Leone, Rudolph L.

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eGrove (Univ. of Mississippi)

Management Adviser Volume 9 Number 5 Article 8 9-1972 Accountant's Role in a Controlled Society Rudolph L. Leone Follow this and additional works at: https://egrove.olemiss.edu/mgmtadviser  Part of the Accounting Commons, Business Administration, Management, and Operations Commons, and the Management Sciences and Quantitative Methods Commons Recommended Citation Leone, Rudolph L. (1972) "Accountant's Role in a Controlled Society," Management Adviser: Vol. 9: No. 5, Article 8. Available at: https://egrove.olemiss.edu/mgmtadviser/vol9/iss5/8 This Article is brought to you for free and open access by the Archival Digital Accounting Collection at eGrove. It has been accepted for inclusion in Management Adviser by an authorized editor of eGrove. For more information, please contact egrove@olemiss.edu. Wage and price controls are not likely to go away, this writer feels. Rather, controls are likely to be extended to new areas. And it is the accountant, it is argued, who must evaluate each new control, its value, and efficiency—THE ACCOUNTANT’S ROLE IN A CONTROLLED SOCIETYby Rudolph L. LeoneLaventhol Krekstein Horwath & HorwathGovernmental controls are likely not only to remain with us, but also to be extended to new areas. We now have price and wage controls in peacetime. We are likely to see ecological controls before long.To those who would like to think of controls as a temporary phenomenon soon to disappear, it must be disconcerting to note that they have been introduced by a conservative administration about to seek reelection and not in need of problems (if any administration ever is). Nor is reassurance to be found in the failure of both fiscal policy and monetary policy to cope effectively with inflation, a failure that is not to be attributed to one side or the other of an economic debate, but rather to current eco­nomic theory in general.There are many factors contrib­uting to the failure of macroeco­nomics: doubtful quantification of qualitative data; defective meas­urement of legitimately quantified data; delays in gathering data for use in making decisions; difficul­ties in analyzing complex inter­relationships; uncertainty in inter­preting variations that are small in relation to total figures; and in­sufficient understanding of psycho­logical responses to policies and conditions. With so much uncer­tainty impeding efforts to give di­rection to the economy through policies that are thought to guide the decisions of the individual en­terprise through the operation of economic laws, governmental ac­tion has fallen back on policies that affect the individual enterprise directly. Instead of combating in­flation primarily by making money tight, we control prices and wages.Direct control over incomes may be necessary for another reason: namely, the powerful influence on September-October, 1972 51inflation of issues related to dis­tribution of income. Growing de­mands for service and facilities in the fields of health and education would, if met, channel more funds in those directions. The emerging ascendancy of service industries over manufacturing tends to chan­nel demand more and more toward a sector of the economy where productivity gains are slow in com­ing. Nevertheless, wage-earning groups demand ever larger shares of the total pie, until the increases we manage to achieve in produc­tivity cannot keep up with all that has been given away—in some in­dustries, at least. Thus are the fires of inflation fed.In the near future, we can fore­see mounting pressures for redis­tribution of income from other quarters. Ethnic groups and the women’s liberation movement are making demands that cannot long be ignored. In a fair assessment, some of the changes sought may be non-inflationary. For instance, when qualified people move up­ward into jobs that make better use of their abilities, their higher pay is justified by increased pro­ductivity. At the same time, it must be conceded that some inflationary changes are morally irresistible. For example, equal pay for equal work, where such equality has not existed up till now.All in all, it is not easy to be sanguine about the prospects for early removal of wage and price controls. Nor can we avoid recog­nizing the cogent reasons for ex­pecting a new set of controls to contend with our ecological prob­lems of pollution, overconsumption of scarce materials, and unbal-RUDOLPH L. LEONE, CPA, is partner-in-charge of the Chicago office of Laventhol Krekstein Hor­wath & Horwath. He was formerly in charge of the firm's Norfolk and Cleveland offices. Mr. Leone is a member of the American Institute of Certified Public Accountants and the Il­linois Society of Certified Public Accountants. He received his baccalaureate from Long Island University, New York.ancing of the processes of nature.Suggestions for cleaning up our environment are essentially exten­sions of accounting practice in charging clean-up costs to the products that create the mess. In moving from factory cost account­ing to intercompany charges and credits, we enter familiar govern­ment grounds of taxes and sub­sidies as the means for transferring funds. The snag is likely to develop in defining and measuring pollu­tion with fairness to all parties.Likewise with other ecological programs. Conservation of mate­rials will require definition, meas­urement, and reporting of inven­tories on a national scale. And preservation of the balance of na­ture requires much definition be­fore any sort of meaningful report­ing can be contemplated. Never­theless, the inevitability of con­trols can hardly be doubted.Consider the alternatives. Un­bridled selfishness is intolerable; and voluntary restraint has its limi­tations. First, those who refuse to go along enjoy economic advan­tages over the conscientious ones. Second, laissez-faire traditions of­ten produce a backlash of sym­pathy for “individualists” who chal­lenge the rules. (Even in sports, the “dirty player” is likely to ac­quire a following all his own.) Third, group self-sacrifice leads to