1996-11-Management-Accounting-v78-n5 - Strategic Finance

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Circle No. 21

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P U B L I S H E D B Y I N S T I T U T E O F M A N A G E M E N T A C C O U N T A N T S

FSCs offer tax benefits for U.S. exporters. 31

Cover. The trick Is to managethose fixed assets and protectthe bottom line. See p. 29.(over by Peter Campbell andBob Grant, NYC.

20 MANAGING RISK WITH DERIVATIVES0 BY CHARLES P. BARIL, CPA; RALPH L.

BENKE, JR., CMA; AND GERALD W.BUETOW, CFADerivatives are getting a black eye because ofwidely publicized financial debacles caused bytheir incorrect use. The most common finan-cial derivatives, described here, are usefultools and should be understood by accountingand financial managers so they can hedgetheir company's price, interest rate, or curren-

29 FIXED ASSETS DON'T SQUEAKBY LOUIS J. SARASOHN, CPA, ANDMICHAEL S. LUEHLFING, CMADon't let fixed assets remain on the bottom ofthe list of those things that need to be fixed.Even though it doesn't make any noise, fixedassets is an area where your company can behurt�—or�helped�as�the�bottom�line�will�attest.

37 FOREIGN SALES CORPORATIONS:J A GREAT INVESTMENT FOR IRAs

BY MARK A. TURNER, CMA, ANDROBERT J. THORNTON, CPAAmerican companies that export their productsshould take another look at Foreign Sales Cor-porations. Contrary to popular notions, they arenot difficult to set up and operate and, once inplace, offer substantial tax benefits for IRAs ofthe shareholders of the exporting company.Certifuate of 9dent

42 COST MANAGEMENT AT THE IRSI g BY JOHN B. MACARTHUR

The cost management philosophy is now perme-ating the federal government, as this descrip-tion of the changes going on at the InternalRevenue Service illustrates. Agency managersare discovering that corporate practices, such asactivity -based costing, can be used to reducecosts at government agencies as well as in

cy exchange rate risk and thus meet their private companies.competition. Cert fate of 9derit

Lybrand Gold 9Hedal'Winner

Ar ticle meets NASBA & IMA /CMA CPE requirements .

Ar ticle meets IMA /CMA CPE requirements .

These articles will be included in IMA's quarterly self -study quiz, which you can orderby calling 1 -800- 638.4427, ext. 278.

MANAGEMENT AC00UNTtN00 (ISBN 0025-1690) is published monthly by the Institute of Management Accountants, 10 Paragon Dr., Montvale, NJ07645 -1760, (201) 573.9000. Price $10.00 per copy. Subscription rates, per year: $20 (included in dues, nondeductible); nonmembers, $130.00.Periodicals postage paid at Montvale, N.J., and additional mailing offices. To ensure uninterrupted mail service, send present address label andnew address including ZIP number to Data Entry Dept., TMA, Montvale, NJ 07645.1760. Allow six weeks for change. IMA'a telephone number is1-800- 638 -4427; IMA's facsimile number is (201) 673 -0639. IMA Bulletin Board Service (modem required ), 1-800- 229 -1268.

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S� P L I N GS O F T W A R E A I D E D P L A N N I N G

INSTITUTE ofMANAGEMENTACCOUNTANTSCERTIFIED MANAGEMEN'T ACCOUNTANTPROGRAM

tia� � z'� �s•

"Financialderivatives arebecoming necessaryfor ... efficientcorporate management."p. 20

49 MAXWELL BUSINESS SYSTEMS'HIGH FLIGHTBY KATHY WILLIAMS AND JAMES HARTUnder the direction of President SassanChakamian, Maxwell Business Systems hastaken off in the job costing software develop-ment area. Here the hands -on executiveexplains project accounting and offers guide-lines for successful implementations.

Columns6 PERSPECTIVES

Students — future leaders.

12 TAXESIncreased expense deduction available toenterprise zone businesses.

14 CAREERS`How do I keep good people when my budgetis cut ?'

Views expressed herein are authors' and do not represent Institute pol-icy unless so stated . Publi cati on o f pai d advert ising and new pro ductand s er vi ce i nf or mati on do es not c onst it ut e an endo rs ement by t heInstitute of the advertiser or the product or service.

MANAGEMENT ACCOUNTING* is indexed in the Accountants' Index andalso in the an -line database of the same name. This publication is avail-able in other forms of media through Information Access Company andthrough University Microfilms, Inc., and ABUINFORM (313) 761 -4700.For more information call (800) 227 -6431. The full text of MANAGE-MENT ACCO UNTING® is a ls o a v a ila b le in t h e e le c t r o n ic v e r s io n s o f t h e

MAN ENT Business Periodicals Index.

ACCOMING Permission is granted to reproduce any of the contents of this issue for

l MANAGEMENT ACCOUNTING NOVEMBER 1996

"Managementaccountants mustseek out silent

exposure areas ona proactive basis."p. 29

54 CASE STUDIES -TRW TAKES BEST APPROACH TO MANAGING ITS

AsSETS ... (page 54)

UNITED DAIRY FARMERS AND GBA SYSTEMS:

PARTNERS THROUGH CHANGE ... (page 56)

CLIENT /SERVER FUNCTIONALITY BOOMING AT

DYNO NOBEL ... (page 56)

Departments8 ANNUAL REPORT SUMMARY

10 LETTERS

16 NEWS

58 TECH FORUM

63 TRENDS IN FINANCIAL MANAGEMENT

70 CLASSIFIED

70 ADVERTISERS' INDEX

72 CONTINUING EDUCATION

use in courses of instruction, so long as the source and Institute of Man-agement Ac countants' copyri ght are indic ate d in any s uch re pr oduc-tions. written application must be made to the Editor for permission toreproduce any of the contents of this issue for use in other than coursesof instruction—e.g., textbooks and books of readings or cases. Except asotherwise noted, the copyright has been t ransferred to the Institute ofManagement Accountants for all items appearing in this magazine. Forthose ite ms for which the copyright has not been transferred, permis-sion to reproduce must be obtained directly from the author or from theperson or organization given at the end of the article.

Quantity reprints of any article in MANAGEMENT ACCOUNTING® orback issues (subject to availabi lity) may be obtained from Ci rculationDepartment, IMA, 10 Paragon Drive, Montvale, NJ 07645 -1760.

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Circle No. 5

PerspectivesSTUDENTS- FUTURE LEADERS

Student membership is one of the critical issues in IMAs LongRange Strategic Plan. Students are one of the most importantcustomers of the Institute of Management Accountants. Our roleis to form a partnership with all our "stakeholders," to identifyand assess their needs, and to develop programs to meet thoseneeds, solve problems, and create opportunities. The IMA recog-nizes that the long -term success and well-being of thousands ofour student members is directly related to the continued successand growth of the Institute and our profession.

As students advance in their careers their needs will change, and the IMA plansto be their career professional partner to help them meet those needs. Studentmembership in IMA is a passport to long -term opportunities. But we must refocus

now on meeting the expectations of students today.The IMA has initiated a number of significant actions that will enhance the

benefits students currently enjoy:

■ Professor -in- Residence —named Gary Luoma, CMA, of the University of SouthCarolina to this position to evaluate and improve our relationship with students

and faculty.■ Market Research and Focus Groups — employed an independent

research organization to meet with diverse groups of stu-dents and faculty around the country to listen to theirexpectations of professional organizations and deter-mine how we can be more responsive to their needs. nu,,

■ Practice Analysis —conducted a major research projectto determine what knowledge, skills, and abilities are nec-essary not only for recent graduates but also for experienced professionals.These data are being used to modify curricula to be more responsive to theneeds of students and their potential employers.

■ Corporate and Academic Conferences —bring accounting and finance profession-als together with faculty to create new ways to better prepare students for ca-reers in corporate, public, government accounting, and business.

The leadership and management of the IMA are very excited about this invest-ment in the future because the major beneficiaries are the future leaders of ourprofession.

In addition, the IMA will continue to provide students with expanded opportuni-ties in certification, education, professional development, and association withbusiness professionals. These opportunities help a student make the transition tobusiness professional and add value to a student's membership, career, employer,and the IMA as we harness the power of change.

CLAIR M. RAUBENSTINE, CMA, CPAPresident, 1996 -97craubens&olybrand.com

6 MANAGEMENT A((OUKM NOVEMBER 1996

1 EiIrURlALALIYF5UR1' BOARORalph L. Henke, Jr,. CMA;Louis Bisgay, CPA;

kArzaM Boer; Robert Boyle, CMA, CPA,

; Le e Bur ke ; Joseph V. Carcello, CMA,; Anthony Joseph Cataldo, CMA. CPA; An

thony S. Cavaheri. CAIA; CPA, CTS, CPIM: An-thony Curatola; Robert A. Czekanski, CMA; Re-beeca Dillard. CMA, CPA; Donna Forrest, CPA;Julian Freedman, CMA, CPA, CPIM; BridgetteHobart. CPA; Thomas J. Jordim, CMA, FHFMA,CMPA; Alfred M. King, CMA; Edward ,1. Mc-Cracken; C. Mike Men, GMA, CPA; John G.Mezquita, (.:PA; J.T. Marty O'I'TTalley, CMA,CPA; Michael D. Osheroff; William I.. Paladino;Susan Pierce, CMA, CPA; Grover L. Porter,

A; William J. Rogers, CMA, CPA; Patrick Ro-no, CMA. CPA; Annette West, CMA.

INSTITUTE ofMANAGEMENTACCOUNTANTScUMM"X"L le ttr ,u:ru1 CARen>GH"txsnPIRDM vtnveeutb,tvaGUM pput:a %At

G PUBLISHERGary M. Scopes, CAE

ASSOCIATE PUBLISHER

James M. Hart

ADVERTISING REPRESENTATIVES

IPC Enterp ris es142 East 30th StreetNew York, NY 10016Tel: (212) 252-0222Fax: (212) 252 -1020

Alice Schulman, Advertising Co ordinatorTel: (800) 6384427, eat. 280;

Fax; 1201) 573 -0639

Authorization to photocopy items for internal orpersonal use, or the internal or personal use ofspecific clients, is granted by the IMA to librariesand other us ers regis tered with the Co pyrightClearance Center (CCC) Transactional ReportingService, provided that the base fee of $3.00 per

copy, plus 30¢ per page, is paid directly to CCC,222 Rosewood Drive, Danvers, MA 01923. ISSN0025 - 1690/95, $3.00 + 30c.

V/ i n

Copyright m 1996 by the ludtute of Muaagement Ac muat=n

Picture themW U M 4 this.To honor the outstanding performance and accom-plishments of financial executives, accountantson call and the Institute of ManagementAccountants have joined forces to createThe Financial Executive of the Year Award.This prestigious award will be presentedto one financial executive in eachof the IMKs participating regionsthroughout the United States.

To receive a nomination package, please call1(800) 327 -1117, ext. 335.Your package willarrive in early January and include detailed

information about the award, how toparticipate, and an official nominationform. Nominations must be postmarked on

or before February 1, 1111. Give topfinancial executives the recognitionthey deserve. Call today.

Z M CO

Financial Executiveaccountantson call' OF THE YEAR

b .19j9 , sy

Circle No. 18ID1996 accountants on call

CommunisationIs Key to ServiceOur focus this year has been on improving

communication and emphas izing its im-portance in providing top - quality service.

We took the opportunity to communicateour message about IMA's extensive profes-sional activities and member benefits tomany different audiences — members, em-ployers, corporate and academic communi-ties, standard se tters , and the public . Ourmembers heard from us on a regular basisthrough chapter /council communications,MANAGEMENT ACCOUNTING, and IMA Focus.Today, more and more people have access toIMA's message through our site on the WorldWide Web,

There have been significant advances inproviding our members with new, innovative,affordable, and convenient continuing profes-sional education opportunities. Members nowhave the opportunity to earn CPE directlyfrom IMA by read ing MANAGEMENT ACCOUNT-

ING, attending locally facilitated workshopsbased on IMA Statements on ManagementAccounting, or using a CD -ROM based self -study program.

We emphasized communication with thecorporate community through the Continu-ous Improvement Center (CIC) and IMNsFoundation for. Applied Research (FAR). Wealso maintained a s trong presence within theacademic community through the AmericanAccounting Association (AAA) and Beta Al-pha Psi. In conjunction with the AAA's Man-agement Accounting Section, we establishedthe annual Jim Bulloch Award for Innova-tion in Management Accounting Education.The "Practice Analysis of Management Ac-counting," an IMA- sponsored research pro-ject, identified corporate accountants' workactivities and the knowledge, skills, and abil-ities necessary for a competent performance.These findings were distributed to collegesand univers ities nationwide.

A special communication this year, an Is-sue Alert, was sent not only to our members,but also to the standard - setting community.This supplement to MANAGEMENT Accotnwr-ING c o mmented o n c hanges b eing p ro p o s ed

b y t he C ha ir man o f th e S e c ur it ie s & Ex -

c hang e Co mmis s io n (S EC ) to the lo ng - s t and -

ing p o s it io n o f t he S EC with res p ec t to s t an-

d a rd s et t in g in t he p r iv at e s ec to r. E a rlie r, a s

in p u t t o t he F in an c ia l Ac c o u n tin g S t a nd a rd s

Bo a rd ' s (F AS B) S tra teg ic P lan, we s ent a

8 MANAGEMENT WOUNTING NOVEMBER 1996

comment letter to the Financia l AccountingFoundation (FAF) suggesting improvementsto procedures followed by FASB.

At its February meeting, the IMA Boardof Directors approved two initiatives thatwill solidify IMA's position as a world leaderin the field of management accounting andfinancial management.

FINANCIAL SUMMARY1$ in Thousands)

Total Revenues and Support $18,988Total Expenses 16,145

Changes in Net Assets $ 2,843

Total Assets $20,741

Liabilities 5,896Deferred Revenues 4,560Net Assets 10,285

Total Liabilities,Deferred Revenues,and Net Assets $20,741

Approval was given to implement a Certi-fied in Financial Management (CFM) pro-gram, effective with the December 1996 ex-amination. Together, the CFM and theCertified Management Accountant (CMA)programs will provide certification opportu-nities not only for those who identify closelywith the accounting function, but anyonewho identifies with the corporate financialmanagement function including CPAs andconsultants.

Also approved was computer -basedtesting programs for the CMA and CFMexaminations. Starting with the first exami-nation given for the CFM in December 1996,the new Part 2 of the examination will bein a 100% objective format. This allows can-didates to schedule examinations at theirconvenience, complete their exams via com-puter, and have their exam results tabulatedimmediate ly.

Effective with the December 1997 exami-nation, the other four parts of the exam alsowill be computerized, thus providing bothCMA and CFM candidates with greater ac-cessibility to take the examination.

Other significant initiatives includedstra tegic alliances with the American Insti-tute of CPAs, Financial Executives Institute,

and AAA, as well as offering a Portugueselanguage version of the CMA examination inJune 1996. Candidates who pass the exami-nation will receive a certificate jointly issuedby the Institute of Certified Management Ac-countants (ICMA) and the Brazilian ICMA.

One of the highlights of the year was com-municating our new Vision Sta tement thatwill prepare the Institute for the year 2000and beyond — "Global leadership in educa-tion, certification, and practice of manage-ment accounting and financial management."The Ad Hoc Long Range Strategy Commit-tee, made up of volunteer leaders and IMAstaff, worked on this plan for over a year toidentify current and future trends and crit i-cal issues that will affect us over the nextdecade. The trends considered to be most im-portant included : the emerging global village;new economy; technology; population diversi-ty; organizational dynamics; and manage-ment accounting.

Six critical issues —adapt to change, al-liances, broadening skills sets, customersand future markets, global challenges, andstudents —were identified for priority treat-ment because of their importance to IMA andour members.

The Annual Conference this year in LasVegas, Nevada, provided a record 1,800 at-tendees with an opportunity to earn over 29CPE credits, making it one of the most suc-cessful conferences in recent years.

Financially, the organization is healthy,and we are managing our operations respon-sibly. Significant gains on sales of securitieswere a result of favorable market conditionsduring the year.

All these programs were accomplishedthrough the dedication of our volunteermembers and IMA staff. We all should beproud of the position the Ins titute is in forthe future.

7p,� iic Q(A� o J r

•William J. Ihlanfeldt, CPAIMA President, 1995 -96

QV A.sr,A—Gary M. Scopes, CAEExecutive Director

The complete Annual Report, Year -Ended June 30, 1996, is available ftesto all members by calling the Public Re-lations Department at 1- 800 - 638 -4427,ext. 154, fax: (201) 573 -8601; e-mail:prdeptkh @class.org.

A

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Circle No. 4

ettersTO THE EDITOR

COPING WITH JOBINSECURITYThe IMA is missing an opportunity toconnect with members in an areawhere they really need help, i.e., copingwith job insecurity. To suggest in theIMNs Mission Statement that "a mem-ber can benefit from the EmploymentNetwork Service" by placing an ad inthe monthly newsletter falls far shortof what a member really needs andwhat the IMA really has to offer. Mostof the chapter members I am acquaint-ed with have just been laid off, are ex-pecting to be laid off, are worried aboutbeing laid off, or are working so hardthey do not have time to consciouslythink about being laid off. IMA serviceofferings couched in intellectual termsare disconnected from the gut- wrench-ing reality of trying to remain gainfullyemployed in the 199Os.

Another area of disconnection is theIMA Vision Statement that mentionsour role in providing "Global Leader-ship." The IMA has skipped a step; onemust learn how to survive before onecan lead. There now exist 750 millioncitizens of the Third World that areunder the age of 21. Upon reachingtheir majority, any one of these individ-uals would gladly come into mykitchen and eat my lunch. In this situ-ation, my idea of "leading" means stay-ing ahead of the pack by learning howto work harder and smarter than thesefolks. That's the only way I can helpprevent jobs in my organization (in-cluding my own) from being shippedoffshore. The value I add to the busi-ness function must be greater than thesavings that would occur if one of thetens of millions of individuals in theworld willing to do my job more cheap-ly were employed to do so.

The IMA vision cannot be so loftythat it fails to attend to member needsin the area of basic survival in theworkplace. I would like to pass along

10 MANAGEMENT ACCOUNTING NOVEMBER 1996

two ideas my chapter has employed tohelp our members cope with job inse-curity. We used the annual roster as avehicle to help our members feel con-nected to the inherent power of theIMA. Instead of publishing just thenames, businesses, and phone numbersof our local members, we put out a listcontaining all the members in our IMAcouncil -1,000 listings in a six -statearea, sorted by SIC code. Message tothe subconscious: "Worried about find-ing a job? Someone in this list is boundto know of one."

Another activity we sponsor is anannual job search workshop. The gistof our message; (a) one out of 10 jobs islisted in the newspaper want ads; re-cruiters have another one of the 10jobs. Of the remaining eight jobs, fourare found through warm calls (readIMA), [and] the other four are foundthrough cold calls. (b) 80% of job seek-ers respond to want ads; call their re-cruiters and a few friends. Only 20%pick up the telephone eight hours aday, five days a week. (c) There ishope. I have been laid off three timesin the last six years (a downsizing, amerger, and a reorganization). It tookme seven months to find a job the firsttime (about average), seven weeks thesecond time, and seven days the thirdtime.

Corporate America eliminated 25%of its middle management white collarworkforce in the 1980s. The process isbeing repeated in the 1990s. In thisera, loyalty to a company and 20 yearsexperience do not seem to count formuch anymore. So be it. The IMA canhelp its membership adjust to the factthat layoffs have become a normal oc-currence during one's career. With re-sumes in order, professional skills upto date (and kept there), CMA/CFMcertifications achieved, MANAGEMENT

ACCOUNTINGarticles read, networkingskills honed, job - hunting strategies de-vised, and rainy day funds established,IMA members can go on about theirbusiness secure in the knowledge thatwhen the time comes to find a new job,they, and the IMA, will be ready.—,JohnK. Matthewson, CMA, Falls Church, Va.

NEEDED: SMALL COMPANYARTICLESI have been a member of IMA for sev-eral years (8 +) and the entire time Ihave worked for a small or medium -sized company. Most of the [IMA] arti-cles and seminars seem to be aimed atthe larger -sized companies. I wouldlike to see more info for the small com-pany. In my job I am responsible forthe entire accounting process, officemanagement, and many other fieldsnot directly related to accounting. Ihave talked with several other CMAsat local meetings, and many are in thesame position. How about some arti-cles on related topics like employeemanagement, accounting staff, andothers.—Kristin A. Ungar, CPA, CMA,controller, Norwich Corp., Newton, Mass.

SUBOPTIMAL[Re "JIT Adoption Costs," Taxes, Sept.1996], I am a Malcolm Baldrige Exam-iner in Massachusetts, a candidate forCFA, and was a CPA candidate (Duke,Accounting & Mgmt. Science, 1978).The benefits in reduced WIP, cycle -time, and increased throughput pale incomparison with what ensues from theeffective and ongoing development anddeployment of Total Quality Manage-ment (TQM). I am concerned for thepotential abuse of well - intended capi-talization of costs that focus on subop-timal outcomes. As described in severalhighly regarded journals, the "big -bang" from TQM comes from integrat-ed and integrative strategic manage-ment and measurement. Thus, IRSLetter Ruling 9544001 encourages sub-optimal corporate policies and furtherimposes (enacts ?) the perceptual inden-ture which noted economist Paul Krug -man called "The Age of DiminishedExpectations. " —Thomas M. Heller,president, Total Quality® Investments

1I I

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Circle No. 9

. 1

• "11 1

e ss, r

Anthony P. Curatola, Editor

INCREASED EXPENSE DEDUCTION AVAILABLE TOENTERPRISE ZONE BUSINESSESA business that places depreciable

tangible personal property in serviceduring the tax year is entitled to a Sec-tion 179 expense deduction of $17,500.Beginning in the 1997 tax year, thisamount will increase incrementallyand reach a maximum of $25,000 inthe tax year 2003.

Section 1397A of the Revenue Recon-ciliation Act of 1993 enhances section179 and pro vide s a more ge nerous de-

duction to taxpayers meeting the defin-ition of "enterprise zone businesses"operating in "empowerment zones."These businesses receive an additionalSection 179 deduction equal to thelesser of the cost of Section 179 proper-ty placed in service during the year or$20,000. Thus, while most businessesare limited to an expense deduction of$17,500 ($18,000 in 1997), enterprisezone businesses have a potential write -off of $37,500 ($38,000 in 1997).

Under Section 179(b), the expensededuction is phased out dollar fordollar when the cost of Section 179property placed in service during thetax year exceeds $200,000. The deduc-tion is completely phased out whenthe cost of the property equals or ex-ceeds $217,500 [$17,500 - ($217,500 -$200,000)].

Enterprise businesses also are sub-ject to a phase -out of the $37,600 ex-pense deduction. However, qualifiedzone property is treated differently inthe calculation of the Section 179phase -out amount. Pursuant to IRCSection 1397A, only one -half of the costof qualified zone property (versus thefull cost of nonqualified property) is


used in the phase -out calculation. Thiscalculation allows the taxpayer toplace in service qualified zone propertycosting $475,000 ($476,000 in 1997),versus $217,500 under normal Section179 rules, before the $37,500 expensededuction is completely phased out[$37,500 - ($475,000/2) - $200,0001. Allother provisions of Section 179 apply toenterprise zone businesses.

"Qualified zone property" is definedas depreciable tangible personal prop-erty acquired by the taxpayer (new orused) from an unrelated party afterDecember 21, 1994, and used initiallyand substantially (85 %) by the taxpay-er in an empowerment zone.

Only "enterprise zone businesses"located in an empowerment zone willreceive the favored Section 179 treat-ment. Generally, these are corpora-tions, partnerships, or sole proprietor-ships that actively conduct a qualifiedtrade or business in an empowermentzone, derive at leas t 80 % of the totalgross income from a business conduct-ed in a zone, use substantially all ofthe tangible property within a zone,and employ a workforce of which 35%are zone residents. In addition, sub-stantially all employee services mustbe performed in the zone, and substan-tially all of the intangible propertyused must relate to active businessconducted within a zone. Furthermore,less than 5% of the average of the ag-gregate unadjusted bases of the busi-nesses' property can be attributable tocollectibles that are not held as inven-tory, and less than 5% of the averageaggregate unadjusted bases of the

businesses' property can be attributedto nonqualified financial property.

Certain businesses, such as those en-gaging in leasing of residential rentalproperty, specifically are excluded fromthe enterprise zone business category.

