Student Essays

What are the limits of "creative accounting"?

The adjective creative accounting is probably the most unexpected one to be connected to accounting as one of the many jobs where strict rules and frameworks have to be followed.


However, there is a certain room for creativity when it comes to the legal manipulation of a company’s Financial Statements – creative accounting.[1]


The desired outcomes using this concept are of different nature. Mainly creative accounting is used to portray what the management is willing to show its stakeholders.[2]


It is obvious that there have to be certain limits to the application of creativity in accountancy according to its rule-based nature.


Thus it is standing to reason to first name the legal basis of accounting as the most important limit of creative accounting. For International Accountants, International Financial Reporting Standards (IFRS) provide the legal framework for all accounting related practices.[3] However, there are other important aspects that restrain the manipulation.


One perspective that has to be taken into account is the ethical viewpoint. Since creative accounting is generally perceived as a negative practice in today’s society, accountants using this practice are often considered unethical.[4]


However, the question arises whether it is even possible to turn away from creative accounting completely concerning the implications of corporate governance. “Corporate governance is about giving to the managers a unique objective: maximizing the profits and dividends. Corporate governance is, thus, the end of the managers’ era.”[5] This affirmation claims that managers are not given the choice to manipulate their books, but they are rather forced to turn to this option in order to achieve the goals required by corporate governance.


Consequently, creative accounting is limited by legal and ethical aspects, but at the same time it seems to inevitable in order to satisfy the organization’s goals.


Author: Verena Klaebe (May, 2016)

[1] Uşurelu, Valentin I.; Marin (Nedelcu), Mioara; Danailă (Andrei), Alina E.; Loghin, Daniela: Accounting Ethics – Responsibility versus Creativity, Annals of the University of Petroşani, Economics, Volume 10 No.3, 2010, p.352

[2] Shah, Dr. Syed Z. A.; Butt, Dr. Safdar: Creative Accounting: A Tool to Help Companies in a Crisis or a Practice to Land Them into Crises, 2011 International Conference on Business and Economics Research IPEDR Vol.16 (2011) © (2011) IACSIT Press, Singapore, p.97

[4] Uşurelu, Valentin I.; Marin (Nedelcu), Mioara; Danailă (Andrei), Alina E.; Loghin, Daniela: Accounting Ethics – Responsibility versus Creativity, Annals of the University of Petroşani, Economics, Volume 10 No.3, 2010, pp.349-356

[5] Shah, Dr. Syed Z. A.; Butt, Dr. Safdar: Creative Accounting: A Tool to Help Companies in a Crisis or a Practice to Land Them into Crises, 2011 International Conference on Business and Economics Research IPEDR Vol.16 (2011) © (2011) IACSIT Press, Singapore, p.101


Is it a good idea to give the freshly hired Management Accountant the responsibility for the budeting process?

Budget management is a significant tool to manage the expectations with acquiring and applying resources efficiently. It requires the participation of all processes and all departments with combining planning, controlling and evaluation together. Due to the complexity of the organization of companies, it is mandatory that the budgeting process can be implemented systematically. As stated by CGMA (2016), a company that has a robust management accounting system is a company that is powered up for success. The management accountant in this system is just the one who can support with the success. However, it’s risky to ask a newly on boarded management accountant to be in charge of the budgeting process immediately, although he/she may have already the knowledge on budgeting.


First of all, one primary requirement of budgeting is the knowledge on the fundamentals, for example, the overall production processes and the chain of capital turnover. If the management accountant has no clue on how the company was operated in the past, it would be hard for him to draft the targeted budget. One may argue that if the freshly hired management accountant is responsible for the budgeting process, he can learn the company situation with a faster pace. But such an accountant cannot just imagine some numbers randomly for the planning!! If a budget is unqualified, it will possibly encumber the normal operation of a company.


Secondly, professional management accountant should be equipped with not only the knowledge on budgeting, but also the ability on communication. Horngren, Harrison and Oliver (2011) argued that a comprehensive budget usually involves all segments of a business. As a result, representatives from each unit are typically included throughout the process. In this case, management accountant is not working alone in a company. Therefore he/she has to be able to coordinate different departments and communicate efficiently. A new comer may have limited resources on communication and insufficient experience on internal cooperation.


Thirdly, management accountant supports deeply with the process of strategic planning. Today and moving forward, there’s a shift in emphasis from a historical to a predictive view of strategy and operations (Cokins, 2013). It’s not an easy task to make relevant information available to decision makers. According to Aver and Cadez (2009), more than 75% of surveyed accountants were found to be more or less actively involved in activities associated with strategic management processes, such as developing the mission, establishing strategic objectives, formulating and selecting best strategies, translating strategies into budgets etc. This process depends on the particularity of the process and the management accountant’s experience. To some extent, a greed hand will need to handle the affairs with proper guidance.


As a conclusion, it deserves to consider twice when assigning a new management accountant as the main responsible for budgeting process due to its complexity and particularity. However, it makes sense to ask the freshly hired management accountant to be involved into the process as a supporter. Therefore he/she can on one hand learn the internal processes with practical experience; on the other hand, he/she can cultivate a good relation with the departments and gain the views about the strategic management.



Author: Jixin Zhou (April 2016)





Aver, B. and Cadez, S. (2009). Management accountants' participation in strategic management processes: A cross-industry comparison. Journal for East European Management Studies, 14(3), 310-322.


CGMA. (2016). The CGMA Perspective: Why Management Accounting is Integrated Thinking. Journal of Accountancy, 221(3), p.46.


Cokins, G. (2013). Top 7 Trends in Management Accounting. Strategic Finance, 95(12), 21-29.


Horngren, Harrison, Oliver. (2011). [ONLINE] Available at: [Accessed 25 April 2016].





If budget is the game machine of the companies, then budgeting process (BP) is the battle field which set up the rules and goals of the game. BP involves management planning and exercising control (Schönbohm, 2016). It is central to the functions of management accounting. Management accountants (MA) are charged with the responsibility of overseeing the formulation of the annual budget (McVay, 2015). They work together with other managers to plan the performance, investigate variation from plans, revise and make new plan based on market feedback and their own experience (Horngren, Datar & Foster, 2006). This responsibility leads to a very important role of MA in implementing company strategy. Therefore various aspects of professional conduct concerning competence, confidentiality, integrity and objectivity of MA is emphasized by professional accounting organization (Horngren, Datar & Foster, 2006).
The freshly hired MA may well equipped with theoretical knowledge or former work experience. However BP requires knowledge highly specific to industry, business models and strategy of the companies. The gap of these knowledge weaken MAs’ capability to challenge and justify input from operational managers in details. Over generic assumptions and estimations result to unrealistic goals and defeat the subsequent controlling effort. In addition, freshly hired MA being not familiar with the environment will increase the risk of failing to identify bottlenecks and causes delay in the whole budgeting cycle. BP also requires technical skill to manage tools like the most commonly used Microsoft Excel. Complex templates are built over time to cater for the dynamic and diverse nature of BP. Without guidance, it is challenging for freshly hired MA to master these templates. A small mistake may result to complete misstatement of the budgeted financial statement. In terms of personal competence, BP require strong coordination, communication and navigation skills across all levels in the company. Since personal competence cannot be easily appraised at the infant phase of MA employment, this imposes further burden and pressure on BP.
From a positive perspective, freshly hired MA may bring new dimensions to creative BP and discover new predictive analysis or tools for improvement. Since they are new, they carry less or even no bias. Ideally, managers strive to make budgets accurate and free from bias (McVay, 2015). BP also offers steep learning curve to new MA within a short period of time.
Considering the pros and cons discussed above, the risks outweigh the benefits of giving responsibility of BP to freshly hired MA. One can conclude that it is not recommended to simply take this step without providing guidance and supervision to freshly hired MA. A mix of fresh and experienced team of MA could be a more optimum solution."


Author: Min Seng Kok (April 2016)


Horngren, Datar & Foster, 2006, Cost Accounting: A Managerial Emphasis, Twelfth Edition, Pg 16, 182, Pearson Prenntice Hall
McVay, 2015, The Effect of Compensation Scheme, Source Creditability, And Receiver Involvement On The Organizational Budgeting Process, Academy of Accounting and Financial Studies Journal, Volume 19, Vol. 19 Issue 3, p217-234. 18p.
Schönbohm, 2016, Technical Notes On Budgeting




“Delegating means letting others become experts and hence the best” (Firnstahl 2016, Quote of the Moment) (cf. Firnstahl 2016, Quote of the Moment). This quote emphasizes that delegating control bears several benefits for both, the company and the employee assigned control. Thus, the following one-pager essay will state that it is a good idea to give the freshly hired Management Accountant responsibility for the budgeting process. By doing so it claims that by delegating this task the new employee is given a positive, value-adding role regarding the budgeting process and the entity as a whole.
The first supportive point becomes visible by considering the definition of a budget and its creation. “The budget […]is an aid of directing the business” (Millians 1947, p.66) (cf. Millians 1947, p.66). Also, it involves formulating (strategic) objectives, action plans and resource planning (cf. Beaudry and Sera 2007, p. 1). Thus assigning the new Management Accountant the task of budgeting provides him with helpful insights into the company’s goals and tasks. Since budgeting also requires input from stakeholders and upper-level managers, the Management Accountant feels immediately involved in the business and can gain valuable insights into its dynamics. Assigning him the task of budgeting can be considered not only a helpful preparation for future responsibilities but also a great means to provide him with training by challenging his skills (cf. Millians 1947, p. 66f).This point is further emphasized by Prof. Scott Williams, who outlines that delegating the budgeting provides opportunities for growth and change for the new Management Accountant in duty. By doing so he receives “a certain degree of discretion” (Williams 2002) and gets empowered in his role. Moreover, quality is promoted which in turn can lead to an ongoing process of capability improvement. Additionally, delegation of the task provides immediate feedback to the employee that the company respects his abilities and that his decision-making is trusted. As a consequence this leads to increased commitment to a successfully complete the assigned tasks which feeds back into a greater level of motivation. In order to achieve the budget, the work performance will then be sought to be increased to stick with the plan. With respect to the successful accomplishment of the budgeted plan there is another argument in favor of delegating the budgeting, namely motivation spillover. This refers to the incorporation of staff of different departments such as the sales department into the achievement of budgeted numbers (cf. Williams 2002). Also regarding the business as a whole, the delegation of control to the new accountant is a good idea. Assigning him the tasks on the one hand means that that somebody down the hierarchy takes control of the budget, which partially eliminates the top down mandated budget process. On the other hand can the newly hired accountant be seen as a valuable source of providing new insights into the strategic goal setting and planning which haven’t been in place before (Lewthwaite 2000,p.680fff.)
To put a long story short, the delegation of control of budgets to a new Management Accountant can be seen as a way to greatly increase the chances of success for the budget. For the new Management accountant it provides a means to understand the dynamic processes arising in the entity at faster pace and contributes to a continuous training and development process. Due to increased motivation the performance regarding the accomplishment of budgets is improved which leads to cross-departmental benefits with respect to sales performance, spending and involvement of employees.


