THE RESEARCH PROPOSAL: FINANCIAL REPORTING FOR INTERNAL USE IN PURSUANCE OF LEVERAGING ORGANIZATIONS EFFICIENCY AND EFFECTIVENESS A Report/Essay by George Blekas CITY Liberal Studies Affiliated Institution of the University of Sheffield JAN 2007 PAGE 1 OF 17
EXECUTIVE SUMMARY Intention of the hereby research proposal is to shed some light into the domain of financial reporting in an alternative way, the one of financial data utilization as internal tool for organizations to leverage their performance in every axis possible. Most of the literature seems to focus and treat financial reporting in the context of law (i.e. reporting to comply with the legal framework) or control (i.e. auditing), which might be partially interpreted as a subcategory of the former. There are, however, bright examples of internal auditing focusing on a similar target, to facilitate improvement. The research to be performed is planned to utilize author s direct environment to formulate a case study, along with some questionnaire utilization which is to be also expanded out of the author s and into other similar organizations in order to provide data triangulation and assure the maximum impartiality possible. The reasoning behind such a research is, on one hand, the existence of somehow of a limited similar investigation (according to some preliminary investigation of relevant academic literature) and, on the other, author s belief, stemming from relevant professional experience, that not only an issue such as this is being overlooked, but that by addressing it properly it can facilitate significant improvements both directly, in monetary terms, and also indirectly, in managerial domain with, for example, improved decision making processes PAGE 2 OF 17
stemming in a framing context, based on financial reporting data, instead of the quite common - heuristic one. PAGE 3 OF 17
CONTENTS 1. INTRODUCTION...5 2. OBJECTIVES...6 3. FINANCIAL DATA & REPORTING IMPACT ON VARIOUS DOMAINS (E.G. PUBLIC & PRIVATE SECTORS, ACCOUNTABILITY, PROFITABILITY, ETC): AN OVERVIEW...7 4. METHODOLOGY...10 5. SUMMARY...13 6. LITERATURE REVIEW...15 PUBLISHED LITERATURE (BOOKS, JOURNALS, ETC)...15 PAGE 4 OF 17
1. INTRODUCTION The thesis scope is to investigate financial reporting utilization as part of organizations internal reporting addressed to its stakeholders in pursuance of enhancing efficiency and effectiveness. A preliminary investigation of already existed literature of such scope reveals that this is somehow limited and is focused mostly in auditing domain. Furthermore this is addressed mostly to executive stakeholders (i.e. top management) and shareholders, instead of low and mid-level management which might be contributing significantly to the final results. Having said this, it is to be investigated whether provision of financial data to the relevant stakeholders (e.g. low and mid-level management) can provide improvements in various domains and result in a chain reaction towards better financial results in both short and long-terms. This data are to be properly formatted, or simply used as the basis for formation of secondary data, depending on its usage and recipient (e.g. custom tailored for some front-line manager in production). Taking into consideration behavioural finance theoretical basis along with decision making processes, which is one of the domains to be impacted, in relation with author s direct experience, it can be stated that mostly heuristic level actions (i.e. decisions) are performed as part of managerial tasks. A PAGE 5 OF 17
desired outcome would be for these decisions to be based on a framing theme stemming from internal reporting, properly focused on mandatory attributes such as resources availability, cost allocation and control, etc. Other positive effects which might be expected could be improvement of operations, cost cutting with minimal quality impact etc. The latter can and possibly should be used in combination with some key performance indicators (KPI), or be part of some KPI. Similarly to this, a reporting mechanism can and should to the extent applicable be correlated with some total quality management system (TQM). The combination of the aforementioned could constitute a roadmap towards higher competitiveness and further leveraging organization s value. 2. OBJECTIVES The intention of the thesis to be elaborated is to investigate the correlation between financial reporting and business efficiency and effectiveness and moreover to provide the ground for such facilitation. More precisely: What type of data can, or should, be provided, to various managerial levels PAGE 6 OF 17
How these data should be presented in order to be as comprehensive and useful as possible for its recipient(s) Linkage with decision making processes Correlation with Key Performance Indicators (KPI) Identification of other potentially impacted domains and providing suggestions for future research evolvement 3. FINANCIAL DATA & REPORTING IMPACT ON VARIOUS DOMAINS (E.G. PUBLIC & PRIVATE SECTORS, ACCOUNTABILITY, PROFITABILITY, ETC): AN OVERVIEW A preliminary investigation of posterior literature revealed somewhat of limited availability. It is however comforting that these sources are spanning various domains in axes including governmental bodies, the private sector, suggestions of evolving financial reporting beyond the framework mandated by the law, internal control (e.g. auditing), etc. An interesting series of some longitudinal pieces of work, published by the U.S. Government Accountability Office (U.S. GAO, 2005) and focusing on the public section, is managing to address a time period stretching back to 1984 and extending up to nowadays. It is interesting seeing the historical evolution of this work which starts by addressing systematic processes as a tool towards improvement, managers accountability and increased awareness towards internal control (U.S. GAO, 1984); bringing up PAGE 7 OF 17
