| typical accounting class of debits and credits. One primary lesson has stuck in Peter's mind. It was actually a series of two questions that Professor Kaplan wanted his students to ask themselves when out in the real world - "Do you know what your organization's strategy is? Does your accounting system know?"
Why did Professor Kaplan think these questions so important? I'd surmise it's because an organization's administrative systems have embedded inside them many policies, procedures, and assumptions. These become 'hard-wired' in and then forgotten. Sometimes these policies and assumptions are aligned with organizational strategy; other times not. This is true for three reasons.
- First, because many assume that there is a "right" way to do accounting, leaders don't examine whether the underlying premises are aligned with the needs and expectations of the organization.
- Second, many processes in today's accounting system have been added as needed and may not be based on the original assumptions.
- Third, even if alignment was achieved with original intent, the organization's needs and expectations have changed faster than its accounting system or processes.
Fast-forward to today - the Comptroller's Office is redesigning the central accounting system for the state of New York. We, along with our partner firm Advanced Strategies, are supporting them. When viewed on a purely technical level, this type of project represents a large undertaking. Yet, once Peter shared Professor Kaplan's admonition, our clients realized that the strategic, business, and cultural changes were potentially even more challenging than the technical ones. At the same time, many opportunities lay in wait!
One of these opportunities involved making the processes more efficient by taking advantage of the capabilities that technology offers. Improving accounting processes can yield significant improvements in accuracy, efficiency, and timeliness.
Because of the accounting system's centrality, however, there were several other important opportunities. For example, accounting's redesign offered the chance to confirm or change each of the following:
- Communication about what is important and what isn't - i.e. priorities
- NY's strategy for winning compliance with financial and other rules
- Role of information in organizational management
- Principles for delegation of authority
- Value of timeliness and accuracy
- Approach to risk management
- Degree of trust - i.e., the trustworthiness of employees and agencies
New York is still in the midst of their work. But I consider their starting point 'cool' in itself. After consideration, our clients decided to start with strategy!
Some the questions we asked New York's design team may be enlightening for your own state (or governmental unit). Try answering these 5 questions:
- What is your State's service operating strategy? What should it be?
Possibilities include:
- None - just get through each year
- Political - maximize gain, minimize pain with politicians
- Operational excellence - low costs, ok products/results, 'one size fits all' customer service
- Superior relationships - customized customer service, ok costs, ok products/results
- Product leadership - unique products or results ("Number one in...") ok costs, ok customer service
- What is your State's accounting strategy?
Possibilities include:
- None - every organization for itself
- Minimum required by GASB/ GFOA
- Support of state finance strategy or service/operating strategy
- Provide a finance or service strategy in the absence of one
- What are the working assumptions about the financial management capabilities of other agencies?
Possibilities include:
- Agencies generally are unable to manage their financial resources
- Agencies generally are competent at managing their financial resources
What role does the central accounting authority have in supporting agencies' ability to achieve their missions?
Possibilities include:
- None - they are on their own; it isn't our job to support them
- Limited - provide a basic system (perhaps with customizable components)
- Extensive - provide highly customizable system
What is your risk tolerance? What should it be?
Possibilities include:
- Very low risk tolerance regardless of potential benefits
- Reasonable risk in return for operational benefits - lower costs, improved products/results, better customer service
- What level of accounting risk is acceptable?
What level of accuracy? - One cent? One dollar? One thousand dollars? More?
What level of detail? (Currently, there were approximately 7000 object codes in New York.)
What level of consistency? (Should there be a single chart of accounts, a single vendor file, other?)
- What should be the control strategy underlying the central accounting system?
Who is the customer for control? What do they expect?
Possibilities include:
- Agencies
- Legislature/Governor
- Citizens
- Financial markets
What is most important - control of inputs or control of results? Which inputs? Which results?
Who is authorized to, and who is accountable for, control?
Possibilities include:
- Agencies
- Central Accounting Office
- Governor
Why is it that some people/agencies don't comply?
Possibilities include:
- They don't know they are supposed to
- They know they are supposed to but they don't know how
- They know how but they are not motivated
- They are capable but they simply refuse
What is the best way to get people to comply?
Possibilities include:
- Build support for standards
- Make standards performance based
- Teach compliers how to comply
- Make the compliance process easy
- Make central accounting accountable for its part of the compliance process
- Report compliance performance
- Treat compliers differently based on their performance
- Employ a continuum of consequences
- Rely primarily on enforcement (i.e. audits, prior approvals)
Now that you've answered these questions for yourself, you can peek at some of New York's answers:
- They recognized that it is extremely expensive to bring the accounting risk down to zero. They've decided to assume reasonable risk in return for reasonable return. By doing so, they expect to build in enhanced capabilities to flag larger problems even earlier.
- They're choosing to assume that the agencies - and the people within them - are competent and can be trusted. Their system will be designed to support the competent and trustworthy, with alternatives built in when those assumptions prove unwarranted. They're emphasizing the provision of information over oversight, such as monitoring or re-checking all the agencies' decisions. This means being "the watcher" is taking a subordinate role to helping agencies do a better job as fiscal managers. And, they're ready to delegate or withhold authorities to agencies based on individual track records of fiscal management.
- Recognizing that their authorizing legislation expects them to be 'the ultimate checker' of all expenditures, they have addressed their oversight responsibility through the expanded use of risk assessment models and statistical audits, rather than individual reviews of each and every transaction.
While many of the specific design questions are still being decided, I salute their choice to address strategy up front - and their hard work to date.
So watch out for your administrative systems. Budget, accounting, human resource and purchasing systems are built on twenty-year-old rules and assumptions. They are on autopilot - and not necessarily heading where you want to go. Remember to ask - "Do you know what your organization's strategy is? Does your accounting system know?" When an organization can answer YES to both questions, it has underlying processes with the potential to dramatically improve organizational performance!
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