Competent and Versatile: Q&A for Smaller Organizations and the Accountants That Serve Them

Professional Accountants in Business Committee October 2010 Questions and Answers Competent and Versatile: Q&A for Smaller Organizations and the Accountants That Serve Them

Professional Accountants in Business Committee International Federation of Accountants 545 Fifth Avenue, 14 th Floor New York, New York 10017 USA The mission of the International Federation of Accountants (IFAC) is to serve the public interest, strengthen the worldwide accountancy profession, and contribute to the development of strong international economies by establishing and promoting adherence to high-quality professional standards, furthering the international convergence of such standards, and speaking out on public interest issues where the profession s expertise is most relevant. The PAIB Committee serves IFAC member bodies and the more than one million professional accountants worldwide who work in commerce, industry, the public sector, education, and the not-for-profit sector. Its vision is the global recognition of professional accountants as business leaders and strategic partners in building long-term sustainable organizational success. This publication may be downloaded free of charge from the PAIB Committee website at www.ifac.org/paib/. The following information can also be accessed: PAIB Strategy and Work Plan, 2010-2012 Key areas of focus and publications This publication was prepared by the chair and staff of the PAIB Committee and has no authoritative status and has not been subject to the committee s due process. Copyright October 2010 by the International Federation of Accountants (IFAC). All rights reserved. Permission is granted to make copies of this work provided that such copies are for use in academic classrooms or for personal use and are not sold or disseminated and provided that each copy bears the following credit line: Copyright October 2010 by the International Federation of Accountants (IFAC). All rights reserved. Used with permission of IFAC. Contact permissions@ifac.org for permission to reproduce, store or transmit this document. Otherwise, written permission from IFAC is required to reproduce, store or transmit, or to make other similar uses of, this document, except as permitted by law. Contact permissions@ifac.org. ISBN: 978-1-60815-075-5 2

IFAC PAIB COMMITTEE QUESTIONS AND ANSWERS COMPETENT AND VERSATILE: Q&A FOR SMALLER ORGANIZATIONS CONTENTS Introduction... 4 1. Is Competent and Versatile relevant to smaller organizations?... 5 2. What does sustainable success mean for a smaller organization?... 5 3. Are the roles defined in Competent and Versatile relevant to a smaller organization?... 5 4. How do the drivers of sustainable value apply to smaller organizations?... 6 Page 3

COMPETENT AND VERSATILE: Q&A FOR SMALLER ORGANIZATIONS Introduction This question & answer (Q&A) article has been prepared for IFAC member bodies to help them apply the consultation paper, Competent and Versatile: How Professional Accountants in Business Drive Sustainable Organizational Success (see below), to their members who work in, or provide services to, smaller organizations 1. The consultation paper highlights the importance of competence and versatility in all professional accountants in business in light of global trends and evolving organizational needs. To help professional accountants remain competent, the paper identifies and analyzes the roles that professional accountants will be expected to fill for organizations in relation to the drivers of sustainable organizational success. The consultation paper is available at www.ifac.org/paib/. Responses are requested by November 30, 2010. In September 2010, the IFAC Professional Accountants in Business (PAIB) Committee issued Competent and Versatile, How Professional Accountants in Business Drive Sustainable Organizational Success, that analyzes future expectations in relation to eight drivers of sustainable organizational success what companies need to do to achieve and sustain success in the changing global economic landscape. The drivers provide a framework for key activities that professional accountants will be expected to perform. These activities are highlighted under the following four roles that form the cornerstones of the services provided by professional accountants: creators, enablers, preservers, and reporters of sustainable value. 1 The Crucial Roles of Professional Accountants in Business in Mid-Sized Enterprises (2008) includes a comparison of general characteristics of small, mid-sized, and large enterprises 4

COMPETENT AND VERSATILE: Q&A FOR SMALLER ORGANIZATIONS 1. Is Competent and Versatile relevant to smaller organizations? The earlier Professional Accountants in Business (PAIB) Committee report, The Crucial Roles of Professional Accountants in Business in Mid-Sized Enterprises (2008), featured interviews with 10 senior-level professional accountants in business on their experiences in mid-sized enterprises. The interviews highlighted that professional accountants in smaller organizations typically operate as generalists. While they specialize in finance and accounting management activities, they serve as an integral part of the management team and fulfil a wide variety of responsibilities beyond the finance and accounting discipline. Competent and Versatile considers what professional accountants need to offer the organization in which they work. It assesses a future affected by rapid technological advances, increasing globalization, and greater complexity, which are likely to impact all organizations, no matter their size, in one way or another. Although the size and complexity of an organization affect the required mix of competences for professional accountants in business, the general principles around the roles and competences can be applied everywhere. Competent and Versatile offers a framework for professional accountants to successfully serve their organizations as generalists, which is especially relevant to smaller organizations. 2. What does sustainable success mean for a smaller organization? There are two parts to this. Firstly, Competent and Versatile assumes that long-term continued existence is a goal of every organization. That means maintaining financial viability by providing profitable products or services. The second part, which contributes to securing the first, is that sustainable success requires operating responsibly toward society, the community, employees, and the environment, and recognizing the stakeholders representing them. What sustainable success means for a smaller organization will vary. For some, it will mean building a business that can be handed on to the next generation or sold off so as to yield funds for retirement. Others may wish to build a business to the point where it can be floated in a capital market. The professional accountant can assist by bringing clarity to the long-term intentions, appraising the viability of the strategy and the business model, establishing business and financing plans, and by insightful analysis of ongoing performance. However, sustainable success depends on social, environmental and economic performance, and therefore the leadership and governance of all organizations must ensure that all three factors are thought about in a connected way. Poor social or environmental performance can result in a loss of trust in any kind of organization and damage financial performance. 3. Are the roles defined in Competent and Versatile relevant to a smaller organization? Competent and Versatile broadly describes professional accountants contributions to organizations as creating, enabling, preserving, and reporting value to ensure long-term sustainable value creation. In large organizations, it is possible to identify separate job roles that operate mainly in one of these quadrants. It s normal for aspects of most finance, management, or operational roles to fall into more than one, or all of them. In a smaller organization, though, the roles may all fall to one person. It is up 5