Author: Louisa Keller, April 2016


Beaudry, S. and Sera, Y. (2007): Budgeting.Social Development Department-The World Bank. Available at: (accessed 04/24/2016), p.1
Firnstahl, T. (2016): Chote of the moment-on delegation. Book of famous quotes. Available at: (accessed 04/24/2016).
Lewthwaite, J (2000 ): Chapter 26 – Budgets. Everything You Need for an NVQ in Management.p. 680 fff.
Millians, P.M. (1947): Profit Planning & Budgetary control. Accounting Review. Jan1947, Vol. 22 Issue 1, p.66f.
Williams, S. (2002): Delegating strategically. Wright State University Leader letter October 10 2002, available at: (accessed 04/24/2016)

What are the Limits of the Altman's Z-Score?

There is no doubt that managing company`s receivables has become extremely important in the recent years. The poor receivables management may decrease cash flow and cause bad debt expense. At the same time the optimum credit policy increases the efficiency of the company`s performance and maximizes its value.


Ideally companies would like to get cash immediately, but it`s highly unrealistic. That`s why they must establish a policy for credit terms given to its customers. But how can companies be sure that the debtors are trustworthy and eventually will pay back? The answer is - by checking and monitoring their financial health.


One of the tools that helps to predict bankruptcy is the Altman`s Z-Score model, which measures 5 key performance ratios. Each of these five financial ratios can be used individually to assess credit risk. According to David Kirk[1], «the giant step of Z-score was to combine them objectively using robust statistical techniques and hard data». Although this model has been used for more than 50 years, many professors of economics and finance point out limitations which it includes.


Firstly, Jeffrey Lui indicates[2] that model`s accuracy has decreased in recent periods than that reported in Altman`s study. The reason for that is the wrong assumption that the model remains stable across economic conditions which constantly change. The environment, in which the Altman`s research was conducted, was absolutely different from today`s. That leads us to the fact that the model is outdated and cannot be accurate.


Secondly, Altman focused on the one particular industry - all of the 66 sample companies were manufacturing. According to Platt and Platt (1991) or Steven Hall (2002), each industry has different characteristics so it`s also inaccurate to apply the model for all industries.


Thirdly, Altman himself doesn`t view his model as perfect, indicating 4 issues[3]: «subjectiveness in the weightings, an element of ambiguity within the model, the univariate approach and some misleading ratios». For example, he agrees that the 4th ratio is difficult to use for non-public companies, because the market value of equity is based on stock prices. Moreover, he thinks that the 5th ratio (Sales/Total assets) doesn`t show the difference between failed and non-failed companies and doesn`t reflect any variations among industries.


Furthermore, Morten Reistad Aasen states[4] that the model uses unadjusted accounting data. Some changes in balance sheets and income statements can seriously alter the results, so that the model is also not immune to false accounting practices.


Although the Altman`s Z-score model has to be proven as a reliable tool for predicting insolvency and is still widely used, we should keep the limitations mentioned above in mind and understand that it`s not valid in every situation.



Author: Luidmila Nikitina (April 2016)




[2] Jeffrey Lui, «Estimating the Probability of Bankruptcy: A Statistical Approach» []

[3] Altman, «Predicting financial distress of companies: Revisiting the Z-score and Zeta Model»

[4] Morted Reistad Aasen, «Applying Altman`s Z-Score to the Financial Crisis»






95% of the predictions made by the Altman Z-Score are supposed to be accurate. This is a powerful statement if you look at how this can be used by companies. Every merger, every cooperation between two firms and every customer selection could be assessed by this Score and would be heavily influenced by it, since you do not want to be involved with any organization that is likely to go bankrupt.


The question of the limitations is thus a very important one to raise, in order to leverage the decision-making effect this tool comes along with.


The first thing that has to be affirmed is that the Z-Score model is relatively old. Developed in 1968, it is justified to raise the question of whether this tool can still be applied to modern companies.[1]


Apart from that, a deeper analysis of the specific ratios that are being used to predict bankruptcy is needed to further examine the limitations of the model.


Researchers do claim that the Z-Score’s validity is limited to certain industries. The reason for this is based on two specific ratios which I am trying to explain further in detail.


Altman himself did already affirm that there are differences in the predictions according to the instable nature of the relation between the variables as such. Besides, there have been studies that provided samples where the Altman’s Z-Score was proved to having misclassified more than half of the companies that where part of the sample.[2]


The first ratio that restrains the applicability of the Score is the T4 which measures the Market Value of Equity by Total Liabilities. For firms that are not traded publicly there is no market value of equity, so this score would bias the outcome.[3]


The other ratio is the asset turnover which is significantly dependent on the type of industry analysed.[4] This led to the affirmation that the Altman Z-Score was not applicable for non-manufacturing companies.[5]


Another thing that I do see problematic as well is the fact that the Score does limit the time horizon for falling into bankruptcy (12 months) but it does not give any indication about when exactly this is going to happen and if the bankruptcy can yet be prevented. Hence, it does serve as an indicator to undertake actions, but it might also be too late already.


Author: Verena Klaebe (April 2016)


[1] Gricea, John Stephen; Ingramb, Robert W.: Tests of the generalizability of Altman’s bankruptcy prediction model, Journal of Business Research, Volume 54, Issue 1, October 2001, pp. 53–61

[2] Hayes, Suzanne K.; Hodge, Kay A.; Hughes, Larry W.: A Study of the Efficacy of Altman’s Z To Predict Bankruptcy of Specialty Retail Firms Doing Business in Contemporary Times, Economics and Business Journal, Volume 3, Number 1, October 2010, p. 126

[3] Heine, Max L.: Predicting Financial Distress of Companies: Revisiting the Z-Score and Zeta® Models, July 2000, pp.22-26

[4] Heine, Max L.: Predicting Financial Distress of Companies: Revisiting the Z-Score and Zeta® Models, July 2000, p.26

[5] Gricea, John Stephen; Ingramb, Robert W.: Tests of the generalizability of Altman’s bankruptcy prediction model, Journal of Business Research, Volume 54, Issue 1, October 2001, pp. 53–61



How to Turn Management Accountants into Business Partners

For decades, the Management Accountant was perceived as a “numerically obsessive, tight-fisted human calculator” (Baier, 2014) and the profession’s image was quite negatively connoted. But with the evolution of new technologies and the growing importance of non-financial process-oriented measures, also the traditional role of the Management Accountant changed. He is no longer regarded as a picky Bean Counter or “number-cruncher” (The Economist) but instead as a value-adding Business Partner who enhances the organizational performance (BPM Partners, 2009).
Today Management Accountants play multiple roles like for example the Trusted Advisor who maintains a good relationship with the CEO and the Board of Directors (BPM Partners, 2009). Moreover, Management Accountants serve as Leaders creating shared beliefs and boundaries and facilitating decision making. Finally, Management Accountants also take part in continuous learning and improvement, support strategic management and enhance operational alignment (Brewer, 2008).
So far, skills like number affinity, sticking to rules and attention for detail were prerequisites for a Management Accountant whereas now especially communication and social skills are needed. Management Accountants have to look beyond numbers and serve as an interface between management and technologies. Therefore, skills in data mining and analytics are indispensable (Pickard, Cokins, 2015). Furthermore, Management Accountants are working together with different departments like HR, sales and marketing to provide financial information, tools and analysis. Consequently, they have to be people-oriented, have strategic knowledge and be able to communicate and present information. In order to conduct negotiations and performance management, relationship building and influencing skills are required as well as the ability to think critically.
One has to take into considerations that this development takes place slowly and that executives need time in order to develop respect and trust for this newly transformed profession. Having interpersonal and strategic skills will be a basic requirement for future accountants and those who don’t have this expertise will be quickly out of the game. Therefore, Management Accountants have to upskill themselves and acquire for example know-how to handle new software and interact with colleagues from other departments. Management Accountants as Business Partners are not a fad or fashion but an ongoing evolving trend which will shape business organizations in the future. They are valuable assets for a company as they combine strategic thinking with financial knowledge. Thus they will no longer be regarded as bean counters but instead help grow the beans.