vulnerability assessments and commenting that these "did not provide management with a whole lot of reliable and useful information" (U.S. GAO, 1985); taken corrective measures delayed and/or failed to completely reduce identified weaknesses (U.S. GAO, 1987, p.6); improvement of internal control but results versus efforts not as intended, need for greater top-level leadership (U.S. GAO, 1989). Other pieces of work are focusing on the private sector where investigation is focusing on business growth and performance on SMEs (Macmahon, 2001) acknowledging management s complexity, addressing a holistic approach and arguing that improved financial reporting should be realistically viewed as simply part of a broader competence in financial management which, taken together with other functional capabilities, is likely to lead to more effective and efficient management of SMEs and significantly improve their prospects. In general, there is some controversy on the impact of financial reporting as a mean towards improvement. Thomas and Evanson (1987) support that there is not significant association between financial ratio usage and performance or profitability. In the same wavelength, Capon, Farley, and Hoenig (1990), investigating organizational, strategic, and environmental factors versus financial performance, concluded that the influence is not significant. Contradictory, Moores and Mula (1993), concerning the contribution of managerial control systems, along with financial reporting, in PAGE 8 OF 17
terms of survival and growth, identify increasing emphasis on financial reporting in-line with business growth. A notable question arising at this point, in the context of ambiguity about casual direction (Saunders et al, 2007), is whether thriving firms are doing so as a result of some financial data reporting utilization or, vice-versa, if they have implemented such reporting as simply some mean to present their robustness. In such a context, Holmes, Lindsay, and Shepherd (1990), investigating the correlation of operating a computer-based accounting system versus enterprise performance, are concluding that it cannot be determined from the results whether use of computer accounting systems leads to an increase in profits or whether more profitable firms tend to purchase computer accounting systems. Where there seems to be some convergence, is the part of plenty variables contributing to the overall picture (i.e. result) and thus why Stevenson and Harmeling (1990) are stating that Many things are necessary, but not sufficient in and of themselves for success. On a similar study, of management training versus SME performance (i.e. profits, growth, etc), Westhead, P., and Storey D. (1996) concluded that such a relationship is currently not well established. Further more they comment that if such a positive link exists, it... requires considerably more analytical sophistication than has been applied to date (p.18). PAGE 9 OF 17
4. METHODOLOGY The issue is considered to be tackled under the pragmatism research philosophy which focuses on the research question(s), instead of some unambiguous doctrine, and thus provides adequate room for further investigation and development by combining for example both positivist and interpretivism research philosophies. Most of literature and studies are focusing on perceived positive events, instead of negative ones which comprise research s minority, and thus a positivist approach is considered proper. Similarly, interpretivism, considering roles of individuals as social actors (e.g. supervisors, managers, etc), seems proper since it takes into consideration meaningful and crucial interactions taking place among the various entities and their roles. Based on author s belief stemming from the relevant managerial experience efficiency and/or effectiveness could be improved by proper utilization of direct or indirect financial information. Furthermore it is believed that association of financial data with KPI and productivity incentives has the potential of leveraging total efficiency and effectiveness in multiple domains (e.g. cost cutting). Having such hypothesis as a landmark, a deductive approach is mostly considered to be applied to test it. To do so some variables are to be defined PAGE 10 OF 17
in order to establish a measuring system, to be able to perform the hypothesis s testing to the maximum extent possible and, following this, to examine the outcomes and if applicable readapt the hypothesis in-line with the findings. A mix of research strategies is to be utilized. Setting such a target poses some risk of losing focus but provides additional headroom for testing the hypothesis under various observation angles. In due time, the research s focus might be brought into few or even one of these strategies, depending on the evolution of the research itself. In this framework a survey strategy is considered to be implemented, being able to achieve significant amount of data collection in a quite efficient way. A questionnaire approach is considered since it also allows for data standardization and comparability. Also a case study approach is to be considered since it can provide answers to key questions like why?, what? and how?. The latter two are also to be provided possibly even better by the survey strategy too and thus allowing triangulation of information to crosscheck that data interpretation is proper. The case study strategy, and as categorized by Yin (2003), is to be a single case (i.e. focusing in author s organization) with various entities (e.g. departments, high/mid/front-line managers) to be cases embedded within, while data collection is to be mainly through observation. The case study strategy presented hereby is to be performed in the frame of a practitionerresearcher. PAGE 11 OF 17
