Category Archives: Accounting

Short-term focus of management ain’t due to accounting

CFO.com had a provoca­tively titled article this morning that just shouted out for a retort: “Is Accounting Blocking R&D Invest­ments?

Now how could accounting be doing that? Why, because senior management is preoc­cupied with meeting short-term quarterly earnings targets, and are cutting back on longer-term focused R&D investments!

I thought this was just an overzealous headline writer, out to get clicks (mission accom­plished!) and perhaps the article itself would walk back the ridiculous premise, but instead it doubled down:

The accounting treatment of R&D as a period expense and the overem­phasis many public-company execu­tives place on EPS. Many execu­tives pay lip service to the long term benefits of R&D. But in reality they base the size of their companies’ R&D budgets primarily on a single period’s EPS dilution. Thus, they are only looking at a tiny fraction of the value equation.

It’s gotta be up to management to teach the market how to appro­pri­ately value their company, and it’s gotta be management that shares a long-term vision of sustainable profitability to share­holders. This short-termism simply has to stop.

It isn’t the accoun­tants who are pushing for quarterly earnings reports. I’m sure accoun­tants would love to spread out the reporting, it would make their lives a lot easier not to have to calculate myriad accruals on a quarterly basis only to reverse them after.

Value, real lasting value, not just for share­holders but employees and commu­nities, is built over the long haul.

Do we have a software valuation issue?

Soumitra Dutta of French business school Insead thinks so, as reported in this story on CFO.com:

Insead has developed a “novel technique” to value software assets. Using conjoint analysis — “a time-tested and widely used robust technique in marketing science,” Dutta claims — companies can place a value on software by identi­fying its individual attributes, compiling trade-off data from employee surveys and crunching the resulting numbers using “a complex form of analysis of variance.”

The report produced by Dutta asserts that companies are therefore “under-reporting” their software assets, which is a troubling leap to make. When it comes to financial reporting, we need to be conser­v­ative about the value of an asset like software and stick to objective data like cost and a reasonable amorti­zation rate. Compa­ra­bility and consis­tency as twin aims of any accounting framework are thus maintained.

There is great intan­gible value tied up in software — as well as the users of the software — but that’s not enough to warrant writing up software assets en masse.

The report also argues companies are not lever­aging these assets optimally, and cites the company’s brand value and patent portfolio as examples of more optimally levered intan­gible assets. But if this is the case, they shouldn’t be arguing that accounting treatment is to blame. Other intan­gibles are not written up using the types of analysis the report urges either. There are more important objec­tives to financial reporting.

What do you think? Would valuing software assets like this improve or distort financial reporting?

Work-life balance: Laptops on holiday

Work-life balance is a topic that comes up frequently in the accounting profession. Robert Half, a recruiting company, surveys accoun­tants occasionally.

38% of accoun­tants take the office with them on holiday in the form of either a laptop or handheld computer. The research also found that 34% of accoun­tants globally admit to working in the evenings, while 37% respond to e-mails and take phone calls in the evening when they have pressing deadlines.

  • I left every­thing when I went on vacation last month. No laptops, and the phone was off the entire time!
  • Working in the evenings is a given during busy season and sometimes necessary at other times.
  • I respond to emails if I happen to check my work address, but that doesn’t happen regularly at this time of year (see above).

I may have left the computers at home because I was worried about potential surges and didn’t want to buy a protector. But I definitely cut the cord to the office. Generally you aren’t taking vacation if it is a busy time, though.

I was reading and responding to email earlier this afternoon (Sunday!) because I happened to check. It didn’t really feel like work, and certainly not burdensome. It all depends on the current workload. If I was writing this post in March, it might sound different!

Improving education through vouchers

Government control of education is accepted without a second thought by most citizens of our society today, but there are growing ranks of those who believe government should have a hand only in financing education, and not admin­is­tering it.

This idea, that a government could fairly finance education based on a voucher system, is often at the heart of any current educa­tional funding discussion. An educa­tional voucher system increases the satis­faction and partic­i­pation of parents in their children’s education. Compe­tition encouraged by a voucher program spurs improvement in public schools.

Equality of access to insti­tu­tions improves dramat­i­cally with a program targeted at low-income children. Finally, in a democ­ratic society like ours that is the champion of the modern free enter­prise system, it simply does not make sense to deprive our children of the benefits a public market in education would provide.

Opponents of a voucher system voice many arguments to defeat the voucher discussion. They claim a voucher system results in schools that are no more effective and no more efficient than public schools. They claim that top students are chosen to attend private schools with voucher aid and it results in “cream-skimming” of the best and brightest out of the public system. They claim that vouchers drain money from the public system as well. Finally, it is argued from a moral high ground that to profit by educating our young people is deplorable. Their arguments are misguided and short-sighted.