"Empowerment zones" are economi-cally distressed areas that have beentargeted by local, state, and federalgovernments to receive a full packageof incentives to promote capital invest-ment and create employment opportu-nities. Currently, communities in thefollowing urban and rural areas havebeen designated as empowermentzones: Atlanta, Ga.; Baltimore, Md.;Detroit, Mich.; New York, N.Y.;Philadelphia, Pa.; Camden, N.J.; andselected counties of Kentucky, Missis-sippi, and Texas.

The six urban zones, designated bythe Secretary of Housing and UrbanDevelopment, and three rural zones,designated by the Secretary of Agricul-ture pursuant to IRC Section 1391, arerestricted in size and have high pover-ty and unemployment rates. The desig-nations, effective December 1994, re-main effective for 10 years. Senate bill1911 proposes to designate an addi-tional 20 empowerment zones before1998.

Enterprise zone businesses locatedin empowerment zones also are enti-tled to an employment tax credit of$3,000 for each $15,000 of employeewages and tax - exempt bond funding.

Section 1397A's increased expensededuction is only one of the tax incen-tives that Congress created in an effortto spur business development and ex-pansion in certain economically dis-tressed areas. Enterprise zone busi-nesses are entitled to an additionalSection 179 expense deduction of$20,000, an amount unavailable to oth-er businesses. This enhanced expensededuction reduces the businesses' tax-able income and makes more moneyavailable for capital investment andother developmental expenditures.— Gwendolyn McFadden -Wade, CPA

Gwendolyn McFadden -Wade, CPA, is an as-sistant professor at North Carolina Agricultural& Technical State University, Greensboro, N.C.She can be reached at (910) 334 -7581, Eat.6006.

Anthony P. Curatola is the Joseph F. FordProfessor of Accounting at Drexel University,Philadelphia, Pa. Tel: (215) 895 -1453.

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areers

`How do I keep goodbudget is cut ?'

people when my

The company for which 1 work as an accounting manager has experienced whatmany mid -sized companies are facing: the need to cut costs in order to stay competi-tive. Not only do 1 agree with this need but I was an integral part of the teamcharged with lowering expenses across the board. But I'm now suffering the effectsof it in a very real way. We instituted a stringent cap on raises and bonuses, andI've recently lost two excellent employees who went to other companies because Icouldn't match what they were offered. I'm afraid I'll lose more of my staff for thissame reason. How does a manager in this climate keep good people when the moneyisn'tthere to encourage them to stay?

Robert Half, Editor

Use nonmonetary perks.

Your managerial dilemma is shared byan increasing number of people in thistighten- the -belt business climate.Watching the bottom line is crucial formany companies. Because employeesalaries constitute a major portion ofevery company's expenses, it's onlynatural to take a hard look at thatbudget area.

At the same time, companies thatplace too many restrictions on salaryand bonuses risk losing good peoplewho might otherwise stay if theircurrent employers could match theoffers they've been receiving fromcompetitors.

So, what do you do faced with thesalary and bonus cap imposed by youremployer? There's no doubt thatretaining good people is among thehighest priorities of American businesstoday.

But while money is, and always hasbeen, a powerful retention tool andmotivator, employees also respond toother gestures of appreciation for ajob well done. Innovative companiesconstantly are coming up with non -monetary or low -cost ways to say"good job." For instance, virtuallyevery employee responds favorablywhen given real responsibilities inwhich his or her success or failure isbased upon initiative and hard work.Employees react positively because


they're anxious to prove their skillsand abilities. The creative use of titlesalso can compensate, to some extent,for a lack of monetary rewards. Titlesare important in our lives. We respondwith pride when asked what we do atour companies if we can mention atitle that represents a position of lead-ership and responsibility.

But one caveat: There is no amountof nonmonetary compensation thatwill keep good people who are grosslyunderpaid. With the nationwide unem-ployment rate low, paying marketsalaries takes on an even greaterimportance.

Most individuals want to learn andto grow. Establishing programs thatallow them to develop new skills need-n't be expensive but can pay off withrenewed employee commitment andenergy. Develop a mentor systemthrough which ongoing training is con-

ducted. Bring in guest luncheon speak-ers. Establish a company lendinglibrary of books that enhance theirknowledge. Provide industry maga-zines they might not otherwise read.

Set up a true two -way communica-tion between you and those reportingto you. One of the most useful attribut-es any manager can possess is the abil-ity and willingness to listen. Ferret outthose small, albeit important, concernsyour employees have, and try to createways to address them. What may seeminsignificant to you might loom largeto an employee. I assume your employ-ees work hard and are willing to put inextra hours when the crush is on. Takeadvantage of slower times to give anadded personal day off, identifying itas a special company policy to recog-nize those whose efforts are exemplary.

Work out a deal with a local restau-rant where good employees can betreated for an occasional lunch. Ticketsfor a local sports team or theater mightbe available at a discount and given asa low -cost perk.

Never forget an employee's family.Often when a spouse feels a part of theemployee's job, he or she generates apositive attitude towards it. And thattranslates into a happier employee.Plan family get - togethers. Have yourcompany newsletter sent to theemployee's home rather than distrib-uted on site.

Keeping good people has become adaunting challenge for today's man-agers. Most companies no longer areable to "throw money" at employeesand automatically expect them to beloyal. There is an entrepreneurialappetite in the country today thatmust be fed. People want to be treatedas entrepreneurs even when they workfor the largest companies.

Solving your problem demands adegree of creativity on your part thatwasn't necessary in previous decades.But it can be done. It's being accom-plished in companies, large and small,across America. By putting your mindto it, I'm sure you'll find your ownseries of answers to go along with whatI've suggested. ■

Robert Half, CPA, is the founder of RobertHalf International, Inc., the world's largeststaffing service firm specializing in the account-ing, finance, and information systems field. Hislatest book is Finding, Hiring, and Keeping theBest Employees (John Wiley & Sons).

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RIDLEY NAMED IIA CHAIRMAN

Anthony J. Ridley, CIA, general auditorfor the Ford Motor Company in Dear-born, Mich., has been elected chairman

of the board of theInstitute of InternalAuditors (IIA). Hisone -year term beganOctober 1.

In his 38 -year ca-reer with Ford, Rid-ley has held seniorfinance positions inEurope, SouthAmerica, and North

Anthony J. Ridley America. He is an

English national and a fellow of theSociety of Company and Corporate Ac-countants in the U.K.

A member of IIA since 1990, Ridleyalso has served as senior vice chair-man of the board, vice chairman of theboard- professional practices, memberof the Research Foundation board oftrustees, and member of several othercommittees.

WORLD CONGRESS WILLCONVENE IN PARIS

The 15th World Congress of Accoun-tants, sponsored by the InternationalFederation of Accountants (IFAC), willbe held Oct. 26- 29,1997, in Paris. Itstheme will be "Accountants and Soci-ety: Serving the Public Interest." Heldevery five years, the World Congress isdesigned to appeal to accountants inall sectors of the global marketplace—public practice, industry and com-merce, education, and government. Thefull program represents about 20 hoursof continuing education.

The conference is arranged aroundthree plenary sessions with the topicsof "The Public Interest in a ChangingSociety with Global Markets and Glob-al Regulations," "The Public Interest,Benchmark Standards, and Meeting

16 MANAGEMENT ACCOUIMNG NOVEMBER 1996

Expectations," and "The Public Interestand the Emerging Market Economies."Workshops that follow the sessionseach day will offer discussions on sub-jects such as the accountant's role inenvironmental matters, coping withinformation technology, the manage-ment accountant's role in meetingstakeholder needs, and roles of inter-national regulatory and standard -setting bodies.

IMA is one of the member body par-ticipants, so special registration ratesare available for Congress attendeesand their guests if they apply throughJan. 17, 1997. For a brochure about theCongress or more information, contactKathy Hogan at 1- 800 - 638 -4427, ext.154, or Jeff Albrechtson, ext. 201.

MEDNICK IS AICPA CHAIR

Robert Mednick, CPA, managing part-ner- professional and regulatory mat-ters of Andersen Worldwide in Chicago,is the new chair of the American Insti-tute of CPAs (AICPA). He joinedArthur Andersen in 1962 and hasspent his entire career there, becominga manager in 1966, a partner in 1971,and managing partner in 1993.

He also has served as the firm's di-rector of SEC policies, managing direc-tor of auditing procedures, vice chair-man of the worldwide Committee onProfessional Standards, and chairmanof that Committee. Some of the AICPA

leadership positionshe has held includechair of the Financeand Accountants'Legal LiabilityCommittees, mem-ber of the AuditingStandards Board,and member of theStrategic Planning

Robert Mednick Committee.

SURVEY CONDUCTED ONDERIVATIVE ACCOUNTING

According to a survey of nearly 700 fi-nancial and nonfinancial organizationsthat use derivative instruments in con-junction with risk management activi-ties, there is consistency in the account-ing for risk management activities. Thesurvey was designed to capture infor-mation about current accounting prac-tices across three areas of risk manage-ment (interest rate, foreign exchange,and commodity) and four types of de-rivative instruments (futures, forwards,swaps, and options). Respondents alsowere asked their views on the Finan-cial Accounting Standards Board's ex-posure drafts on derivatives and hedgeaccounting and comprehensive income.(See "Trends in Management Account-ing," p. 63, for the official response byIMA's Financial Reporting Committeeto the Board's exposure draft.)

The survey was sponsored and devel-oped by Citicorp and J.P. Morgan, andresults were compiled and summarizedby KPMG Peat Marwick LLP. (Therewere 139 responses.) Here are some ofthe highlights:

• There is consistency in accountingfor the surveyed instruments usedin risk management.

• There is consistency among organi-zations in requiring designation anddocumentation, correlation, linkage,and probability of occurrence for an-ticipated transactions.

• There is a range of practice with re-spect to the detailed criteria organi-zations use to define and evaluaterisk, whether written option posi-tions can qualify for risk manage-ment accounting, and the treatmentof intercompany exposures.

• The majority of respondents ex-pressed a lack of support for theFASB's recent proposals on deriva-tives and hedge accounting andcomprehensive income.

• The majority of respondents believesome form of special accountingshould be permitted for hedgingactivities.

For a copy of the complete report,"Survey on Current Accounting forRisk Management Activities," contactFrank Taylor or Mary Migacz atKPMG Peat Marwick at (212) 909-5600, phone; (212) 909 -5699, fax. ■

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Managing Risk w

Hedging

your

company's

risks is

just good

business

management.

For IMA's comment

on the FASB

Exposure Draft,

"Accounting for

Derivative and

Similar Financial

Instruments andHedging Activities,"

see p. 63.

BY CHARLES P. BARIL, CPA; RALPH L. BENKE, JR., CMA; AND GERALD W. BUETOW, CFA

Lybrand Gofd 9KedafWinner

A company wishes to finance expansion into a newmarket. The traditional approach to financingsuch a project is to sell a working interest in it toother partners or to increase debt. Neither method,however, considers the risk, cash flow, and rev-enue generation characteristics of the project. Intoday's financial environment, the company,instead, can use creative derivative securities thatboth reduce risk and meet client - specific needs.The company consults a risk management expertwho examines the components of risk in the expan-sion and how they interact with existing risks. Thespecialist then structures a derivative or hybridsecurity that possesses all the necessary cash flowand risk characteristics needed to meet the specif-ic needs of the project. This arrangement enablesthe company to finance the expansion and reduceits overall risk exposure.

erivatives have been around for a long time,but only recently have corporate managersbegun to view derivatives as a viable strate-

gy for actively managing financial risk. Properlyused, derivatives can protect a business. Deriva-tives allow a business to counterbalance existingrisks, thereby limiting potential losses and stabi-lizing cash flows. Moreover, derivatives offerspeed, precision, flexibility, and low transactioncosts. Improperly used, derivatives can causesubstantial harm. Either way, derivatives arecomplicated and becoming more so. But they arethe wave of the future, and accounting managersneed to understand them to enable their compa-nies to compete successfully.

In addition to the issues of derivatives valua-tion and disclosure, accounting managers mustdeal with identifying risk exposures, measuringthese exposures, and providing recommendationson how existing risk exposure can be reduced oreliminated.

The risk environment in which businessesoperate has changed dramatically over the last 10years, presenting new challenges to financialexecutives and managers. The government hasdropped most attempts to fix interest rates,


exchange rates, and prices on goods and services.Trade and capital investment restrictions havebeen relaxed. Complex, cross - boundary economicrelationships have developed in a world no longerdominated and stabilized by the United States orany other economic power. Moreover, advances ininformation and computer technology haveenabled the design and use of increasingly com-plex financial instruments.1

Within this environment, managers face twomajor types of risk — business risk and financialrisk. Business risk represents the uncertaintiesconnected with developing, manufacturing, andmarketing products and services. Most managersare willing to assume business risk when theassociated expected economic returns are suffi-cient. When undertaking activities within theirprimary business realm, these managers believethey have a competitive advantage in projectingthe amount and timing of future cash flows. Man-agers effectively can deal with business riskusing traditional tools such as diversification andsecuritization.

Financial risk, on the other hand, refers to theuncertainty associated with exposure to fluctua-tions in interest rates, currency exchange rates,and the prices of commodities and equities. Inter-est rate exposure reflects the relationshipbetween a company's capital structure and mar-ket interest rates. The choices between fixed andvariable rates, short -term maturities or long-term maturities, and debt or equity financing canhave a dramatic effect on net income. Foreigncurrency exposure refers to the varying exchangerates over time between a company's domesticcurrency and the foreign currencies of its ven-dors, customers, and even competitors. Commod-ity price exposure results from the dependence ofa company's production process on raw materials,such as cotton or oil. The more dependent a com-pany, the more vulnerable it is to commodity pricechanges. Such a situation is particularly trouble-some when the company locks into long -term sup-ply agreements, such as the contracts by MGCorp. (See sidebar.) Finally, equity price exposure

ith Derivativesrefers to the changing market value of a compa-ny's equity holdings in its investment and pen-sion portfolios.

With the global business environment chang-ing so rapidly, managers often have an incom-plete understanding of the financial risks thatthey face. While managers may be confident pro-jecting raw material usage for the coming quar-ter, few managers feel comfortable projectingfuture currency exchange rates. In this arenathey do not have a competitive advantage. How-ever, the choice of doing nothing, hoping for thebest, and letting external events shape financialresults can be devastating. Consequently, it is ina company's best interest that financial risk beidentified, analyzed, measured, and, most impor-tant, controlled. The accounting manager will beintegrally involved in each.

TRADITIONAL RISK MANAGEMENT

F inancial risk has been recognized and managedfor many years. Early techniques relied on operat-ing and balance sheet solutions. For example, com-panies controlled their interest rate exposure byaligning assets more closely with liabilities ofmatching maturities. Manufacturers reduced theirforeign currency exposure by building plants over-seas in strategic markets. Manufacturers withcommodity exposure hoarded excess inventory,adopted flexible production processes, and verti-cally integrated to minimize risk.

These traditional risk management techniqueshave several difficulties, however. First, they areexpensive. While building plants overseas mayprovide an effective hedge against foreign curren-cy risk, it can be an inefficient use of resources,and it introduces translation risk. Translationrisk arises when operations are recorded in thelocal currency and profits are reported in the cur-rency of the parent corporation; it is a foreign cur-rency risk that is created when foreign sub-sidiaries operate in local currencies.

Second, these traditional techniques encourageinefficiencies. Holding excess raw material inven-

tory to protect against future price increases canlead to subpar production quality and output.Moreover, a company following this path loses ifinventory prices fall. Third, traditional risk man-

agement methods are not always available tocompanies. For example, an inadequate creditrating may prevent a company from issuing long-term debt to better align its expected future cashflows. To cope with business and financial riskefficiently, companies need a tool for managingthese risks. Financial derivatives are that tool.

NOVEMBER 1996 MANAGEMENT ACCOUNTING 21

WHAT ARE DERIVATIVES?

F inancial derivatives used for risk management are con-tracts that derive their value from some underlying asset, ref-erence rate, or index. They transfer price, interest rate, or cur-rency exchange rate risk from the hedger to another party.

Hedging is a term applied to any trading strategy used tomanage or reduce (ideally eliminate) risk. Thus, hedging is nota profit- motivated strategy; rather, it is a risk - reduction strat-egy. When a company's risk exposure and its hedging strategyare perfectly matched, all undesirable risk is eliminated; a per-fect hedge has been formed. A cross hedge arises when a com-pany's risk exposure and its hedging strategy are imperfectlymatched. Undesirable risk is reduced, but not eliminated.Cross hedges are the rule, rather than the exception, due tothe standardization of quantities, qualities, and timing ofhedging instruments traded on organized exchanges.

Speculation, on the other hand, is a risk - increasing andprofit - motivated strategy. Frequently, the terms speculationand hedging are used incorrectly in the press. It is impossiblefor a properly placed hedging strategy to lose the amounts ofmoney claimed in recent events such as the Gibson Greetings,Proctor and Gamble, and Metallgesellschaft losses. (See side-bar.) The parties involved were speculating for profit, nothedging to reduce risk. And, the result has been a black eye onthe face of derivatives.

There are four primary types of financial derivatives used inrisk management: forwards, futures, options, and swaps.

Forwardsare contracts traded over the counter that obligatethe purchaser of the forward to either buy or sell somethingat a specific price, quantity, and date in the future. The rea-son forwards are traded over the counter is that each for-ward is often a customized contract. Each purchaser of a for-ward is using the forward for a different purpose, requiringa contract customized to that purpose. Forwards allow for a

Demonstrating the importance of

identifying and properly managingrisk, the press has reported numerousfinancial catastrophes due to financialderivatives during the past few years.Examples include a $1.3 billion loss byMG Corp., a U.S. subsidiary of the $15billion German mining company Met -allgesellschaft. After agreeing to supplygasoline, heating oil, and diesel fuel atfixed prices for up to 10 years, the com-pany attempted to protect itself andmake a profit by purchasing short -termfuture market positions in oil. In 1993,oil prices dropped and MG's futures ranup losses, requiring the company to putup cash to cover margin calls. And,while MG's fixed price supply contractsrose in value, the cash inflows from


perfect hedging strategy due to their customization.

Futuresare similar to forward contracts but have standardizedcontract terms. Futures are traded on an organized exchangeand follow a daily settlement procedure. The losses of one par-ty to the contract are paid (as a gain) to another party. Theorganized market, standard contract terms, and lower costsmay give futures a significant advantage over forwards.Although a forward can be sold before its expiration date, it ismuch harder to sell a customized forward contract than a stan-dardized futures contract.

XYZ, Inc., a medium - sized, U.S. manufacturing firm, fre-quently transacts with Swiss institutions, mostly as a pur-chaserofSwiss products. XYZ has committed to purchaseSwiss products for 1 million Swiss Francs (SF) 90 daysfrom now. With a current exchange rate (ER) of .87 $1 SF,1 million SF equals $870,000. XYZ faces a short -term ERrisk if the dollar depreciates versus the SF.

Assuming that the standardized terms of the futures aremet, XYZ can hedge the short -term ER risk of the 90 -daycommitment perfectly using either a forward or a futurescontract. To accomplish this arrangement, XYZ purchaseseither eight futures contracts2 or one forward contract.These contracts obligate XYZ to purchase one million SFfor $875,000, given the 90 -day forward ERof.8751 SF.

If after 90 days the ER rises to .90 /SF, XYZ will purchasethe Swiss goods for $900,000. XYZ will receive $25,000[i.e., 1 million X (.90$ /SF - .875$ISF)J from either theexchange or a financial institution that sold them thefutures or forward contract. On the other hand, if the ERafter 90 days is .86$I SF, XYZ will purchase the goods for$860,000 and owe $15,000 to the exchange or financialinstitution with which it contracted. Whether the ER rises

them would not take place until long inthe future, if at all.

Less spectacular, but closer to home,are publicly disclosed losses of $157million by Proctor and Gamble and $20million by Gibson Greetings from inter-est rate swaps with Bankers Trust NewYork Corp. The swap agreementsenabled both companies to exchangefixed rate payments on existing debt forlower (at the time) variable (floating)rate payments. However, the swapsmade the companies' variable rate pay-outs extremely sensitive to increasinginterest rates. When interest ratesturned up in early 1994, the borrowingcosts of Proctor and Gamble and GibsonGreetings increased dramatically.Moreover, neither company had an

existing position that counterbalancedthese losses.*

*Both Proctor and Gamble and Gib-son Greetings sued the organizationthat sold them the derivatives, BankersTrust, The Wall Street Journal, Nov. 1,1994, p. C1. The Securities & ExchangeCommission concluded that BankersTrust had defrauded Gibson Greetings.Bankers Rust paid a $10 million fineand reimbursed Gibson Greetings for$14 million oftheir losses, The Wash-ington Post, June 11, 1995, p. 1.Bankers Rust settled the Proctor andGamble suit by agreeing to absorb asmuch as $150 million of their loss oninterest rate swaps, The Wall StreetJournal, May 10, 1996.

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or falls, the aggregate cost to XYZ is $875, 000, the cost theylocked in originally by implementing the hedge.

There are 12 futures exchanges in the U.S., the most promi-nent being the Chicago Board of Trade. There are activefutures markets in Sydney, Hong Kong, Tokyo, Osaka, Paris,London, Singapore, and Toronto. Some of these exchanges arefully automated, meaning that all trading is done via comput-er. Some of the exchanges are linked to each other, allowing atrader to open a position onone exchange and close iton another exchange.

Options. American optionsgive the purchaser theright to buy (call options)or sell (put options) a spec-ified quantity of a financialasset at a particular price(the exercise price) on orbefore a certain futuredates Options differ fromforwards and futures inthat options do not requirethe purchaser to buy or sellthe underlying asset. Thus,the buyer can simply letthe option expire, with theonly loss being the premium, the amount paid for the option

Swaps.There are many types of swaps, but the two most sig-nificant are currency swaps and interest swaps. Currencyswaps involve the exchange of cash flows in two different cur-rencies. Most often, one cash flow is floating and the otherfixed. Interest rate swaps are agreements between two partiesto exchange floating interest rates for fixed interest rates, bothin the same currency.

Swap dealers stand ready to offer clients almost any swapavailable. Depending on the complexity of the swap, the deal-

er profits either in the formof an up -front fee orthrough a bid/ask spreadbetween cash flow pay-ments. Any risk that thedealer faces is hedged inother derivatives markets.

Instead of forwards or futures, XYZ, Inc., can use optionsto eliminate the short -term ER risk arising from its pur-chase agreement. Fearing a depreciation of the dollar rel-ative to the SF, XYZ can purchase call options on the SF,which increase in value as the dollar depreciates againstthe SF. Each option contract controls 62,500 SF. Therefore,XYZ needs 16 option contracts to control one million SF,the price of the Swiss products. Assume further that theoptions expire on the purchase date 90 days hence, theexercise priceofeach option contract is .875$1 SF, and thateach option contract costs $625, for a total premium of$10,000.

If in 90 days the ER rises to .90$ISF, XYZ will exercise theoption for a profit of $25,000 (1 million SF X [90 $ISF—.875$ISFJ), making XYZ's aggregate cost $885,000($900, 000 — option profit + option premium). Here, the costof a depreciating dollar is offset by the option profit. On theother hand, if the ER drops to .86$/SF in 90 days, XYZwill not exercise the option. In this case, XYZ's aggregatecost will be $870,000 ($860,000 + option premium).

Used as hedging vehicles, futures and forwards lock in theaggregate cost. Changes in the value of the underlying positionare exactly offset by changes in the value of the future or for-ward. Options, because their exercise is optional, allow thehedger to benefit when the value of the underlying positionmoves in his or her favor, yet maintain an upper limit on theaggregate cost. The cost of the advantage is the option premium.

Similar to futures, an active market for options exists. Infact, the Wall Street Journal devotes several pages to optionslistings.

24 MANAGEMENT ACCOWNG NOVEMBER 1996

XYZ agrees to purchaseSwiss goods for one mil-lion SF every six monthsfor the next five years.Now XYZ must devise arisk management strate-gy to protect against theirlong -term ER risk. XYZapproaches a swap deal-er and enters into a "cir-cus swap." In exchange

for one million SF, XYZ agrees to pay the swap dealer afixed $880,000, semi - annually, for the next five years. Byfixing these cash flows for inventory acquisition, therebyeliminating the ER risk, XYZ's management now can fore-cast profits and cash flows more accurately. The swapdealer profits either from the ER charged to XYZ, an up-front premium, or some combination.