Author: Pia Sander, April 11, 2016


Baier, N. (2014): Bean Counters no more!, Strategic Finance,
Brewer, P. (2008): Redefining Management Accounting, Strategic Finance
Pickard, M., Cokins, J. (2015): From Bean Counters to Bean Growers: Accountants as Data Analysts - A Customer Profitability Example, Journal of Information Systems, Vol. 29, No. 3, Fall 2015, pp. 151–164
Author unknown: From bean counter to business strategist: The changing role of the accountant, The Economist, file:///C:/Users/Pia%20Sander/Downloads/CRM_Changing_role_of_accountant.pdf
Author unknown (2009): Bean Counter to Business Leader: The Changing Role of the CFO, BPM Partners,

People use to define Management Accountants' role into organization using the widely accepted adjectives of planning, control, and decision making. Their function is indeed broader in scope, and can be summed up in adding stakeholder value. This goal is reached by Manager Accountant through several activities in four important organizational fields which are leadership, strategic management, operational alignment, and continuous learning and improvement. Some of these activities are: enable decision making and organizational innovation, create shared beliefs and boundaries, identify and manage risks, formulate strategy, assess performance, communicate vertically, coordinate horizontally, evaluate employees and so on. So, summarizing, they provide help and decision bases for business development and strategic guidance, as well as for the planning process. What emerges by this brief definition of the Management Accountant's functions, is that Management Accountant are actually a strong pillar in the enterprise, and not only bean counter.

Why than, in some organizations, they are still merely seen as bookkeeper? How is it possible to develop them from mere accountants to business partners?
Before starting to answer this questions, I would like to focuse a while on the reason why it is important to include Management Accountants in the business partnership. I am explaining my point through an example. I see MAs as a sort of bridge which connects into a unique body the organs - the empirical and practical organizational world - with the mind – the management and directive offices. While working the organs produce an overabundance of data, which are to be filtered by MAs in order to provide the mind (management and direction) just the vital information (and not general data!) that helps them to make more informed and faster decision. If MAs were only seen as Accountants, they would also be embedded in the organs, providing and producing just data instead of re-elaborate them to help the direction.

Once explained this, it is easy to answer the question introduced at the beginning of the last paragraph: the key for the development of MAs from bean accountant to business partners is just make the business partnership aware of the importance of MAs activities, by simply do what they firstly stand for: re-elaborate and communicate data. This is indeed the first step to reach consideration in the enterprise's managament deeds. The communications must be precise, punctual, accurate, incisive and efficient, which is actually the difference between share generic data and share vital information. If MAs do that properly, they will be automatically more and more firstly consulted and than included in the decision making process, becoming trusted influential and suvvy advisors.

Once they develop and establish partnership, MAs have to reinforce their position by striving to add value to the business showing tangibles results. Which means for example elaborate cost savings or efficienty projects; use knowledges of business strategy coupled with rigorous data analysis to accuratly forecast future sales and expenses and allocate resources across business units in order to provide optimal performance; minimize the financial impact of stockouts; align operation through vertical communication and horizontal coordination; and so on.. The keypoint of this step is to recive trust by the business not just acting as advisor, but also as a leader: business shoul look at MAs as someone to count on, someone able to lead the enterprise on a higher level of efficienty.


Author: Anna Pezzini, April 11, 2016


At this point the MA should be automatically allowed to act in the strategic management and leadership area, becoming a properly business partner. Finally the Management Accountant can cooperate with managers on all the four fields I introduced in the first paragraph (leadership, strategic management, operational alignment, learning and improvement) supporting the management processes, and acting all those activities which allow him to add stakeholder value.

Not only by looking at the recent developments in ERP systems but also by considering the increased usage of business intelligence and process automatization it becomes obvious that there has been going on a profound change in the professional field of management accounting. The “Bean counter image” is slowly beginning to vanish, being substituted by a business partner role in which management accountants have huge potential to contribute substantially to business decision-making. The information which is provided my management accounting is vital for a company’s survival, on the one hand regarding its competitive environment and on the other hand with respect to the globalization. This 1 pager essay seeks to shortly outline what has to be done in order to successfully turn Management Accountants from Bean Counters to Business Partners.
Organizations have been facing some major transformations in their organizational environment, there is bigger uncertainty and market competition (cf.Cullen and Wanderley 2013, p.2 ). As a consequence, the profession of management accounting has to adapt to the ever changing market place. New skill development and training has to be undertaken in order to create a more people oriented and strategic profession on the field of management accounting. Without any doubt the number affinity is still playing an important role, however today’s changing environment demands to accommodate further. In order to be a business partner, the management accountant has to get rid of the image of just being the cost accountant, rather focusing on in-house management consulting. The value chain has to be controlled in all business functions which is why management accountants should consider themselves as business navigators having to conduct operational planning, people orientated management and driving the strategic planning process.
Additionally, the management accountants’ environment plays an essential role in the transformation. The profession has to be seen as internal management consultant by employees from all business functions. Certainly, the business-partner concept needs to be better understood and promoted by entrepreneurs and decision-makers. This can only be achieved in the long run if businesses understand that in the 21st century the bean counting is a rather old fashioned image since planning and establishing a budget has been becoming increasingly difficult in many industries. It is wrong to see the management accountant simply as a number-provider. The profession’s helping function has to be accepted regarding the strategic planning process. Hence it is crucial to consider the tasks of management accountants as cross-functional, including as well management control and the proper planning of employees’ creativity. By aiding decision-making, the management accountants have to be better incorporated, their skills have to be respected and they need to be seen as vital to the business performance. This implies that there is a need for better education with reference to the management accounting profession. Employees have to be made aware of its huge importance in the 21st century and have to include, respect and share information with management accountants (cf. Kulkarni 2014).
To put it in a nutshell, management accounting has been playing an essential role in making business. However, the profession keeps struggling to be taken serious as such. In order to become a business partner, adaption processes, education and skill development on several levels have to be conducted.


Author: Louisa Keller, April 11th, 2016


Cullen, J / Wanderley, C (2013): Management Accounting Change: A Review. Ebsco Database Vol. 10 Issue 4, p294-307. 14p.2
Kulkarni, S (2014): Journey from Bean Counter to Business Partner, accessed 04/10/2016, available at:
Schönbohm, A (2016): Material Binder Management Accounting & Controlling. DRAFT 2016 © Avo Schönbohm

Financial ratio analysis is just a meaningless effort to confuse investors


When investors contemplate investing money into a new company, one of the first and most important things they do is an analysis of the financial statements such as the Balance Sheet, Cash Flow Statement or the Income Statement. Even though the usefulness of some of these ratios could be put into question because they are very theoretical - the Acid-Test ratio for example assumes all the current liabilities become due immediately which is unlikely to happen- most likely there is a reason why millions of people around the globe use this tool during the last decades to evaluate a company’s current status and prospects for the future.
Figures like the Sales Revenue do not necessarily tell you very much as an (potential) investor unless you know what share of it is left for you as a Net Income at the end of the day. Many Financial ratios were probably invented because of their simplicity and because they are more intuitive to understand: If I tell someone that my inventory is being replaced on average every 30 days (Inventory Turnover), people can imagine that a lot faster and easier than complicated statistics. Days of Sales Outstanding tells you straight away how fast you normally collect your receivables without causing too much confusion about your collection policies.
Even if you are an expert in reading Financial Statements it can be difficult and take time to cope with a spreadsheet full of numbers in front of you and extract useful information. Some people might think that more complex information yields better insights, but even the opposite could be true: Simplicity should be the final stage of an evaluation, not (only) the beginning. The fact that these ratios are being taught in introductory courses of Finance and Accounting hints to the fact that these ratios bear a very fundamental meaning and build the basis for a lot of concepts to think about consequentially.
If people are engaging in a discussion during a business event and talk about companies, they can easily use these metrics as “anchors” or as a reference to compare other companies to if they want to see if they are doing better or worse than their competitors for example.
The debt ratio for instance can “visualize” how much your leverage is; better than the mere “raw” information about equity and debt as numbers in the Balance Sheet to give decision-makers a more intuitive understanding about what is happening with the company or how it is structured.
Some of the Financial Ratios however, could have the problem of being useless but being too often used by everyone else to be dropped as a useful metric: The often-used price-earnings ratio (P/E ratio) should ideally make a prediction on how much earnings per share you can expect in the future from this share relative to its price. In theory, this might hold true, but as Einstein said: “In theory, theory and practice are the same. In practice, they are not.”
As Ken Fisher could prove through statistical analysis, the P/E ratio can only explain 20% of an observed 10-year stock development correctly which does not make it one of the most useful measures to evaluate a stock purchase. In the short-run, over a 1-year stock development, the P/E ratio can be considered entirely random, so it has no implication on future stock development whatsoever.
Even though Financial Ratio analysis is obviously not a guarantee for success, it might still be one of the best techniques we have. Or as Rolf Dobelli described it: “It is as if you were in a foreign city without a map, and then pulled out one for your home town and simply used that.”   (Availability bias) Financial ratios do not always pave the road to a successful decision but as long as they do most of the time and don’t cause any additional confusion when it comes to Financial Statements and their analysis, we are probably better off having them than not to have them.


Author: Lorenz Postner/ 15.04.2016

[1], Editorial staff, “Famous Quotes from Albert Einstein”, retrieved 14.04.2016 from


[1] Investaura, “Why P/E ratios are useless, unless you are Warren Buffett”, retrieved 14.04.2016 from


[1] Rolf Dobelli, „The art of thinking clearly“, Sceptre, 2013, page 37






Manipulating financial statements is a prevailing problem in the modern corporate world. Albeit, international efforts for standardizing accounting practices, like the Generally Accepted Accounting Principles (GAAP) as well as incentive restructuring on management level, which used to be closely tied to the financial performance of the company1, try to minimize the loopholes of opaque financial business details. Still, investors have to carefully evaluate existing issues, understand warning signals early on and prepare strategies to mitigate the risk of investments1.


Ranging from the problem that the GAAP still allows the flexibility to adjust accounting principles in favor of the financial conditions of a business, to the difficult relationship between the seemingly independent auditor and the business client that pays the auditor, the reasons for tuning up financial information are manifold1 and will ultimately be represented in the financial ratios. This naturally can lead to faulty decision-making in investment activities. However, simply stating that the financial ratio analysis is meaningless and is only used to confuse investors seems somewhat ignorant.