Vouchers are, in essence, a government subsidy given to parents to fund the cost of private education. In what is widely regarded as the origin of the voucher movement, economist Milton Friedman argues in his 1955 essay that “a minimum level of education” should be funded by vouchers to be spent by parents on “approved educa­tional services.” The role of government “would be limited to assuring that the schools met certain minimum standards, such as the inclusion of a minimum common content among their programs” and their previous role as providers would be reduced. This was a somewhat revolu­tionary idea in a system whose basis up to this point had been accepted as unchangeable.

The power of vouchers is not limited to reducing the role of government in education. Vouchers targeted at low-income urban children are currently being used in small-scale programs in Milwaukee, Cleveland, and Florida. Vouchers have long had an “unappre­ciated intel­lectual pedigree among reformers who have sought to help poor children and to equalize funding in rich and poor districts.”

The government of Ontario also recently announced a contro­versial tax credit plan similar to a voucher plan that would reimburse the parents of children currently in private schools. The voucher movement is gaining accep­tance and support will continue to grow in the future.

One of the main advan­tages of a voucher system is the increase in parental satis­faction and partic­i­pation that results. Parents who are allowed to choose the school their child attends generally feel more engaged in their education and empowered. Commu­ni­cation between schools and parents will increase in a free choice world as “schools will have to market themselves to potential buyers and to maintain enrolment through better communication.”

Choice is paramount to people in our society today. Choice is the backbone of the free enter­prise economy we live in. The ability to choose where we buy our gas or groceries is the corner­stone of our social structure. These rather pedes­trian choices we take for granted have trans­formed choice into a value in and of itself. Furthermore, “the instru­mental benefits of choice may not always be uppermost in our minds.”

The simple act of choosing seems to be good for us. Having a choice in something like our children’s schooling “affirms our autonomy and our funda­mental dignity as human beings.” Parents of children in voucher programs feel better about their child’s education, if only for the simple fact that they had the oppor­tunity to choose.

It has also been shown that voucher programs actually improve public education as well, through compe­tition. This, of course, is one of the aims of the public market, and the “operating mechanics of the voucher system reflect a marketing principle.” Through compe­tition, schools that are not efficient compared to others lose students and thus are forced to improve and increase their enrolment, or cease to exist. It has been shown that “even partial subsi­dization of private schools had a compet­itive impact on neigh­bouring public schools, where students’ marks rose by an average 8%.”

Voucher opponents often decry vouchers on the basis that compe­tition will not improve public schools. Sweden operates the world’s most robust and wide-ranging voucher program and a recent study showed compe­tition from independent schools “improves both the test results and the grades in public schools… The improvement is signif­icant in both statis­tical and real terms.”

This is a convincing rebuttal. The evidence suggests that vouchers have the ability to not only improve the voucher students’ education by giving them access to better schools, but also the education of students who stay in public schools.

The voucher programs currently in practice in the United States are targeted specif­i­cally at low-income students, in an effort to improve equality of access to quality education. In large urban centres, public schools are often under-funded because the system is based on property taxes in the U.S. Suburban parents want to “protect their physical and financial exclu­sivity against the threat of school choice,” and there is no question the system of public school finance “creates dramatic dispar­ities in the resources available to educate children.” Suburban districts end up having more dollars per pupil in education funding than urban districts, but because of the value of the property being taxed, they have lower tax rates.

Indeed, the goal of most voucher programs imple­mented today is to remedy this situation. It is not surprising then, that minority parents are “especially concerned about the public schools, with a majority (68%) now in favour of school vouchers.” Low-income families “have expressed great satis­faction with their new schools” , and although perfor­mance results are mixed, there is no doubt that targeted voucher programs help poor children get an educa­tional oppor­tunity they would not otherwise have received. Limited voucher programs allow the recon­cil­i­ation of local autonomy with some measure of racial diversity and educa­tional equality.

Arguments against vouchers in education more often than not come from teachers unions. In the U.S., support for voucher programs is entirely the duty of Repub­licans, because the teachers unions have the ear of the Democ­ratic Party. A larger voucher program to test its effec­tiveness has not been imple­mented mainly because of teachers, and this is an argument they use against vouchers. They claim that “trials have been so isolated that their results are unproved.”

This is, however galling, still true of vouchers. They are largely untested, with only a few small-scale programs scattered around a country as large as the U.S. Perfor­mance results from these test programs have so far been mixed. Minority students, such as African-Americans, have “scored signif­i­cantly higher on standardized tests than compa­rable students who remained in public schools.

Inter­est­ingly, there is no evidence that vouchers have improved the academic perfor­mance of other ethnic groups.” From an objective viewpoint, these mixed results are not at all upsetting. There is “little in the way of detectable gains for whites” but urban minorities perform better than their counter­parts in public schools. If the only effective advantage of vouchers is a reduction of the divide acade­m­i­cally along racial lines, there is merit to the idea.

Opponents of vouchers claim they encourage “cream-skimming”, that is the selective removal of the best and brightest students or the most active parents’ children from the public school system to place them in private insti­tu­tions, with of course the help of public funds. This is mainly a problem with universal voucher programs, because targeted programs go to low-income students on a more equitable, and sometimes random, basis.

