Interpreting Accounting data

Introduction

We react to the world using our own experiences and judgement gained for our time on the planet, our survival instincts continually influence our decision making.  All situations are interpreted, they are not mere physical stimuli, they are manifestations of our own consciousness, We therefore have subjective views of reality and truth, examination of accounting data is no different, the numerical analysis of key events can have different interpretations.

Perception

Interpretation involves the abbreviation and simplification process, we subconsciously transform facts and often go beyond their initial intention.  Individuals vary greatly in their thinking, some suppress facts, some deny their very existence, others manipulate data for their own ends.  In ambiguity there is a tendency to distort data to prove a point.  This leads to polarisation of thinking and the favourable or unfavourable view of numbers, often leading to confusion over facts and aspirations.

Sometimes the slightest number or cost component within the profit and loss account can be given inordinate weight if it suits a particular point of view, the resulting halo effect often overshadowing the intended meaning.  Perceptions of truth (or fairness) can be altered dependant on the context in which the information is given, such manipulation or marketing of data can have a profound impact on the behaviour of the intended recipient, where groups are involved, this manipulation can produce unintended consequences.

If a CEO is pre conditioned to accept bad news (in meetings he may be told in advance that Margins are not expected to be as good this month,) then he is being managed to anticipate reduced Margins and hence profit in the Monthly Accounts, his expectations are being managed.

CEOs also tend to interpret information in the light of clues as to the possible decisions for which it is to be used and are quite capable of incorporating their own views of the decision situation into their own perceptions.  An empathic CEO will factor in their feelings about possible reactions of other managers to different types of information that can influence their behaviour
Role plays by Cyert and March with a group of students found marked differences in their behaviour dependant on whether they were Sales Conscious or cost conscious.  Further research by Dearborn and Simon confirms the theory in the first paragraph, namely that Managers interpretation of data and situations are framed by their own areas of expertise/experience.

The interpretation of accounting information is not a mechanical process, it has to be perceived as relevant and not clinically or technically correct.  We should also not forget social or functional groupings, such groupings are a basic need for validation of our views by our peers, we also lean heavily on other people for a rationalisation of our understanding of data .

A group consensus may be the only reality because the ambiguity of the data of situation requires removal, and that most groups move towards the consensus of the majority or the controlling influence.  Where there is interaction between individuals or groups then counter biasing behaviour becomes the norm. comments like ‘you need to discount these figures as the Sales Department always exaggerates’ or Harry is conservative, he will have contingencies up his sleeve to cope with unknowns’. are commonplace.

An organisation has many built in defences against interpretive behaviour.  Accounting information is not above distortion, it has to be interpreted though by experienced people.  The Culture to facilitate ‘correct’ interpretation and perception needs to encourage people to be adaptable in their behaviour and not inflexible in thought.

Managing people with numbers

‘Challenging’ or ‘realistic’ budgets become subjective models if not based on inputs from those whose behaviour they are trying to measure.  The Accountant may well see a working draft set of accounts as realistic, refining the accounts as a result of CEO review is an indication that there is a certain management style.

The understanding of the behavioural impact of Accounting data requires not only the appreciation of the manner in which information is provided , but also the way in which recipients of such data respond based on their perceptions.

If you want to influence behaviour, set appropriate performance measures in place to do so, the most obvious is a reward structure for Sales Staff based on the number of new accounts opened, or for credit control staff for the number of debtor days, either way the dissemination of information, and more importantly the reception and perception of the information must be timely and relevant to the behaviour requirements of the recipient within the overall business requirements.

Managing people by numbers isn’t easy, manipulation of behaviour with numbers is even harder.

Control of the processes by which these numbers are disseminated is the key.

Traditional Accounting systems will concentrate on techniques and procedures, as Accountants become more embroiled in the overall management of the business, consideration is being given to the processes involved in churning out this information and the reflective feedback loop which is inherent in modern day systems as the very people who are creating the information, are the end users also.
The use of IT has greatly enhanced this reflective loop thinking.

We have seen nomenclature changes, ‘cost accounting ‘ becomes ‘management accounting’, ‘budgeting’ becomes ‘budgetary control’.

Understanding the Human and Social processes which accompany the operational management accounting systems are important.
Look what happens with some Mergers, although they may have the same brand of Software, the use and abuse of the system is different in the respective businesses.  This idea of an adaptive accounting system stems from the behaviour of the users and the system gradually evolves over time to accommodate the users and their intended outcomes.

Woodward found that the relationships between IT, Accounting systems and organisational behaviour reflected the degree of uncertainty and unpredicatability in organisations.

Resurgence

Or are we really talking here about how a CEO manages the business using the available tools, only one of which is controlling the output of the Accountancy function?

Most CEOs will celebrate diversity, provided that the margin of tolerance does not interfere with the Cultural norms in the business.
This leads to questions as to how ‘ creative’ Accounting can be in influencing behaviour and the relentless march towards profit.
There is a fine balance here between the drive towards conformity, globalisation and the think alike, look alike mentality, with a real desire to manage the talents of all individuals in the balance sheet.  The example of the optimism of the Sales Team and the pessimism of the Accountant referred to earlier is the typical example of managing diversity

A misguided attempt at control in this manner can lead to almost persecution complexes.  Clarity on multiculturalism within the organisation is therefore important as it underpins the political (and indeed non political) decision making processes, there is a fine balance between Blame culture and genuine Accountability.

The definition of Leadership takes many forms, the description which involves Leaders supporting their subordinates to perform at their peak can only be achieved by a clear and concise propagation of cultural values and norms, and as said earlier a tolerant (but not too tolerant) culture in embracing diversity.

Leaders will expect subordinates to lead themselves within the framework set down by the CEO, breaking down the obscurantist culture and stereotyping within organisations is an essential part, managing with numbers becomes easy if there are honest, timely, accurate and there are no preconceived notions that all numbers are negative, controlling and ultimately terminal.

Cultural based norms within organisations need diversity to revitalise themselves, new recruits, new processes, change, all add up to the re energisation of business.  How these issues are measured and compared are part of the culture of the business, the leader who rules by fear and concentrates on divisive leadership will not allow these energy levels to flow.

It is not unknown for Yehudi Menuhin and Ravi Shankar to perform on the same stage, similarly embracing the diversity of the IT department and Marketing to ensure the new CRM software works is important.  The Flat Earthers amongst you will recognise the resistance to reality that numbers can bring, embracing information in a positive and helpful light can empower people, self managing perceptive thinking and understanding the necessity for diversity is important in this self empowerment.

Managing people, with or by numbers becomes irrelevant if notions of self leadership, self empowerment and self responsibility are the prevailing norms in the organisation, this , I believe can only occur with the CEO’s blessing, so as in any organisation, it starts with Leadership, numbers are a means to an end.

Ethics

Most companies would like to operate on an Ethical basis, the manipulation of data to cover up financial irregularities is not unknown.  Pressure to meet numbers can lead to dysfunctional and unethical behaviour.  A numbers culture , whether it be sales leads, cost minimisation or just plain budgetary controls is no a sustainable strategy.

CEO’s should explain that there is a difference between attaining the numbers in an ethical way, through adherence to the underlying norms and values within the Companies, and attaining numbers in a non ethical-winner-takes-all approach.  Organisations that have diversity and sectoral differences struggle to inculcate ethical behaviour throughout all levels of the organisation.

Numbers can give feedback on a value centric business model

References

Cyert and March a Behavioural Theory of the Firm 1963