Financial ratios, used with some caution, can reveal significant knowledge about the current and future performance of a company for investors. A major advantage of financial ratios is that they can give a quick insight on the financial situation of a company as well as the possibility to compare the performance with other companies. This is not only meaningful to investors, but also managers in general2. At the same time, as the corporate world is getting more and more complex, we cannot only rely on some given information, but have to critically review them and, if necessary, expand the collection of information to a broader level.

Let me transfer this scenario to the world of online dating to better illustrate the issue and to discover some surprising parallels. Imagine you meet someone online and the “metrics”, meet your expectations - blue-eyed, 1, 85cm tall, engineer - then this already gives you a good first impression. However, in any case you would always look for more details, maybe a date vis-à-vis, to evaluate whether the chosen one is really a good match. Upon closer examination, he might be an engineer in the weapon industry and someone who fudged on his height, which would not be conform with your expectations and thus would prevent you from engaging with this person. So why not transferring these precautions to an even more sensitive topic than someone’s love life? Financial ratios can be very useful to give a first lead to a much more complex situation. However, investors should be careful with the information they are provided with, and not only limit their view on pure financial intelligence which can be easily manipulated.


1 Adkins, T., Financial Statement Manipulation An Ever-Present Problem For Investors, Investopedia, Retrieved: 18.04.2016  from:


2 Lohrey, J., Pros and Cons of Financial Ratios, eHow, Retrieved: 18.04.2016 from:



Author: Helena Sternkop, April 20th, 2016




Every company produces financial statements containing different financial ratios every year. These ratios are supposed to help outsiders and also the management to understand the current position of the company. But are these ratios nothing more than a farce? Are financial ratios reliable indicators or a mere meaningless effort to confuse investors and make them think the company is doing better than it actually is?
    In every financial statement there seems to be a myriad of different ratios. In general they measure one of three things: whether a company can pay back its’ debt, whether it can sell its’ inventory and collect money from customers and lastly, simply whether it is profitable. All these ratios, including debt ratio, current ratio, inventory turnover and others paint a picture of how a company is doing. This picture however, is incomplete and flawed. Even though ratios “help explain financial statements” (Faello, 2015, p. 75), they do not show the reasons for specific developments in a firm’s financial statement. To understand what is really going on in a company and whether there is any reason for major concern, special reporting sections in the annual report can be an indicator. (Schönbohm, 2016) In these sections the company’s president, the management and an independent auditor explain the circumstances surrounding the financial ratios and their development. So it can be said that financial ratios really do confuse investors until they are properly explained and put into context. Moreover, the financial ratios used may differ between firms and over time (Faello, 2015), making it harder to compare them and therefor hard to analyze. A ratio in general can be affected by a lot of things depending on industry and system (Biery, 2014) (e.g. LIFO or FIFO). So it is essential to not just look at the numbers without taking their environment into account. But there are more limitations to financial ratios. One is the fact that ratios can be easily influenced and in that sense manipulated. Looking at the current ratio as an example, it can be improved by either transforming short term loans into long-term debt or simply get a new loan altogether. That way the current liabilities go down, making it seem like they can be covered by the current assets. This fact can be used to make a financial statement look better than it actually is and therefor is a meaningless effort to confuse investors in that way. 
    However, financial ratios in themselves give heavy indicators about how a company is performing. There are signs that should warn investors about a firm’s performance like the loss of profitability or decreasing cash flow. (Schönbohm, 2016) These numbers among others indicate a problem in a company’s finances that could eventually lead to insolvency. As can be seen, it is still important to put the numbers into context and look for reasons for changes in the explanatory notes (Faello, 2015). Putting together a complete picture by looking at details, red flags and connections between the different values is what makes financial ratios so valuable. If they are taken for what they are in the environment they were produced in, they can give a pretty coherent picture of a firm’s situation. This can also be done by doing a vertical analysis, so taking values of the statements and evaluating them against their base, and a horizontal analysis by comparing different years. (Schönbohm, 2016)
    In short, financial ratios are more than a meaningless effort to confuse investors. Even though they can be influenced and only show part of the whole story, they can be the key to understanding a company’s situation. It is important to also make use of other sources like additional parts of the annual report to wholly understand them. By looking at the reasons for certain developments and comparing numbers across years and companies, these ratios can be crucial when deciding how a company is really doing. 


Author: Julia Franz, April 18, 2016   

Faello, J. (2015) Understanding the limitations of financial ratios, in:  Academy of Accounting and Financial Studies Journal, Vol. 19, Issue 3; September 1st

Biery, M.E. (2014) Can a company pay its’ bills? Which industries have strong liquidity ratios?, Dec. 7th, retrieved from (04/17/16, 8:29pm)
Schönbohm, A. (2016) Management Accounting and Controlling, Material Binder

How can we motivate with budgets?

"A company does not only create budgets to reach the company’s goals and objectives – it does also follow a strategy to succeed on the market. A case study has shown that strategic and budgetary decisions are however linked to each other.[1] The interpretation of accounting numbers can influence strategic decisions, which then again have an effect on other employees concerning cost control and budgets (Marginson/Sharma p.3). One can describe the broad connection of strategy and budgeting as followed: “(…) the process of budget setting is viewed as enabling top management’s strategic plans to be translated into a series of financial targets (...).“ In order to achieve strategic plans through budgeting, the company must follow a strategy that involves advanced knowledge and management of human resources, since the efforts undertaken by individuals within the firm determine the company’s achievement of goals (Jorgensen/Messner(2010)[2]). However, traditional budgeting is increasingly seen as impediment to progress and as a time-consuming (simultaneously budgets run out of date and lose relevance), non-cherished effort.[3] In order to be successful and remain competitive, a company must develop budgeting processes that are efficient and allow to “constantly develop human capital and keep the good employees” (Daum, 2001). New management implications such as the Balanced Scorecard (for better internal coordination of strategic targets) and the value based management (focus on expectations of investors) allowed for more flexibility but the Beyond Budgeting model increases flexibility even more (Daum, 2001) and allows performance improvement through the motivation of employees and managers. Beyond Budgeting is a concept that should introduce leadership principles to liberate managers and employees from the original controlling system and motivate them “with shared values, [through which] a company can mobilize enormous innovative potential” (Rickards, p.62[4]). It also provides principles of decentralized responsibilities, which encourages all actors to take part in decision-making and develop entrepreneurial skills. The implementation of a coach-and-support leadership helps to encourage decentralized managers, knowing that the top management only interrupts peripherally (Rickards, p.65). Through one common information system applicable for everyone to receive information in real time, a company can create transparency and division of control[5] which again leads to an increase in motivation as it is a psychological evidence, that people tend to contribute more when they feel integrated and important. All in all, a company should focus more on “non-monetary performance indicators” during the budgeting processes (Rickards, p.66) to motivate the individuals in contributing to the company’s objectives."

[1] „Strategizing through budgetary practices: Evidence of a ‘mutually emergent’ interplay between budgeting and strategy“ p. 4, from: (29.10.2015)

[2] „Strategizing through budgetary practices: Evidence of a ‘mutually emergent’ interplay between budgeting and strategy“ p. 9, from: (29.10.2015)

[3] „Beyond Budgeting: A Model for Performance Management and Controlling in the 21st Century?“ by J. H. Daum, 2001 (Controlling & Finance, July 2002 issue), (29.10.2015)

[4] BEYOND BUDGETING: BOON OR BOONDOGGLE?“ p.62, Investment Management and Financial Innovations, Volume 3, Issue 2, 2006  (29.10.2015)

[5] BEYOND BUDGETING: BOON OR BOONDOGGLE?“ p.65, Investment Management and Financial Innovations, Volume 3, Issue 2, 2006  (29.10.2015)




