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THE EVOLVING ROLE OF THE FINANCIAL FUNCTION: ENHANCING ORGANISATIONAL
EFFECTIVENESS VIA FINANCIAL LITERACY
by
Richard M S Wilson, Ian Herbert and William Murphy
“Given: one marketing manager and one accounting manager.
Finding: poor communication on financial criteria and goals.”
(Berry, 1977)
In the first article in this series (see accounting & business,
May 2004, pp 43-45), readers were encouraged to visit the associated
web-site (www.role-of-finance.com) and contribute to the discussion
on the ACCA-sponsored project examining the evolving role of the
financial function. This second article takes as its point of departure
the important issues of communication and financial literacy and,
as its frame of reference, the notion of organisational effectiveness,
and seeks to provide further stimuli to encourage readers to visit
the web-site in order to share their views/experiences.
COMMUNICATION
Whilst financial metrics provide a lingua franca which can be potentially
useful in organisations of any size and in any sector, their usefulness
is typically constrained by a number of factors. For example, financial
metrics are partial as a reflection of the fact that accounting
systems only measure those things which can be measured by accounting
systems, and accounting systems do not set out to measure such key
issues as purchase predisposition on the part of customers, employees’
job satisfaction, or the value of information as an asset, all of
which have an importance in seeking to enhance organisational effectiveness.
In addition, the preparation and distribution of financial reports
of various types, whether statutory accounts or internal budget
reports for example, presupposes that recipients are financially
literate. Consider the situation portrayed in Figure 1.
FIGURE 1: A basic communications system
The accountant (as sender) compiles financial reports to be communicated
to users (e.g. shareholders or managers), and this is done on the
basis of a set of expectations regarding the intended recipient’s
ability to make sense (i.e. to understand) those reports. Unless
there is reasonable congruence between the compiler’s expectations
of an intended recipient’s ability to understand financial
reports and that recipient’s actual sense-making there is
unlikely to be effective communication. How does the accountant
earn his/her keep and add value if communication is ineffective?
To think of the communication of financial information as simply
involving a message which will be automatically understood by its
recipient assumes that:
• the message itself is unequivocal and unambiguous;
• the meaning of the message is not socially constructed.
Work undertaken by the team suggests that this is not a useful
way of viewing the communication of financial information since,
in complex organisations, recipients of financial information do
indeed engage in sense-making activities which involve the social
construction of meaning. To date, sense-making has not been widely
discussed in the context of the design, implementation and operation
of accounting systems (but see Boland 1984 and, in relation to statutory
financial reporting, Hines 1988), although it is a well-established
approach in the field of information science (see Dervin 1999).
A MARKETING CONTEXT
If we take as a specific context the interface of accountants and
their marketing colleagues within a commercial setting, it can be
argued with some conviction that closer links and greater mutual
understanding are likely to help in enhancing organisational effectiveness.
(See Wilson 1999.) The procedural and legalistic traditions of accounting
have not lent themselves to the emerging needs of marketing practitioners,
but the onus is on the accountant on the one hand to relate to the
planning, decision-making and control needs of marketers if accounting
is to justify its role as a service function in the furtherance
of improved organisational effectiveness, and on the marketer on
the other hand to ensure he/she is sufficiently financially literate
to understand the relevance/meaning of financial reports to marketing
activities along with the financial consequences of marketing decisions.
This setting is clearly two-sided. Accountants need to understand
the context of marketing if they are to design, implement and operate
accounting systems that will be useful to marketers, whilst marketers
need to be aware of the potential of accounting information to help
them in achieving desired marketing outcomes.
EFFECTIVENESS
Being effective – whether at the individual or organisational
level – involves achieving that which one set out to achieve.
In other words, an effective organisation is one which realises
its desired outcomes. However, different stakeholders aspire to
achieve different outcomes, and not all outcomes can be expressed
in financial terms, which inevitably limits the organisational role
of the financial function.
On the marketing /accounting interface, as on other interfaces,
there is a need to avoid the problems of “specialised ears”
and “generalised deafness” pointed out by Boulding (1956)
whereby those from one discipline or functional area can converse
in a meaningful manner with others from that same discipline/functional
area but lack the lingua franca to facilitate meaningful dialogue
with those from other disciplines/functional areas.
How can effective communication by the accountant be achieved?
In striving for this it is important to avoid blinkered vision.
For many senior managers, as argued by the late Peter Doyle (1998),
the principal business objectives are profitability, growth and
shareholder value – as characterised by what he termed right-handed
or financially- driven organisations. These organisations have as
their key planning mechanism a financial plan or budget, with costs,
expenses, debt and assets all being controlled in order to achieve
financial goals. The consequence of this is that, if sales begin
to slip, there is a tendency to look inwards and to cut back on
areas such as advertising and R & D in order to maintain or
boost profits.
