The price of popular culture – surprising accounting

by John on February 15, 2018 at 10:40 am
Posted In: Ch 4 - Job costing, Ch 5 - Accounting for Overheads, General management accounting

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There has been more interest recently in the research of accounting practices in areas of popular culture. One such area of popular culture, and where there has been some interesting accounting stories is film-making.

Consider for instance the block-buster film, Forrest Gump, released in 1994. Starring the world-famous actor Tom Hanks, of course, winner of many accolades including 6 Academy Awards, and in its time hailing record box office receipts, the film’s profits have been surprising low. And, this is all really down to the accounting of the film.

According to popular media reports, the writer of the book on which the film is based received somewhere in the region of $300k for the rights to make a film, and then ‘only’ $250k receipts from the film studio based on net profits for the film. While to you and I these might seem like enormous monies, they are not really so huge in this type of industry, even back in 1994.

Hollywood, and their film studios (which are effectively the accounting/profit centres) are notorious for idiosyncratic accounting practices, and it is these practices which have steered such a smash-hit film towards surprisingly low profitability. For instance, it is claimed that the studio for Forest Gump allocated significant and many expenses against gross profits, including a charge for losses in future films! And also, maybe bizarrely, major stakeholders such as the lead actor Tom Hanks, are claimed to have received part of their payment based on gross profits (which is bound to have a sizeable effect on net profit).

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Disputed accountability: policing in football

by John on February 1, 2018 at 10:31 am
Posted In: Ch 13 - Relevant Costs & Revenues, Ch 19 - Cost Management, Value Creation and Sustainable Development, Ch 3 - Taxonomy of Costs, Ch 4 - Job costing, Ch1 - changing contexts, General management accounting

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Everyone knows how successful English football has been in the last 25+ years, at least in the Premier League. Especially with an enormous growth in TV revenues, those clubs who have remained regularly in the Premier League, and the multiple elites connected to such clubs (e.g., owners, sponsors, players, agents), have earned huge sums of money.

However, out of such growth, economic success, and financial spoils, it would seem that there have been numerous areas where accountability in the game has become somewhat hazy, lost even. One such example of this surfaced last year in the general policing of football matches.

Usually football clubs meet the cost of policing inside their grounds (but also aligning the amount of policing with how much private security they contract in). However, outside of a club’s ground, in the surrounding community, is where much of the policing happens, and it is local councils who meet the bill for this service.

In 2017, the Mayor of London argued that big clubs in London should pay much more towards the costs of policing outside grounds before games. He was effectively questioning the accountability channels in place; and was arguing that as football clubs were earning huge sums for their games, they should also be accountable to more of the wider costs incurred for putting a game on. And, especially at times of strict austerity measures, where councils’ funds are being cut significantly, these costs are not negligible.

This case conjures up questions about where accountability lies in the Premier League of English football. Should the clubs, and their economically-benefitting associates, incur more of the indirect costs of putting on a game? Or, as is the case here, should it be the taxpayer (e.g., through council tax), many of whom don’t even like football, who should take the hit?

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Invisible consequences of accounting

by John on January 18, 2018 at 10:30 am
Posted In: Ch 19 - Cost Management, Value Creation and Sustainable Development, Ch 22 - Management Accounting Change (Implementation), Ch1 - changing contexts, General management accounting, Uncategorized

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Accounting in all societies is predominantly grounded in a focus on the economics of transactions; it visualises and legitimates financial success or failure. The economics values underpinning accounting practices is never really questioned, at least not so much in commercial business. Over time, organisations, groups and individuals have benefitted significantly from the accounting we know and understand. Using accounting tools, many have earned significant economic returns (e.g., business profits, shareholdings). However, there can be repercussions, adverse consequences, from a generally unquestioned approach which sees accounting as a means through which to achieve the economic ends targeted. Indeed, there are many also who suffer greatly as a result of the approach which gives priority to making economic gains. These are the invisibles in today’s society.