Figure 1 illustrates the periodic cash flows between theswap dealer and the Swiss Company. Note that no ER riskexists for XYZ. XYZ pays a fixed dollar amount ($880,000) forthe Swiss goods and the one million SF simply passes throughXYZ to the Swiss company.

Swaps offer an advantage over the other derivatives whenhedging risk arising from long -term, periodic cash flows. Swapsrequire only a one -time transaction to hedge risk over a longexposure period, while the other derivatives require a rollovertransaction for each periodic payment. Unlike futures andoptions, no organized and liquid exchanges exist for swaps or for-wards. Managers interested in transacting in swaps should con-tact one of the large investment offices. Most deal in both swapsand forwards. However, with no organized market, unwinding ahedging strategy that uses swaps may be expensive.

DERIVATIVES AND RISKMANAGEMENT STRATEGIES

L fs seen in the previous examples, various types of deriva-tives exist that can be used to implement risk managementstrategies. The choice of the derivative (or portfolio of deriva-tives) will depend on management, as well as on specific char-acteristics of the company. Each derivative security offersunique properties such as distinct payoff profiles, existence of

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organized exchanges, and the ability to cover a longer timehorizon. These properties will make one derivative securitybetter than another in a particular situation.

Hedging strategies are created to reduce the risk of an exist-ing position. Therefore, all hedging results must be analyzedin conjunction with the underlying risk being hedged. That is,the cash flows from the hedging strategy must be matchedwith the cash flows of the pre- existing position, as shown inFigure 1. If this is not done, confusion between hedging andspeculating may result.

Finally, similar to health insurance for an individual, hedg-ing is undertaken to reduce or eliminate risk. And, risk reduc-tion can be costly. As the examples demonstrate, the futuremay unfold in such a way that the company's cash flows wouldbe superior if the hedging strategy had not been implemented.However, if the future were known, there would be no expo-sure to risk. To criticize a hedging strategy retrospectivelywould be analogous to an individual finding fault with payingan insurance premium after the coverage period has expired.

MANAGING THE RISK OF DERIVATIVES

U sed properly, derivatives enable companies to reduce pre-existing financial risks associated with exposure to fluctua-tions in interest rates, currency exchange rates, and equityand commodity prices. However, the process of managingfinancial risk with derivatives must itself be managed. In1993, the Group of Thirty, a collection of derivative users anddealers, published a study titled "Derivatives: Practices andPrinciples." The Group of Thirty identified four major risksrelated to using derivatives:

■ Operational Risk. Exposure to losses caused by inadequateinternational control systems, management failure, fraud,or human error.

■ Market Risk. Exposure to changes in value of derivativesportfolios resulting from volatility in financial markets.Investments in derivatives intended to reduce a pre- exist-ing exposure involve low market risk. Any drop in marketvalue of a hedger's derivative portfolio will be offset by anincrease in value of the existing position.

■ Credit Risk. Exposure to the possibility of financial lossresulting from a counterparty's failure to meet its financialobligations. The exposure of futures is minimal because thecounterparty is a clearinghouse.

■ Legal Risk. Exposure to financial loss due to a contractbeing unenforceable. The greatest enforceability risks arisein connection with bankruptcy and insolvency when con-tracting with foreign dealers not subject to U.S. laws. Addi-tionally, inadequate or misunderstood documentation canlead to loss.

The key to managing the operational risk of derivatives isdeveloping the procedures and implementing the necessarycontrols to ensure the effective management of the market,credit, and legal risks of derivative use. With appropriate pro-cedures and adequate controls, the losses by Metallge-sellschaft, Proctor and Gamble, and Gibson Greetings mighthave been avoided.

The most important step in successfully managing the riskof derivatives is to establish effective oversight by the board of


directors, audit committees, and senior management. Accord-ing to James A. Johnson, chairman of the American Instituteof CPAs' Financial Instruments Task Force, companies shouldestablish a clear and internally consistent risk managementpolicy, including risk exposure limits. Consistent with theboard's authorization, top executives need to develop strate-gies and implement policies for day - today derivatives man-agement. These policies should include the development of alisting of derivatives instruments approved for hedging, hedg-ing strategies, counterparty guidelines, risk manager respon-sibilities, lines of authority, and bases for performance evalua-tion. The responsibility for managing the risks of derivativesused must start and end at the top.4

Effective oversight requires knowledge. If board membersand senior management have little knowledge or experiencewith derivatives, it will be necessary to provide training ses-sions before using derivatives to manage risk. These partiesneed not have a detailed understanding of the mechanics andpricing of each derivative product. Rather, they need sufficientknowledge to answer fundamental questions regarding thecompany's financial risk exposures, the potential impact ofthese exposures on the company, and acceptable exposure lim-its. When possible, the company should use an independentconsultant rather than a dealer in derivatives to conduct thesetraining sessions.

With the responsibility for oversight comes the need forfeedback. Senior management and the board of directorsmust receive timely, accurate, and useful reports on derivativeactivities so that, when necessary, they can act quickly anddecisively to maximize gains and minimize losses. Manage-ment reports should cover exposures and hedging activities,as well as hedging effectiveness. A backtracking system thatconstantly monitors all risk management strategies alsoshould be implemented in order to improve hedging tech-niques continuously.

To ensure that the magnitude, complexity, and risks of thecompany's derivatives position are commensurate with itsobjectives, all derivatives transactions or positions must belinked with the related risk exposure position. In this way, topmanagement can determine whether the derivative is a per-fect hedge, a cross hedge, or a speculative transaction. And, asperfect hedges are oftentimes too costly, the report shouldinclude the results of sensitivity analyses to provide a morecomplete picture of risk exposure.

Management's report should compare risk managementresults with corporate goals. The measurement of derivativesrisk begins with valuing the derivatives portfolio at currentmarket value to reflect the magnitude of potential losses orgains. Then, sensitivity analyses should be performed to mea-sure the risk of loss under both expected and "worst case" mar-ket conditions.

To manage risk with derivatives successfully, a company'sorganizational structure must include controls to ensure thatonly authorized transactions take place and that unauthorizedtransactions are detected quickly. To limit derivatives tradingirregularities or errors, the company should separate theresponsibilities for (1) establishing hedging strategies; (2)approving transactions; (3) executing transactions; (4) gather-ing, summarizing, and communicating exposure information;(5) management reporting; (6) trade information; and (7)accounting and tax involvement. In addition, the company

should require independent trade confir-mation and dual control for all deriva-tives transactions.

Based on public disclosures, it is notclear that senior officials at either Gib-son Greetings, Proctor and Gamble, orMetallgesellschaft were fully aware oftheir company's risk exposure. Or, ifaware of the potential for loss due totheir companies ' derivatives position,that these officials chose to speculate,taking a risk - increasing, profit- motivat-ed position, and lost.

The goal of an internal control systemis to enable effective oversight. A clearand internally consistent risk manage-ment policy with risk exposure limitsmust be established. Accounting man-agers should insist on such a policy sothat the responsibility for risk manage-ment is clearly defined . And, timelyreports must be provided to manage-ment, identifying and characterizing riskexposures , measuring the magnitude,and recommending appropriate hedgingstrategies to reduce the risk. A caveat:even a strong internal control systemcannot prevent senior officers from mak-ing uninformed, speculative choices.

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income, and increased firm value. Onoccasion, financial derivatives can even contribute to netincome.

Numerous derivatives exist that can be used to develop riskmanagement strategies. The choice of the derivative (or portfo-lio of derivatives) will depend on management and on other cor-porate specific characteristics. Hedging results must be dis-cussed in conjunction with the underlying risk being managed,otherwise confusion between speculating and hedging results.Properly placed, risk management strategies cannot decreasefirm value.

Entering a financial derivative agreement should be donewith caution. It is especially important that management feelscomfortable with its understanding of the derivatives agree-ment. Using a consultant and establishing the proper controls

can turn financial derivatives into a useful tool for managingrisk. ■

Charles P. Baril, Ph.D., CPA, is Arthur Andersen & Co. Faculty FellowAssociate Professor, James Madison University, Harrisonburg, Va. He is amember of Virginia Skyline Chapter, through which this article was sub-mitted. Ralph L. Benke, Jr„ DBA, CMA, is Arthur Andersen & Co. Alum -ni/Journal of Accounting Education Professor, James Madison University,and a member of the Virginia Skyline Chapter. Gerald W. Buetow, Ph.D.,CFA, is manager, investment research, at PDI Strategies.

'Charles S.Sanford, "The Risk Management Revolution, ' The Legac y of NorbertWiener: A Centennial Symposium, cosponsored by the American Mathematical soci-ety and the Massachusetts Institute of Technology, 1994, p. 2.

2A Swiss Franc contract controls 125,000 SF.3European options, which are traded globally, can be exercised only on the options

expiration date.4James A. Johnson, chairman of the AICPA Financial Instruments Task Force, Defoitre

& Touche Review, June 27, 1994, p. 1.

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roper loss prevention and earlydetection are critical componentsof any internal control system.

This principle, espoused by the Com-mittee of Sponsoring Organizations(COSO) of the Treadway Commissionin its report, has special relevance forcorporate accounting managerscharged with control of fixed assets.'

Certain systems, or system partici-pants, clamor for immediate atten-tion —often on a continuous basis.However, as illustrated in the casestudy below, it is important that themanagement accountant proactivelyseek out silent areas of exposure andnot just react to problems called to hisor her attention.

Georgia Computers (GC) began in1984 as a startup company that ex-ploited a critical niche in mainframesoftware development.2 GC created aproprietary database managementsoftware that sifts through transactiondetail to identify sales and customertrends. Customized for each client, thesoftware was particularly responsive tothe needs of top -level management.

Initially, GC stored both its softwareprograms and clients' transaction de-tails on mainframe computers strategi-cally located across the United States.Over time, as the cost of computerhardware rapidly declined in favor of


minicomputers, GC revised its soft-ware to operate on its clients' systems.GC eventually offered to supply itsclients with equipment and to buildthe hardware cost into the software li-censing agreement.

Until the early 1990s, GC enjoyed a$20- million revenue stream from soft-ware licensing, external use of itsmainframe systems, and on -site sys-tems. The combination of increasedcompetition and declining hardwareprices encouraged GC to consolidate itsoperations with those of its competi-tors. In 1991 and 1992, GC acquiredtwo similar companies from a largemultinational conglomerate. As a re-sult of these acquisitions, GC revenuesmushroomed to $80 million overnight.Unfortunately, along with integratingthree different administrative staffs,GC had to integrate three different in-formation systems.

The company prioritized the integra-tion. The emphasis first was placed onthe operations and billing systems be-cause both had an impact on cus-tomers. The integration of internal sys-tems, such as the accounting systems,was subsequently addressed. By thetime the operations and billing sys-tems were assimilated into GC in late1992, the company had already over-spent its budget and had little timeand money left to spend on accountingsystems (general ledger, receivables,payables) or its secondary system(fixed assets). Controller Mike Adamsproceeded with work on the criticalsystems and delayed work on the fixedassets system until mid -1993.

FIXED ASSET INTEGRATION

Adams faced significant problemswhen work began on the fixed assetssystem. The three companies had dis-tinctly different policies concerningtheir record keeping and depreciation.One company kept extremely detailedrecords, recording even minor itemssuch as computers, cables, and deliverycharges as depreciable assets. Anothercompany only included general descrip-tions of entire computer systems in itsrecords and aggressively expensed asmany capital expenditure- relateditems as it could. GC itself kept a rea-sonable amount of detail and used aninformal $1,500 capitalization thresh-old for computer hardware and soft-

30 MANAGEMOR ACMRM NOVEMBER 1996

ware and a $500 threshold for all otherpurchases.

Adams did not have a paper trailfor the acquired assets because GC didnot receive the underlying support forthe fixed asset purchases; the underly-ing support remained the property ofthe previous owners. Adams was notsure if all the acquired assets existedbecause GC neither took a physicalinventory of the fixed assets it pur-chased nor affixed fixed asset tags toany assets.

Adams decided to combine therecords (with a few edits), and herecorded $15 million of fixed assets as-is. To continue the straight -line depre-ciation of the acquired assets, GCrevalued all fixed assets to their netbook value at the time of the acquisi-tion and reset the useful lives of thefixed assets to their remaining usefullives. For example, a typewriter pur-chased for $1,200 on January 1, 1991,with a 60 -month useful life would berestated as $720 with a 36 -month use-ful life as of January 1, 1993.

INTERNAL CONTROLWEAKNESSES

though Adams successfully com-bined the three systems, he encoun-tered other operational problems con-cerning the fixed assets system in 1993and 1994. The senior accountant whohad oversight over the payables func-tion also maintained the fixed assetsrecords. Between 1992 and 1994, theposition turned over twice and re-mained open for several months. In theabsence of written policies, each senioraccountant, along with several tempo-rary workers, made additions and dele-tions based on their experience withprevious employers.

Field personnel rarely notified theaccounting department about theirsales and transfers of fixed assets. Theoperations personnel frequently trans-ferred computer equipment from onecenter to another, or from one cus-tomer to another, without informingthe senior accountant.

GC employees who used companyequipment (PCs, fax machines, copiers,cellular phones, and answering ma-chines) in their homes were never re-quired to sign that they had receivedthe assets. As employees left the com-pany, they kept these assets. Because

nothing was on file in the personnelrecords, or within the fixed asset sys-tem, the assets disappeared. Yet thesesame assets were still being depreciat-ed and were not written off.

The tax manager could not accurate-ly break out the fixed assets into theclassifications required for annualproperty tax reports. The existing de-scriptions were vague and cryptic,while the corresponding depreciationexpense was by location rather than byasset type. The differences between as-set types were critical because someassets, such as computers, lose valuemore quickly than others. Without theproper identification, the managermade assumptions she could not sup-port in the event of an audit.

In September 1994, as Adams re-viewed his departments, he recognizedthat the fixed assets system was a ma-jor trouble spot. To make mattersworse, the owners of GC, a privatelyheld company, desired to go public in1997. In this regard, Adams neededfive years of audited financial state-ments and flawless accounting systemsto generate the statements. Fixed as-sets represented approximately one-third of GC's balance sheet. According-ly, fixed assets became a criticalpriority.

FOCUS ON FIXED ASSETS

Carla Johnson, the GC accountingsystems manager, became the fixed as-sets project manager on November 1,1994. Adams identified four critical ob-jectives for her:

1. Obtain an accurate count and de-scription of all company assets.

2. Affix sequential tags to all companyassets.

3. Determine the appropriate value ofall company assets.

4. Keep a correct inventory rolling for-ward over time.

Johnson's cursory review of the exist-ing records revealed that detail did notmatch reality. Her first action would beto take a physical count of all assetsand attach inventory tags. An analysisof the existing fixed asset records indi-cated the breakout by count and cate-gory displayed in Table 1.

Johnson reviewed the figures andbegan to question their integrity. Her

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SignaturePrices subject to change without notice. 0 1996 BNA Software, a division of Tax Management Inc. BANDS61H

Mainframe computers 1,225 13,348 16,350,856 11,666,034 4,684,822Premise equipment 65 2,240 145,610 3,209 142,401Capital equipment, leased 88 2,390 210,316 27,484 182,832Office equipment 1,558 470 732,000 418,404 313,596Office furniture 3,032 850 2,575,930 1,481,690 1,094,240Leasehold improvements 247 3,413 843,133 471,830 371,303Total 6,215 3,785 20,857,845 14,068,651 6,789,194

greatest exposure was in the main-frame computers, office equipment,and office furniture categories. The lowaverage cost per asset for office equip-ment ($470) and office furniture ($850)indicated that most of the assets thatshould have been written off, insteadof being capitalized, were in these cate-gories. Indeed, she realized that sever-al items, such as desks or chairs, werelumped together as a single item in or-der to meet the $500 threshold, andthat minor items (cables, floppy disks)were not likely to be specifically identi-fied, and write -offs of such items werelikely.

Though Johnson was concerned ini-tially about the lack of equipment onpremises, she recognized that the com-pany arranged for operating leasesthrough a third party for almost all ofits 1,500 premise -based systems. Fur-ther, the company used operating leas-es for most of its corporate assets be-cause it did not want to tie up its cashflow. Because the paperwork for eachof the company's 88 capital leases in-cluded bills of lading and unique iden-tification numbers for the original pur-chases, she verified each of the 88assets against the records.

Although the leasehold improve-ments could not be tied to the originaldocuments, Johnson identified all ofthem as related to an existing currentlease. Follow -up conversations withlong -time employees at each locationconvinced Johnson that the recordswere correct.

THE TAGGING PROCESS

P rior to taking the inventories, John-son consulted with the tax managerand determined the major categoriesthat would be used for property tax re-porting. (See Table 2.) She then or-

dered 10,000 sequentially numberedtags that would be attached to all cur-rent assets and future additions. Final-ly, she prepared an inventory listingthat included, for each individual fixedasset, the category, description, vendormake/model, serial number, and othercomments. The listing also included in-formation that would be used for prop-erty tax reporting, such as the city,county, and state where each asset wasphysically located.

Johnson prepared instructions de-scribing items to be included in thefixed asset inventory. For example,keyboards, mice, and surge protectorswould not be tagged because they wereunder the $500 capitalization thresh-old; items to be tagged would includethose assigned to employees for theiruse at home or on the road.

Johnson found that more than 80%of GC's fixed assets were located in itsfour operations (ops) centers in Chica-go, Los Angeles, New Orleans, andNew York City. The remainder were lo-cated at its corporate office in Atlantaand in its 20 sales offices across theUnited States. On December 1, John-son sent the instruction set, fixed assetinventory listing, and category list tothe four operations managers and the21 office managers. Each manager wasto complete the listing and fax it toJohnson by December 15.

After she received her listings fromall sites, Johnson sent the fixed assetinventory to an external data process-ing service to be keyed into a spread-sheet.

Johnson received the fixed assetspreadsheet from the external dataprocessing service just after Christmas.After reviewing the spreadsheet, shedecided that her greatest exposure wasat the ops centers and the corporate of-fice; the accounting department would

verify all these assets in person. John-son contacted the operations depart-ment and made arrangements to sendan accounting staff member to each ofthe four ops centers during the firstweek in January. An ops center em-ployee at each site worked with the ac-counting person to verify the accuracyof the spreadsheet listing, affix tags toall assets, and to enter the tag num-bers and any corrections on a printoutfor later editing.

At the same time, Johnson workedwith the office manager at the Atlantacorporate office. Whereas each ops cen-ter had a low count of high- dollarmainframe equipment, the corporateoffice had a high count of low- dollar of-fice equipment and furniture. As a re-

1 Artwork2 Billing system equipment3 Bookcases4 Cabinets, filing5 Copiers6 Credenzas7 Desk/chair combinations8 Equipment, other office9 Fax machines

10 Furniture, computer11 Furniture, other12 Hard and tape drive /Bernoulli boxes13 Kitchen equipment14 LAN equipment and file servers15 Leasehold improvements16 Mainframe computers17 Modems18 Modular furniture19 Overhead and slide projectors20 PC accessories21 PCs /monitors /keyboards22 Postage meters23 Power supplies and generators24 Printers25 Security equipment26 Software, mainframe27 Software, PC28 T -1 Equipment29 Tables, conference30 Tables, other31 Telephone systems, office32 Testing equipment33 TVs and VCRs34 Typewriters35 Other


sult, the ops centers were finishedwithin one or two days, while Johnsonspent four days in three office build-ings and two off -site storage areas.

In mid - January, Johnson decided toforego visits to the sales offices. In-stead, she assigned sequential tagnumbers to those assets on a printoutof the spreadsheet. She forwarded thetags and printout to each sales manag-er and asked them to place the tags onthe assets. Informally, she asked hercolleagues within the sales force tocheck if assets had been tagged attheir offices, and she contacted thoseoffice managers who did not tag theirassets in mid - February. After a secondinformal check in early March, sheasked the sales vice president to con-tact those sales managers who still hadnot tagged their assets. A final checkconfirmed that all sales offices were incompliance.

RECONCILIATION

After editing the spreadsheet for tagnumber errors and other miscellaneouscorrections, Johnson next had to recon-cile the 5,024 -item physical listingwith the existing 6,215 -item fixed assetrecord. Because the spreadsheet listingignored items below the $500 capital-

were reclassified as software. All ofthese software items were externallydeveloped.

Using serial numbers, model num-bers, and unique identifiers whereavailable, Johnson was able to match1,450 items. This represented 80% ofall original cost dollars, or approxi-mately $16 million. Most of theseitems were easily identified, high -dol-lar items systems, and Johnson wasleft with approximately 20% of allfixed asset dollars to be accounted for,$4 million in original cost, and 2,853items from the existing system versus3,574 items from the spreadsheet list-ing (721 items on the spreadsheet hadnot been properly included in the exist-ing system). Most items remainingwere low - dollar, high- quantity items,such as office furniture. However, with-out the original support, Johnson wasat an impasse.

Adams opted to allocate the remain-ing $4 million in original cost from theold system to the remaining 3,574 as-sets in the spreadsheet listing and toattach the corresponding in- servicedates and useful lives of the assetsfrom the existing system. He rational-ized that the existing records were notnecessarily correct as is, but the newspreadsheet listings would be a posi-

Mainframe computers 1,110 14,341 15,918,741 11,549,643 4,369,098

Software 115 3,758 432,115 116,391 315,724

Premise equipment 65 2,240 145,610 3,209 142,401

Capital equipment, leased 88 2,390 210,316 27,484 182,832

Office equipment 1,062 549 583,175 273,954 309,221

Office furniture 2,337 799 1,866,910 780,261 1,086,649

Leasehold improvements 247 3,413 843,133 471,830 371,303

Total -new spreadsheet listing 5,024 3,927 20,000,000 13,222,772 6,777,228

ization threshold for office equipmentand office furniture, the new spread-sheet listing did not include 1,912items that were in the system. Becausealmost all items were depreciated fully,the write -off of these 1,912 items (with$857,845 in original cost) resulted ina loss of only $11,966. Additionally,with respect to the mainframe comput-er category, 115 of the 1,225 items


tive step forward. The remaining de-preciation of the $4 million in originalcost was to be depreciated somehowsooner or later, so any date differencesbetween the old and new assets wouldbe a timing difference rather than apermanent difference.

The tax manager concurred, but heindicated that the tax depreciationwould have to be allocated in the same

manner as the book depreciation. Thetax manager expressed concern aboutchanging the in- service dates and assettypes and handling any potential auditrisk. Adams decided that he could livewith that risk exposure if it allowedhim to correct the fixed asset systemfrom this point on.

Johnson allocated the old dollarsbased on similar types of items, suchas office furniture, to office furniture,and was successful for the most part.However, due to the allocation proce-dure, the average cost for office equip-ment ($549) and office furniture ($799)was still unusually low. For the finalbreakout of the new fixed asset listingsee Table 3.

CURRENT PROCESSINGPOLICIES AND PROCEDURES

!Johnson knew that the final step inthis project would be the developmentof fixed asset procedures to be commu-nicated to all corporate personnel.Over a two -month period, she devisedprocedures that handled such topics ascapital vs. revenue expenditures, addi-tions and deletions, asset transfers,and tagging. She included supportingdocumentation to illustrate specific ex-amples and provided a significant levelof detail,

Controller Mike Adams discussedJohnson's procedures with the chief fi-nancial officer and received permissionto circulate them throughout GC. InApril, Johnson sent the procedures toall managers in the operations centersand sales offices, as well as to corpo-rate personnel who authorized the pur-chase and disposal of fixed assets.Johnson's cover letter indicated thatthe accounting department wouldabide by these procedures and that noexceptions would be made. Because thenew policies affected capital budgeting,Johnson notified the finance staff andgave them the opportunity to reconsid-er the capital expenditures budget forthe current fiscal year.

An additional concern was enforce-ment. Johnson spent several hours dis-cussing the new policies with thepayables clerk and the senior accoun-tant in charge of payables. She alsodiscussed the fixed asset policy withother accounting and finance staff andencouraged them to notify Mike Adamsor her if they noticed any irregularities

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or discrepancies. Adams and Johnsonnoted any problems, allowed no excep-tions, and resolved problems with theresponsible party, sending a copy of allcorrespondence to the appropriate se-nior vice president.