The theme of motivation has been for years one of the key issues on focuse of organisational studies and theories. It is indeed considered to be a strong pillar of the company's efficienty and performance, since it spurs anybody along the business hierarchy to work aligned and willingly with one another to accomplish common goals. "The term motivation refers to factors that activate, direct, and sustain goal-directed behavior [...] Motives are the "whys" of behavior - the needs or wants that drive behavior and explain what we do" (Nevid, 2013). The concept is therefore very simple: high motivation is aimed to substitute duty-sense and impositions, with positive consequences not only on processes speed and efficienty, but also on the atmosphere on work and self consciousness. Many economists and organisation theorists investigated therefore deeply this theme to find out ways to increase motivation among the employees as way to enhance performance, in alternative to the other expensive coordination and control systems (eg intoduction of new levels on the hierarchy – new manager – to direct and supervise). Among them two stand out of importance, Locke and Latham, who already in the 60s elaborated the important and well- known "Goal setting theory". It claims that motivation is strongly connected and proportional to the way objectives are set, communicated and rewarded. In their studies they observed increments in efficiency and effectivness when generic objectives (for examle: do your best) were replaced by specific and quantitative and qualitative well defined ones (achieve x revenues in y months). This implication works howewer just under the condition that these objectives are challenging but not impossible: "the more difficult the goal, the higher the performance achievment [...] although goal setting does not work if goals are totally preposterous" (Golembiewski 2001). Finally objectives should be merely content/aimed oriented, which means, set what you want someone to achieve, but do not arrange and impose the way the goal is to fullfit (Isotta 2011). A last brief glimpise regarding this theory deserves the goal setting process. Locke thought goals should be set with the partecipation of those people who are later called to achieve them, not just because that would increase their consciousness and level of acceptance, but also because they possess several knowledges on the execution level which are helpful to define more concrete and realistic results. Evidences show the goal setting theory has many implications into reality: a survey was sent to firms averaging approximately 6000 employees inquiring about their use of the goal setting theory, and also about firm profit level and growth. Significant relationships were found (Golembiewski 2001).
Now the company's challenge is therefore just to find out the way to bring the concepts of this theory into practice, and the most simple and even obvious solution for it could be basically budgeting.
A budget is a detailed financial plan that quantifies future expectations and actions relative to acquiring and using resources (Harrison). Fitting the goal setting theory, the goal set by budgets are specific, qualitative and quantitative well defined and merely content oriented. It's then up to manager to make them also challenging but not impossible. But it's not always so easy to find out the right balance between challange and attainability, especially in business environments strongly affected by uncertianty and unpredictable and changeable events (just think eg about the Nokia case, or the Sarbanes-Oxley one). The point is that what today is achievable, tomorrow could already be hard to meet, due to the most different reasons (a strong competitor join the market, an environmental calamity prevent the supply of row materials, costumers change their preferences and so on) and managers who decide to proceed carefully can end up setting not enough challenging objectives, and the more hazardous ones vice versa. It is therefore useful to substitute the widely accepted idea of static budget with new budjeting concepts designed to change with fluctuations in activity level. They indeed allow the definition of demanding results because adjustable if it become clear they are getting preposterous. To provide an example, the Flexible Budjet constantly adapt and relate expected expenses to observed revenues. Furthermore when performance evaluation is to be based on a static budget, there is very little incentive to drive sales and production above anticipated levels because increases in volume would tend to produce more costs and unfavorable variances. The flexible budget-based performance evaluation is a remedy for this phenomenon (Harrison).
To achieve strong motivation among the business members, the goal setting theory require furthermore a partecipative approach in the targets definition – the more people feel integrated and important, the more they tend to contribute. On a budgeting point of view it translates into what is known as "bottom up and partecipative budgeting", which are decentralized budgeting processes involving departments in the decisionmaking. "The participative budget approach is viewed as self-imposed. As a result, it is argued that it improves employee morale and job satisfaction" (Harrison). The most exalting example around this topic is surely the avant grade Beyond Budgeting model which substitutes traditional command and control with a more empower and adaptive management model that motivates employees with shared values and responsibility / decisionmaking decentralization.
Motivation is so important because employees and all the other actors in the enterprise are the channel through which goals are achieved. Without their contribution and care nothing would properly go on in the business. It is therefore vital not to think just on objectives, but also on the phsycological involvement of anybody who is going to work to achieve them.


Author: Anna Pezzini (May, 2016)

Nevid, J. (2013). Psychology: Concepts and applications. Belmont, CA: Wadworth
Locke, Edwin A (2001). Motivation by goal setting". In Golembiewski, Robert T. Handbook of organizational behavior
- Isotta (2011) La progettazione organizzativa, Caedam. Paragraph "the goal setting theory"
- Harrison, Horngren, Oliver (2011) Principles of Accounting, chapter 21 and 22
- what is beyond budgetin




Budgeting is conducted by almost every organisation. Its main purpose is to act as management control mechanism in order to achieve objectives, ensure and improve the efficient use of resources within the organisation and direct managerial actions (cf. Raghunandan et al., 2012; cf. DeMicco/Dempsey, 1988). Budgeting is very important because it enables the organisation to set future-oriented strategic goals, plan systematically e.g. in terms of strategic decisions or resource allocation, coordinate activities and communicate effectively, remind everyone of the agreed objective, control and evaluate performance and take corrective actions if required (cf. Raghunandan et al., 2012; cf. DeMicco/Dempsey, 1988; cf. Schönbohm, 2016). Although a budget is a quantitative statement of expectations and a plan concerning resource allocation over a defined period of time, its success mainly depends on the commitment and motivation of an organisation’s employees (cf. Raghunandan et al., 2012; cf. DeMicco/Dempsey, 1988). Consequently, it is crucial to motivate employees which can be done in several ways.
Firstly, according to the expectancy theory of motivation, employees and managers obtain a purpose and specific goal to work on through budgeting. Furthermore, they feel satisfied and hope for higher chances to get rewarded if the budget is attained which motivates them. Secondly, research has shown that the budgets difficult to achieve motivate the most as they require more effort from the participants who therefore show higher levels of commitment and motivation. Additionally, a supportive organisational environment and structure as well as management style are essential variables influencing motivation during the budgeting process, for instance it is important to make sure that no culture of blaming exists if employees fail to meet an objective (cf. Raghunandan et al., 2012; cf. DeMicco/Dempsey, 1988). Generally, using a participative approach to budgeting leads to greater support from all parties involved by creating a “game” and team spirit (cf. Raghunandan et al., 2012; cf. DeMicco/Dempsey, 1988; cf. Schönbohm, 2016). Meaningful participation in budgeting by lower level managers and employees involves them into the decision making process which assigns them more responsibility and influence. Thus, they are more committed to the budgeting process and the achievement of the budget objectives since decisions have a less “dictating” character and are therefore more easily accepted as “their own ones”. Moreover, the increased participation can also be seen as job enrichment which usually contributes to higher motivational levels (cf. Raghunandan et al., 2012). Other positive effects of participative budgeting are that subordinates understand the relationship between behaviours and outcomes better which also raises their cost awareness. Lastly, the budget is more likely to reflect reality as it is generated by those who are close to the actual operations.
Nevertheless, one also has to consider potential challenges which come with the aforementioned aspects. The first one is that too ambitious budgets are the most unlikely ones to be achieved and consequently connected with rather poor performance (cf. DeMicco/Dempsey, 1988). One of the main deficiencies of participative budgeting is that participation can lead to dysfunctional behaviour such as self-serving interests at the expense of the organisation. Good examples are a manager who inflates the importance of his department since he competes with others for resources to be allocated as well as the “spend it or lose it” phenomenon observed in the public sector shortly before the fiscal year ends. Another problem occurs when individuals can influence budget goals and are evaluated based on budget variance since most likely they will tamper with budget information to avoid unfavourable variances and thus evaluations (cf. Raghunandan et al., 2012; cf. DeMicco/Dempsey, 1988).
To conclude, budgeting can definitely motivate if it is not only quantitatively-oriented but also people-oriented and flexible. However, one should always take possible undesirable effects of a more flexible, people-oriented approach into account and compare potential benefits with potential cost.
Berlin School for Economics and Law Laura Ng
Management Accounting and Controlling


Author: Laura NG (May, 2016)

 RAGHUNANDAN, M./RAMGULAM, N./RAGHUNANDAN-MOHAMMED, K. (2012) Examining the Behavioural Aspects of Budgeting with particular emphasis on Public Sector/Service Budgets. International Journal of Business and Social Science, Vol 3 (14)
DEMICCO, F./DEMPSEY, S. (1988) Participative Budgeting and Participant Motivation: A Review of the Literature. Hospitality Review, Vol 6 (1)
SCHÖNBOHM, A. (2016) Budgeting: The Art of Operations Planning & Control




“Budgets are unarguably the most obvious form of utilizing accounting data to monitor and punish or reward strategic business units and consequently employees (…) according to their performance in relation to budgeted targets” (Drischel 2003, p.2). Regardless of size, complexity, and structure of organizations, the preparation of a quantitative plan of expected resource allocation is a key element of management accounting, which facilitates not only the achievement of strategic objectives but also employee rewards and recognition if adequately implemented (Raghunandan et al. 2012; DeMicco/Dempsey 1988).
Budgets are expressed in numbers and are therefore usually associated with technical business functions such as the development of financial and operating plans, the comparison of actual with planned results, and the analysis and assessment of reason for deviations. However, budgeting also aims at influencing the way that managers coordinate and control business activities in order to improve managerial performance (DeMicco/Dempsey 1988). Thus, budgeting consists not only of a technical part but is also characterized by social and behavioral components, which focus “(…) on the ability to achieve the technical aspect of budgeting with the use of people” (Raghunandan et al. 2012, p.111). To combine both technical and behavioral components of the budgeting process advanced knowledge in human resources is required, since the achievement of corporate goals highly depends on individual efforts. Therefore, communication and motivation are two further important aspects of budgeting beyond the fundamental planning function. Budgets are necessary tools to communicate goals and to promote consistency in order to ensure coordinated resource allocation. At the same time, budgets motivate employees by involving them in the budgeting process. Participation and integration usually increase employee satisfaction, automatically leading to improved performance. Especially the participative budgeting approach increases motivation and can lead to desirable outcomes. Even if this type of budgeting requires a lot of resources, it is still a great opportunity to ensure full participation and cooperation on a departmental-wide level (Schönbohm 2016).
To put it in a nutshell, motivation plays an essential role in the overall budgeting process and determines the managerial performance of companies. Consequently, “(…) organizations should recognize that the effective use and application of any budget is very much dependent on the extent to which employees are committed to the ideals of the budgetary process and encourage behavior that is in accordance with the entity’s objectives” (Raghunandan et al. 2012, p.111).

Author:  Yasmina Alaoui (May 2016)


•    DeMicco, F.J./Dempsey, S.J. (1988): Participative Budgeting and Participant Motivation: A Review of the Literature. Hospitality Review, Vol. 6: Iss. 1, Article 9. Available at: (accessed 05/01/2016), p.77
•    Drischel, J. (2003): Participative Budgeting and its Effects on Employee Motivation, p.2
•    Raghunandan, M. et al. (2012): Examining the Behavioral Aspects of Budgeting with particular emphasis on Public Sector/Service Budgets. International Journal of Business and Social Science, Vol. 3 No. 14 (Special Issue – July 2012). Available at: (accessed 05/01/2016), p.110, 111

•    Schönbohm, A. (2016): Management Accounting and Controlling, Material Binder, Chapter 3, p.17




How Does Digitisation Change Performance Management?