Concerning the research choice, and since both survey and case study approaches are to be implemented, the multi-method is to be applied, focusing on quantitative data. Following this data s analysis, some qualitative data collection, in the form of interviews with selected respondents, will be considered and thus the choice might be shifted to mixed-methods and more precisely possibly to mixed method research. This concept allows for a more custom-tailored collection of qualitative data, following the initial generalized portrait, and providing further added value to the thesis in question (i.e. a better targeted and more in depth investigation). The aforementioned ability of data triangulation is once more available, providing an additional advantage. For data collection the power of electronic correspondence (e-mail) is intended to be utilized, in order to achieve input in electronic form and thus facilitate more efficient analysis. Each request e-mailed to any participant is going to be as custom tailored for him/her as possible (as opposed to some generic template) in an attempt to achieve the highest response rate possible. With this purpose in mind some proper follow-up (e.g. reminder ) will be performed for the pending to be received responses (as long as the participant is an acquaintance, which will be the case for the majority of the participants as a result of active professional relationships). The time horizon approach to be taken is mostly the cross-sectional study. Some historical records are to be included but mostly as part of literature PAGE 12 OF 17
review instead of investigation of the entities under research. However, and when possible and applicable, referencing on prior statuses might be included. Last but not least concerning the methodology to be followed the issues of reliability, validity and ethics, are to be addressed, which are up to an extent interrelated and which are to be seriously taken into consideration to assure the highest objectivity, and standards in general, possible. Especially concerning ethics it needs to be mentioned that the research population is going to be properly informed about the research in question and its purpose, will be assured for anonymity preservation and the relevant data confidentiality, and, sequentially, of data utilization following proper consenting. 5. SUMMARY It is the author s belief that such a research might be able to provide useful insight into most if not all managerial levels, concerning financial data usage as an advancement tool of both individuals and organizations performance (i.e. efficiency and effectiveness). A potential implication might be some shifting of front-line management towards more administrational issues (e.g. studying of the provided data) PAGE 13 OF 17
instead of purely operational ones. Such an impact could not be considered a negative one as long as some proper balance will be kept in order to prohibit the front-line managers transforming into white collars workers. Other implications include the correlation of such a scheme with KPI and sequentially with monetary rewards, as some motivation platform, resulting in some win-win situation for both shareholders (i.e. through leveraged organization s value in the form of lower cost, higher competency, higher competitive advantage, etc) and employees (i.e. through higher net salary). PAGE 14 OF 17
6. LITERATURE REVIEW PUBLISHED LITERATURE (BOOKS, JOURNALS, ETC) Capon, N., Farley, J.U., and Hoenig, S. (1990) Determinants of Financial Performance: A Meta-Analysis. Management Science, 1990(October), p.1143-1159. Holmes, S., Lindsay, N.J., and Shepherd, B. (1990) Computerised Accounting Systems and the Performance of Small Business. The Growing Small Business: Proceedings of the 5th National Small Business Conference. Ed. KM. Renfrew and C. McCosker. Newcastle, New South Wales: Institute of Industrial Economics, University of Newcastle, p.326. Macmahon, R. (2001) Business Growth and Performance and the Financial Reporting Practices of Australian Manufacturing SMEs. Journal of Small Business Management, 39(2), p.152-164. Moores, K. and Mula, J. (1993) Managing and Controlling Family Owned Businesses: A Life cycle Perspective of Australian Firms. Gold Coast, Queensland: Research Report, Bond University. Saunders, M. et al (2007) Research Methods for Business Students. 4 th Edition. Essex, Financial Times Prentice Hall, p.151. PAGE 15 OF 17
Stevenson, H., and Harmeling S. (1990) Entrepreneurial Management's Need for a More 'Chaotic' Theory. Journal of Business Venturing, 1990(January), p.11. Thomas, J., and Evanson, R.V. (1987) An Empirical Investigation of Association between Financial Ratio Use and Small Business Success. Journal of Business Finance and Accounting, 1987(December), p.555-571. U.S.A. Government Accountability Office (2005) Financial Management: Effective Internal Control is Key to Improving Accountability. Washington D.C.: US Government Accountability Office (GAO-05-321T). U.S.A. Government Accountability Office (1984) Implementation of the Federal Managers Financial Integrity Act: First Year. Washington D.C.: US Government Accountability Office (GAO/OCG-84-3). U.S.A. Government Accountability Office (1985) Financial Integrity Act: The Government Faces Serious Internal Control and Accounting Systems Problems. Washington D.C.: US Government Accountability Office (GAO/AFMD-86-14). U.S.A. Government Accountability Office (1987) Financial Integrity Act: Continuing Efforts Needed to Improve Internal Control and Accounting Systems. Washington D.C.: US Government Accountability Office (GAO/AFMD-88-10). U.S.A. Government Accountability Office (1989) Financial Integrity Act: Inadequate Controls Result in Ineffective Federal Programs and Billions PAGE 16 OF 17
in Losses. Washington D.C.: US Government Accountability Office (GAO/AFMD-90-10). Westhead, P., and Storey D. (1996) Management Training and Small Firm Performance: Why is the Link So Weak? International Small Business Journal, 1996(July), p.13-24. Yin, R.K. (2003) Case Study Research: Design and Method. 3 rd edition. London, Sage. PAGE 17 OF 17