CURRENT REVIEW PROCEDURES

Though the fixed assets system re-mains one of the low maintenanceitems, Johnson has heightened heroversight of the system and made theeffort to maintain its accuracy. Everymonth, she reviews additions and dele-tions and confirms that the senior ac-countant has sent tags to the appropri-ate location for additions. She reviewsthe monthly depreciation expense, notonly for its total, but also for its break-down by site to see if all figures arereasonable.

Johnson also will perform randomsurprise fixed asset audits throughoutthe year. She will request that man-agers at all sites compile a list of tagnumbers at their sites and fax them toher. She will key them into a spread-sheet and compare them to the active

numbers in the fixed assets system.Any faxed numbers that do not appearin the fixed assets system may indicateerroneous deletions while the numbersin the system that do not appearamong the faxed numbers may indi-cate missing assets. In addition, John-son has requested that GC's internalaudit staff also inventory fixed assetson a test basis.

Three essential points concerningthe fixed assets system seem clear. Ac-counting systems operate for the bene-fit of other departments. For example,receivables collects money due fromthe revenues generated by the salesdepartment; payables pays the billsthat the operations department gener-ates. Because the fixed assets systemis for others' benefit as well, people inother departments should be activeparticipants in the process. The ac-counting staff cannot operate in avacuum,

Though conversions or changes toan active accounting system can be po-tentially troublesome, advance plan-ning and ongoing review are critical. Awell - developed plan informs those in-

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volved of impending changes and pre-vents fire drills that might impedeprogress. Once the system is in bal-ance, a healthy review process is im-portant for keeping it that way.

The long -term benefit of a properlymaintained fixed assets system caneven be dollar denominated. The com-pany identifies and disposes of its ex-cess or salvage property on a timelybasis, avoiding storage charges andproperty taxes. Property taxes may bereduced when property no longer atthe company is removed from therecords, or when assets are transferredto jurisdictions with low or no propertytax assessments. If the tax deprecia-tion records are properly set up, thetax depreciation records can be accu-rately entered. External tax preparersmay review rather than prepare thedepreciation schedules, thus reducingbillable hours.

Loss prevention is a critical compo-nent of any internal control system.Management accountants must seekout silent exposure areas on a proac-tive basis. Reacting only to thesqueaks of a few high profile systems,or their participants, is not only impru-dent, it may allow one or more wheelsto fall off the corporate bandwagon. ■

Louis J. Sarasohn, CPA, is a financial sys-tems analyst for Canada We Insurance Compa-ny of America in Atlanta, Ga., an adjunct pro-fessor in the School of Management atSouthern College of Technology in Marietta,Ga., and accounting systems manager at Voice -com in Atlanta. He holds a M.Acc. degree fromthe University of Georgia. Additionally, Louieholds a Masters of Technology Managementfrom Southern Polytechnic State University. Hemay be reached at (770) 963 -1959.

Michael S. Luehlfing, CMA, is an assistantprofessor in the department of accounting atLouisiana State University in Baton Rouge, ACPA, he holds a Ph.D. degree from the Univer-sity of Georgia. Previously, Mike was affiliatedwith Armco, Inc., and Ernst & Young. He is amember of the Baton Rouge Chapter, throughwhich this article was submitted, and may becontacted at (504) 388 -6216.

'The generally accepted standard for internal controlis�presented�in�the�report,�"Internal�Control—Integrat-ed Framework," issued by the Committee of Spon-soring Organizations (COSO) of the Treadway Com-mission. An addendum to this document focused oncontrols concerning safeguarding assets. In essence,it suggests that proper loss prevention or early detec-tion are critical components of any internal controlsystem.

2This case is based on the actual experience of a man-agement accountant. Because some of the informa-tion in this article is proprietary, the names of individ-uals and companies have been disguised. Allinformation is represented faithfully.

A GreatInvestment for IRAsBY MARK A. TURNER, CMA, ANDROBERT J. THORNTON, CPACertificateofMerit

or the past 11 years, foreign salescorporations (FSCs) have beentouted as a great way to reduce the

corporate tax liability of exporters.While that continues to be true, a newtwist enables the FSC to pay rich divi-dends to individual retirement accountsinvested in FSCs. This arrangementcan produce nontaxable gains far inexcess of what otherwise might beearned by IRAs invested in publiclytraded securities. It also results in thedistribution of C corporation profits atno immediate tax expense to share-holders.

Before looking at the merits of thisarrangement, let's review the FSCrules. Recall that FSCs were intro-duced as a surrogate for the domesticinternational sales corporation (DISC)rules in 1984. The intent was to pre-serve the objective of the DISC, which

Financial ryict►tagers should takeanother look at the tax benefits of FSCs.

was to encourage export activity, with-out offending the sensitivities of U.S.foreign trading partners. Those part-ners had viewed the DISC as a govern-ment subsidy of U.S. exports, which isprohibited by the General Agreementon Tariffs and Trade (GATT).

The FSC rules, on the surface,seem extraordinarily complex. Ingeneral, a corporation must beformed in one of about 30 foreigncountries. Certain kinds of foreigneconomic processes must take placeoutside the United States, and theseforeign corporations must have for-eign management. To many practic-ing accountants unfamiliar withinternational exporting activity, suchterms may have proven too amor-phous to justify wading through. Inaddition, many accountants whowork with small and medium -sized

businesses often do not have muchexperience working with internation-al taxation. Many businesses arereluctant to tackle the apparent com-plexities of FSCs. These reasons, cou-pled with other factors peculiar toindividuals and their businesses, mayexplain why FSCs have not caught onquickly, despite significant tax bene-fits. Approx- imately 6,000 foreignsales corporations exist. Comparethat to an estimated 100,000 U.S.businesses that export their products.

Creating and operating FSCs doesnot require an extraordinary amount oftime, knowledge, or effort. Companiesthat specialize in FSC managementare available to help smooth overobstacles. Closely held Cs will findIRA -owned FSCs to be an appealingalternative for enhancing deferredincome plans.


SMALL FSCs —THE BENEFITSB usinesses with foreign sales of $5 -6million or less should consider forminga small FSC. Small FSCs are able tomake a book allocation of net profitsearned on any of their foreign sales, upto a $5 million limit. In its simplestform, there are two basic choices todetermine how much profit to allocate.One method, the percentage of com-bined profit, is a fixed 23% of the Ccorporation's combined taxable incomerelated to the foreign sales. Thismethod is used when the net profit(before) tax percentage is greater than8 %. When the net profit is between 4%and 8 %, an alternative allocationmethod becomes advantageous. Thatmethod is called the gross receiptsmethod and is a fixed 1.83% of grosssales to foreign countries. When thenet profit is below 4 %, the profit onforeign sales allocated to the FSC is469o' of combined total income.

Regardless of which method is used,only those sales whose final destina-tion is outside the United States quali-fy. If sales are made to an intermedi-ary, and the goods are shipped outsidethe United States by that intermediarywithin 12 months of the original sale,they can count toward the $5 millionlimit. Shipments to Canada and Mexi-co qualify as foreign sales.

Once profit has been allocated to theFSC, a nontaxable amount is comput-ed. The specific exclusion depends onwho owns the stock in the FSC. Zb theextent that a C corporation owns FSCstock, the exclusion rate is 15/23rds(65.2%) of allocated income. If theshareholders are other than C Corpo-rations, the rate of exclusion is16/23rds (69.5%). Therefore, the FSC istaxed on about one third of its alloca-ble income, subject to the regular cor-porate tax rates. If the exporting corpo-ration owns 80% or more of the FSC


stock, the benefits of the graduated taxrates must be apportioned betweenparent and subsidiary. In addition, if aparent C corporation owns less than100% of the FSC stock, the 100% divi-dends- received deduction available tothe parent would be reduced.

SMALL FSCs—THE REQUIREMENTS

An FSC must be formed to obtain thetax benefits. Creating a foreign corpo-ration is a legal process that oftenrequires an attorney and may be unfa-miliar ground for some accountants.For example, establishing a corpora-tion in the U.S. Virgin Islands, orSaipan, or Egypt, may seem quiteimposing. That's where an FSC man-agement company comes into play. Fora fee of about $2,000, an FSC manage-ment company can set up and performmost of the management tasks neces-sary to create an FSC that meets taxcode and local jurisdictional require-ments. Annual maintenance costs(including business licenses, tax returnpreparation, offshore office, overseasdirector, and storage of documents) fora small FSC is in the $2,500 range.Currently, almost all FSCs are servicedby an FSC management companylocated in a qualified foreign country.

Additional requirements for a smallFSC include:

■ Making quarterly estimated taxpayments on estimated FSCincome.

■ Forwarding copies of foreign salesinvoices to the FSC office, annually.

■ Forwarding a copy of the FSC quar-terly profit and loss statement tothe FSC office, annually.

■ Forwarding a copy of the FSC annu-al balance sheet to the FSC office.

■ Filing an FSC annual tax return forthe same tax year as the majorityshareholders.

FSCs must not have more than 25shareholders, may not have preferredstock, and status as a small FSC mustbe elected. The tax savings provisionsare limited to $5 million of sales for asmall FSC. If foreign trading grossreceipts are expected to exceed thisamount, the small FSC can eitherchange status to a regular FSC orapply the election only to the most

profitable $5 million of foreign sales.Small FSC status must be electedwithin the first 90 days of the tax year.That status cannot be changed duringthe tax year, should the exporter's cir-cumstances warrant a change. There-fore, some tax planning is importantfor maintaining the most advantageousFSC arrangement.

Because the small FSC does not per-form any particular function, no bankaccount is necessary. A bank account,however, will be needed for an IRA -owned FSC. Other than cash distribu-tions to IRA shareholders, all transac-tions take the form of journal entrieson the parent's and FSCs financialstatements. The process really is verysimple. With the involvement of anexperienced FSC management compa-ny, the corporate exporter's burden isminimized. One difficulty for somebusiness owners is overcoming the con-cern that it is too easy and, therefore,must be wrong, or that it will invite anIRS audit. Experience has proven oth-erwise, as ownership of a small FSChas not increased the probability of anaudit. Congress views exporting activi-ty as beneficial to the economy, and theFSC "subsidy" was a Department ofCommerce- sponsored concept. U.S.trading partners do not object to FSCs,and because this provision is one of thefew tax breaks available to small busi-ness, the FSC rules seem likely to stay.Furthermore, there have not been anysignificant changes to this tax lawsince its inception in 1984.

REGULAR FSCs

B enefits available to regular FSCsare computed in the same manner asfor small FSCs. The primary differenceis that regular FSCs are not-limited to$5 million of foreign sales. There are,however, a number of additional quali-fications that apply. First, regularFSCs must maintain a bank account inthe foreign location. The account mustbe established within 30 days of thebeginning of the FSC tax year. Officersand some expenses, such as directorfees, must be paid or reimbursed fromthis account, along with FSC operatingexpenses. Some banks may requirethat a minimum deposit be main-tained. In addition, all formal stock-holder meetings and director meetingsmust be held outside the United States

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Xlleme CONGRES MONDIALDE LA COMPTABILITE

XVth WORLD CONGRESSOF ACCOUNTANTS

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in compliance with the laws where theFSC is incorporated. Some countriespermit these meetings to use proxiesfor compliance.

Perhaps the most challenging set ofrules applicable to regular FSCs con-cerns the foreign economic process test.The test has two components —the for-eign sale activity test and the foreigndirect cost test. A small FSC is not sub-ject to the foreign aspects of theserequirements.

The foreign sales test requires thatthe FSC, or its agent, conduct sometype of sales activity outside the Unit-ed States. These activities includesolicitation, contract negotiation,securing contracts, or any other sales -related activities. The spirit of thisrule is to ensure that the FSC doesperform some legitimate action onbehalf of the exporting company, orthat it employs an agent to performthese functions. Generally, the agentacting on behalf of the FSC is theexporter itself. This also is an areawhere the FSC management companycan play an important role. The man-agement company, for example, canassist by mailing sales brochures fromforeign locations soliciting orders, orperform other tasks that are helpful tothe sales process. It is not necessarythat a sale take place in order forsolicitation to have occurred. Advertis-ing, however, generally is not suffi-cient to qualify as solicitation.

The foreign direct cost test requiresthat 50% or more of foreign direct costs(described below) attributable to theforeign sales must be incurred by theFSC. Alternatively, the FSC must incurat least 85% of the costs from any twoof the following five items:

1. Advertising and sales promotion.2. Processing of customer orders and

arranging for delivery of the exportproperty.

3. Transportation for the goods sold.4. Determining and sending an invoice

or statement and receiving payment.5. Assumption of credit risk.

It is not necessary that the FSC'sidentity be disclosed to the customer.The FSC may incur these costs direct-ly, or it may contract with others toperform such tasks, as long as thefunctions are conducted outside theUnited States. The costs described


above are not meant to be restrictiveso as to cause an FSC to fail to qualify,but rather so that it can be expanded.These costs should make it easier todemonstrate that the FSC is morethan a paper entity, that it (or itsagent) is providing real services to theexporter. As should be apparent, com-pliance with the regular FSC rulesrequires more attention to the detail ofthe kinds of costs incurred and whatportion is borne by the FSC. Mostlarge exporters, however, will find theygenerally are in compliance with theserules already. The rules are flexibleand easily complied with, given a littlebit of creativity on the part of FSCmanagers and exporters.

Switching from a small FSC to a reg-ular FSC becomes economical whenforeign sales exceed $5.5 million. Theexact breakeven point depends uponforeign profit margins, FSC manage-ment charges (which are generallyhigher for regular than for smallFSCs), and the various costs that theregular FSC must incur.

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So far, we have looked at only theadministrative pricing rules as thebasis for determining how much profitis allocated to the FSC. These rulesusually are less cumbersome and applywhen the FSC is treated essentially asa commissioned agent of the exportingcorporation. It also is possible that theFSC could operate on a buy -sale basis,where profits allocated to the FSC aredetermined on the basis of an arm's -length exchange between exporter andthe FSC. This arrangement involvesanalysis of a number of additional taxissues and is beyond the scope of thisarticle.

THE FSC AS AN IRAINVESTMENT

In addition to sheltering corporateexport income, the FSC can save taxeson FSC dividends distributed to IRAshareholders. Fundamentally, the FSCtax rules allow a corporation to assignits income to a third party who thenmay exclude a significant portion fromtaxation. The tax benefit created whenthe FSC shareholder is a corporateexporter is created not because of theFSC rules alone, but in conjunctionwith the deduction rules for dividends -received afforded a corporate share-holder. Regular C corporation share-holders, unlike those in an S corpora-tion, are permitted to exclude fromincome 100% of the dividends receivedfrom a wholly owned subsidiary. Therate of exclusion drops to 70% whenthe C corporation owns less than 70%nof subsidiary stock. Thus, when theFSC distributes its income to the par-ent, the dividend is received tax -free(or mostly tax -free). In the case of asmall FSC, the distribution is on paperonly. A regular FSC actually wouldtransfer funds from its bank account toshareholders.

Generally, FSCs have corporateshareholders, but that condition is nota requirement of the Code. Indeed, it ispossible for other tax- deferral entitiessuch as IRAs to be shareholders. For ashareholder of a closely held C or Scorporation, creation of a super IRA —one where an IRA owns all or a portionof the FSC stock —opens up significantnew alternatives for tax - deferred dis-tribution of corporate income to share-holders. Distributions from eithersmall or regular FSCs would be tax

Foreign gross receiptsAssumed net profit margin before tax

(After S3,000 FSC expenses)Foreign profit and amount of income

allocable to foreign salesStatutory amount allocated to the FSCFSC incomeExcludable portion of FSC incomeExcludable FSC income

FSC IncomeTaxable portion of FSC incomeTaxable FSC incomeCorporate tax rateFSC tax

FSC commissionTaxNet cash available for distribution to IRAs

IRA - 1 50% interest in FSC stock =IRA - 2 25% interest in FSC stock =IRA - 3 25% interest in FSC stock =

Net Cash outflow from Corporation:FSC commissionTax due @ 34% without FSCNet after tax cash distribution by corporationNet Corporate savingsCorporate tax due on income without FSCFSC corporate income taxNet cash savings to exporter

$5,000,000

8%

$ 400,00023%

S 92,00016(23

S 64,000

S 92,0007/23

S 28,00015%

$ 4,200

$ 92,000(4,200)

$ 87,800 $87,800

$ 43,90021,95021,950

$ 87,800

$ 92,000(31,300)

$ 60,700 S60,700

$ 31,300(4,200)

$ 27,100 $27,100

deferred when received by the IRA.The Tax Court affirmed this arrange-ment in its summary judgment issuedin James H. Swanson and Josephine A.Swanson (U.S.T.0 Docket No. 21203-92). The IRS challenge to IRA -ownedFSCs centered on concerns that thepurchase of stock by the IRA of a bene-ficiary's business is a prohibited trans-action. The Tax Court did not agreewith this assessment. Because the IRShas not acquiesced to this decision, andalso because Congress did not initiallyenvision IRA -owned FSCs, a cautioustaxpayer should consider distancingthe IRA from the business by using aspousal IRA or child's IRA as the vehi-cle for owning the FSC stock.

The computations in Table 1describe a small FSC with shares heldby three IRAs in the name of thespouses, or children, of the exportingcorporation's shareholders. The IRAsmay be held in the name of spousesrather than in the name of corporateofficers to ensure that the IRA invest-

ments are not viewed as prohibitedtransactions, or may be in the name ofother family members should estateplanning be a goal.

FSCp MANAGEMENT COMPANIES

When the tax code for FSCs wasestablished in 1984, a number of largecompanies immediately opened officesin foreign countries, particularly in theVirgin Islands. These offices weremeant to comply with the requirementthat FSCs maintain an office in speci-fied foreign countries. As the regula-tions emerged, however, it becameapparent that each business did nothave to maintain its own individualoffice. Rather, office space could beshared. FSCs need to maintain only aminimal office presence to comply withthe tax rules.

Today, the FSC management indus-try has consolidated to a few majorcompanies that service the vast majori-ty of FSCs. Included in the services

they provide in order to comply withthe U.S. and local rules are:

■ Maintenance of a physical officeoutside the United States for eachFSC client.

■ Maintenance of a duplicate set ofbooks outside the United States.

■ Preparation and filing of the docu-ments necessary to incorporate theFSC in the appropriate jurisdiction.

• Completion and filing of businessforms to remain in compliance withlocal jurisdictions, including busi-ness licenses and permits.

• Arrangement of annualdirectors/shareholders meetings.

• Providing an overseas director.• Assisting the exporter in complying

with the foreign economic processrequirements.

• Assisting in making timely dis-bursements of dividends and opera-tional expenses.

• Establishing an overseas bankingaccount for the FSC, if necessary.

• Keeping exporters informed of anychanges in procedures and eventspertinent to an FSC.

Depending on the circumstances,these services may be provided in onecomprehensive annual fee. The serviceproviders make living with an FSC avery convenient arrangement. Taxpreparation work for the FSC, andcompliance with income tax laws gen-erally are the responsibility of eachFSC. They are not a part of the basicservices described above.

Starting and managing an FSC isnot so onerous, and tax savings can besignificant. In addition, IRA -FSCs com-bine tax benefits with retirement bene-fits. Such an arrangement will notjeopardize existing corporate employeebenefit programs. The place to start isto contact a tax adviser or an FSCmanagement company. The sooner theprocess begins the better —annual ben-efits must be prorated for the portionof the year that follows the creation ofan FSC. ■

Mark Turner, CMA, CPA, is an associate pro-fessor of accounting at Stephen F. Austin StateUniversity, Nacogdoches, Texas. He is a mem-ber of the Tyler Area Chapter, through whichthis article was submitted, and he can bereached at (409) 468 -3105.

Robert J. Thornton, CPA, is president ofExport FSC International, Ltd., and he hasworked in the FSC industry since its inception.He can be reached at (800) 243.1372.


Cost Ma a9emeBY JOHN B. MACARTHUR

Certificate of Merit

ost management requires deliber-ate actions by managers to meetthe needs of customers at the low-

est possible cost to the organization, aphilosophy that has reinvigorated theprivate sector. This management phi-losophy also has permeated the publicsector; a case in point is the InternalRevenue Service (IRSO In fact, accord-ing to the IRS commissioner, IRS per-sonnel "have studied and implementedthe best practices of private industry. "z

In order to improve business opera-tions, the IRS uses quality improve-ment and reengineering methods andobtains improvement ideas by examin-ing organizations that are consideredto be the "best in the class." For in-stance, the reengineering of IRS ad-ministrative support services in sum-mer 1993 saved more than $61 millionin salary expenses by May 1996, with-out reducing the support servicesavailable to IRS employees.3

The customer focus and least costemphases of cost management clearlyare embedded in the IRS mission "tocollect the proper amount of tax rev-enue at the least cost; serve the publicby continually improving the quality ofour products and services; and performin a manner warranting the highestdegree of public confidence in our in-

IRS employees sort mail by return type.

.12 MANAGEMENT ACCOUNTING NOVEMBER 1996

Federal government adopts corporate practi

tegrity, efficiency, and fairness."4 Bothaspects of cost management at the IRSare considered here to illustrate therelevance of cost management in thepublic sector.

CUSTOMER FOCUS AT THE IRS

T he IRS conducts an annual Cus-tomer Satisfaction Survey to identifythe public perception of its servicequality and also to set targets for ser-vice quality improvement.5 Recentsteps taken by the IRS to improve cus-tomer service include two programscalled Tax System Modernization(TSM) and Compliance 2000.

Tax System Modernization.6 The TSMprogram is designed to upgrade the in-formation processing capability of theIRS in order to provide taxpayer cus-tomers with prompt and accurate an-swers to their questions in a singlephone call. The goal is to provide IRSpersonnel with online access to taxpay-er return and account information tofacilitate swift responses to taxpayerqueries.

In addition, TSM simplifies the taxenvironment by allowing taxpayers toselect convenient alternative filingmethods to traditional paper returns.For example, online filing is availableusing home computers through a thirdparty transmitter. An additional bene-fit of alternative tax filing methods isthe reduced error rate: Electronicallyfiled returns have a 0.5% error ratecompared with the 17% experiencedwith paper tax returns.

The IRS recently conducted a self -as-sessment study of its TSM manage-ment practices by comparing them withthe management practices of leadingorganizations that were successful inenhancing their performance throughthe use of technology. As a result of this

benchmark study, the IRS is developingimprovements to the system.?

Compliance 4000.The IRS compliancestrategy focuses mainly on methods toencourage voluntary and accurate taxfiling rather than the traditional focuson noncompliant taxpayers. Ways toimprove voluntary compliance with taxrules include simplifying the taxprocess and providing education andassistance on filing and correcting non-compliant tax returns. Also, improvedways are sought to enforce the taxlaws.

The focused market segment special-ization program approach is used as away to improve voluntary complianceand to identify nonfilers or incorrectreturns more efficiently and effectively.Where possible, noncompliant taxpay-ers are contacted in a less confronta-tional and less expensive way than apersonal, face -to -face interview with anIRS tax examiner. Thus, taxpayer cus-tomers are treated in a respectful man-ner, similar to the way private organi-zations should treat their customers.

Under the market segment ap-proach, taxpayers are classified by com-mon characteristics such as their occu-pation or earned income credit status.Investigations are made into unexpect-

At Cincinnati Center, employees key infederal return data.

nt at the IRSces to reduce processing costs.

ed trends in the aggregate tax data re-garding market segments that suggestwidespread noncompliance factors. Costeffective strategies such as educationalefforts, new legislation proposals, andenforcement activities are developed tocorrect any noncompliance problemsthat are unearthed.s The merchant ma-rine market segment and the agricul-tural migratory workers market seg-ment illustrate the IRS approach.

The merchant marine marketsegment9 IRS employees in the Jack-sonville, Fla., office identified an areaof potential noncompliance in the mer-chant marine market segment. Certainliving expenses erroneously wereclaimed as a deduction from taxable in-come based on an incorrect interpreta-tion of the tax home of merchant ma-rine sailors. IRS agents contacted thetax preparers who specialized inpreparing tax returns for merchantmarine taxpayers and alerted them tothe common error in their clients' taxreturns. The tax preparers agreed tocontact their merchant marine clientsand offer to correct 1993 tax returnsand to prepare amended returns forthe previous two years. More than 80%of the clients accepted the offer, whichresulted in a very successful and cost-

Filing paper returns at Returns Manage-ment Branch,

effective approach to improve taxpayercompliance.

