three separate subsidiaries and su-pervise three staff. The successfulcandidate must be detail oriented withattention to accuracy and timeliness.Duties include monthly financial state-ments, fixed assets, depreciation, cashmanagement, annual audit, budgets,accounts payable and receivable, fi-nancial analysis, tax reporting andvarious other projects. BA/BS in Ac-counting and PC literacy (MicrosoftWord, Excel, PC DOS -based Windows)desired. Excellent management andcommunication interpersonal skills amust. Great bonus and benefits pack-age including a salary to $65,000.

Privately owned $18 billion financialinstitution has a position for an experi-enced auditor. Responsibilities includeplanning and implementing informa-tion systems and software as well as fi-nancial and operational audits. Notravel required. Candidates shouldhave no less than four years' electronicdata processing audit experience,BS/BA in Accounting/Finance andgood organizational skills . PublicAccounting or Bank industry experi-ence preferred. Salary to $45,000 withexcellent benefits.

Northern suburban publicly tradedconsumer finance company is seekingan experienced professional. Your timewill be equally allocated between fi-nancial reporting and treasury activi-ties. Career oriented individualsshould have at least two years of priorfinance experience and excellent com-munication skills. In addition, a strongsoftware background in spreadsheetsand Paradox is a plus. CPA/CMA orcandidates thereof preferred. Compen-sation includes great benefits and asalary to $40,000.

Ground floor opportunity with anemerging high -tech medical equip-ment manufacturer planning an IPOthis year. Position reports to the Cor-porate Controller and requires an ex-tensive involvement with the imple-mentation of the Initial PublicOffering and subsequent SEC report-ing. Additional responsibilities in-clude consolidations, knowledge ofFOREX transactions and overseeingaccounting and special projects.CPA and "hands -on" SEC reportingexperience are required. Salary to$65,000, options and good benefits.

New York based publishing organiza-tion has an opportunity within theircorporate controller's group for an ex-perienced analyst. While reporting tothe Manager of Financial Reporting,the responsibilities will includeaccounting and analysis for complexfinancial issues such as foreign cur-rency exchange, acquisitions and dis-positions while assisting in establish-ing and implementing corporateaccounting policies. Excellent writtenand oral communication skills and aBS/BA in Accounting/ Finance are re-quired. An MBA is a plus. Salary to$55,000 with great benefits.

A major international investmentbank has an opportunity for anachievement oriented analyst. Dutieswill include analyzing retail compa-nies, preparing research reports, de-veloping financial models and liaisonto the firm's clients. Required skillsinclude a background in financialanalysis, problem solving, and PC's.Preferred candidates will have excel-lent communication skills and eithera CPA or MBA with at least fouryears of retail industry experience.Salary to $70,000 with good benefits.

A Classified Section

A billion dollar telecommunications com-pany seeks a seasoned, hard charging pro-fessional for a major subsidiary. Responsi-bilities include heavy budgeting andanalytical projects. Requisite skills includefive years of proven analytical exposure,strong PC background and a BS/BA inFinance/Accounting. MBA and telecommu-nications experience a plus. Salary to$55,000 with great benefits.

A small investment management firmseeks multiple professionals to help buildthe infrastructure of their growing compa-ny. This is an opportunity to help build theteam from the ground up! If you have atleast three years of investment accountingexperience, this might be just what youhave been waiting for! CPA/MBA a plus.Salary and bonus varies with experienceand qualifications but will be well abovemarket in addition to great benefits.

Public sector firm which manages threecompanies seeks a principal advisor to theGeneral Manager. Position requires theformulation, development, articulationand implementation of all financial andcompany protocol decisions. A minimum often years' prior experience supervisingmid - managers in addition to superior ana-lytical and presentation skills are requi-site for this position. Salary to $105,000 inaddition to superior benefits.

A $20 million division of a billion dollarwater utility company seeks a hands -onmanager to oversee the daily activities ofthe Accounting Department. You will su-pervise two professionals in the AccountsPayable and Billing areas in addition tovarious special projects. Qualifications re-quire a minimum of two years of supervi-sory experience and strong PC skills .CPA/CMA preferred. Good benefits includ-ing a salary to $40,000.

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CHIEF ACCOUNTANT/FINANCIAL MANAGER

Plan, direct, coordinate and formulate the financial policies and ac-tivities of an international manufacturing company. Prepare re-ports which outline the company's financial position in areas of in-come, expenses and earnings based on past, present and futureoperations. Direct preparation of budgets and financial forecasts.Prepare and analyze monthly, quarterly and annual financial state-ments, budget analysis and maintenance of accounts such as gen-eral ledger accounts and document business transactions using var-ious computer programs. Analyze data regarding material assets,net worth, liabilities, surplus, income, and expenditures. Prepareand timely file quarterly reports and annual tax returns. Direct thepreparation of various special computerized reports for governmentand management personnel. Conduct cost analysis of operationsand develop reports for management personnel. Requires a Bache-lor's degree in Accounting and five years experience in job offered orfive years directly related manufacturing accounting experience.Within the required experience, must have at least one year expe-rience in a start -up company and systems implementation of finan-cial systems. 40 hour work week. Salary $55,000 per year. Apply atthe Oklahoma State Employment Service Office, Hwy. 70 East andBrinkley Dr., Idabel, Oklahoma 74745 (ID #4500) Job Order#224744. Ad Paid by an Equal Opportunity Employer.

F- O- R- T -U -N -E of Columbia isan authority in the placement ofManufacturing ManagementAccounting professionals na-tionwide. We conduct searchesfor CFO, VP Finance, Con-troller, Cost Manager and Fi-nancial Analyst positions in the$40,000 to $150,000 range. Todiscuss our current opportuni-ties, call (803) 788 -8877. Youmay fax your resume to (803)788 -1509 or mail to:

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CommanderTIVIFDCTired of saying "Sorry, I can't" because reports from a `70s accounting system can't keep pace with yourcompany in the `90s? You need Commander FDC (Financial Data Control), the client/server solution forfinancial consolidation and reporting that simplifies the most complicated (and most urgent)information requests. With FDC, reorganizations are as simple as changing an on- screen organizationchart and pressing the "Consolidate" button. Commander FDC helps you collect, consolidate andanalyze financial data with ease. FDC's database keeps all your reports consistent whether you use aspreadsheet (via FDC's built -in linking) or use FDC's own multidimensional analysis. So, before youhave to say "Sorry" again, call Comshare for more information and a schedule of our free half -dayseminars where you will learn more about Comshare's financial decision support applications forconsolidations, budgeting and management reporting.

(onto& Chris Kelly at 1- 800 - 922 -7979 or Emoll ckelly @comshore.comCommander * a aedemark end Comshare R a rBpl9WW trademark d Comshare, Im.

THE DECISION SUPPORT COMPANY' C 19%, Comehaze. ft.

C O M M A N D E R F D C : T H E C L I E N T ! S E R V E R S O L U T I O N F O R C O N S O L I D A T I O N S A N D R E P O R T I N G

Circle No. 6

.dVII III] IlI - Strategic Finance

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Transcript of .dVII III] IlI - Strategic Finance