In the Cleveland voucher program, there were more eligible students than spots in schools, so voucher students were chosen in a random lottery. The notion of cream-skimming due to vouchers is still up in the air, since there are not any programs of large enough scale or univer­sality to test this theory. The idea that private schools would reject troubled students is unproven as well, especially since most students of this nature who are forced out of the public system are taken in by the private. In targeted voucher programs cream-skimming is avoided.

Teachers unions have fought the imple­men­tation of voucher plans by arguing they are uncon­sti­tu­tional. The U.S. Consti­tution specif­i­cally states that church and state are to be separated. In the Cleveland program, parents overwhelm­ingly used the vouchers for religious schools. Teachers unions challenged the voucher plan under the consti­tution and twice won. The third appeal was to the Supreme Court and it ruled that public funds flowed to religious schools “only as a result of the genuine and independent choices of private individuals.”

The ruling made sense. After all, there has been no consti­tu­tional challenge for federal student loans when they’re used to attend Notre Dame. If magnet and community schools are taken into account as well, 37% of parents chose nonre­li­gious schools in Cleveland.

However, as many as three dozen states have laws separating church and state in their consti­tu­tions that are even stronger than the federal consti­tution, some “specif­i­cally ban states from giving money to religious schools.” The choice is for the parents to make regarding which school their child attends with the aid of vouchers. If that choice happens to be religious, then it should be accepted as the will of the people.

It has been argued that voucher students drain money away from public schools when they leave and their voucher money goes to a private school. The best example of a large voucher program is the Cleveland plan. The $10 million it provides to voucher students is additional funding for education. More than $600 million goes to public education in Cleveland, and that figure did not change with the intro­duction of vouchers. If and when broader voucher programs are imple­mented, chances are schools will “receive the resources their enrolment merits.”

The argument that students take money away from the schools when they leave does not hold up under closer inspection. It has also been argued that when bright students leave the public system, the ‘peer effect’ causes the students left behind to perform more poorly. This ‘drain’ on the public system, however, is far from conclusive.

Voucher foes also point to capacity as a sticking point. “Public schools in the U.S. serve 46 million K-12 children, private schools six million.” They argue that there are simply not enough schools to accom­modate a lot of students leaving the public system. The law of supply and demand tells us that if the demand is there for additional educa­tional insti­tu­tions, the supply will catch up, and probably quicker than it would if publicly controlled. Granted, there are not going to be additional schools overnight, but in a couple years the supply would be there to match demand.

According to Milton Friedman, “You can’t think of it in terms of the existing stock of schools. There will be a flood of new schools started.” It is silly to think that there will be no schools available if there are hundreds of students with government money looking to spend.

In the end, we are left with the critics’ most desperate argument. They assert that it is morally wrong to profit from educating our children. This is how they view private schools – as profit vehicles. But education is already big business, for textbook manufac­turers, janitorial and food services companies, software companies and building contractors. Business will always profit from education, and this will not change with the adoption of a voucher program. What will change is who controls the flow of the cash, and who decides which businesses get to profit from education. This choice, will be the parents of voucher students’.

Widespread use of vouchers in education is far from becoming a reality. With opponents as rich and vocif­erous as teachers unions holding sway over the Democrats in the U.S., it can seem almost hopeless. But the voucher movement marches on, amidst naysayer and teacher propa­ganda. “The simple fact that the voucher exper­iment has been allowed to continue is an enormous victory in itself.”

Vouchers have a lot going for them. They increase parental partic­i­pation and satis­faction with their children’s education. They lead to improvement in public schools through compe­tition and market forces. They increase equitable access to education for minorities and poor children. Vouchers represent what has increas­ingly become a corner­stone of our democ­ratic society: the right to choice. First, however, we must choose vouchers.

BDO and Grant Thornton decide against merger

It was only a few weeks ago I was blogging about the the potential merger in Canada of BDO Dunwoody and Grant Thornton. They announced that they were in talks and conducting the necessary due diligence proce­dures to see if a merger would be good for the two firms and their clients.

They announced today that the merger talks are off.

BDO Dunwoody LLP and Grant Thornton LLP announce today that their respective Boards have agreed to discon­tinue merger discus­sions. No specific reason led to the decision to cease discus­sions; however, both firms recog­nized that despite the potential of the union, a merger of this nature also presented signif­icant challenges.

HandshakeFirst and foremost I’d say the fact they belong to their respective inter­na­tional networks and one of the two firms would’ve had to dissolve in Canada and the merged firm continue as the remaining firm. That’s a lot of brand value up in smoke for either one of them. I’m not sure the merger’s potential benefits would’ve been great enough to overcome even that sole stumbling block.

So Grant Thornton merges with RSM Robson Rhodes in the UK, and the Grant Thornton merger with BDO in Canada is kaput. Who’s next?