The total tax inflow from the 800amended returns was approximately$1.6 million for the 1991 -93 fiscalyears and $620,000 for each subse-quent year. The tax preparers, not theIRS, incurred the expense and effort ofcontacting, educating, and assisting434 marine clients. In order to com-plete the case, the IRS needed to con-tact only 15 -20% of the merchant ma-rine taxpayers who had not respondedto their tax preparers' advice, and thisstep was conducted in an economicalmanner by mail.

In effect, tax compliance wasachieved in a relatively nonthreateningmanner that, for the most part, did notinvolve the trauma of a personal auditby an IRS examiner. In this way, thetaxpayers were treated with respect ascustomers of the IRS. The applicationof the market segment approach in themerchant marine case reached a fargreater number of taxpayers thanwould have been possible under thepersonal audit approach —and at a farlower cost.

The agricultural migratory workersmarket segment.As employers, crewleaders are responsible for withholdingincome and social security taxes fromthe wages of migratory agriculturalworkers and forwarding the taxes tothe IRS, but crew leaders often failedto file and pay their employment tax li-abilities. In addition, in most cases, theagricultural workers failed to reporttheir income on personal income taxreturns and did not pay the relatedtax. Based upon these facts, two IRSdistricts initiated projects aimed at in-creasing the tax compliance of the agri-cultural crew leaders.

In California and Florida, agree-ments have been made between the

IRS and the Departments of Labor(state and federal) that crew leader li-censes will not be issued unless thecrew leaders are current on paymentsof federal employment taxes to theIRS. Each crew leader is asked to signan authorization allowing the Depart-ment of Labor to access IRS informa-tion regarding the currency of thecrew leader's federal employment taxpayments.

This solution to the migratory work-ers' case is a further illustration of acost- effective approach to solve a taxnoncompliance problem. This agree-ment also is beneficial to state govern-ments and their agencies because theyare better able to ensure compliancewith state income tax withholding, un-employment taxes, and workmen'scompensation requirements.

Based on the success of these andother local Compliance 2000 projects,the IRS has elected to decentralize itscompliance research efforts by the re-cent formation of 31 District Office ofResearch and Analysis (DORA) sites.These DORA sites have been chargedwith expanding on the concept of Com-pliance 2000 by measuring and analyz-ing baseline compliance within variousmarket segments in a top -down, data -driven approach. This approach to im-

Another view o1sorting returns at ' Tingletables."


■�Analyze�net�balance�due.■�Determine�maximum�monthly�payments.■�Explain�subsequent�action�to�taxpayer.■�Arrange�for�revenue�officer�contact�(for

specialized knowledge).■�Confirm�that�taxpayer�has�ability�to�pay

proposed sum.

■�Reroute�documents..■�Prepare�collection�information�form

(a copying exercise).■�Advise�taxpayer�to�call�automated�collection

system.■�Wait/delay�time�in�completing�a�case.■�Print�substitute�form�that�duplicates

automated work.

proving compliance enables the IRS tofocus its limited resources on thosemarket segments that have the great-est positive impact on tax revenue be-cause of their tax base size and degreeof noncompliance. Furthermore, thebaseline compliance measures will al-low the IRS to test and compare differ-ent treatment strategies in order to de-termine the most cost efficient methodfor increasing compliance within a giv-en market segment. It is anticipatedthat these treatments will concentrateon taking a less expensive group ap-

proach rather than the more tradition-al and costly one -on -one enforcementeffort. Specifically, the IRS will mea-sure the effectiveness of improved com-munications, taxpayer education, andlegislative changes in raising the levelof voluntary compliance.

The changed philosophy of the IRSembodied in Compliance 2000 was inpart prompted by necessity. Tax law ismuch more complicated than twodecades ago. In 1971, the tax code wascovered in one volume and the tax reg-ulations in two books. In 1996, the tax

code is contained in two volumes andthe tax regulations require five books.Because of the increased number andcomplexity of case loads, coupled withdecreasing resources, tax audits havebeen reduced from 3% of all returnsfiled 20 years ago to 1% today. To in-crease audit coverage to 2% of all tax-payers would require an additional42,000 tax examiners! Also, knownnonfilers increased from four million in1987 to ten million in 1991. Clearly,the IRS needed a new approach to en-courage taxpayer compliance.

IRS EFFORTS TO CONTROL COSTS

T he IRS is developing a Cost Man-agement Information System (CMIS)for full -scale operational use in 1997.10The CMIS is intended to be a majordriver of the changes required to ac-complish the Compliance and TSM ini-tiatives discussed above, as well asother IRS initiatives.11

A prototype CMIS was developed inthe Account Settlement and Acquiring

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processes located at the Cincin-nati Service Center. A furtherprototype CMIS was developedat the Seattle District Office inthe Installment Agreementarea. Installment agreements Cyclare products of the Collectingsubsystem, that is part of theEnsuring Compliance CoreBusiness of the IRS.12

Process value analysis (PVA), Cycle Efficiencyto foster continuous business (VA Time /Cycle Time)

improvement, and activity- Conbased management (ABM) are (Vthe twin pillars of the CMIS.ABM is called activity -basedcost management (ABCM) inthe Internal Revenue Service. ABCM isa management approach that uses ac-tivity -based costing (ABC) informationto guide managers in making deci-sions.13 Cross - functional project teamsare used to implement PVA and ABCfor IRS processes.

PVA is used to identify the value -added (VA) and nonvalue -added (NVA)activities of IRS processes across func-tional or departmental boundaries. Thegoal is to optimize the workings of en-tire cross-functional processes and notjust subparts located within functionsor departments. Also, the IRS wishesto get rid of process complexity and toreduce costs with the help of PVA inconjunction with ABC.14 As in privatecompanies, process simplification helpsto improve the quality of IRS productsand services as well as to reduce costs.

To facilitate the cross-functional ap-proach, an "activity definition sheet" isused to identify the input, output, andcustomers of each activity. Internalcustomer needs in one department,

eTme

Value -Added(VA) Time

l.aboro"° 'S46.0 M W

Facilities S 5,0 lobSupport S 3.0

Resource Drivers:■ Number of people,■ Square footage and so on

15 -120 minutes:

30- minute average

11.111 minutes:

23- minute average

77%

([23/301 *1001)

version Efficiency 77%A Time /[Cycle Time - Queue Time])

say, for a particular document to be ex-pedited promptly by prior links in theprocessing chain, are formally commu-nicated via activity definition sheets tothe prior processors of the document inother departments. Possibly, some ofthe prior processing steps are unneces-sary (NVA activities) and can be elimi-nated to shorten the time required toprocess the document. It may be possi-ble to improve the way necessary pro-cessing steps (VA activities) areprocessed, further reducing total cycletime. Such opportunities may not beconsidered, because of ignorance ofcustomer needs, if a purely functionalor departmental approach is usedwithin the IRS.

As in the private sector, the goal ofPVA is for value-added tasks to be per-formed as efficiently as possible and toeliminate or at least reduce the nonva-lue -added work. A VA activity con-tributes "to customer satisfaction/val-ue/worthiness, reduced taxpayerburden, or increased compliance," and

WW1 I

atsttagtng accounts S 4.0Informing, Educating, & Assisting S 7.0Ensuring Compliance 533.0(Eg: Collecting $111Resourcing $10.0

Activity Drivers:• Volume• Cycle time and so on

2 -6 days:2400 - minute (5-day) average

11 -16 minutes:13- minute average

0.5%

1[13/24001̀100)

40%(113/(2400 - 2361.51)1 *100)

'The queue time is assumed forthe illustrative calculation.

is something for which a customer( "compliant taxpayer who timely fileswith full payment") would be willing topay if allowed to choose.15The drivers(causal factors) of NVA activities areidentified so that the root causes ofwaste can be addressed, not just thesymptoms. Quality - related tasks asso-ciated with installment agreements areclassified in a cost-of- quality format asprevention, appraisal, and internalfailure or external failure costs. Theyalso are labeled as VA or NVA activi-ties. Table 1 illustrates value -addedand nonvalue-added activities in thecontext of installment agreements withtaxpayers that were identified in theSeattle District Office PVA.

Measures to evaluate the perfor-mance of installment agreementsprocesses include the following:

■ Cycle time: the total time, includingqueue, required to complete the ac-tivity for a single case.

■ Value-added time: includes the

" i " .

c0ecting pioduct';Full Pay S

Installment Agreements S 3.0Offer in Compromise S 0.2Currently Not Collectible S 4.0Taxpayer Bankruptcy S 0-8

$11,0

NOVEMBER 1996 MANAGEMENT ACCOUNINIG 45

■ Group assignment to initial contact,■ Initial contact to closure,■ From initial contact to full payment.

■ Full paid:• With seizure,• Without seizure,• On initial contact,• In classification perfection and closing team.

■ Taxpayers meeting deadlines (per team).■ Compliance contacts completed:

• Taxpayers brought into the system,• Returns secured,• Dollars assessed.

■ Sold,■ Without filing bankruptcy.

■ Technical team,■ Classification perfection and closing team.

first -time verification and conver-sion of the taxpayer's data into aninstallment agreement, completedconsistent with customer and IRSrequirements.

■ Cycle efficiency: VA time/cycle time.■ Conversion efficiency: VA time (cy-

cle time -queue time).16

A numerical example is given inTable 2 of the use of the four measuresto evaluate the cycle -time efficiency ofprocessing installment agreements (ex-cluding defaulted agreements) in the"work -up" (for example, analyze cases)and "resolve" (for example, send or givedocumentation to taxpayers) activitiesof the Examination Division. The"work -up" cycle efficiency measure in-dicates that 77% of the total processingtime is spent on VA activities versusonly 0.5% in the "resolve" activity. Theconversion efficiency measures indicatethat the elimination of queue timewould improve the proportion of VAtime significantly in the "resolve" ac-tivity to 40% but would make no differ-ence to the "work -up" activity measure.

Activity -based costing.ABC providesIRS managers with the cost of the ac-tivities for which they are responsibleto complement information from PVA


regarding the qual-ity and timelinessof these activities.The IRS ABC mod-el follows the pat-tern of a typicalABC system in theprivate sector. Infact, the SeattleDistrict Office usedthe popular PC-based softwarepackage, EasyABCas its interim ABCmodel.17

A numerical ex-ample of the IRSABC model is illus-trated in Figure 1,based on the Seat-tle District Officeexperience. Be-cause the IRS is alabor- intensive or-ganization, cycletime is a key activ-ity driver. The fre-quency of conduct-

ing an activity also is a major activitydriver, as is the case in many othertypes of organizations.

Activity costs and product costs canbe compared with activity -based bud-gets and also internal benchmarknumbers to evaluate performance. ThePVA analysis and ABC information willpoint to activities and processes whereopportunities for improvement, such ascycle time reductions and cost savings,are the greatest.

there is a clear need to improve fieldcollection productivity.

The field collection function is re-sponsible for collecting tax revenuesfrom individuals who file tax returnsbut do not pay their taxes and frompersons who fail to submit tax returnsto the IRS. The traditional field collec-tion method consists of individual rev-enue officers working on their own totackle about 70 to 80 collection cases ofvarious types and levels of complexity.This antiquated approach is not able tocope with the increased complexity ofthe tax law, the increased numbers oftaxpayers, and decreased taxpayercompliance. As a result, there is abacklog of collection cases throughoutthe nation.

The Jacksonville, Fla., office was se-lected by the IRS national office for afield intervention project to developand test a reengineered field collectioncase assignment and workload process-ing system. The objectives of the testare to:

■ Increase revenue collection,■ Increase taxpayer entity turnover,■ Reduce costs of collection,■ Bring additional taxpayers into the

system, and■ Increase job satisfaction.

The Orlando, Fla., branch of theJacksonville District volunteered to bethe local site to develop and test a newfield collection procedure. With much"grass roots" participation, a team -based approach to field collections wasdeveloped. The reengineered field col-

The collectionreengineeringpilot study.lsAn- _ Table 4. FIELD COLLECTION RESULTSMEASURESother IRS initiative Total Dollars Collected:to improve perfor-

■ Balance due,mance and reduce■ With delinquent return,

costs is a pilot■

Assessedamount (delinquent return).study project toreengineer the way Returns Secured

field collections are Taxpayer Delinquentundertaken by rev-enue officers. The ■ Full paid,

collection function ■ Installment agreement,

assigns about 63% ■Abated,

of its workforce to ■ Classification perfection and closing team,

field collection ac- ■Other.

tivities that recov- Taxpayer Delinquenter only a fraction of

■ Return secured,the tax monies col-

■ Other.lected.Obviously, o

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lection approach consists of dividingeach of the four revenue officer groupsinto five teams that each specialize inone of the five distinct types of fieldcollection work.

For example, Classification, Perfect-ing, and Closing (CPC) teams handleall case activities that do not requirefield actions by revenue officers. Theresponsibilities of CPC teams includethe initial screening and analysis ofcases, case assignments to otherteams, and various other support activ-ities. Each of the other four teams spe-cializes in field contacts on complexcases, on seizure and sale activities, ontechnically complex collection cases, oron compliance work. Teams ratherthan individual employees are respon-sible for the resolution of assigned cas-es. This system mirrors the team ap-proach that is popular in privateindustry.

The pilot study commenced in Octo-ber 1994, and the collection groups ex-perienced some early transitional prob-lems. However, recent monitoring ofboth results measures and processmeasures show that improvementswere made in field collection throughuse of the specialized team approachinstead of individuals tackling all typesof cases on their own.

Prompt identification and resolutionof tax collection cases means thatmany taxpayers are alerted to tax un-derpayments before they grow to pro-portions that lead to bankruptcy pro-ceedings. Efficient dispatching of fieldcollection cases allows collection em-ployees more time to engage in proac-tive compliance activities that will helpto reduce the incidence of noncompli-ance and nonfiling in the future.

Improved collection efficiency andsuccessful prevention efforts will leadto cost savings in the future. For exam-ple, savings are possible in staff salaryreductions through nonreplacement ofretirees, and higher proportions of low-er paid paraprofessionals (tax examin-ers) in collection teams in place of themore costly professionals (revenue offi-cers) who are needed under the oldsystem. Also, using the decentralizedteam approach, with team leaders su-pervising field collection activities,should lead to fewer managers neededto oversee the collections function, thusreducing overhead costs.

To evaluate the performance of the

48 MANAGEMENTACCOUNTING NOVEMBER 1996

pilot field collection project, test groupmeasures are compared with measuresof prior periods and with equivalentmeasures of nontest groups. See Table3 for examples of the field collectionprocess measures and Table 4 for ex-amples of the field collection results

measures.

ARE THE IRS CHANGESCOST- BENEFICIAL?

The IRS does consider the costs andbenefits of proposed changes. For ex-ample, the Seattle District Office iden-tified the costs and benefits of therecommended interim CMIS imple-mentation plan. However, the costswere quantified in monetary termswhereas the benefits were expressed inqualitative terms (for example, "(i)den-tifies opportunities for continuousprocesalquality improvement and costreduction" 19), that makes cost - benefitevaluation difficult. The IRS also con-sidered the significant monetary andother benefits from improving the com-pliance rate and improving customerservice in deciding to launch the TSMand Compliance initiatives.

Based on the IRS experience and theinfluential accounting standards of theFederal Accounting Standards Adviso-ry Board,20 cost management will con-tinue to have an important role to playin decisions regarding future develop-ments and operations within the publicsector. It is important for all govern-ment agencies to emulate the efforts ofthe IRS to become more customer ori-ented. The implementation of suitablecost management information systemscan help government agencies continu-ously improve in satisfying their stake-holders in cost - beneficial ways. ■

John B. MacArthur is an associate professorof accounting at the University of North Florida,Jacksonville, Fla. He submitted this articlethrough the Jacksonville Chapter of which he isa member. He can be reached at (904) 646 -2630.

The autho r wishes to thank the Internal Rev-enue Service for granting permission to publishdetails of their cost management efforts. In par-ticular, the author wishes to thank the follow-ing Internal Revenue Service personnel fortheir helpful contributions: at the JacksonvilleDistrict, Fla.: Ralph E. Collinson, chief of Dis-trict Off ice Research and Analysis (DORA); Hol-ger Euringer, public affairs officer; Robert L.Holmes, program analyst DORA; LouiseKaminskyj, assistant public affairs off icer; andTerry W. Wood, chief, Orlando Field Branch;and in Washington, D.C., C. Morgan Kinghorn,Jr., former chief f inancial officer,

IA.Y.S. Chen, and R.B. Sawyers, "TQM and the IRS,"Journal of Accountancy, July 1994, p.77, stated that"(0he IRS is embracing private - sector managementtechniques to solve its problems" and comparedTQM with Compliance 2000 and the Tax SystemModernization projects of the IRS.

2Statement of Margaret M. Richardson, Commission-er of Internal Revenue, before the Subcommittee onTreasury, Postal Service, and General GovernmentHouse Committee on Appropriations, Feb. 16, 1995.

3Michael P. Dolan, Statement before the Senate Com-mittee on Government Affairs, May 9, 1996.

4"Internal Revenue Service Business Master Plan Fis-cal Years, 1995- 2001," Department of the Treasury,Internal Revenue Service, Document 9255, April1994, p.3.

5"IRS Business Master Plan, p. A1.14.6The detailed information in this section on TSM waslargely drawn from "Progress Towards Reinventingthe IRS," Department of the Treasury, Internal Rev-enue Service, Publication 1825, November 1994;from "It's a Taxing Job, but Someone's Got to DoIt!" Remarks by Margaret Milner Richardson, Com-missioner of Internal Revenue, at the Common-wealth Club, San Francisco, Calif., April 11, 1995;and from Michael P. Dolan, Statement before theSenate Committee on Government Affairs, May 9,1996.

]Statement of Margaret M. Richardson, Commission-er of Internal Revenue, before the Subcommittee onTreasury, Postal Service, and General Government,House Committee on Appropriations, Feb. 16, 1995.

s "Progress Toward Reinventing the IRS," Departmentof the Treasury, Internal Revenue Service, Publica-tion 1825, Nov. 1994, p.10.

9The general information and statistics for this andthe next two sections came from District Office Re-search and Analysis (DORA), Internal Revenue Ser-vice, Jacksonville, Fla.

10 "Intern al Revenue Service Business Master Plan Fis-cal Years, 1995- 2001," Department of the Treasury,Internal Revenue Service, Document 9255, April1994, p.88.

11 Information in this paragraph and elsewhere de-scribing the development of the IRS CMIS and CoreBusiness Systems was obtained from "Cost Man-agement Information System: Seattle District OfficeCore Business System Model, Collecting Subsystem,Installment Agreements," IRS Publication for Exter-nal Distribution, June 1993. Also, some additionalmaterial was gleaned from the Activity-Based CostManagement Presentation Case Study, "Offer inCompromise," Chief Financial Officer's Office ofCost Management, Internal Revenue Service, Wash-ington, D.C.

12The six core IRS businesses are: Ensuring Compli-ance; Managing Accounts; Informing, Educating andAssisting; Value Tracking; Resourcing; and Develop-ing and Managing Systems.

I3Robin Cooper, Robert S. Kaplan, Lawrence S.Maisel, Eileen Morrissey, and Ronald M. Oehm,"From ABC to ABM," MANAGEMENT ACCOUNTING* , No-vember 1992, pp.54 -57; and Implementing Activity-Based Cost Management: Moving from Analysis toAction, Institute of Management Accountants, Mont-vale, NJ, 1992.

14 "Cost Management Information System: Seattle Dis-trict Office Core Business System Model, CollectingSubsystem, Installment Agreements," IRS Publica-tion for External Distribution, June 1993, p.1.

15 "Cost Management," p.321s "Cost Management," pp.40 -44.17Thomas L. Albright, "Software for Activity-Based

Management," Journal of Cost Management, Spring1995, p.25, reported that EasyABC Plus Version 2.06ideveloped by ABC Technologies) was used in theU.S. and in Europe in more than 2,700 installations.

1s Material for this section was obtained from T.W.Wood, chief, Orlando Field Branch, Internal RevenueService, and from the Field Intervention Charter thatauthorized and sanctioned a Field Intervention Testthat would reengineer the way tax revenue officersconducted business.

1s "Cost Management Information System: Seattle Dis-trict Office Core Business System Model, CollectingSubsystem, Installment Agreements," IRS Publica-tion for External Distribution, June 1993, p.107.

20 See the cost management and performance mea-surement proposals in Federal Accounting Stan-dards Advisory Board, "Managerial Cost AccountingStandards for the Federal Government," Statementof Recommended Accounting Standards, ExposureDraft, Washington D.C., Oct. 7, 1994.

MAXWELLBUSINESS SY

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In front of the Stealth fighter are Maxwell's Sassan Chakamian and Glynn Curry Ithird and fourth from left), and Lockheed Skunkworks'Len Curtis, Bob Sear, Dick Jones, and Sid MacTarnaghan.

BY KATHY WILLIAMS ANDJAMES HART

ometimes the American dreamcomes true. Growing up in Iran andworking part -time as a computer

programmer for an architectural andengineering company while going toschool, Sassan Chakamian never imag-ined he would one day head a U.S. com-pany that specialized in software forthe defense industry. Now, however, he'spresident of Maxwell Business Sys-tems, Inc., a subsidiary of MaxwellTechnologies, Inc., San Diego, a compa-ny that develops, manufactures, andmarkets products and services involv-ing information technologies, purifica-tion systems, and power conversion sys-tems and components.

In 1978, Chakamian had just fin-ished his college classes in computerscience and applied math, but hadn'tgone through graduation ceremonies,

when the revolution occurred. So hecame to the United States to finishschool and then return home. But aftergetting an undergraduate degree inbusiness administration and a master'sdegree in management, he decided tostay and took a job as a computer pro-grammer with a high -tech company. Ahands -on executive who still dabbles inprogramming, he also oversees systemimplementation and serves as an advo-cate for project accounting.

Q:Could you tell us a bit about theorigins of Maxwell and of JAMIS?

Maxwell Technologies, Inc., our parentcompany, started in 1966 as a govern-ment contractor, working mostly on de-fense- related contracts. Now it is more acommercial contractor than a govern-ment one. In 1995 the commercial rev-enue was 57% of the company's revenue,while government was 43%. Maxwell is

very diverse, with several operations insoftware development. The one I head,Maxwell Business Systems, Inc., is oneof them. We are targeting the govern.ment contractor market with a client/server job costing system. Another oper-ation just finished an interactive CDROM application for physics and alge-bra courses for schools. They also are do-ing client/server systems for IntegratedJustice Information Systems (IJIS) andsimilar types of applications.

Maxwell also competes in the hard-ware business. We manufacture OEMcomputers for Lucent Technologies—voice and telephone PCs. In addition,in -flight computers that airlines use forentertainment and in -flight telephonesystems are manufactured by Maxwell.

JAMIS (Job Cost Accounting andManagement Information System) be-gan in 1979 when Maxwell had a needfor a job costing system. It searched the

NOVEMBER 1996 MANAGEMENT ACCGUNTMIG 49

market but couldn't find anything. So itpurchased a general - purpose accountingsystem and commissioned a third -partysubcontractor, a company called TetraTech, to customize the software andturn it into a job costing system.Maxwell used the software in -house forfive or six years, then realized there wasa market for it. So it rewrote the soft-ware, making it more general, andstarted selling it by word of mouth.Eventually the company realized thesoftware's potential and in 1991 formeda separate entity, Maxwell BusinessSystems, to market and sell the system.

QoNow large a company is Maxwell,and who are some of your customers?

I think the revenue for last year wasaround $81 million. During the last sixmonths Maxwell Technologies has un-dergone a senior management changeand a major reorganization of its oper-ating units and has seen its stock priceincrease from $8 to the present price ofaround $30. Some of our Maxwell Busi-ness Systems units are Lockheed,Hughes, Booz -Allen & Hamilton, andITT/Vandenberg Air Force Base.

Q;When a company like Lockheed buysyour system, does it buy the softwarefor the whole company or for divisions?Divisions, usually. We have installationsin four Lockheed divisions. The largestone is at LADC, also known asSkunkworks, which designs sophisticat-ed jet fighters and airplanes. They de-signed the Stealth Fighter and theSB71, Black Bird.

They work on top- secret projects andhave about 4,000 employees and close to$1 billion in annual revenue.

Qt Now did you find your way to

Maxwell?