"According to digitization is the “conversion of analog information in any form (text, pictures, voice, etc) to digital form [...] so that the information can be processed, stored and transmitted through digital circuits, equipment and networks”.  We now live in a digitized world, where every transaction, exchange of information and communication happens digitally or, otherwise expressed in a 21st century word, online. This transformation has caused the emergence of a new type of consumer, ever more demanding and in search of flexible, cheap and fast solutions to his problems. In turn, this led to companies having to adapt to the new requirements by becoming ultimately available to satisfy customer`s needs. Digital companies, whether born or transformed, are now the providers of the latest services in the whole range of industries and are first and foremost characterized by the fiercest of competition. Staying competitive in the fast-paced, ever-changing environment of digital services requires an equally competitive performance management strategy.

Making sure an organization`s goals and objectives are effectively and efficiently met is not an easy task. In the digital industry, where everything is equally available and easily comparable it is even more difficult to coordinate customer satisfaction with cost control and profit maximization. In order to meet the high customer expectations and make sure customers remain loyal to the company, organizations have to constantly reinvent and upgrade business processes such as reducing the number of steps required to perform a transaction or developing automated decision making capabilities. Data and operating models require constant adjustments so as to enable improved performance tracking and customer insights. The complexity of the issues digital companies have to keep track of can now be more easily dealt with by using web and application performance monitoring software. This relatively new product category is offered by a wide variety of vendors, each promising to optimize the speed and availability of digital content, to identify areas of weak performance and recommend effective solutions. The software collects and analyses data on different variables and statistics such as page load times, heat maps, segmentation, etc to determine what motivates customer behaviour. An example would be analysing the number of customers that made a purchase versus the number of customers that abandoned their shopping carts and determining what exactly caused the customers not to complete the purchase in order to find solutions for this particular issue.

The software can also be used to predict an outage or potential performance issue before they actually occur, through tracking, monitoring and controlling multiple metrics. Some of them also have integrated “self-learning” capabilities that automate performance analysis with customer behaviour learning tools and anomaly detection. This whole arsenal is aimed to equip digital companies with qualitative and quantitative predictive data that allow them to create and maintain competitive advantage, increase conversion rates and ensure business success. In the future, information collected by the system could be combined with other valuable data from finance, marketing and operations to create new insights that can further increase organizational performance. Integrating data from sources across all business functions and using it for predictive purposes is the next step to becoming the know-it-all leaders of their sectors.

In conclusion, the digitisation era in which we now find ourselves has brought about numerous changes and transformations, including in the way we manage a company`s performance. Ever since the emergence of the internet in the late 20th century we have triggered a so called domino effect that has now reached the level of creating new markets for whole new products, one of the latest being web and application performance management software for digital companies. The question now is how long it will be until we witness another fashionable business changing phenomenon that lately has been happening very frequently, the one we call disruption."


Author: Madalina




In today’s world, digitization no longer means companies “playing around” with IT Technology. In fact, more and more companies across industries leave the analog market place and immigrate to a digital marketplace that is characterised by always-on, real-time and information rich transactions with their “connected” customers. The so-called generation C is growing up in a digital world and is thus directly familiar with technology, which shapes a new way of working and consumption. The economic benefits that can be derived through digitisation are great, which leads to big amounts of capital being invested in the digital transformation process of companies (PwC, n.d.).
Some companies are directly “born digital”, while many former brick-and-mortar companies go trough a complete digital transformation process that leads to both cultural and structural change. When a great percentage of a company’s revenues and costs or even its survival depend on digitization, it becomes clear that IT no longer is a side business but one of the top priorities of CEOs as it leads to a completely new way of doing business (Hendrik Andersson and Tuddenham, 2014). However, there are some things to keep in mind when it comes to digitization of companies. Besides the fact that it requires increasingly sophisticated technology, digitization also changes the way of how performance measurement is conducted. Previously companies focused on efficiency as the most important performance measure. However, now everything matters and a lot of new KPIs need to be considered. While Time-to-Market has always been of great importance, it now becomes even more critical as seconds can matter in deciding who becomes the new supplier of digital innovations (Hendrik Andersson and Tuddenham, 2014). Also, measuring a company’s sales now ranges from store sales to online sales of physical and non-physical products and goes on to measuring online subscriptions and descriptions as well as a downloads of a company’s apps. Companies also need to watch out how they perform among others in the digital community. How many and how effective do they reach online customers? What is their search engine performance? What is the conversion rate, e.g. how many of the company’s website visitors do buy something on the site? All these questions now come up with the digital market place. Also customer lifetime value measurement becomes more comprehensive as customers now have multiple ways how to consume the products of one and the same company. Besides, digitization also affects the performance measurement of a company concerning business networks. KPIs such as “cost per click” or “backlinks” need to be taken into consideration to find out how well and at what cost the company is integrated in the digital
market place. Next to this new performance indicators such as “analog reliability” (as in the digital world no manual work-around is possible to make up for shortcomings) and “online security” are of great concern to not loose competitiveness in the digital world. All of the aspects mentioned above show how different and how much more comprehensive performance measurement becomes in times of digitization. It also gives an impression of how much more data concerning the performance of a company need to be analysed. This requires on-time analytical systems in order to make use of the data. Only then, the company business can be keep up with new evolutions on the digital market place. Real-time comprehensive performance measurement thus becomes an integral part of
business to be able to compete on the digital market place.

Author: Josepha Niebelschütz

Hendrik Andersson, Tuddenham, P., 2014. Reinventing IT to support digitization | McKinsey
& Company [WWW Document]. URL
_digitization (accessed 11.5.15).
PwC, n.d. Digitization | The Digitization megatrend | PwC’s Strategy& [WWW Document].
digitization/megatrend (accessed 11.5.15).



"Digitization changes performance management in many ways. Managing performance in a traditional company requires the analysis of various financial indicators such as financial ratios. Financial ratios are always necessary in a business, but businesses becoming heavily digitalized or even new businesses having their origins in the digitized market will find themselves analyzing different kinds of ratios as well. Another change relates to the culture of a digitalized business. The culture must be closely connected with its viewers and have a tight network. A business like that of my wife, for example, where her blog earns revenues from companies posting ads on her web page, is largely analyzed and managed by focusing on web activity. The business idea is to make new recipes for meals and desserts, making the product, and posting the recipe and photos of the new recipe on the site. We do not have a product that sells physical products. The physical product is actually never sold (just eaten by me). Rather, the real product is the information on the page, whereby the number of sales takes on a new form- the number of page views. So a ratio that indicates the success of the business would be, for example, page views per day. Many page views per day attract the companies that wish to advertize on the website, meaning more cash for the blog. For this new digitized performance management, we must decide how best to place advertizements on the page so as to optimize the ad companies' earning capabilities and ours. Performance management in these businesses is often outsourced to management companies that specialize in this task. The web-based company Ezoc is an example of this. The founder of Ezoic “set off to start [his business]” after “realizing that most websites lacked the resources to scientifically analyze, test, and improve their sites” ( They also function as an ad intermediary while testing ad placement using their own ads and the existing ads from their customers' websites to optimize earnings for clients.
It is also important to maintain the community the blog creates. In addition to the website itself,
keeping active on pinterest, facebook, instagram, or twitter are ways to maintain a loyal community. Pins or shares or likes per day are key performance indicators, and they always correlate with the monetary success sought. Also featured posts from other blogs in the same market are indicators of healthy performance. To summarize, performance management in the digitized world is changing in that the focus tends towards a different set of performance indicators. These indicators focus on views or advertizement placements. Another change is the culture where interconnectedness and strong networks are increasingly important due to increasing competition within the already existing culture of the internet."

Samuel (November 10th, 2015)

Should Activity Based Costing be Applied by every Company?

"As we already discussed during our last lecture in class the activity based costing approach is most applicable for service companies as they cannot use the cost accounting approach.
When looking at production companies using this approach makes the most sense for businesses that produce/ manufacture two or more different products that have totally different manufacturing requirements. The ABC approach especially makes sense to be applied when one of these products is for example a high volume piece that runs continuously and does not need special activities or attention. Additionally the company also produces a low volume piece that requires special activities such as additional testing, many machine set ups due to small quantity orders and special engineering. If the company uses traditional costing, all the overhead will be allocated based on the number of machine hours. This would lead to a little amount of overhead costs allocated to the low volume product as it did not need as many machine hours as the high volume product. As a result there is a miscalculation of the true overhead costs of each product. The low volume product will at the end have little overhead costs even when it needed more complex overhead activity. We also said in class that changing the company’s cost system and implementing the activity based costing system takes a lot of time and energy as well as it is expensive. This shows that not every company should consider / make the step to apply this costing approach. The system works best for companies that have a complex production environment as for example many machines and products, different, tangled processes and so on. As a consequence it makes no sense and is only a waste money and time to apply the ABC in a rationalized production
environment with less complex and short production processes. As a conclusion it is to say that, and also referring to the question from the beginning, the activity based costing approach should not be used by every company. A company that wants to use the approach should consider before whether its production environment really needs such a complex costing system or not. ABC should only be used/ considered to be applied by companies that have lots of overhead costs and produce multiple products that on the one hand completely differ in the way they are produced and on the other hand uses complex manufacturing methods. In other words if a company has only a small amount of overhead costs and produces products that are almost identical, this company should not apply ABC."

L. November 24, 2015

Why is capital budgeting more an art than a science?

"Capital budgeting is the process of determining whether or not to pursue various projects or investments, depending on particular benchmarks, such as NPV, Cash Flows, and Discount Rates. Although, the computations of cash flows and NPV themselves are perceived as rational process, the practice of capital budgeting in real projects is bound to different cognitive biases, such as over-confidence, mental accounting, partition bias and escalation of commitment. Therefore, the decision making process of capital budgeting ultimately is the state of the art rather than a hard science.