feelings of being put-upon, and finally to frustration, which is poli­tical dynamite; it creates a climate in which demagoguery can flourish. Fourth, a program of voluntary re­straint requiring full public sup­port can only survive while a recog­nizable national emergency exists.Perhaps the best we can hope for is a system for limiting controls to those industries where they are demonstrably necessary. To begin with, there are the industries where consumers have lost their tradi­tional market influence over prices. While this list includes some of our most important and influential in­dustries, it would still leave a siz­able number of industries to oper­ate in a free market. The advan­tages are obvious: the control mechanism is less likely to become overloaded; political considerations and unrealistic pricing would not invade the uncontrolled area of the economy; and evasions of law would be averted.This brief survey of the outlook for controls suggests a role for accountants in defining and meas­uring the things to be controlled; in designing and installing systems for reporting activities; in provid­ing feedback information for com­pliance; and in recommending ex­tension or relaxation of specific controls in certain areas. Chances are that some of these functions will be thrust upon accountants willy-nilly. It behooves us to be prepared to meet these challenges.To stop there, however, would be to shirk responsibility that ought to be recognized as truly belonging to accountants by virtue of training, experience, and apti­tudes. Moreover, accountants tra­ditionally maintain an attitude of detachment while enjoying oppor­tunities for familiarization with the operations of the individual enter­prise. The proper course for ac­countants is manifestly to place these assets at the disposal of both business and government.Input/output analysis is guideAs advisers to business, account­ants might begin by developing a body of expertise in interpreting official policies and assessing their impact. Input/output analysis pro­vides a benchmark of interindustry transactions from which to con­struct pro forma input/output esti­mates that contemplate shifts in consumption, production, and use of materials. The problem with input/output analysis is that it cannot by itself accommodate such changing relationships as are brought about by substitutions of synthetics for commodities, or by price changes, or by economics of scale (as demand grows). But an input/output chart can offer a use­ful, if imprecise, picture of the en­tire economy, illustrating relation­ships between industries. This pic-52 Management Adviser. . . accountants might begin by accumulating data on how individual enterprises react . . .ture can serve as a starting point from which modifications can be estimated.As advisers to government, ac­countants might begin by accum­ulating data that will permit more accurate evaluations of how indi­vidual enterprises react to various policy changes, and to predictions of change. The failure of macro- economic policy is attributable in part to a paucity of information on the precise impact of specific poli­cies on specific industries and en­terprises, and on the way that managements adjust to the situa­tions they find themselves in. A great deal of imaginative thinking will be required to fill this infor­mation gap. Accountants ought to do more to join in the effort to find solutions.One direction that we might take is to extend industry’s exper­tise in the field of budgeting to a reporting structure that would par­allel the reporting of actual finan­cial data, in the hope of overcom­ing problems associated with time lags between the occurrence of significant events and the aware­ness of them. Each company’s bud­get reflects its management’s cur­rent expectations as to volume of activity, material consumption, labor requirements, expenditures, and earnings. There may be biases, to be sure, very likely on the op­timistic side. But analysis and in­terpretation may be able to eval­uate these biases in time. Aggre­gates of budget data from many sources may then prove to be highly reliable, as random errors cancel out and adjustments are made for observed tendencies to­ward over- or understatement.Such budget aggregates would be quite useful in analyzing changes in plans and expectations. Com­parisons of projected figures with actual data of past periods might help to reveal trends before they fully develop. Revisions of budgets, reported monthly or quarterly, would indicate changes in opinions and outlook, supported by recent occurrences. And variance reports of actual versus budget would pro­vide feedback for evaluation of earlier conclusions, and of the pro­cess of budget aggregation itself. Not only would budget aggregation improve the timeliness of available data tremendously, but it would also emphasize change and rate of change. The impact on the whole structure of decision making by government and industry could be considerable.Incidental to this discussion, per­haps we should note that the time may not be far off when independ­ent accountants will be asked to certify to the reasonableness of budgets or the soundness of the methods by which they are pro­duced. Investors prefer to look ahead and to evaluate a company’s prospects from forecasts that relate to economic trends, rather than rely exclusively on historical pat­terns and the hope that they will continue. Increased utilization of budgets to satisfy the wants and needs of investors would fit very well with the use of budget aggre­gates in establishing economic pol­icy, as advocated in this article.In addition to collecting and aggregating budget data, we can improve the timeliness of reporting by gathering information on pur­chase contracts and agreements. A company’s total position in a com­modity, for example, includes its open contracts as well as its inven­tories. And its total position may indicate something of the manage­ment’s views on the trends of prices and business volume.Inventory data might be im­proved also by aggregating figures that indicate substitutions of one material