I was working for Tetra Tech, the com-pany that Maxwell hired to modify theJAMIS system. I suppose they thoughtI did a good job because once the projectwas finished Maxwell hired me as aprogrammer /systems analyst to supportthe product. That was in 1981. I workedmy way up and in 1991 became thepresident of the newly formed BusinessSystems Division. I designed the majori-ty of the programs in the JAMIS sys-tem. I have written hundreds of pro-grams and know the code inside andout. I'm very much a hands -on person.

Q:Now did JAMIS evolve?


We bought basic accounting softwarefrom a company called MCBA. Then weadded our own job costing, billing, allo-cation, purchase order, and labor distri-bution modules. That was the start ofthe JAMIS system. It was running onthe Wang VS computer. With the demiseof Wang, we ported over to the VAX andthen Unix. Then we decided to under-take a brand new project, which is acomplete rewrite of the software. It isn'ta conversion of the system but a com-plete rewrite of the current software.And we decided to use the latestclient/server technologies. We still sup-port Wang customers, though.

Q:Why did you decide to go this routeIf the other was working well?

We saw that the industry was moving tothe chent/server relational database en-vironment. It's definitely the best way ofinstalling a financial system because itlets the users get to the data any waythey want to.

Q:Now would you describe a generalpurpose financial system versus a jobcosting system?

The basic difference is the language ofgovernment contractors. In governmentcontracting, you talk about organiza-tional breakdown structure and workbreakdown structure. There also arebilling requirements specific to govern-ment. Commercial software isn't de-signed for government requirements.The government breaks down its con-tracts into four different types: costclass, time and material (T &M), fixedprice, and progress payment. Each onehas a specific requirement that must becalculated. And there are special gov-ernment forms that you have to use forbilling government work. For example,if you have a fixed price contract andyou are building widgets, when you fin-ish one widget you're supposed to fillout specific forms and shipping informa-tion —form DD -250. No commercial soft-ware has a DD -250. Progress paymentsare billed on a 1443 form.

Q: Now does project cost accounting fitthe needs of controllers or CFOs?

In my opinion, any organization shoulduse a job cost accounting system, or atleast an activity -based cost accountingsystem, to track its activities. A compa-ny needs to know how much it spendson a particular project. Our market iscontractors — generally government con-

tractors —but also commercial contrac-tors and nonprofit organizations. Thesegroups have very defined projects, suchas government projects or grants, orthey have commercial projects and needto keep track of the costs spent on them.Not many software companies have pro-ject costing software. If they do, it's usu-ally general ledger based, so all transac-tions end up in the general ledger. Theyhave large GL accounts or a suffix thatgets attached to the general ledger onwhich they put a project number. If theywant to know the total cost for a pro-ject, then they sort using that particularsuffix, and it gives the cost for the pro-ject. They are dependent on a generalledger module to get their project cost.

Our system is 100% different. Wehave a general ledger module for the fi-nancials, then a project management orproject costing system. Accountantsdon't have to clutter their generalledger system by adding accounts whensomeone wants to keep track of travelor labor or unallowables or whatever.Few general ledger accounts accumulatethose costs, but job costing softwarekeeps track of the detail of all thosetypes of costs. We leave the setup of thejob costs and the breakdown to the pro-ject managers and the contract depart-ment. They decide how much detail theyneed for a job. The controllers and otherfinancial people set up the generalledgers any way they want to. That's themajor difference in the two systems.

Q:Can you give an exampleof howthesystem works?Let's say you have a time card. You en-ter an employee's time card informationinto the labor distribution module, andhis time gets posted. The posting pro-gram simultaneously updates both thegeneral ledger and the job cost module.It creates two transactions that areequal in the bottom line, but the detailis different. Say you have 10 differenttypes of employees working on a project.You may have a project manager, an en-gineer, a scientist, and programmers.Each has a time card. And all chargetime to the same job. When we post thetransaction, the system creates 10transactions for that job, and each ofthem contains the employee number,the labor category that the employeeworked on, the number of hours, andadditional different information. Butthe person using the general ledgermodule doesn't care if the laborer is a

project manager or engineer or someoneelse. All they care about is direct laboror indirect labor. We can summarize allthose transactions into one transactionfor the GL called direct labor. Then thejob costs are broken down into 10 or 100different transactions. But the totalnumber of labor hours and dollars inthe job cost module and the GL moduleare equal.

Q:Do you use activity -based accountingin your system?

Our system is totally capable of doingactivity -based accounting because itkeeps track of all costs (we generally re-fer to them as jobs). Those jobs can beactivities or tasks or subtasks, whateverthe user wants. You can set up an un-limited number of activities, which canbe broken down into subactivities orgrouped with larger activities. Employ-ees simply chart their time against theactivities and buy materials againstthose activities, and so on. At any timethey can call for a detailed cost break-down by every activity.

Q:Do you find you often reengineer acompany by placing your job - costing con-nection with the ABM or ABC system?

That's an interesting question. One ofour customers, a city government, wantsto use our JAMIS system to figure outthe breakdown of costs for each of its di-visions. One division has a multimilliondollar annual budget. But due to lack ofinterest in detail cost information, aswell as accounting system inability, itdoes not know where the money goes orhow it is spent. It has seven facilities,each with several sections, and each sec-tion has numerous processes. Beyondthe bottom line of its annual budget, thecity has no idea how much money is be-ing spent on each facility or section; itdoesn't know how much material eachfacility buys, or how much labor is spenton various activities.

The city decided to create a perfor-mance incentive system for its employ-ees based on cost savings in the depart-ments. But there was a catch. They did-n't know how much they were supposedto spend, so savings couldn't be mea-sured. The solution: an activity -basedcosting system. The software: ourJAMIS system. With it, the city can in-stitute an organizational breakdownstructure or OBS. It can set

up its de-partments, with a budget for each one,which can be broken down by labor, ma-

terials and supplies, whatever. Then itcan define unlimited activities. The citycan keep track of the costs for those ac-tivities and then, we hope, find outwhich department is meeting its budgetand then give those employees an incen-tive to improve.

Something else distinguishes our soft-ware. We maintain the detail transac-tions for the life of a project. A customercan go look at a project that's five yearsold and ask for a list of all employeesthat worked on that project five yearsago on a certain day, say August 22.JAMIS gives the user the name of theemployees, their employee number, thenumber of hours an employee charged,and the cost of every individual transac-tion plus any applied burdens. We don'tarbitrarily summarize and delete thedetail at end of the month, quarter, orend of the year. We also maintain thebilling information on a transaction -by-transaction basis. If a customer or theDCAA (Defense Contract Audit Agency)comes back 10 years from now andquestions a certain invoice, the companycan pull out every single transactionthat made that invoice. We can main-tain the same level of detail for indirectexpenses. If somebody questions anemployee's travel expense, we can pullout airfare cost, hotel cost and howmuch they spent on meals or per diem,how much the car rental cost. In thegovernment contractors' area, particu-larly, companies see the value of thatinformation.

Q: You have conducted many installa-lions in your career with Maxwell. Doyou have any recommendations formaking the process smooth?

Changing to new systems and softwareis painful and takes a great deal of timeand resources for a customer. The leastnumber of times they have to do it, thebetter off they'll be. Most companiesdon't plan for implementation. They re-alize they're buying a new system, butthey totally underestimate the effort ittakes to implement it. The first thingwe tell potential customers is to do animplementation plan. Our standard im-plementation plan describes the processof implementing the software, shows aGAN'fT chart, and shows every activitya customer will have to undergo duringimplementation and who's going to doit. Either we're going to do it, or the cus-tomer has to do it. So we give a clearpicture of the process and how long it

takes to accomplish an implementation.For a time frame, we use an estimate ofabout four to five months. We let cus-tomers know the process isn't easy

...it

takes time, and it takes resources.I'm sure most software companies do

the same thing. It's something all ven-dors should do for potential customers.And customers should ask for a meetingif it isn't offered. We usually have two.The first one is a pre - installation meet-ing in which we define the process forthe customer. We ask a lot of questions.Have you planned for new hardwarewith your systems? Where is it going tobe set up? Is a network set up? Howmany systems do you have now thatmust be integrated with the one you'rebuying from us? Who's going to do theintegration? How are the data going tobe transferred? During this two or threedays we show them everything that hasto happen. A few weeks later we have apre - implementation meeting to decidehow the system should be installed.

It's a necessary step because youdon't want the customer to enter the sit-uation blindly with you just bringing insoftware and training the end user. Ifwe simply do a shift of the software,give the user software installationnotes, and train the users, the softwareinstallation is going to fail. Those com-panies that allocate time and resourcesfor the implementation are going to besuccessful.

Q:Who usually spearheaids the imple-wentation for the client?

It depends. But the commitment and in-volvement of top management are veryimportant to a successful installation.In some companies, top managementtakes a hands -on approach, becomingthe project leader. Employees see themandate from the top, so everybody justpitches in and gets the system installed.In other companies, top managementgoes the hands -off route, giving the sys-tem to a middle manager to install. Butin that scenario, the manager doesn'thave authority to make decisions, sosometimes the old system is duplicated.Also, if the manager has no authorityover other people, he or she might notget enough resources, and that's a mis-take. To have a successful implementa-tion, top management must get involvedand sit through the training sessions —even though they are busy. They mustknow all the capabilities of the new sys-tem so they can do a business reengi-

NOVEMBER 1996 MANAGEMEIR ACCCNINiING 51

neering right away in which they decidethe processes to discard and theprocesses to keep.

Q:0o you help companies decide whoshould be on project teams?Yes. We insist that the top managers,the CFO, the controller attend at leastthe initial meetings. We also stronglyrequest that the top project managersattend those pre - installation meetingsbecause they have to know the capabili-ties of the software in order to get cer-tain reports and other information. Orsay they're negotiating a new contractin which they negotiate the cost plusthe level of effort/fee. They need to knowif the software can handle that arrange-ment. If it can't, then they have a prob-lem because the software has to be mod-ified. So we insist that project managersparticipate in the pre - implementationmeeting. It also is important for anyonerunning the company to know the capa-bilities of the systems because some-times internal staff members will playpolitics and say a system can't do some-thing when it really can.

Q:Company politics can sabotage thesystem?Exactly. Many companies have thisproblem, especially when a certain indi-vidual doesn't want to give someoneelse the control of running a report orgiving out a certain budget. The easiestanswer always is, "the system cannothandle that."

Q:Let's talk about your competitiveenvironment for a moment.It is pretty amazing, actually, but onlytwo companies provide a solution forgovernment contractors. Maxwell isone, and Deltek is the other. No oneelse in the market has a solution. Wecompete from time to time against Ora-cle, but they don't have project costingfor government contractors. We come upagainst SAP, Ross Systems, J.D. Ed-wards, but none of them is designed foror dedicated to this market. We com-pete with Deltek probably 85% of thetime, but each of us has our own nichemarket.

Q:Where do you see your market go-ing over the next five to 10 years?We are definitely in the contractor'smarket, either government or commer-cial. With the downsizing in the govern-ment, especially the Department of De-


fense, everybody expected our market toshrink, but, in reality, it is expanding.Companies like Lockheed or Hugheshad in -house systems, big mainframecomputers, with hundreds of MIS peo-ple. They were spending millions of dol-lars every year maintaining those sys-tems. Then came all the mergers andacquisitions, and those divisions could-n't be on a central system anymore.When a company spins off a division,if the division has been in the corpora-tion's central system, it becomes diffi-cult to separate its accounting from themainframe. So many large corporationsneed to cut costs by running on opensystems so divisions can be totally inde-pendent and run their own system.

Q:Where do you see the financial soft-ware industry headed over the next 10years?I think there will be many consolida-tions. There are too many softwarecompanies today. A few years ago,maybe 50 companies sold spreadsheets.Now there are Microsoft and Lotus. Ithink the same thing will happen to thesoftware market. Technology is movingso fast, and some software companiesare not able to move fast enough be-cause the tool they are using is veryrigid, isnot dynamic, and is not goingto change. The tool doesn't allow thesoftware to grow to the next phase.That's why we have so much opennessand flexibility in our software. We don'tcare which direction the market goesfrom the point of view of the hardware,client, and database. We want to be ableto operate on any of our clients' systemsand platforms.

Q:Earlier you gave some great imple-mentation advice. What other kind ofadvice would you give to, say, a con-troller who's in charge of getting anew system for his or her company?As a starting point, I'd say to select theproper software. We get numerous RFPs[requests for proposals] coming to ouroffice, but the majority are not adequatefor selecting the right software. Compa-nies ask questions about certain func -tionalities that they need for current op-erations, but they may not need thesame ones for future systems, such ascertain reports.

Rather than emphasizing the RFP,companies should come up with differ-ent processes and ask for a requestfor a demonstration of the software.

They should tell the vendor the prob-lems they have with their currentprocesses and ask the software vendorto show them how they can resolvethose problems.

Also, they should not emphasize hard-ware. Hardware is not as importantthese days. With system openness andnetworks you can access any data withthe tools on the market. They must finda system that meets at least 90% oftheir functionality requirements ratherthan buying software and trying tomodify it later. It just doesn't happen.And once a company selects the soft-ware, controllers must get involved.They cannot delegate someone else toinstall the system for them. They haveto understand the ins and outs of thesoftware. They have to know every fea-ture of the system.

They have to look at software imple-mentation as a triangle. One corner isthe software. One corner is the proce-dures. One corner is staff. Controllersmust look at this triangle and try to re-solve any problems they have with anyof the three sides. In some areas theycan say, "Okay, the software has to bemodified to meet our requirements be-cause I cannot change my procedure,and I cannot change my staff or trainthe staff." Sometimes staff can be movedaround in the organization, but theyhave to be retrained and retained. Wedraw this chart on the first day of ourpre - implementation meeting. We referto it as the JAMIS triangle. During theimplementation process, every time wecome across a problem, an issue thatcannot be resolved, we look at the chartand decide which of these three itemsmust be changed or modified to solvethe problem. The majority of the timewe can change a procedure or move thestaff around or change their training orchange their focus and solve the prob-lem. Too many companies try to solveall of their problems by changing thesoftware.

This flexible mindset can mean thedifference in failure and success. Com-panies that spread problem solvingover those three different corners aremuch more successful than the onesthat try to change just one corner andleave everything else exactly as it wasbefore. ■

Note:You can reach Maxwell BusinessSystems, Inc., at(619) 576 -3727,phone;e-mail: www.jamis.com.

A

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CASE STUDIES

TRW TAKES BEST APPROACH TO MANAGING ITS ASSETSFASTRACKTMAND FAS FOR WINDOWSTMFROM BEST SOFTWARE INC.STREAMLINE MANUFACTURER'S FIXED ASSET MANAGEMENT

W hen a company is knownfor its technology, it's no sur-prise that it uses advancedtechnology to maintain em-ployee efficiency. For Cleve-land -based TRW, a leader inaerospace and automotivetechnology with 60,000 em-ployees, something as mun-dane as tracking equipmentinventories is made easierwith sophisticated bar codescanners and fixed assetmanagement software. Thesetools make it possible for justone employee to track thevalue of thousands of fixedassets in use at numerousmanufacturing locations.

TRACKING ALLTHE ASSETSMesa, Arizona, is the hub ofTRW's North American airbag operations that servesFord, General Motors, andother major auto manufac-turers. Since 1988, the 3,500employees of Vehicle SafetySystems Inc., a TRW sub-sidiary, have produced morethan 30 million air bags —$12.4 million worth in 1995alone —for customers aroundthe world.

As a fixed asset accoun-tant, Steve Reding is respon-sible for all fixed asset track-ing and reporting at theTRW/VSSI passenger -side

air bag facility in QueenCreek, Ariz., just outsideMesa. When new equipmentis placed in service, Redingmust add it to the fixed assetmanagement computer sys-tem, then track and reportdepreciation values eachmonth for TRW's consolidat-ed financial statements.Scanner and database man-agement software from Best


Software Inc. of Reston, Va.,help him single - handedly ac-complish his duties.

For financial reporting,TRW's accountants mustfigure the value and depre-ciation on the company'sland, buildings, and infra-structure such as utilities,construction improvements,and roads. Other more tan-gible items like assembly

line equipment, tooling atparts supplier locations,vehicles, computers, andoffice equipment also mustbe inventoried and tracked.Depreciation methods varyby the type of asset, usuallyaccording to its useful life,the number of units it pro-duces, or certain taxconsiderations.

Reding uses a Janushand -held data collectionterminal from IntermecCorp. to scan bar code inven-tory labels that he has af-fixed to the 1,900 fixed as-sets at the Queen Creek fa-cility. Information about theassets, such as description,location, and condition, ispulled into a software pro-gram called FASTreckTm,which then allows Reding toreconcile the inventory on-line, and update the fixedassets database. That data-base is shared by FAS forWindows"'" (also from Best),the fixed assets manage-ment system Reding uses tocalculate depreciation andtrack the current value of allthe facility's fixed assets. Byusing the two applications,Reding is assured that hisdepreciation calculations areas accurate as possible —they are made on a fixed as-set database that is in sync

with the assets owned by thefacility.

Reding used the FASTrackscanner software for the firsttime last fall when he did acomplete fixed assets inven-tory over a two -month periodto establish his new data-base. He now has set up a cy-cle wherein certain fixed as-sets are inventoried eachmonth, so that each fixed as-set will be evaluated at leastonce every two years to stayin compliance with federalaccounting regulations.

EFFICIENCY 1S THENAME OF THE GAME"I label 50 to 100 items amonth, do the inventory,manage the database andtracking system, and run allthe reports," says Reding.

Efficiency is very impor-tant to him. Automatic datacollection has slashed thetime it takes him to do hisinventory. Without this tech-nology, he would have to car-ry a notepad from building tobuilding, across the 640 -acremanufacturing site, writedown the inventory codes,and then type them all into aPC upon returning to hisoffice.

"Using a bar code scannerto collect the information isso much easier," says Red-ing. "I don't have to worryabout the accuracy of my en-tries because the name ofthe inventory item automati-cally comes up on my scan-ner screen. Location and de-partment codes, and depreci-ation values, are readilyaccessible from the data-base. When I get back to myoffice, I can easily upload allof the information into myfixed assets managementsystem and run exception re-ports that compare the data

from the two systems. I cansee at a glance any assetchanges — what's missing, forexample —and then reconcilethe data."

Asked if the scanning soft-ware is a time - saver, Redingenthusiastically says,"There's no doubt about it.It's a huge improvement. IfI'd done my inventory byhand, it probably would havetaken three to six timeslonger. I'm sure that Ishaved a month off myschedule by using the scan-ner and FASTrack."

Reding says that the FAS-Track program and bar codescanner not only make in-

GAAP - compliant deprecia-tion methods, and can pro-duce more than 20 standardreports.

"I like the fact that Bestoffers program updateswhenever there are changesin the tax laws that affectfixed assets," Reding said."The software calculates allthe depreciation for me,which can be very complicat-ed for federal tax reporting.And, I don't have to keep upwith all the tax laws myselfto maintain and reprogrammy fixed asset managementsystem."

The software also givesReding the capability to

throughout his company andto export data to Lotusspreadsheets.

TRW's accountants havebeen long -time users of Bestfixed asset software, which isconsidered the most feature -rich available. "When Ijoined TRW, I began usingPCFAS, Best's first fixed as-set management product,"Reding noted. "Then I usedFAS2000, which operated inDOS, and later converted toFAS for Windows, which Iuse now. Best has done agood job of improving theirprograms and making themmore user - friendly. We getgood support from Best's

Counting by hand would have

taken three to six times longer.

ventories go faster, but theybecome more accurate. "Be-cause you don't have towrite down the informationas you collect it, and thentype it into the computerlater, you avoid the doubleopportunity to make mis-takes. It definitely speedsup the process and cutsdown on errors. And the au-tomatic database updatingis a big advantage."

While FASTrack is a pow-erful, stand -alone solutionfor tracking fixed assets, italso seamlessly integrateswith FAS for Windows, aleading fixed asset deprecia-tion software.

With FAS for Windows,Reding can view up to sevenbooks on a single screen. Theprogram gives him access tomore than 20 IRS and

store scanned photos ordrawings for easy identifica-tion of assets. In addition,several features make it easyto add, maintain, and changedata for entire groups of as-sets instantly.

"I like the FAS for Win-dows capability to break theasset listing into groups, soyou can look at the assets indifferent ways for differentpurposes. And it has a tem-plate function that's nice foradding standardized piecesof equipment. The pull -downmenus are easy to workwith, too."

Reding often has used theCrystal Reports and ReportHelper sections of FAS Re-port Writer for Windows, anadd -on program, to createcustomized reports that canbe distributed to managers

technical support team,and their sales representa-tive has been very helpful,too."

Since its beginnings in1901, "a company calledTRW" has progressed withthe times and been a pio-neer in developing new tech-nology. As we ride in oursafety - engineered cars to-day, we're protected by airbags that inflate automati-cally if we're involved in acrash. And accountantsroam around with laserscanners to count their as-sets, then compute theirvalue with lightning speed,using advanced software.Manufacturing and account-ing —not the staid profes-sions they once were, butmaking use of the "Best"technology available. ■


UNITED DAIRY FARMERS AND GBA SYSTEMS:PARTNERS THROUGH CHANGEChris Than-Win, senior ac-countant of United DairyFarmers, Inc.(UDF), directedthe search for fixed assetssoftware to replace UDF'santiquated and inaccuratesystem. After an exhaustiveyear -long search, havingevaluated numerous vendorson both the AS /400 andHewlett- Packard platforms,Than-Win selected GBA Sys-tems' Fixed Assets Manage-ment System/ On -Line(FAMS /OL).

GBA's system has two fea-tures that are especiallyvaluable to UDF —the masstransfer and disposal op-tions. In the conveniencestore business, stores areregularly remodeled or up-graded, creating a need for

e

aUU

a quick way to dispose of allstore assets. Than -Win likesthe ability to allocate lumpsum proceeds across indi-vidual assets based on netbook value. He also utilizesthe partial transfer and dis-posal options, citing as par-

ticularly useful the flexibili-ty of disposing assets basedon percentage of dollaramount.

Ease -of -use was a para-mount consideration, and

the company found whatthey were looking for inGBA's default code capabili-ty. UDF creates default tem-plates for asset informationsuch as location, deprecia-tion method, lives, and con-ventions. Because these arelogically established by storenumber and asset class, theonly additional fields re-quired are description, ac-quisition date, and cost.When you add more than1,600 assets annually, thisnot only saves time, but alsoimproves the integrity of thefinancial and tax data.

Two years ago, UDF was abeta site for GBA's newclient/server tool, DataTransfer. In October, it alsopurchased GBA's Project Ac-

counting Management Sys -tem/On -Line (PAMS/OL) tomanage capital projects.A major factor in selectingPAMS /OL was GBA's abilityto provide integration for ac-counts payable and fixedassets.

When asked about themost important qualities toconsider when selecting asoftware vendor, Than-Winresponded, "Good service andselecting a vendor who canchange and adapt to newbusiness needs and environ-ments. UDF has grown overthe last three years, andGBA has been there right be-side us. Selecting GBA hasbeen a very positive experi-ence for me careerwise —it'smade me look good." ■

CLIENT /SERVER FUNCTIONALITY BOOMING AT DYNO NOBELEXPLOSIVES MANUFACTURER DEFUSES DATA MIGRATION TROUBLES WITH INrSOURCE CS—FIXED ASSET MANAGEMENT SYSTEMThe promise of flexible and

easy access to financial ap-plications and data hasprompted many companiesto move information from themainframe into a more de-centralized environment likeclient/server. Yet, for most,the migration has proved tobe troublesome, causing con-cern that vital corporate da-ta may be compromised orlost. Companies like DynoNobel Inc. have discoveredthat one way to minimize therisk is to start the move witha fixed asset managementsystem: an approach thatprovides a safe path througha minefield of compatibilityand conversion traps.

Salt Lake City -based DynoNobel Inc., a subsidiary ofDyno Industrier, A.S. of Nor-way, is a leading manufac-turer and distributor of ex-plosives, including world fa-

mous Dynamite®. DaleReeder, MIS analyst forDyno Nobel, says, "We havea lot of assets spreadthroughout the UnitedStates tracked from ourmain office. The amount ofmoney that we have in vehi-cles, equipment, largeplants, and general facilitiesis significant."

Dyno Nobel needed a newsoftware solution that wouldoperate on its client/servernetwork, and they decided totake a look at InSource CS-Fixed Assets ManagementSystem (FAMS) from Com-puter Language Research,Inc. Leanne Burt, Dyno No-bel application specialist,says, "It provided everythingwe were looking for —use inthe client/server environ-ment as well as the relation-al database and the generalledger interface. The big sell-


er was the advanced ac-counting capability, whichthe others we looked at sim-ply didn't have." AddedReeder, "The application wasdeveloped to help manageassets, not just calculate de-preciation and report it as alump sum to the general ledger."

