July 2001: Lessons from a Neighbour

Talk Given to the Swaziland Institute of Accountants by Charles Hattingh

At the tender age of 25 I decided to abandon the security of a monthly salary and go on my own. I very soon realised that it was a tough world out there and if I did not get my act together I would not make it. So I embarked on the task of creating and training six personalities to help me cope. These personalities are:

  • The leader, who makes macro choices and decides on missions and goals
  • The strategist, who develops strategic plans
  • The manager, who creates, allocates and schedules resources
  • The worker, who focuses on performance
  • The informer, who gathers and evaluates information
  • The controller, who monitors activities and measures performance

To illustrate how my team works:

  1. The leader decides that I must improve my health.
  2. The strategist develops a strategic plan of action:
  • Crystallises the goal (defines it, sets standards and targets, makes a commitment, etc.)
  • Calls for information from the informer to help develop suitable strategies
  • Defines the objectives to be achieved (strength, stamina, endurance, etc.)
  • Identifies the constraints, risks, obstacles and problems to overcome (CROPs)
  • Applies creative thinking on how to achieve the objectives and overcome the CROPs
  • Formulates the best tactics to achieve the goal (diet, exercises, relaxation, sleep, etc.)
  • Develops a strategic and operating plan of action
  1. The manager organises the necessary infrastructure, creates a suitable environment and allocates and schedules times.
  2. The worker visualises the outcome and focuses energy on performing the activities.
  3. The informer is always on the lookout for ideas to improve strategy and performance.
  4. The controller designs feedback systems, monitors and measures performance and reports back to the other team members.

The feedback system that the controller designs is an essential element to the successful outcome of the goal. Inputs are monitored and measured. Points are developed for various exercises and compared against targets. A scorecard for measuring success is designed containing measures such as blood pressure, heart beat, bone density, sugar and cholesterol levels, etc. Feedback reports are made to the other team members regularly to enable them to modify the strategy, when necessary.

Would Statements of Generally Accepted Accounting Practice (GAAP) be suitable as the basis for monitoring, measuring and reporting on my progress towards a healthy body? What is happening in RSA at present is that some accountants are getting so involved with GAAP that they apply it to every performance measurement and reporting problem they encounter.

Let’s get GAAP into its proper perspective:

  1. GAAP is only applicable to general-purpose financial statements, i.e. situations where the users are not in a position to demand reports tailored to meet their specific information needs.
  2. GAAP was designed to measure performance for reporting to capital market players to enable them to make economic decisions.
  3. Although GAAP states that one of the key objectives is to fairly measure performance, its main objective is to measure the assets and the liabilities of the enterprise. The income statement is derived from the balance sheet and the matching concept, an underlying basis for performance measurement, has been compromised.

SAICA announced in the February 1999 Techtalk that close corporations should comply with GAAP. The whole purpose of creating close corporations was to reduce the red tape and costs for small enterprises. After much lobbying SAICA relented and has now decided that close corporations do not have to comply with GAAP.

Having won the battle of the close corporation, the next battle was to get the authorities to understand that GAAP was not relevant to the small private company that prepared financial statements primarily for the tax authorities. I collected over 1700 signatures in support of this stand. The authorities have now accepted this argument. The problem, however, is that the law in RSA presently requires that all companies comply with GAAP. Of the 270 000 companies registered in RSA, GAAP is not applicable to at least 250000 of them. The cost to the country of applying an unsuitable performance measuring and reporting system to these companies is enormous. It is also disruptive to the businesses of the companies. Our Government understands the problem, but the law stands and progress towards getting it changed seems to have come to a standstill.

