Accountancy & Management: Backwards is not the way forward: A challenge to traditional accounting systems offers a business opportunity, reports Roger Trapp

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BRITAIN'S accountants have a lot on their plates. Just as they are trying to digest the implications of the draft report of the Cadbury committee on corporate governance, along comes a strange new arrival that threatens to diminish, or at least alter, their role.

Much attention is being given to the debate over Cadbury and such connected issues as the 'expectation gap' relating to auditing. But this at least acknowledges the profession's continuing importance in the nation's business life.

The new arrival is challenging because it takes as its starting point dissatisfaction with financial measures to assess how well a business is performing. Many companies have shunned the stock market in favour of the private sector to avoid being judged by their share price and because they feel that analysts and investors lack adequate understanding of the cycles of business and the need for long-term investment. Moreover, even leading listed companies on both sides of the Atlantic have sought techniques besides profitability to measure their performance.

What is different, says Professor Robert Eccles of Harvard Business School, is 'the intensity and nature of the criticism directed at traditional accounting systems'.

In his influential Harvard Business School article of last year, The Performance Measurement Manifesto, Prof Eccles writes that academics and practitioners alike have begun to show that accrual-based rules and theories are obsolete and can even be harmful. The numbers produced by these systems often fail to support the investment in new technologies and markets essential for success in the global markets in which most companies now compete.

The result is that those businesses that do not seek the sanctuary of the private sector are forced to play the earnings game, in which there is a strong incentive to indulge in manipulation in order to produce what the investment community is seeking.

This is bad enough, but some managers are finding that this approach is not suited to the demands of the modern market. Income-based financial figures look backwards. What businesses need now is help assessing future performance.

The impetus for this, though, is not merely business-led. It is also wrapped up in discussion of the company's future place in society and the increasing demands made on it by the consumer.

The Royal Society for Arts, Manufacture and Commerce (RSA) recently initiated a detailed inquiry on 'Tomorrow's Company', which tries to take debate beyond the confines of the Cadbury recommendations. The RSA's programme director, Mark Goyder, indicated last week that the central issues initially were the changing international perspective; company purpose, obligations and changing definitions of success; and new measures of success.

But these form part of a larger investigation that is taking in such developments as the Government's expectation that business will have a growing role in education and the community, as witness the rise of Business in the Community, which celebrates its 10th anniversary this week. There are also the conflicting demands of investors, employees, suppliers and customers (increasingly being grouped under the new heading of 'stakeholders'); the acknowledgement by even a Conservative government that business cannot act in a totally unfettered way and that there is a need for regulation; and the power of single-interest pressure groups to put such issues as the environment at the top of companies' agendas.

Last week, the RSA launched the Performance Measurement Foundation, a forum that aims to unite those working to add customer satisfaction, quality and market share to the measures of success. It will bring together representatives from the boardroom, public sector, business schools, professional associations, institutional investors and other interested parties to develop best practice in these areas.

Progress has already been made with the issue of quality. Recognising the value of quality as a powerful weapon in the battle for market share, many businesses in the Eighties devoted significant resources to develop such measures as defect rates and response times to assess the performance of not just products but also service.

In addition, the concept of 'total quality' took off and a British standard was developed. The Government and large companies began to insist on their suppliers meeting these requirements.

Similar trends are beginning to take place with customer satisfaction. The problem is that adherence to high standards of quality and customer satisfaction does not traditionally sit well with financial measurement criteria. Although it may make long-term business sense, in the short term it results in higher costs. However, the difficulty is not so great if a company's competitors are also grappling with these new criteria. Which is where the new buzzword of benchmarking comes in.

A measurement technique that emphasises non-financial criteria, benchmarking involves identifying competitors and/or companies in other market sectors that in some way exemplify best practice and then comparing your own performance with theirs. Such an approach is more effective than those concentrated inwards, say its advocates, because it avoids complacency and applies competitive urges to the genuine competition rather than internal rivals.

So why was it not introduced across the board years ago? There are two main reasons. It is easier to stick to the old, if no longer so trusted, ways of financial reporting. And it is difficult to draw together all these strands of measurement into one meaningful string.

The solution to both may lie in information technology. Ever-improving and cheaper hardware and constantly developing software give companies the means to embrace the new thinking. And the good news for accountants is that companies will need a lot of help dealing with this on a practical basis even if they have accepted it in theory.

Accordingly, says Prof Eccles, the accounting firms have 'what may be the single most critical role in the revolution'. They can inhibit its progress in defence of the status quo, or recognise the opportunity the new approaches offer to their consulting practices. They will be able to hold the hands of companies as they venture into the unknown, and also have the chance to develop measurement methods that are common to one industry or cross divides.

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