For instance, while many people in the developed and globalised world regularly enjoy the spoils of economic maturity – e.g., watching TV, eating a variety of foods, wearing fashionable clothes – there are others in lesser developed nations who toil in ‘sweat factories’ to produce these spoils at low cost and, importantly, for very little wage in return. We only have to think about rising levels of homelessness across the world, and modern-day human slavery to realise again that the way we account for ‘success’ in our societies clearly doesn’t touch everyone’s lives.

The question must be: do we need to account differently in our societies? Do we need a wider visibility than we have? For instance, should our mainstream accounting be more in tune with accounting for the social wellbeing of the many, and/or accounting for the environment which human beings inhabit? Do we really account for things in appropriate ways that is fair to everyone, or is the indisputable bias on economic values a big enough problem for us to need to tackle it now, and, how?

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Avoidable costs – United Airlines

by admin on June 12, 2017 at 1:27 pm
Posted In: Ch 3 - Taxonomy of Costs

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Image from Bloomberg.com

Recently, it seems United Airlines got themselves into a bit of a bad public relations  scenario by ejecting passengers (with force) from a domestic US flight. I’ve never used United and based in this, I never will, as it seems they commonly overbook flights.

First, in the age of technology we live in, how the hell a system allows overbooking I cannot fathom. Maybe if a smaller replacement aircraft transpired in an emergency, I can understand, but this would not be an overbooking issue.

You can read an article about the event at the link above, but here’s a brief rundown:

  • United over book
  • They look for four volunteers
  • They offer $400, then $800
  • Nobody volunteers
  • They forcibly remove four passengers

And all of this to get their own crew to a location for the next day – this alone says a lot about their ability to manage the business, not having a standard way to get staff, or reserving x seats for staff.

Back to management accounting, and we know that an avoidable cost is one which can be eliminated by not doing something e.g. close a production line. We also know that in the long term, all costs are avoidable. So what about the United story.  Well, one thing that will no doubt happen is a string of expensive law suits – and I personally hope United get screwed. This is an avoidable cost, and surely are the costs associated with the apparent regular overbooking. I’d even have a wild guess that it may have been cheaper to charter an aircraft for the staff than what this will ultimately cost United. Even $5000 a passenger to entice volunteers would be cheap too, or maybe $50000. Regardless, United need to find a long term solution to avoid such costs. They have apparently now increased the offer to passengers to $10,000 to give to give up their seats.

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Goals gone wild (and hitting back) at Wells Fargo

by João on May 29, 2017 at 8:00 am
Posted In: Ch 16 - Performance Measurement: theories and principles

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The scandal around Wells Fargo’s opening of fake accounts continues to evolve. Last year, news emerged that bank employees opened up to 2 millions of bank and credit card accounts without getting customers’ authorization. And the reason was the adoption of high-pressure sales tactics, driven by “the bank’s pressure-cooker sales environment” – an intense pressure for sales people to meet their goals, requiring them to work extra hours to meet widely unrealistic sales goals – otherwise, they would lose their jobs.

After the scandal emerged, the much-criticised sales goals were dropped, the CEO apologised and soon afterwards retired and employees were fired “for improper sales tactics”. New account openings and bank traffic have sharply reduced. Although distinguishing between the reduction caused by the end of the irregular practices and the reduction caused by negative publicity and badwill is difficult, it is likely that the second effect is quite significant.

And there are very significant and direct “out-of-the pocket” costs. After paying $185 million to federal and California authorities in 2016, they have just announced that they will pay an additional $110 million to settle a class-action lawsuit.

“Goals gone wild”, is the title of a very interesting 2009 paper by Ordoñez, Schweitzer, Galinsky and Bazerman (published version here; HBS WP here), alerting about the “systematic Side Effects of Over-Prescribing Goal Setting”. Its list of examples of aggressive goal setting in large organizations going terribly wrong can be easily updated throughout the years, as many organizations are lured by the promise of better performance if they set very (too) ambitious goals. The Well Fargo’s scandal provides a recent, and very notorious, addition to such list of examples of goals going terribly wrong – indeed, of “goals going wild”.

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