When developing a monitoring, performance measurement and reporting system, it is essential that the goals and the objectives of the entity be understood because the whole purpose of such a system is to control the operations and to give the management team feedback on progress being made. When solving accounting problems many practitioners ignore the facts and go straight to GAAP for the solution. Here are a few examples of such crooked thinking:

  1. “As the assets of the museum are not productive, they should be impaired.” The objective of a museum is not to maximise wealth. Investors are not buying and selling shares in the museum. The objective of a museum is to conserve the history and culture of the country. What has GAAP got to do with a museum?
  2. “The animals in the Johannesburg Zoo should be measured using the statement on agriculture (animals are biological assets), which states that they should be fairly valued and changes in fair values should go through the income statement.” I sincerely hope that the objective of the Johannesburg Zoo is not to maximise the wealth of its owners. I would suggest that the mission of a zoo would be to conserve animal species, educate our children, entertain the people of Johannesburg, etc. GAAP is not appropriate to this enterprise. The accountant of the zoo should identify the needs of the team running the zoo and design a control and reporting system to meet those needs.
  3. “A dental practice was incorporated into a private company that acquired the assets and goodwill of the partners. The goodwill of the dental practice should be amortised in accordance with the statement on business combinations.” The goodwill is not a deductible expense for tax purposes. If the goodwill is amortised, there will not be enough profit to pay salaries to the shareholders. The financial statements of the dental practice are not being used by outside parties for the purpose of making economic decisions. Why then amortise goodwill?
  4. “A utility that is formed to provide water to the residents in the area at cost should comply with GAAP.” Surely the main control and performance measurement problems here would be to control the costs, monitor water usage and control receipts from users. Of what relevance is GAAP in this set-up?

The third step in solving accounting problems, after getting the facts and defining the problem, is to define the objectives to be achieved. If an enterprise is merely preparing financial statements for tax purposes, GAAP is not applicable; tax laws are. If an enterprise provides charitable services to the community, GAAP is not applicable; management accounting rules are. As accountants, we must understand when to get in the box (follow the rules of GAAP) and when to get out of the box (apply our creativity, common sense and logic).

Auditors must also get creative. We cannot have a standard audit report for every situation. If we, as a profession, want to increase our relevance in the community, we are going to have to start using our heads. The following report appeared in the Sunday Times dated 20 May 2001: The R1,9 billion in bail and maintenance fees collected each day by the Department of Justice could not be audited because the Department did not subscribe to GAAP. If the auditing profession can only produce audit reports based on GAAP, maybe we should go the route of the UK and reduce the situations where audits are necessary.

I make this plea to our friendly neighbours: Please learn from the mistakes that we, in RSA, are making: Do not get mesmerised by generalities such as “we must join the world accounting community” or “we should strive for one language of accounting in the world”. Do not dive in and adopt International Accounting Standards for every enterprise in Swaziland. Go the route of Europe where IAS statements are only applicable to listed companies or companies that choose to use them. Let the small companies get on with the business of providing employment, making profits and building the economy of the country. To ensure that such businesses contribute to the infrastructure of the country, learn from the work being done by the SA Revenue Services: hit tax evaders hard. Define objectives and solve problems by using creative, out of the box thinking. Keep it simple and keep costs down. This is the route to a successful monitoring and performance measurement feedback system.

The Six Personalities for Managing Success

Leader (Positive Visionary)

Identifies needs, wants and desires; determines attitudes, values and ethics; sets policies, standards and targets; visualises the future; searches for opportunities; makes macro choices; decides on missions and goals to achieve; decides on allocation of resources; sets deadlines and boundaries.

Strategist (Creative Schemer)

Crystallises goal (definition, motivation, standard, targets, commitment and deadline); defines objectives to be achieved; identifies constraints, risks, obstacles and problems; applies creative thinking (options, consequences, sequels, spin-offs, better ways); formulates tactics, approaches, policies and systems and systems; identifies activities to perform to achieve objectives.

Manager (Methodical Organiser)

Optimises resources; allocates resources to each project; schedules projects and activities; organises the workplace.

Worker (Proactive and Focused)

Creates mindset for performance; visualises outcome; performs the activities methodically and systematically; focuses full concentrated energy.

Informer (Enquiring Ferret)

Listens, observes, reads and researches; summarises and documents; archives for future retrieval; distributes to the other team members.

Controller (Logical Critic)

Designs monitoring, measuring and reporting system; monitors performance; measures inputs and outputs; evaluates performance; looks for continuous improvement; provides feedback to other team members.