Another major selling ben-efit is the expertise and sup-port offered by ComputerLanguage Research (CLR).Reeder says, "What soldeverybody, immediately, wasthe vendor's knowledge ofboth the tax and book sidesof fixed assets. We ultimatelycouldn't have done the taxconversion without theirhelp. The people at CLR fo-cus on support."

FINANCIAL DATAMIGRATIONLeanne Burt says,"The in-stallation of the InSource

software went smoothly, butthe actual migration of ourdata brought with it someproblems and delays. In-stalling and running thehardware and database wasparticularly challenging be-cause we had a compatibilityproblem between our net-work server and the Oracle®database. We were glad wehad moved our fixed assetsystem ahead of other, morereal -time accounting applica-tions, like the general ledgerand accounts payable system."

Dyno Nobel is not unique.Many organizations withmainframe or mini -based ac-counting applications are mi-grating their fixed asset sys-tems to client/server aheadof all other accounting appli-cations. There are severalreasons for this. First, thereis less worry about downtime, because the fixed asset

system need not be updatedon a minute -by- minute basis.Second, fixed asset migrationis typically less disruptive;there are fewer users andlimited interfaces with othersystems. Third, InSource CS-FAMS in particular has builtin "hooks," or interface ta-bles, to integrate with the ex-isting general ledger, ac-counts payable, and othersoftware prior to their migra-tion. These same hooks canthen be used to link fixed as-sets to any future client/serv-er -based applications as well.

Regarding the application,JeffTSnngey, Dyno Nobel fixedasset manager, says, "Thereare 10,000 or so assets on thesystem. It is now much easierto work with the informationby going online and seeing allof the data on- screen. We nowrarely print out anything."

Future plans at Dyno Nobelcall for even greater utiliza-tion of the InSource CS -FAMSsolution. Jeff Tingey says,"We own about 30 subsidiarycompanies, so we are gradual-ly moving from paper -basedreporting to a real -time onlinesystem companywide. The In-Source summary report isvery helpful —we can recon-cile numbers with the generalledger on a one -page report,compared to the dozens usedbefore. We can do trial end -of-month closings almost anytime we want, as well aschange any numbers that asubsidiary requests, and eventransfer figures between sub-sidiaries. The final reportsare sent out much earlier,faster, and, in fact, anytimewe choose. That is all possiblebecause of the Oracle rela-tional database we now use."

In summary, Jeff Tingeysays,"The software hasworked very well, and theCLR support has been re-sponsive to our needs." ■

Alpine Data, Inc.ASSET /PackMontrose, Colo.Tel. (800)525 -1040

American Fundware, Inc.Fundware*Denver, Colo.Tel. (800) 551-4458

Apprise Software, Inc.Apprise@ FinancialsSomerville, N.J.Tel. (908) 725 -6000

BNA SoftwareFixed AssetManagement System

Washington, O.C.Tel(800)372 -1033

Best Software, Inc.FAS EncoreReston, Va.Tel. (800) 368-2405

CharterHouse SoftwareCorp.

CharterHouse FixedAssets System

Westlake Village, Calif.Tel. (800I767 -7638

CODA IncorporatedCoda - AssetsManchester, N.H.Tel. (603) 647-9600

ComprehensiveMicrosystems, Inc.(CMI)

THESYSTEMSafford, Ariz.Tel, (800)678.3658

Compu- Share, Inc.Comptrol AccountingSuite

Lubbock, TexasTel. (80O)35fi -6568

Computer AssociatesInternational, Inc.

CA- Masterpiece /2000Islandia, N.Y.Tel. (BOO) 225-5224

CLR (Computer LanguageResearch)

InSource@ CS -FixedAsset ManagementSystem

Carrollton, TexasTel. (800) FAST -TAX

Computron Software, Inc.FinancialsRutherford, N.J.Tel. (201) 935-3400

Comshare, Inc.Commander DecisionAnn Arbor, Mich.Tel, (800) 922-7979

Concepts Dynamics, Inc.CDI Financial ControlSystem

Schaumburg, III.Tel. (847) 397-4400

Creative Solutions, Inc.Depreciation Solution IIDexter, Mich.Tel. (313) 426-5860

Deltek Systems, Inc.CostpointMcLean, Va.Tel. (800)456-2009

Decision SupportTechnology

BASSETS Fixed AssetSystem

Ramsey, N.J.Tel (2011934-9259

Design Data SystemsSQL TIME Financials andDistribution

Largo, Fla.Tel .(800)655 -6598

Dun & Bradstreet SoftwareSmartStreamAtlanta, Ga.Tel. (8W 290 -7374

Flagship Systems, Inc.World Class ManagerialAccounting

Dallas, TexasTel. (800) 582 -FLAG

FlexiloternationalFlexiAssetsShelton, Conn.Tel. (203) 925-3040

GEAC VisionShiftVisionShiftTmTampa, Fla.Tel. (813) 872 -9990

HyperionHyperion FinancialsStamford, Conn.Tel. (203) 703-3000

J. D.Edwards & CompanyOne WorldDenver, Colo.Tel. 1800) 727 -5333

Lawson SoftwareInsightTm FinancialManagement

Minneapolis, MinnTel. 1800) 477 -1357

Macola SoftwareProgression and HorizonSeries

Marion, OhioTel. (800) 468-0834

Maconomy NE Inc.Job CostMarlborough, Mass.Tel. (508) 460-8337

Maxwell Business SystemsJAMISSan Diego, Calif.Tel. (619) 576-3727

MBA Business AccountingSoftware

MBA Fixed AssetAccounting

Mendota Heights, Minn.Tel. (800) 431-1416

MCBA, Inc.QuantumGlendale, Calif.Tel. (818)242.9600

McDonnell InformationSystems

Chess ERP SolutionLos Angeles, Calif.Tel. (310) 306-4000

MICRO VISION SOFTWAREFixed Assets ReliefCommack, N.Y.Tel, IBM) 829 -7354

Oracle CorporationOracle AssetsRedwood Shores, Calif.Tel. 14151506 -7000

Orange SystemsALCIE FinancialsClearwater, Fla.Tel. (813) 571-1606

PeopleSoft,Inc.FinancialsPleasanton, Calif.Tel. (510) 225-3000

Platinum Software Corp.Platinum@ SQLIrvine, Calif.Tel. (800) 426-0469

PowerCeryINTERGYOOTampa, Fla.Tel. 1813) 226 -2600

RealWorld CorporationVisual AccountingManchester, N.H.Tel. (603) 641 -0200

SBT Accounting SystemsVisionPoint 2000San Rafael, Calif.Tel. (415) 444-9900

Scala NorthAmerica,Inc.SCALAMaitland, Fla.Tel.(407) 875-6999

Skylight Systems, Inc.Relational FinancialSystems

Wyncote, Pa.Tel, (215)576 -1001

Software2000, Inc.Infinium: FinancialManagement

Hyannis, Mass.Tel. 1508) 778.2000

Solomon SoftwareSolomon IVT"' forWindows

Findlay, OhioTel. (800)476.5666

SOL FinancialsInternational, Inc.SQL FinancialsAtlanta, Ga.Tel. (770) 390 -3900

State of the Ari m SoftwareMAS 90 for WindowsIrvine, Calif.Tel. (800)854-3415

System SoftwareAssociates, Inc, (SSAI

BPCS Client/ServerChicago, III.Tel. (312) 258 -6000

Systems Union, Inc.SunAccountWhite Plains, N.Y.Tel. 1800) 542 -5420

Walker InteractiveSystemsTamaris C/SSan Francisco, Calif.Tel. (4151243-2837

NOVEMBER1996 MAUGUUNTACCOUNH8G 67

ch Forum

Michael Costelluccio, Editor

Who Will Collect the Taxes on the New Silk Road?Tax wars have played a major role in

our history beginning with the BostonTea Party. The musket cracks of thatfirst conflict, however, have been re-placed, for themost part, bygrumblings inmany court-rooms. As newtrade routesopen up everyday on the Inter-net though, thestorm clouds offuture tax con-flicts gather —conflicts thatmight create seri-ous discord be-tween states, andbetween nations.

NEXUS

The source of theproblem is thesame for statesas it is for nations —who has the rightto tax? Wayne Berkowitz, CPA, J.D., amanager at David Berdon & CompanyLLP, believes that "electronic com-merce is destroying the states' conven-tional basis for imposing tax." A statederives its right to impose income andsales tax on individuals when suffi-cient contact with the state, or nexus,is established. Physical presence isusually the measure of nexus, but thistraditional rule loses much or all of itsmeaning in the ether, which is the In-ternet's medium. Does a company(Acme Bits) owe tax if its main server

is in Iowa and its customer is in Hous-ton? Does the mail order catalog modelapply? (California and South Carolinaboth impose tax on goods delivered by

mail, but not thosedelivered online.)Does the customerowe taxes to anyone?Acme uses an Inter-net service provider(ISP) that has aphysical presence inmultiple states, anddue to the packetswitching nature ofInternet communica-tions, the ISP cannotsay what route theorder took. Acmedoes not need toknow the origin ofthe order, and insome cases, for secu-rity, does not requestthat information.And what if Acme us-es a third party to

bill its customers, and that agency hasten servers here and overseas, and itassigns accounts to different locations,depending on how busy the traffic ison any given day? Nexus? Not exactlythe factory/showroom/business officemodel that states are used to. And ascomplicated as this model is, whatabout the company that will move itsserver to some tax friendly islandwhen it gets squeezed by one, or sever-al states?

Dr. Berkowitz expects states to fightagainst losing tax income. It will taketime, however, because the laws are


not yet written. There are two relevantSupreme Court rulings, neither ofwhich is particularly helpful in defin-ing the situation. One ruling claimsthat having a moderate amount of soft-ware in a state "does not create sub-stantial nexus." In other words, youcan have some software —but not astockpile —and not belong to thatstate's tax collector. What about pack-ets of information that are just passingthrough? A second Supreme Court rul-ing states that customers who pur-chase goods from a vendor who is outof state may be taxed by their state,but the vendor is not required to col-lect the taxes. Does the ISP collect thetax? Not likely. Kaye Caldwell fromCommerceNet has said, "It is unlikelythat the states are going to be able tocreate a system that functions fairlyand well ... and the federal governmentmay need to step in and resolve this."

IMMATERIAL GOODS

Perhaps the problem could be solvedby focusing on the warehouse fromwhich the products are shipped? Sure-ly, nexus should be easy to establishthere. Well, actually much of what issold on the Internet does not material-ly exist. Information, publications,software, banks of clip art, applets,photos, answers —all streaming every-where, every day. And you don't need awarehouse filled with skids of paper todeliverThe New York 71mesj u s t aserver that operates like a digital lawnsprayer. The Supreme Court's "moder-ate amount of software" might includethe handful of copies needed for thevendor to sell and deliver from nontax-able sites in 10, or 20, or all 50 states.

A few final numbers before we lookat the international problem: KentJohnson of KPMG Peat Marwick re-ports that "the bulk of a company's taxliability (70% of an average tax bill,35% of that in excise taxes, such assales and use taxes) is state and lo-cal—not federal." State taxes are sub-stantial. According to Forrester Re-search, Inc., projected sales throughinteractive retail will reach $6.9 billionin the year 2000, up from $.52 billionthis year. Peat Marwick surveyed 291$50+ million companies and concludedthat "8 out of 10 were either engagedor planning to engage in electronic

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Circle No. 14

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GBA Systems FAMS

commerce in the next two to fiveyears." More business conducted bymore companies electronically in thefuture could mean decreased tax rev-enues for the states at a time whenmany are asking the federal govern-ment to do less and the states to domore. Some skirmishes between juris-dictions would seem inevitable.

INTERNATIONAL TRADE ROUTES

Nilesh K. Shah, a partner in the Inter-national Services practice at KPMGPeat Marwick LLP, has said, "Issuesabout who has the right to tax haveproven difficult enough to rectify be-tween states, but the issues are com-pounded internationally, in large part,because there is no central interna-tional governing body to bring a bind-ing resolution." Further, Shah warns,"I wouldn't be surprised if the interna-tional tax issues related to electroniccommerce become a major source ofcontention between governments inthe future."

Zak Muscovitch of the Osgoode HallLaw School in Toronto uses a historicalanalogy to define the problem: "The In-temet ... is best characterized not as a`more modem communications device,'but as a new trade route. The Internetcan be likened to the Silk Roads ofChina (circa 2nd century B.C.), whichconstituted a brand new route for theinternational trade of a brand newcommodity." The new route is hyper -space, and the commodity is not silk,but information.

Muscovitch explains that the SilkRoads created transnational shippingroutes that required new laws. Admi-ralty law was part of the solution, andhe sees it as analogous to cyberspace."Just as the territory a ship traversesis not subject to any one state's juris-diction, so too the user in cyberspace


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Hyperion Assets Management

traverses a sovereignless region that isnot subject to any one state's exclusivejurisdiction." As with the states, estab-lishing nexus within international bor-ders is going to be very difficult.

An interesting feature of admiraltylaw is the way it encourages flag -shop-ping. The ship owner registers his ves-sel in the country that offers prefer-able legal and tax treatment. Muscov-itch points out that "Companiesoperating on the Internet can alsochoose a flag of a country that offerslegal advantages, such as bank secrecyand low or no taxes. This is achievedby a company establishing their com-puter (which is an `electronic establish-ment') in the beneficial country."

In order to avoid escalating tax rev-enue losses, governments will have toforce Internet commerce into those ex-isting laws that fit, and to write newlegislation without inciting cross -bor-der competitors to riot. Probably, sub-stantial new legislation will be re-quired. To be followed by the next levelof difficulty -- getting nations to agreeon the new rules.

The forces that will collide in cyber-space are fundamental. The Internet ispurposely decentralized, antiauthori-tarian, unregulated, nonproprietary,and free. Commerce, and its conse-quent taxation, is basically the oppo-site. Perhaps nexus will not be theguiding principle for jurisdictions. TheInternet, after all, has been set up insuch a way that it is more concernedabout time than it is about place.

PRODUCTS MARKETFIXED ASSETSGBA Systems Fixed Assets Manage-ment System (FAMS) provides the userwith a single source of reference forcontrol, analysis, and management ofall assets from capitalization to retire-

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nNrwrolnmi h r � h t l sa ,mO l L L ' . O l dn a b� } - - 0 p0h.lAp. C.a E-o.r� ,OiminfNj� n r r v r t � oG.m

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ment. Depreciable as well as non -de-preciable assets may be tracked. Thesystem features mass transfer, dispos-al and reinstatement functions; masschange features; depreciation suspen-sion; depreciation allocation based onusage; inflation adjustment calcula-tions; and foreign currency translationcapabilities. Internal/external manage-ment reporting, income tax reporting,property tax reporting, and foreigncurrency reporting present the neces-sary information in a format designedby accountants. A complete reportwriter is also included for any ad hocreporting required. IBM AS /400 plat-form. Circle No. 50

Hyperion Software offers Assets Man-agement as part of its HyperionFinancials. For organizations withlarge asset volumes, Hyperion Assetsstreamlines the asset managementprocess, reducing manual tracking andadjustments, while managing diverseinformation needs. Comprehensive taxand depreciation control are augment-ed with powerful end -user tools to effi-ciently search for and analyze assetdata, even at detail and summary lev-els. Sophisticated asset tracking tosupport the entire life cycle of an as-set, payables integration to streamlinethe acquisition of new assets, powerfulinquiries, and "as of date reporting ca-pabilities round out the program's fea-tures. Circle No. 51

Flexilnternational Software, Inc. offersFlexiAssets, the fixed assets module ofthe F1exiFinancials integrated suite ofclient/server applications. FlexiAssetsis a full- function asset managementand tracking system. It provides a fa-cility for tracking the physical locationof all assets plus the movement of as-sets from one location to another.Users can track asset lives, costs, in-

service and acquisition dates; adjustthe depreciation and cost basis of anasset; maintain insurance, lease, tax,licensing, and financial information byasset; maintain fixed asset capital im-provement relationships; perform a va-riety of depreciation calculations;maintain unlimited sets of books, andperform short year tax calculations forassets. Circle No. 52

Decision Support Technology Inc.rs Bus.sets Fixed Asset System for Windowsmakes a number of depreciation meth-ods available including: straight line,sum -of -the- years' digits, declining bal-ance, ACRS, MACRS, adjusted currentearnings (ACE), alternative minimumtax (AMT), and 20 user - defined meth-ods. The program features six assetand 14 depreciation reports, which cov-er the range of detail required to ana-lyze depreciation allowances and man-age assets. The reporting process pro-vides the user with extensive sort andselect capabilities and a report writer.Current enhancements include: amemo field for unlimited free form da-ta entry, 10 user - definable data entryfields, 4 -level sort capability for re-ports, and property tax, security, andreport writer modules. Circle No. 53

The COI Fixed Assets Module fromConcepts Dynamic, Inc. supports fixedasset accounting needs and meets allIRS requirements. Support of multipletax books allows independent federal,state, and local reporting for the sameasset. Reports automatically calculatethe difference in depreciation betweenany tax book and an alternative mini-mum tax (AMT) book to determine theproper adjustment. Another reportquickly calculates the adjustment foradjusted current earnings (ACE). Theprogram features a full range of depre-ciation methods, user - definable assetcategories, multiple asset transfermethods, easy cost revision, choice ofpartial or full retirements, detailedaudit trails, effective forecasting andanalysis, extensive query capability,and security that is tied to the menuand submenu systems. CDI FixedAssets operates as a stand- alone, orcan be integrated with other CDIapplications. Circle No. 54

McDonnell Information Systems (MDIS)has announced the availability of three

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F9 is the perfect tool forfinancial reporting. Create a singleperiod income statement. With aclick of the mouse, you can go to amulti period comparative incomestatement or any financial reportyou can imagine. And with a littlemore effort, you can create acomplete EIS, with buttons, and"hot Charts" that changeautomatically when the data does.And the best part is, if you knowhow to use a spreadsheet, youalready know 95% of what youneed to know in order to use F9.

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Circle No. 13

new applications for its Chess ERP So-lution including a Fixed Assets appli-cation. The new application allowsusers to maintain and track corporatefixed assets. It features asset registra-tion and classification, composite as-sets, asset tagging, asset retirement,numerous depreciation methods, andgeneral ledger integration. MDIS, aninternational provider of enterprisesoftware applications for the manufac-turing industry, also has added Serviceand Repair and Field Service applica-tions to the Chess ERP Solution.Circle No.55

J. D. Edwards & Company Fixed Assetssystem directs decisions on the pur-chase, use, transfer, and disposal of as-sets. It supports strategic internationaldepreciation methods while complyingwith a variety of regulatory bodies andtaxing authorities. It can produce anumber of reports: location transfer,responsibility, transaction, and onlinereports. Automatic procedures includeasset creation, depreciation allocation,and general ledger integration. It com-plies with tax laws for every countryin which you do business with its ca-pacity for dual currency, multiple taxledgers, and multiple depreciationmethods. The Fixed Assets system in-tegrates seamlessly with the GeneralAccounting, Accounts Payable, Inven-tory, and Equipment Managementsystems. Circle No, 56

Tax SOFTWARETAXWARE International, Inc.has justreleased the INTERNET Tax System,which offers Web mall owners and on-line merchants a system for automaticcalculation of sales tax. The systemprovides merchant profile creation,customer address verification, exemp-tion processing, product taxation, juris-diction logic, tax calculation, transac-tion tracking, nexus determination(physical presence), international taxa-tion, and reporting. It is the only taxsystem for the Internet that is basedon ZIP Code locations for address veri-fication. Circle No. 57

Kiplinger's TaxCut will feature a new"getting to know you" section this year.It is designed to streamline and cus-tomize the interview process. Two oth-er procedures, Audit Buster and De-

62 MANAGENENT ACCOUNTING NOVEMBER 1996

duction Sleuth, also are appearing forthe first time in this year's H &R Blockand Kiplinger collaboration. Three ver-sions of the program are available:Windows, Deluxe Multimedia Versionfor Windows, and Macintosh. TheDeluxe Windows edition includes all 23TaxCut state editions. Already avail-able is the planning edition of TaxCut,and the filing edition will ship in earlyJanuary with the state editions follow-ing in January and February.Circle No. 58

SCS /Compute®now offers LMS/Tax forWindowssoftware for accounting andtax professionals. Both a Windows 3.1and 95 version are available. The pro-gram allows the choice of an interviewstyle, or entry by topic or from com-pleted data input sheets. Other fea-tures include a diagnostic tool bar with2,000 built -in warnings, fast review ofdetailed information for line items, cal-culation of federal and up to two stateforms simultaneously, end of the daybatch processing for calculation andprinting, and support for electronicfiling. Circle No. 59

Bottomline Technologies, Inc. has intro-duced EPIc•Enterprise Tax, a softwaresolution that allows companies to com-ply with the Internal Revenue Ser-vice's new Electronic Federal Tax Pay-ment System ( EFTPS). The softwarehas been tested against the EFTPStest system provided by the IRS, and itis completely integrated with Bottom -line's EPIC (Electronic Payment Inter-change and conversion system) soft-ware suite. The product was developedto help companies comply with the re-

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Circle No. 19

quirement that beginning in July1997, companies that made annual de-posits of $50,000 or more in 1995 willbe required to pay all business taxesusing Financial EDI protocols (includ-ing federal excise tax, unemploymenttax, corporate income tax, and severalother categories). Circle No. 60

Creative Solutions, Inc.has announcedthe release of its new Ultra Tax forWindows. It is a completely opera-tional, professional tax product de-signed specifically for the Windows 9532 -bit operating system. The initial re-lease of Ultra Tax for Windows in-cludes a calculating and printing ver-sion of the federal Ultra Tax/1040 andUltra Tax/1120 software, along withselected state programs. Circle No. 61

NetNEWSA limited liability company Web sitehas been established. It offers informa-tion and materials on LLCs, as well asa question and answer forum.http://www.11c-usa.com

Creative Solutions, Inc., a provider ofclient accounting, accounting, taxpreparation, and office managementsoftware now has a site athttp: / /www.CSIsolutions.com

SCS /Compute offers news and impor-tant information for tax and account-ing professionals at its new Web site.The page also has links to tax, ac-counting, and government sites,http: / /www.scscom.com

TAXWARE International, Inc. has anOnline Tax Calculator for what -if taxscenarios. It will look up rates and cal-culate sales tax for any taxing jurisdic-tion in the United States.http://www.taxware.com

The American Success Institute offersfree business advice on its Web site. A501(63 nonprofit organization, the In-stitute offers its help to any organiza-tion, large or small.http://www.success.org

The Consumer Information Center ofthe U.S. General Services Administra-tion offers a Consumer InformationCatalog of publications athttp: / /www.pueblo.gsa.gov

F!'VV%qLFwWAI r.- ends

IN FINANCIAL MANAGEMENT

MANAGEMENTACCOUNTING PRACTICESLouis Bisgay, CPA, Editor

FRC COMMENTS ON DERIVATIVES

Since the occurrence of several wide-ly reported losses related to these fi-nancial instruments, derviatives havebecome a matter of serious concern invarious quarters. For its part, theFASB issued a proposed Statementthat would establish standards on ac-counting for derivative and similar fi-nancial instruments and for hedgingactivities. IMA's Financial ReportingCommittee (FRC) submitted IMA's po-sition on the FASB proposal and plansto be represented at the public hearingthis month. Following is the completetext of FRC's comments.

The Financial Reporting Committee(FRC) of the Institute of ManagementAccountants is pleased to comment onthe Exposure Draft (ED), "Accounting forDerivative and Similar Financial Instru-ments and for Hedging Activities." FRCis supportive ofthe Board's undertakingto improve the current financial report-ing model with respect to derivatives, aswell as to resolve certain inconsistenciesand fillgaps in hedge accounting rules.