From the start of the story building for investment strategy, management usually experiences overconfidence bias. It mean that own knowledge and opportunities are overestimated while the risks areunderestimated or even neglected. In one of the studies at Berkeley Haas School of Business, the overconfidence bias was studied trough capital budgeting problem in which a manager, using his information about the prospectsof a risky project, must decide whether his firm should undertake the project or abandon it in favor of aless risky investment alternative. The model developed thereshows that a manager’s overconfidence creates two potential sources of value for him and the firm overall. First, the manager’s overconfidence implicitly commits him to follow an optimal risky investment policy with a flatter compensation schedule. This is valuable when risk-taking incentives come with suboptimal risk-sharing arrangements between firms and risk-averse managers. Second, the manager’s overconfidence commits him to exert effort to gather information that improves the success rate andvalue of the firms investment policy (Gervais et al., 2011). This generally demonstrates that one of the key drivers of the firm’s decisions is the managers’ compensations andhis/her behavioral biases.


In the next stages of capital budgeting process, namely the cash projections and sensitivity analysis, mental accounting as a cognitive bias alters the rational decision making. In particular, mental accounting challenges the categorization and valuing of financial planning and outcomes. It could come from the different perceptions of markets in terms of investment perspectives. Thus, it can result in treatment of new risks differently than existing risks; separation of funds to different accounts based on subjective criteria and so on. (Schönbohm, Zahn, 2012). Other biases,such as partition bias and escalation of commitment, also affect the decision making and execution of the project. The partition dependence bias leads to escalation of commitment through equally allocating available funds over the business of the firm.


Given all those various biases it is clear that management can be very creative in capital budgeting process onthe one hand, but quite prohibitive in terms of different behavioral biases onthe other. However, this demonstrates that capital budgeting process, in its core of story building, is the state of the art, setting aside the scientific tools such as NPV, computation of cash flows and discount rates that bring some rational to the creative process of capital budgeting.


Author: Aldar (Nov. 215)




·     Gervais, S., Heaton, J. B., Odean, T. . (2011). Overconfidence, Compensation Contracts, and Capital Budgeting.Available: Last accessed 15th Nov 2015.

·     Schönbohm, A., Zahn, A. (2012). Corporate Capital Budgeting – Success Factors from a

Behavioral Perspective. Available: https://kluedo.ub.uni- Last accessed 15th Nov 2015.

Is There a Link between Business Model and Accounting?

"The primary purpose of accounting is to provide information for decision-making. The recipient of the information generated by the unit accounting system, need to understand how the company generates a value for the customers and revenues, to introduce a new Business Model. In all companies there is unbreakable link between Accounting and Business Models.

A Business Model is kind of a value chain made of two parts: “Part one includes all the activities associated with making something: designing it, purchasing raw materials, manufacturing, and so on. Part two includes all the activities associated with selling something: finding and reaching customers, transacting a sale, distributing the product, or delivering the service.”[1]

According to second paragraph, to create new business model is important to remember this three different but complementary tools: strategy, business model and management accounting. It needs to be used by companies to create value in the long term. All activities taken by the company involved significant changes in the expenditure and effort within it, need to be controlled by the managers on regular basis.  In order to achieve the intended objectives of introducing a Business Model, they should first perform an in-depth financial analysis and consider any changes, which may occur as an income or expense of the company, and, consequently decide, whether the model will bring the company success in the market.

What’s more, supporting the above paragraph, I quote the statement of L.W. Walter, who emphasize one sentence in his book “Principles of Accounting”, that “one of the primary task of the management accounting professionals is the mapping of the Business Model used by the unit and examine whether this business model will allow you to achieve the required level of profitability. [2]

To sum up, there is a link between Accounting and Business Models, which cannot be broken. It is impossible for the company to create its value without carrying out the measurement results of the actions."


Author: Dagmara (Nov. 2015)


-          Harvard Business Review, January 23, 2015, “What is a Business Model?”

-          ICAEW, Financial reporting Activity, “Business Models In Accounting: the theory of the financial reporting”;

-           CEEOL, Article by Jan Michalak, “Business models impact on accounting representation of an entity’s financial position”,



[1] Harvard Business Review, January 23, 2015, “What is a Business Model?”

[2] CEEOL, Article by Jan Michalak, “Business models impact on accounting representation of an entity’s financial position”


"Business model is the plan implemented by a company to generate revenue and make a profit from operations. It is set by the company because the main purpose of the business is definitely to make money. In strategic performance management, the company tries to extend their value of existing business model and innovatively create new business values with creative business models. Considering that the definition of financial accounting is the process of recording, summarizing and reporting the myriad of transactions from a business, it seems business model and accounting do not have closed relationship. However, accounting is deeply involved in whole concept of business model in three perspectives.

            First of all, the objective of setting business model has a link to accounting. As stated above, the company has to earn profit and this is why it has to set profitable business model which can tell why customers should buy its product or use its service. Colin, Nick, Tord & Pauline (2015) stated that this profitability of the company is directly related to its ability to sustain liquidity and solvency. Moreover, the company has a lot of stakeholder relations so it has to make a visible information through its business model. All of these information can be suggested by accounting numbers.

            Secondly, accounting information is needed when the company set up its business model. Procedure of setting business models includes considering their resources or capital available, risk, value proposition, and so on. For resources or capital, the company must know what it can use for satisfying their customer and it is clearly shown in financial statements. Further, one of risks the company has to be cautious mostly is an ability to pay back its debt in time. By carefully watching the cash flow statement and amount of debt in balance sheet, they can manage their debt efficiently. For the value proposition, the company must have knowledge about exact cost of its products and services. Above this, there are numerous things it has to consider with accurate accounting information about the company itself.

            Lastly, the company can use accounting methods when it evaluates whether its business model goes well because it can be the most objective measurement. Their result can be measured by various ways with accounting number. Key Performance Indicator (KPI), a set of quantifiable measures that a company uses to gauge or compare performance in terms of meeting their strategic and operational goals, can be a good example (Klipfolio, 2015). For instance, the company can calculate sales growth, average profit margin, or average purchase value with accounting numbers regarding their sales.

            To conclude, financial accounting has a strong connection to business model from the perspective of purpose, procedure, and evaluation of its business model. When the company creates the business model, it has to consider all aspects which would have an effect to them. This means, of course, they must not focus only on numbers. The company must do a lot of research of their market and customers and use a qualitative measurement for more accurate and better evaluation of its status. However, the role of accounting should not be ignored. It will always help the company to have an object viewpoint.

Author: Soomin Lee (Nov. 2015)



 Haslam, Colin, Nick Tsitsianis, Tord Andersson, and Pauline Gleadle. "Accounting for Business Models : Increasing the Visibility of Stakeholders." Journal of Business Models 3.1 (2015): 62-80. Journal of Business Models. Web. 25 Nov. 2015.

        Key Performance Indicator. Klipfolio Inc. Web. <> 25   
              Nov. 2015.

"From my point of view, the answer is quite obvious at the first glance because accounting has a very close relationship with every parts of business. However, as the concept of business model is not very familiar for me compared with accounting, I firstly looked it up in Wikipedia and it says: A business model is an "abstract representation of an organization, be it conceptual, textual, and/or graphical, of all core interrelated architectural, co-operational, and financial arrangements designed and developed by an organization presently and in the future, as well as all core products and/or services the organization offers, or will offer, based on these arrangements that are needed to achieve its strategic goals and objectives." And as I underlined, financial arrangements is involved, where accounting plays an important role.

Secondly I looked up an essay called Business Models in Accounting: The Theory of the Firm and Financial Reporting Information for better markets initiative. The essay is a fascinating work but I only read part of it because it’s too long. Here is the link In this article, the author raises the opinion of the way of relating theory of the firm and accounting measurement via firms’ business models. For example, cost allocation and revenue recognition for different firms are also closely tied to their business models.

To illustrate this point, I found an example in another article (it’s in Chinese so the link is only for me Haha) Here the author mentions a company named PPG, who switched its business model from the traditional retailing to innovative supply chain and call center. After changing its business model, its accounting measurement also changes significantly. For instance, as the company has a very direct relationship with its customers then there are less accounts receivable but more cash, which insures the company’s cash flow. What’s more, as there are no more real retail channels, its inventory cost is lower. However, as the need of advertisement increase noticeably, PPG’s cash outflow is more than before, which my result in contingent liability.

This is actually a quite ambitious topic and maybe I can go deeper into it in the future after further research. But up to now, the answer is for sure that there is a link between accounting and business model, or I would like to say, many links between them."

Author: Choayng He, Nov. 2015

What is the Value of Management Control Systems?

The principal and agent problem suggests, that in a conflict of interest people are prone to pursue their own agenda and ignore the best interest of their employer. (The Economic Times, 2015) Managers often face the pressure of fulfilling the needs of the stakeholders, and controlling that the organizational objectives are achieved by the employees. The attention of the management is thus often limited, which management control systems are trying to solve.

Employees are governed through hierarchic systems, supervisory boards, budgets and rules and regulations. They can be monitored with the help of peer pressure, or even technologically. Technology can support managers and owners to keep a finger on the pulse of people they may never meet in person, but who are responsible for work that contributes to the growth of their businesses. The control systems are there to provide supervision, pressure and even fear of replacement if desired outcomes are not achieved, but also to provide the employees with tools of improvement. These can be feedback processes, planning and setting objectives, and incentive programs. (Simons, 1992) As a whole, management control systems cover almost the entire company; its culture, planning processes, cybernetic controls and administrative controls such as the company policies and procedures. (Schönbohm, 2015) Companies want engaged employees, who fully identify themselves with the company. For this reason, cultural control plays a significant role in controlling. The more employees feel belongingness within the company clans and share its values, the more integrated they are, and the more they are committed.

Different methods of control can affect the employees positively or negatively. Control in the form of micromanagement is actually a decrease in power for everyone involved. When every detail of the employee’s work is scrutinized, managers don’t have the bandwidth to perform their own necessary tasks and employees are never given the autonomy to grow so that they can excel in those particular duties. On the other hand, when small groups of people work together, they can easily get feedback from their peers, not from their bosses and that gives them more chances to improve. A strong sense of belonging to the work group and feelings of being a part of the organization will motivate the employees to work more effectively and create more benefits to the company.