for another. Also, shifts in quality and price are of interest. And analytical methods should be employed to study the implications of changes in the aggregates for these characteristics. Improved clas­sification of inventories might offer useful clues to trends of ecological importance. There are opportunities for gaining insight into the work­ings of the economy through ex­panded reporting and interpreta­tion of inventory data. Accountants ought to concern themselves with this area more than they do.Improving productivityAnother field of considerable im­portance is productivity: its meas­urement and improvement, as well as the manner in which the bene­fits of improved productivity should be distributed. And if distribution problems are deemed to be the special province of economists, then perhaps what I am suggesting is that accountants are economists, a fact that few people doubt, but not many accountants live up to, in terms of meeting the responsi­bilities implied.The measurement of productiv­ity raises difficult problems of valuation. Perhaps they can never be resolved to everyone’s satisfac­tion. Nevertheless, we have a few things going for us as accountants in this area. In cost accounting, in financial statement presentation, and particularly in reporting inven­tories, we have been coping with many facets of evaluation for a long time, exploring possibilities and weighing alternatives to meet various purposes and needs. We have also learned to be objective in our approach; and we have de­veloped and emphasized concepts of fairness, largely for our own guidance. In taking on the chal­lenge of measuring productivity, we can justifiably show confidence in our methods.Improvement of productivity is one of the purposes of those among us who specialize in management advisory services, systems analysis,September-October, 1972 53Should each industry keep its own productivity gains intact, or should all industry and the entire work force share in productivity gains generally? As a corollary question, and one of great significance, should the service industries stay permanently behind in raising wages?and information systems. Some seek to improve systems and procedures directly to accomplish more work at less cost; while others provide operations managers with informa­tion for planning and control. Either way, accountants have long accepted responsibility for encour­aging productivity. Techniques for allocating resources so as to maxi­mize profits may also be considered as methods for promoting the pro­ductivity of available resources. Thus, capital budgeting and linear programing may be counted among the tools that accountants use to increase productivity.In the area of productivity, per­haps the trickiest questions of all arise in connection with equitable distribution of the gains from in­creased productivity. While bar­gaining power may always remain the chief determinant of distribu­tion patterns, nevertheless, there is a need for a reference point to be established in each case with ob­jectivity, judgment, and fairness. Accountants are particularly well qualified to address themselves to such problems. Since increased productivity is widely considered to be the key to containment of inflation, every effort to encourage productivity must be valuable. And what better source of encourage­ment is there than equitable distri­bution of benefits derived?However, equitable determina­tions are not at all obvious in many cases. When higher productivity comes from improved machinery, those who operate the machines may or may not need a higher level of skill. How much of the gain should be awarded to them? And how much should go to the de­signers of the new machines, to those who build them, and to those who provide the capital for putting them to use? For that matter, how much of the gain should go to the consumer? Similar, though not identical, considerations apply when higher productivity is achieved through improved methods and in­novations.Additionally, there is an even more basic question: Should each industry keep its own productivity gains intact, or should all industry and the entire work force share in productivity gains generally? As a corollary question, and one of great significance, should the serv­ice industries stay permanently be­hind in raising wages? This ques­tion leads to another dilemma: If the answer is yes, then how are the service industries to be held down; and, if the answer is no, then how are they to be given a fair share?Perhaps we will do well to avoid such questions as these as much as possible by resorting to the mar­ket mechanism, negotiation, and compromise. In any case, the ulti­mate solutions are likely to be practical rather than theoretical. Still, as we noted before, reference points can be very useful; and if these reference points need to re­flect considerations of a practical nature, then accountants are even better qualified to produce them, by reason of the close association of accountants with practical mat­ters in all their work.SummaryThere can be no doubt that our national economic problems would be more tractable if we had con­siderably more information of the sort that arises with individual en­terprises. Both macroeconomic poli­cies, that influence the economic climate for doing business, and microeconomic policies, that affect individual companies directly, can be expected to pursue their pur­poses with greater assurance of success if we define and measure precisely the effects of government actions on managerial decisions and business transactions.To further this end, accountants should become involved in a con­certed effort to define, classify, measure, and collect data on a great many variables in the busi­ness world. In particular, accoun­tants might concern themselves with aggregates of corporate budgets, nationwide inventory analysis, and studies of productivity.54 Management Adviser

Accountant\u27s Role in a Controlled Society

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Accountant\u27s Role in a Controlled Society

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