There is a real danger of the customer being ignored - even though
satisfied customers are the main source of all profits and shareholder
value. Hence left-handed or market-driven organisations have as
their primary focus the objective of satisfying customers. This
involves defining and understanding market segments and then managing
marketing programmes for each segment in ways which ensure that
customers’ expectations are either met or exceeded. Looking
outwards and forwards, and building on the diagnosis of an external
market situation, is the essence of marketing, whereas there is
still evidence to show that accounting too often tends to build
from the analysis of internal costs and financial figures.
How can organisations best structure their financial functions
to provide the necessary support – along with suitable systems
– to meet the needs of marketing staff? Readers may care to
share their experiences via the web-site (www.role-of-finance.com).
FINANCIAL LITERACY
The team’s interest in financial literacy stems from the
belief that every responsible manager will be involved in one or
more of the processes of resource acquisition, resource allocation
and resource utilisation. These processes inevitably have financial
characteristics hence, in order to function in an effective manner,
every manager needs to be financially literate. This is equally
applicable in (budget-constrained) public sector organisations as
well as in (profit-seeking) private sector organisations.
Literacy enables individuals to make meaning, to understand, and
to learn – which gives scope for them to become more effective.
In other words, sense-making is a pre-requisite for the achievement
of desired outcomes or objectives. We can define financial literacy
as:
An individual’s ability to obtain, understand and evaluate
the relevant information necessary to make decisions with financial
consequences.
(Mason & Wilson, 2002)
It is important to note here that financial literacy can only ensure
that individuals are informed to make decisions: it cannot ensure
that the ‘right’ decisions are actually made. This is
because, inter alia, individuals do not always make decisions based
purely on economic rationality (see, for example, Wilson & Zhang,
1997). In addition, managers are often required to make decisions
in situations steeped in ambiguity and equivocality – and
this reinforces the requirement for them to engage in sense-making.
CONCLUSION
Underlying this discussion of effective communication, financial
literacy and good links between those in the financial function
and their colleagues in, say, the marketing function in striving
for enhanced organisational effectiveness, there is a significant
organisational learning thrust. Thus the financial function’s
role is seen as being crucial in contributing to organisational
learning via better communications as a means of enhancing organisational
effectiveness based on:
• improving users’ ability to understand (i.e to make
sense of) financial information;
• improving the quality/relevance of information provided
by the financial function.
Readers are encouraged to visit the web-site (www.role-of-finance.com)
to contribute any points which may have been prompted by the issues
discussed in this second article in a series of four.
REFERENCES
Berry, D. (1977) “Profit contribution: accounting and marketing
interface”, Industrial Marketing Management, 6(2), pp 125-8.
Boland, R.J. (1984) “Sense-making of accounting data as a
technique of organizational diagnosis”, Management Science,
30(7), July, pp 868-882.
Boulding, K.E. (1956) “General systems theory: the skeleton
of science”,
Management Science, 1(1), April, pp 197-208.
Dervin, B. (1999) “On studying information seeking methodologically:
the implications of connecting metatheory to method”, Information
Processing and Management: An International Journal, 35(6), pp 727-750.
Doyle, P. (1998) Marketing Management and Strategy, London: Prentice
Hall. (2nd edition).
Herbert, I.P., W.D.Murphy & R.M.S.Wilson (2004) “The
evolving role of the financial function: keeping the score or adding
to it?” accounting & business, 7(5), May, pp 43-45.
Hines, R.D. (1988) “Financial accounting: in communicating
reality, we construct reality”, Accounting, Organizations
and Society, 13(3), pp 251-261.
Mason, C.L.J. & R.M.S.Wilson (2002) “Conceptualising
financial literacy”, Paper presented at 9th IAAER World Congress
of Accounting Educators, Hong Kong, 14-16 November.
Wilson, R.M.S. (1999) Accounting for Marketing, London: International
Thomson Business Press for CIMA.
Wilson, R.M.S. & Q.Zhang (1997) “Entrapment and escalating
commitment in investment decision-making: a review”, British
Accounting Review, 29(3), pp 277-305.
THE AUTHORS
Richard M S Wilson FCCA FCMA is Professor of Business Administration
& Financial Management (Emeritus) at Loughborough University
Business School
Ian P Herbert FCMA is a Lecturer in Accounting at Loughborough
University Business School
William D Murphy CPFA is Principal Lecturer in Managerial Accounting,
Organization Theory and Research Methods at the University of Derby
Business School
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