In the end these systems give an illusion of control of the management. Management control is often only a “rationality facade”, a social dilemma, where there truly is no full supervision. (Schönbohm, 2015).  People are also not machines that can be controlled, nor does the management control only serve the sole purpose of supervision. It serves a bigger picture, as a process by which the managers influence other members of the organisation to implement the organization’s strategies and goals. It is communicating information and improving the company as a whole.

The value of management control systems is to improve the overall performance inside a company with the use of different methods.


Author: Mia Varis, Dec. 2015




Robert Simons (1992) The Role of Management Control Systems in Creating Competitive Advantage: New Perspectives. In Emmanuel C., Otley D. & Merchant K.  Readings in Accounting for Management Control

Schönbohm, Avo (2015) Management Control Systems 08 CMA Management Control System WS15-16, lecture slides

The Economic Times (2015) Principle Agent Problem [online] Available from:                      [Accessed on 27th November]

Risk Management: Strategic Planning or Bureaucratic Burden?

"Risk management is not just preventing bad things from happening but “properly implemented, it can provide strategic and operational opportunities by focusing activities on what is important to an organization”[1].

When conducting strategic planning, according to the environment, in which the company is concerned, is the inevitable risk that occurs during its implementation. Risk management is a key aspect of strategic planning, because it gives the company ability to determine where it is most likely to appear, it provides quick response and appropriate measures taken to minimize the risk and its consequences.

Moreover, a certain amount of risk is necessary and unavoidable, but can be a positive force in the development of services that the companies provide.         The companies need to remember that “risk management is not a barrier to innovation but it is an enabler”[2].  All of them face threats in their environment-new competition, new technology, changes in consumer tastes but only a few of them manage these risks effectively. Those who do so are alert to changes in the environment and are willing to change internally to respond to them. Today’s risk managers see their role as helping firms determine and clarify their appetite for risk and communicate it across the company to guide decision making.          In some cases this means helping line managers reduce their risk aversion”[3].

Unfortunately, risk management is to often treat as a compliance issue that can be solved by drawing up lots of rules and making sure, that all employees follow them. Many such rules are sensible and reduce some risk that could surely damage a company; nevertheless, rules-based risk management did not prevent the failure of many financial institutions during the 2007-2008-credit crisis.

To sum up, risk management has a lot f common with strategic planning. Companies, that identified risk management with the introduction of a series of principles designated to protect the company against potential threat, should rather focus on the conversion of its strategy, minimizing existing risk and work together on the further implementation of their plans and continuously succeeding.

Author: Dagmara Kozlowska, December 2015



-          Risk management. Achieving the value proposition”, Paul Wallis;

-          Integrating Risk Managment into Strategic and Business Planning, Paladin Risk

-          How to live with risks, Harvard Business Review, July-August 2015

-          More bureaucracy or strategic change agent?, Julian Luevano

-          Managing Risks: A New Framework, Harvard Business Review, June 2012, Robert S. and Anette Mikes

[1] Risk management. Achieving the value proposition by Paul Wallis;

[2]  Integrating Risk Managment into Strategic and Business Planning, Paladin Risk

[3] How to Live with Risks” Harvard Business Review, July-August 2015


Risk management is an essential tool to be prepared in order to react to uncertain and unforeseen events.  Risk management is the area that is mostly targeted for improvement. Therefore, many organizations are being asked by their boards, lawyers or other stakeholders to continuously control and improve the way they are managing risk, in order to prevent crisis or repercussions (AICPA 2010).  An effective Enterprise Risk Management (ERM) process helps management and the board to reflect (and occasionally revise) the organization’s overall risk appetite (Wallis 2012: 37) and ensures that the organization’s strategic objectives are congruent with that appetite which should be well proportioned: No risk, no profit.  An effective risk management can be seen as a coordinated activity that supports strategic business objectives. It is a process within the organization’s fabric, which supports informed decision-making and provides reasonable assurance because risk is not eliminated but managed (Wallis 2012: 37). Considering this, one can conclude that strategic planning and risk management are closely linked to each other: Not considering the potential emergence of risk (i.e. poor risk management) but having high strategic objectives will lead to disastrous outcomes (Wallis 2012: 38). The author Paul Wallis published an article in the “Government Finance Review” in 2012 where he defines a well-implemented risk management as a value proposition, which is the result of the optimum balance between risks and cost an organization needs to consider:  For risk, Wallis seeks to find out whether the organization understands the risks it faces. For cost, he considers whether the organization’s focus is on the most crucial risks and if they optimize technology in order to manage risk.  When the risks are aligned to business, program and process objectives within the organization but also to customer service, risk management will be most effective and might serve as value proposition (Wallis 2012: 38). According to Wallis, companies are often too stressed to give risk management process its time to prosper and tend to quick top-down approaches that lead to failure. In addition, a majority of companies find it difficult to identify risks and try to find quick solutions without considering the company’s strategic objectives or overall culture, which prevents them from finding an appropriate risk management style (Wallis 2012: 39). However, managing and addressing every potential risk can be time-consuming and might be seen as “bureaucratic burden”. Therefore, categorizing risks (i.e. with the help of a risk map showing the impact and likelihood of each risk) are an important tool in order to keep the ERM process simple (Wallis 2012: 40). By the help of such a map, companies are able to eliminate a service or a process that does not meet with the business objectives or addresses significant risks (Wallis 2012: 40).  To sum up, risk management may be the most important factor that companies need to consider in order to fulfill their strategic objectives and remain competitive even in times of economic uncertainty. 
Maximiliane Merleker, 02.12.15  


AICPA (2010): Audit Commitee Brief: Taking a Strategic View of the Enterprise, in New York, NY, October 14-15 In URL: f/DownloadableDocuments/Adding%20Value,%20Not%20Bureaucracy.pdf

 Wallis, P. (2012), Risk Management: Achieving the Value Porposition, published in „Government Finance Review“ In URL: 

Why do managers need management control/performance system?

A management Control is defined as the “the process by which managers ensure that resources are obtained and used effectively and efficiently in the accomplishment of the organization’s objectives.”  This definition shows the key importance of the MSC as an encompassing the largely accounting-based controls of planning system, monitoring of activities, measuring performance and integrating mechanisms, but MCS also served to artificially separate management control from strategic control and operational control.
Management control/performance system is very important for every manager because the concept of MCS can include management accounting systems, budgetary practices, performance measurement systems, project management systems, planning systems, and reporting systems. MCS is the type of control, which ‘requires performance measures and evaluations and the provision of incentives, dominance in importance in the vast majority of organization.”  Moreover, when we are talking about incentives we are not thinking just about bonuses or stock opinions but also nonmonetary incentives, like praise or recognition.
MCS provides managers with effective control over performance across the whole organization and one of the effective tools that support MCS is the Performance Wheel, suitable for most organizations. This tool suggest, that “different models of control can be reduced to one overarching model, provides a comprehensive model of performance management that can be adapted to meet the needs of any form of enterprise.”
Moreover, managers need to use MCS to increase the employees’ motivation to work. In fact employees spend at work an important part of their life and spewed from time to time speeches is not enough. Mostly managers assume, that an effective program to raise employee morale requires the expenditure of a specific sum, but it is not true. Research shows that those elements, that make employees happy, managers cannot even buy.
To sum up, management control system is very important for managers in every enterprise. Managers do not normally take part in everything that takes place in the company and they are not able to control all activities, nor any employee. A well-chosen MCS can become an effective solution in this situation. It ensures effective management of the company, contently employees and thus faster and more efficient work.


by  Dagmara Kozlowska (2015)


  1 Management Control System, Strategy and Performance, Anthony, 1965,
  2 Kenneth A. Merchant &Wim A. Van der Stede, Management Control System, Prentice Hall, 2007
  3 Ted Watts, New performance measurement and management control system, University of   

     Wollongong, 2012

Sustainability Accounting has seen its peak.

“Sustainability Accounting has seen its peak and there is no need to revive it.”


Sustainability accounting is a useful tool that can be employed to assist organisations in becoming more sustainable. „It recognises the important role of financial information in this transformation and shows how traditional financial accounting can be extended to take account of sustainability impacts at the organisational level.”[1] The focus is on extending the range of monetised information (covering environmental, social and economic impacts) on which decisions are made. Nevertheless, in nowadays comapnies sttoped to creating this raport and there is no need to revive it.


Sustainability reporting regards how the company distributes the value created among the stakeholders in order to achieve a sustainable competitive advantage. “If there is no point of reference in a sustainability report, such as comparisons to industry peers readers of the report will find it difficult to know if what they are reading is in fact truthful.”[2]


"Sustainability reporting becomes too burdensome"[3]. Much of the current criticism has to do with the number of indicators expected and the inclusion of value chain assessments in order better define an organization’s broader negative and positive impacts. Critics say this is too complex for multinationals and too burdensome for smaller organizations. Moreover, despite the fact that sustainability and CSR reports focus on ESG factors, the information they contain is seldom useful to investors.


To sum up, even if the objectives of sustainability accouting give a clear and complete picture of the real costs and benefits arrising from decisions about allocating resources – financial, human or physical, there is no need to reviev it. Nowadays, „value generation of the company does not happend by simply creating a sustainability raport, but it focuse on teh resoults of a company analysis, vision, implementation and execution”[4].

by  Dagmara Kozlowska (2016)


[1] The sigms guildelines – toolkit, Systainability Accounting Guide, SIGMA project, 2003;

[2] Michelle Millar,  The pros and cons of sustainability accounting

[3] Ralph Thrum, Reforming sustainability reporting: for and against, 2013

[4] Prof. Dr. Avo Schönbohm, Sustainability Management