COMPETENT AND VERSATILE: Q&A FOR SMALLER ORGANIZATIONS to the individual professional accountant to decide the right mix of effort within these categories, while recognizing that every organization needs action in each role. Creating value is a key objective of any organization. It requires clarity about strategy; having a well-understood, easy-to-explain business model; understanding what drives performance and measuring the outcomes of the business process correctly; and deploying resources and personal effort so as to achieve the desired development of the organization. In a smaller organization, strategy, business planning, and performance management are equally critical functions, but may be done by one person or a few people, and because of the nature of the organization, can involve simpler processes. Furthermore, owners and managers in smaller organizations often know their customers and other key stakeholders well and are close to the operations. Enabling value is about supporting others in the organization with sound analysis and advice. In a smaller organization, with fewer people, the expected contribution and leadership of the professional accountant may take on greater importance and a broader scope. The need remains to choose the best approach for the circumstances, without overcomplicating things. However, in the face of complex situations where additional resources are required, professional accountants have the skills to evaluate investment decisions and resource allocation, and to determine when it is appropriate to engage the services of a business advisor. Preserving value means engaging professional accountants to understand and respond to business risks and to ensure the organization is under management control. Large organizations have complex governance, risk, and control requirements expected of them: in a smaller organization, it may well be first and foremost a matter of strong personal discipline and awareness, and ensuring sound integrity and ethical values set by top management and owners. Reporting value is only partly about preparing formal accounts for regulatory purposes and complying with relevant rules and regulations. For successful performance, the need is to have relevant, timely, and useful information about financial and operational performance inside the organization, as well as processes to comply with rules and regulations. Where smaller organizations have fewer resources to deal with regulatory change and preparation of accounts and management reports, professional accountants can advise on how to deal with new information needs as they arise. 4. How do the drivers of sustainable value apply to smaller organizations? All the organizational drivers as identified in Competent and Versatile are important for sustainable success, but some merit greater emphasis in smaller organizations, particularly in their early stages of development. Others matter more once the organization grows to a size beyond the ability of one person to understand them fully. The drivers apply to smaller organizations in the following ways: Customer and stakeholder focus Every business needs to know who its customers are, what they expect, and where and how new customers can be found. Stakeholders can be any group of people who might have an interest in the organization and whose actions and reactions might affect business performance or reputation. The main focus is usually on the financial stakeholder, the source of funds, but many organizations have made the mistake of overlooking the needs and perceptions of other stakeholders, such as suppliers, employees, and even the local community. 6

COMPETENT AND VERSATILE: Q&A FOR SMALLER ORGANIZATIONS Effective leadership and strategy A small organization needs a clear strategic direction, even if its medium-term goals are modest. Everyday decisions can then be tested for alignment with the strategy. The need for leadership ensuring everyone understands what the strategy is and motivating them to achieve it obviously grows with the number of employees. It becomes critical when size begins to require extra layers of management between the owner and frontline workers. Integrated governance and control This is about ensuring the business is well run and remains viable by avoiding crises. In smaller organizations, this is typically achieved by the owner or manager s ability to know everything that s going on. Once a business is past that stage, procedures need to be put in place to see that risks are properly identified and managed, and that appropriate checks and balances are in place to keep everything operating without error or fraud. Innovation and adaptability The ability to respond readily to changing circumstances is important to all organizations. It includes staying alert to what s going on in your industry, sector, or neighborhood and how that might affect your business or customer base. A smaller organization should find it easier because there will be fewer people to influence and persuade. Furthermore, many smaller organizations are inherently more nimble and differentiate themselves on product innovation and targeting niche markets. However, they will require a determined effort to preserve these advantages as the organization grows in size. As headcount and organizational complexity grow, the other drivers grow in importance. Financial management A professional accountant should be particularly well equipped to be the smaller organization s main financial navigator. This role is about managing cash flow, dealing with the bank or other sources of finance, providing useful, timely information and analysis with which to manage the business, and ensuring the right, relevant information is taken into account when making decisions. People and talent management Organizations with very few people are more likely to rely heavily on key individuals, including their professional accountant. Therefore, planning succession or, at the very least, knowing what to do to prevent an unforeseen departure of key personnel causing disruption to business continuity is critical. A larger organization will have to address people management on multiple fronts. However, all organizations need to pay attention to employees, to ensure that they feel valued and motivated, and remain knowledgeable, loyal, and committed. Strategy execution This is about doing what you set out to do, turning words into action. In a smaller organization, this will be about personal determination and will involve applying more formal performance management techniques as the organization enlarges. Effective and transparent communication Employees, customers, and stakeholders need to be kept informed. No one likes to be surprised by an unforeseen development, and an adverse reaction could be damaging to reputation. Therefore, it is important to know what to communicate when and to whom, and involves effectively describing achievements and, when necessary, warning of risks in both figures and words. 7

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