However, the FRC cannot support theED as proposed because we find it to bea radical departure from the current ac-counting model that supplants manysupportable and understandable hedgingpractices without producing suitable im-provements. We object to the notion thatrecording derivatives on the balancesheet requires the rejection of SFAS 80deferral /basis adjustment accountingand the elimination of synthetic instru-ment accounting practice. The invalida-tion ofthese practices is a setback to pre-senting the business purposes andeconomic outcomes of derivatives hedgingtransactions. Further, it is not useful to

move forward with a hedging approachthat denies fair value hedge accountingfor insurance contracts, leases and held -to- maturity investments (particularlythose denominated in a currency otherthan the functional currency). Addition-ally, we do not find it conceptually ap-pealing to fair value cash positions tra-ditionally carried at historical cost when,and only to the extent, they are hedged.It is especially troublesome that convert-ing a fixed rate loan portfolio or longterm debt issue, for example, to a vari-able rate instrument with an interestrate swap results in the position markedto fair value for the change in credit riskas well as market interest rates.

Having reached these conclusions,FRC considered whether derivativesshould be recorded on the balance sheetunder any circumstances. We agreed thatsuch a step could produce greater rele-vance and transparency for financialstatements, but that it should also retainmany of the attributes of current hedgeaccounting practice. Therefore, FRC rec-ommends that the Board adopt an ap-proach that fundamentally records allderivatives at their fair value on the bal-ance sheet, and, when designated ashedges, accounts for subsequent changesin their values as deferrals or basis ad-justments related to items being hedged.

Under this approach, we would viewthe change in fair value of a derivative,such as a foreign exchange forward orforward rate agreement, that is hedgingthe future cash flows ofa forecastedtransaction to be deferrable as a basisadjustment (or down payment) againstthe forecasted transaction until thetransaction is complete, at which timethe change would adjust the carrying

amount, or income amount if applicable.For an interest rate swap used as a cashflow hedge, we would view the change infair value as similar to an original issuediscount or premium that would adjustthe effective interest rate of the debt overthe swap's life: thus, income should onlybe affected by the accrual of related cashflows. For an interest rate swap desig-nated as a fair value hedge, we wouldview the change in the swap's fair valueas a modification of the book basis of thefixed rate instrument, and would againexpect income to reflect future net inter-est cash flows on an accrual basis. Webelieve that the current procedures forforeign exchange transaction and trans-lation exposures on the balance sheet areworking well and should be retained.

We believe other constituents share ourview that the Board should focus onways of achieving the transparency ofrecording derivatives on the balancesheet while still presenting the economicsubstance of sound business transactions

asdescribed above. We urge the Board tomove in this direction in making whatwill be a threshold step forward in thefinancial reporting model.

The FRC recognizes the significantprogress made by the Board on this dif-ficult issue. However, we strongly believethat the model underlying the ED needsto evolve further so that routine hedgingtransactions that most would agreeshould receive hedge accounting are di-rectly accommodated. We view the ex-panded use ofbasis adjustment withinthe model and incorporation ofsyntheticinstrument accounting for qualifyingtransactions as critical steps towardmaking that goal a reality. The Commit-tee is aware of alternative models thathave been proposed in comment letterssent in response to the ED which we be-lieve are responsive to the significant is-sues expressed in our letter. We urge thatthe Board give each of these proposalsthorough consideration.

If you have any questions, pleasefeel free to contact us. —L. Hal Rogero,Jr., CPA, Chairman, Financial ReportingCommittee

MAC RESPONSIBILITYTO CONSTITUENCY

T oday's management accountant of-ten has ever - changing and consistentlyincreasing responsibilities. The Man-


agement Accounting Committee (MAC)was established by IMA to help man-agement accountants discharge thoseresponsibilities by providing authorita-tive guidelines that recommend an ap-proach to addressing an issue, thatsuggest alternative approaches to solv-ing a problem when no one way seemsdefinitively preferable, or that simplypoint out useful reference material.

Many IMA members probably dis-cuss with their colleagues the "best"solution to a particular reporting,measurement, or implementation prob-lem. MAC cannot act as a jury or ref-eree regarding a company - specific is-sue. However, if you are troubled by acertain matter, it seems likely thatothers are facing similar issues. MACwould welcome the opportunity to de-vote some of its resources to respond-ing to matters of broad concern calledto its attention by IMA members.

If you have a question or need guid-ance on a management accounting is-sue, please feel free to call the Com-mittee chairman, A.M. King, at (609)452 -0900, or the Committee secretary,Louis Bisgay, at (800) 638 -4427, ext.215. To the extent possible, they willhelp you directly or refer the matterto the full Committee. ■

FRC MEETS IN WASHINGTON

O n September 12, the Financial Re-porting Committee (FRC) held a regu-larly scheduled meeting in Washing-ton, D.C. At the meeting, Securities &Exchange Commission Deputy ChiefAccountant Stephen Swad joined FRCmembers for a discussion about recentand current events relevant to finan-cial reporting and what the near -termfuture is likely to bring.

Among matters discussed was a re-cent SEC release that, when adopted,will make litigation reform law opera-tional and that expands auditor re-sponsibility for identifying illegal acts.Mr. Swad spoke about Staff Account-ing Bulletin 96, regarding the ac-counting treatment of certain treasurystock transactions, and SAB 97, whichaddresses business combinations in-volving public and nonpublic entities.The SEC's involvement with the Inter-national Organization of SecuritiesCommissioners (IOSCO) also was aprominent part of the discussion.IOSCO is a supporter of the effort by


the International Accounting Stan-dards Committee to develop an accept-able set of international accountingstandards that will facilitate cross -bor-der securities filings.

As always, the Financial AccountingStandards Board was represented atthe meeting. Beginning with the Sep-tember meeting, Board member NeelFoster has taken over responsibilityfor liaison with the IMA. Mr. Fosterreported on the status of key FASBagenda projects and discussed Consoli-dation Policy and Procedures, Disag-gregated Disclosures, and Closure orRemoval of Long -Lived Assets. Mr.Foster also noted the addition to theBoard's agenda of issues regarding as-set impairment (including goodwill),issues involving accounting for stockoptions, accounting for business com-binations, and an exposure draft thatwould exempt smaller companies fromthe requirements for disclosure underSFAS 107.

The Financial Reporting Committeeaddressed a number of responsive is-sues, including Reporting Comprehen-sive Income, Accounting for Derivativeand Similar Financial Instruments andfor Hedging Activities (see text on p. 63),Software Revenue Recognition, Presenta-tion of Financial Statements, and Re-forms to Securities Registration. ■

RESEARCHJulian M. Freedman, CMA, Editor

THE ROLE OF FINANCE INSTRATEGY DEPLOYMENT

T he third - quarter meeting of theConsortium for Advanced Manufactur-ing- International (CAM -I) in Albu-querque, September 16 -18, focused on'the Role of Finance in Strategy De-ployment." The presentations empha-sized the leading role that finance canplay in the deployment of effectivestrategy through a number of emerg-ing strategic management methods.

Lean enterprises do not avoid com-petition through cost leadership andproduct differentiation strategies; in-stead they seek out and confront com-petition. In a two -part presentation,Robin Cooper, author of When LeanEnterprises Collide, discussed theemergence of lean enterprises, con-frontation strategy, and the critical

cost management and design tools(target costing and value engineering).The key for success in a confrontation-al environment is the integrated man-agement of the survival triplet: prod-uct cost -price, quality (conformity tospecifications), and functionality. Thesurvival zone for a product is the dif-ference between the highest and low-est acceptablelachievable price, quali-ty, and functionality.

Cooper demonstrated that the sur-vival zone in a confrontational envi-ronment is significantly smaller thanthe survival zone of the cost leader orproduct differentiator. The key to sur-vival in a confrontational world is todevelop an integrated quality, func-tionality, and cost management sys-tem. These systems must create acompanywide discipline that willachieve the highest degree of integra-tion of these characteristics to com-pete successfully. Target costing andvalue engineering are two critical costmanagement tools that enable organi-zations to achieve this integration. Or-ganizations cannot begin target cost-ing (a misnomer— should be profitmanagement) without a strategy con-cerning price, functionality, and time(quality is a hygiene factor). Cooperthen presented an in -depth look at thetarget costing process.

Gary Toyama, Rockwell/Rocketdyne,provided an overview of the targetcosting implementation strategies usedin Rockwell's "Design to Cost" pro-gram. Customers are requiring in-creased functionality and radical re-ductions in price. Traditionalbelt- tightening approaches cannot sat-isfy these new requirements so Rock-well developed a design -to -cost or tar-get costing philosophy and approachto meet them. Toyama pointed outthat design to cost is "easier said thandone." The key to success is imple-mentation through the use of practi-cal, user- oriented training and simpleforms with a minimum of administra-tive support and without complexcost - tracking systems. Rockwell devel-oped a series of templates that facili-tated tracking progress to multiple de-sign-to- cost targets, identifying Paretoareas of cost drivers, and testing forevidence of out -of -the -box thinking de-sign trades. This "keep it simple" ap-proach along with management sup-port, bringing in the customer and

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tiersin Mana ement A ccoun tin g

CAPA CITY MEASUREMENT TARGET COSTING& IMPROVEMENT

A Manager's Guideto Baluating & Optimizing

Capacity Productivity;lrithors: CAM-1 Capacity

11odel I11wty GroupEdited by Thornas Klarnmer C21$35

In a competitive economy, theeffcctive use of capacity is critical.The model explained in Ca' wcitij,VfcZurmlent "? Improvvoment show,-;how capaLlty measurement can. beused to provide stratcgic lnfonA_tionl do malingers c a n i m p r o 4 * eproduct ivity o f exis ting; capacit y and facili-tat e int elligen t cap it al in ves tm en t d ec ision s.Developed by the Capacity Interest Cro up of the

Cons ort ium fo r Advanced Manufdctwring—International (CAM-[) Cost Mann Bement Sk_ 'stem

(CMS) Program. thebook is a ,practical,reasoned Ztpproach tothis critical manufactur-ing issue.

Begides.the.medel, thebook -presents tem-plates foir application

`-* rr j l ementat ionprocedures and d'efini - tions, key point sum-maries, and illustra-tions to facilitate readerunders tanding.

READ THESERELATED MATERIAL'S

The Next Frontier in Strategic Cost Management:

A CAM -1/CMS Model for Protit Planningand Cost Management

:authors: CAM -I Target Cost Corey Group, .1

Shahid Ansari, and Jan Bell } Cl /$50

This book provides a process model and Aacticalinsigh'k; on how to use target costing for profitplanni%and cost manage- _ment. Target costing is strategicin nature and, if done properly,allows the firm to create aculture of exceljence in anorganization. it s more than anarrow focus on it;liprovingoperating efficiencies ormeeting cost budgets' r

The book focuses on details ofhow target costing works inpractice. The authors relied on

Measuring: the Cost of CapacitySMA 4Y is designed to increase one's awareness dndund ers tand ing o f a wid e variety o f c ap ac it y c o 4d rea-

surement practices; provide several.difbewaf erspec-tives employed in defining capacity; aM _ give an over-view of implementational is§ueff Snd the organizationaland management ges embodied in capacity costm €asur +f. S A4Y/$7.50

Implementing Target CostingMAG 28 provides a concise introduction to target cost-ing and describes the steps required to implement theconcept. It changes the perspective on the relationshipbetween prices and costs to succeed in the highly com-

petitive markets at home and abroad. MAG28 /$15

Join RPS Now!

state -of- the -art prac-tices drawn fro mtrar. rA ions of papers

vdila ble on ly in Japa-

nes e and fro m the co0ect iv_exper ience of several wor ld -cla ss comp an ies. _

To order, use the order coupon in LVA's 1996 -97Publications Catalog; call (800) 638-4427, ext. 278;fax (201) 573 -9507. The IMA member discountapplies: 20% for members, 40% for academics.

Subscribers to MIA's Research Publications Service (RPS) receive Target Costing, Capacity Measurement &Improvement,and a new Statement on Management Accounting (SMA), SMA 4Z, "Tools and Techniquesof Environmental Accounting for Business Decisions," as part of their RPS subscription. IMA membersshould consider joining RPS now to obtain this fantastic value. Members subscribing or renewing in themonths of November 1996 through January 1997 will be sent all three works as their initial RPS shipment.As RPS subscribers, IMA members and international members -at -large can receive every new researchreport and Statement on Management Accounting published during a 12 -month period, starting whenpayment is received. Annual subscription rates, which include shipping and handling, are: (1) regular,student, and associate members, $85; (2) international members -at -large, $120.

Call Joel Pirard, (800) 638 -4427, ext. 278 to subscribe or check off the RPS box on your member dues bill

supplier upfront, and arming teamswith knowledge are the key to a suc-cessful implementation.

The last presentation, by John Mc-Clellan, Monitor Company, focused on"Using Activity Cost to Drive StrategicAction." This presentation was basedon the recent work of Michael Porterto be published in the November/De-cember 1996 issue of the HarvardBusiness Review. Getting the most outof your organization's cost manage-ment program requires you to analyzecosts with a view toward strategy, notjust tactics. Your choices are to reactto competitive pressures to reducecosts or to design your cost structureto be a strategic weapon. The chal-lenge is to remain market focused andto leverage the resources you consumeto maximize the value created for cus-tomers. Strategy is based on creatinga unique position —operational effec-tiveness is essential, but it is notenough. Good strategy requires a goodunderstanding of costs and value atan activity level and good informationfrom effective decision- supportmodels.— Dennis C. Daly, Metropolitan StateUniversity, IMA representative to CAM -1

CAM -1 RESEARCHCHOSEN FOR RPS

IMA is making two recent publica-tions from CAM -I (Consortium for Ad-vanced Manufacturing - International)available to IMA members and sub-scribers to its Research PublicationsService (RPS). Target Costing: TheNext Frontier in Strategic Cost Man-

.. - - - - - 1Target Costing and Value

EngineeringReaders interested in these strategic

management too ls can look forward

to the research monograph TargetCosting and Value Engineering by

Robin Cooper and Regine Slagmulder

to be published by the IMA Founda-

tion for Applied Research, Inc. in1997. It is the f irst in a series of f ive

books by Cooper on Japanese costmanagement practices. CAM -I's re-

cently issued Target Costing: TheNext Frontier in Strategic Cost Man-agement is described in the section

in this column about CAM -1 research.


Participants at IMAs CIC European benchmarking kickoff meeting learn GBS softwarewhile a crew films them. The resulting video will be used for a planned internationalrollout of an enhanced version of GBS. After the pilot project, the new version will beavailable for global companies that want to do companywide internal benchmarking.

agement (C1/$50) provides practicalinsights on how to use target costingfor profit planning and cost manage-ment. Capacity Measurement & Im-provement (C2/$35) shows how capaci-ty measurement can be used to obtainstrategic information so managers canimprove the productivity of existingcapacity and facilitate intelligent capi-tal investment decisions.

IMA members can order either bookat the 20% member discount by call-ing (800) 638 -4427, ext. 278. RPS sub-scribers received both books and anew Statement on Management Ac-counting, SMA 4Z, "Tools and Tech-niques of Environmental Accountingfor Business Decisions." (See P. 65 fora special offer to subscribe to IMA'sRPS.) ■

NEW STUDY LINKS PERFORMANCEMEASURES TO SHAREHOLDER VALUE

Cash Flow and Performance Mea-surement: Managing for Value, a newstudy by Financial Executives Re-search Foundation, Inc., describes howa growing number of companies aretying their performance measures tothe creation of shareholder value. Thestudy documents this trend throughinterviews with executives at 12 case -study companies and analyzes surveyresponses from an additional 153 com-panies. Call (800) 635 -4427, ext. 278,to order (FERF2/$38 plus shippingand handling; no discounts). ■

ENVIRONMENTAL ISSUES NEEDCROSS-FERTILIZATION

N anagement accountants alreadyhave observed the cross - disciplinary in-volvement of engineers in design andproduction and of scientists, lawyers,operating management, and financialaccountants as these professions wres-tle with the subject of environmentalcosts and resource management as itpertains to the corporation. Now econo-mists are becoming involved.

The fourth biennial meeting of theInternational Society for EcologicalEconomics (ISEE), "Designing Sustain -ability: Building Partnerships AmongSociety, Business, and the Environ-ment," was a gathering of world -classeconomists at Boston University in Au-gust. ISEE researchers presented pa-pers on technical analysis and mathe-matical models examining techniquesfor identifying costs and benchmarkingcorporate performance within an indus-try. Unfortunately, the corporate busi-ness perspective was not well under-stood nor represented at the meeting.Exceptions were a few management ac-countants and consultants who dealtwith environmental cost issues.

A second conference further demon-strated how apparently divergent pro-fessional interests are merging andoverlapping. The 1st Annual Interna-tional Congress of the Society of Logis-tics Engineers (SOLE) on Reverse Lo-gistics Management was held in New

Orleans in September. Its topic, "Re-verse Logistics Management: ProfitablyRe- Engineering the Supply Chain,"translates to an eco- efficiency view ofresource management and costing, thebasis for cosponsorship by the IMA andthe American Production and InventoryControl Society (APICS).

One of the keynote speakers wasMarc Epstein, author of Measuring Cor-porate Environmental Performance, pub-lished by IMA's Foundation for AppliedResearch. The subject of integrated re-source management and the analysis ofcosts for the use of those resources areconnected to sustainable production ex-plored by the ISEE.—Jeffrey N. Parker,CMA, principal, Prime Management Associ-

ates, Osterville, Mass., 15081 428 -0619

IA. Title of Publication: Management Accounting

1B. Publication No.: 327160

2. Date of filing: Oct 3,1996

3. Frequency of issue: Monthly

3A. No. of issues published annually: 12

3B. Annual subscription price: $130.00

4. Complete mailing address of known office of publication:Institute of Management Accountants, 10Paragon Drive, Montvale, NJ 07645 -1760

5. Complete mailing address of the headquarters or general business offices of the publisher:Institute of Management Accountants, 10 Paragon Drive, Montvale, NJ 07645 -1760

6. Complete mailing address of publisher, editor, and managing editor. Publisher, Gary M.

EUROPEAN STUDY UNDER WAY Scopes, Institute of Management Accountants, 10 Paragon Drive, Montvale, NJ 07645 -1760.Editor, Kathy Williams, same.

O n October 1, IMA's Continuous Im- 7. Owner (if owned by a corporation, its name and address must be stated and also immediatelyprovement Center (CIC) held a kickoff thereunder the names and addresses of stockholders owning or holding one percent or moremeeting for its European benchmark- of total amount of stock. If not owned by a partnership or other unincorporated firm, its name

ing study of the finance function at and address, as well as that of each individual must be given. If the publication is published

Johnson & Johnson's facilities near by a nonprofit organization, its name and address must be stated):

Antwerp, Belgium. The following com- Institute of Management Accountants, 10 Paragon Drive, Montvale, NJ 07645 -1760

panies participated in the event: B. Known bondholders, mortgagees, and other security holders owning or holding one percent orHewlett - Packard (Belgium), Citibank more of total amount of bonds, mortgages, or other securities: none.(United Kingdom), DuPont (Switzerland), Hoffman LaRoche (Switzerland), 9. For completion by nonprofit organizations authorized to mail at special rates ISecUOn 423.12

Holiday Inn Worldwide (Belgium), ITT DMM only). The purpose, function, and nonprofit status of this organization and the exempt

Automotive (Germany), Johnson & status for Federal income tax purposes Has not changed during preceding 12 months.

Johnson (United Kingdom), Reuters 10. Extent and nature of circulation:(Sweden), and Whirlpool (Ireland).

Part of the day's session was hands- Average no. Actual no.

on training in the use of CIC's Global copies each copies ofissue during single issue

Benchmarking System (GBS) software. preceding nearest toGBS facilitates data gathering for 12 months filing date

benchmarking and produces interimA. Total no. copies printed (net press run) 90,726 88,230

and final reports on a company's sta-tus. The reports are used for internal B. paid circulation

and external benchmarking. 1. Sales through dealers and carriers,

The value of benchmarking and street vendors and counter sales

specifically using IMA's CIC approach 2. Mail subscription 77,224 76,665

is covered in "The Economics of Con- C. Total paid circulation 77,224 76,665tinuous Benchmarking and the CIC D. Free distribution by mail carrier or otherModel," a white paper by Dan El- means (samples, complimentary, andnathan (University of Southern Cali- other free copies). 5,500 5,000fornia). An article expanding the con- E. Total distribution Isum of C and D) 82,724 81,665eept, "Benchmarking and Management

F. 1. Office use, left over, unaccounted,Accounting: A Framework for Re- spoiled after printing 8,002 6,565search" by Dan Elnathan, Thomas W.Lin, and S. Mark Young, appears in 2. Return from news agents NONE NONE

Volume 8 of the Journal of Manage- G. TOTAL (sum of Eand F should equal

ment Accounting Research. net press run shown in A) 90,726 88,230

If you feel your company is ready tobenchmark its finance function, re- I certify that the statements made by me above are correct and complete.

quest a copy of Elnathan's paper by Robert F. Randall, Assistant Publishercalling (800) 638 -4427, ext. 306. IN

NOVEMBER 1996 MANAGEMENT ACCOUNTING ( i

A .S"1111.1,

A large public company seeks a profes-sional for the financial and operationalU.S. audits. Requirements include ahands -on, detail- oriented work styleand the ability to travel no more thanone quarter of the year. BABS inAccounting preferred. Salary to $40,000including excellent benefits.

A Fortune 100 telecommunicationscompany seeks seasoned professionals.The company offers a rotational pro-gram with opportunities to advance intooperations! Ideal candidates will have aCPA and at least three years of "Big 6"experience with a varied client base.Minimum travel is required. Excellentbenefits including a salary to $47,000.

SENIOR FINANCIAL ANALYSTS

A well - established container leasingfirm seeks a polished professional. Thecompany, with a reputation for excel-lence, will require you to coordinate andconsolidate management reports, bud-gets, and product profitability analysisfor Headquarters. In addition, you willinterface with management to demon-strate your ability to see the "big picture"and be ready for the director positionwithin nine months. Three -plus years ofanalytical experience and a good knowl-edge of Access and Excel are required.CMA or MBA considered a plus. Excel-lent benefits include a salary to $65,000.

A software development company seeksa knowledgeable professional for thissenior level position. Responsibilitiesinclude analyzing operating results, fi-nancial reports, budgets, and forecasts.If you possess a BA/BS in Accounting orFinance with a minimum of four yearsof general accounting and analysis ex-perience, do not miss this opportunity!Strong presentation and interpersonalskills considered a must. CPA/CMApreferred, but not required. Salary to$50,000 with a good benefits package.

A $12 million civil engineering firmspecializing in highways is seeking afour -plus years accountant. Responsi-bilities include bank reconciliations, ac-count analysis, general ledger entries,financial statements, and job costing.The position requires heavy interactionwith management and project man-agers. The qualities you should possessinclude excellent communication skills,computer literacy, and a backgroundfrom public or a similar private indus-try accounting. Salary to $40,000 withexcellent benefits.

A $40 million division of a nationalfinancial printer seeks a dedicated pro-fessional to join the team! While work-ing closely to the Controller, your re-sponsibilities will including monthlyreports, budgets, and financial analysis.This company provides excellent bene-fits in a strong team environment!Salary to $40,000 in addition to a goodbenefits package.

A high - technology medical equipmentmanufacturer seeks a three -plus yearsprofessional. Qualified candidates willbe assertive and career - oriented. Re-sponsibilities include reporting to theController while overseeing the dailyaccounting activities including month -end closing, financial statement prepa-ration and assisting with the IPO. Agreat opportunity exists for the rightperson! Good benefits including asalary to $40,000 and stock options.

A well - established chemical manufac-turing and distribution company seeksa three -plus years manager. Responsi-bilities include inventory purchasing,scheduling and maintenance, vendoridentification, and RFP responses.Qualified professionals will possess aBA/BS in Accounting with a CMA pre-ferred. Related industry backgroundconsidered a plus. Excellent benefitsand a salary to $50,000.

A $500 million multinational freightforwarding company seeks a profession-al with excellent technical and commu-nication skills. This consistently prof-itable company requires an individualwho can "fast- track" into management!Responsibilities include consolidations,review of accounting reports, and vari-ous special projects. Requirements in-clude a minimum of two years of con-solidation experience in addition to asolid knowledge of GAAP and SEC10 -K's and Q's. BS/BA in Accountingor Finance and a CPM/CPA required.Excellent benefits include a salary to$52,000.

An unrivaled leader in the commercialconstruction arena has a high profileposition which may be right for you!Responsibilities include billing esti-mates, general ledger, payable analysis,and various special projects. The suc-cessful candidate will possess a BA/BSin Accounting or Finance, four -plusyears of related industry experienceand a solid computer background. If youare a self starter with excellent inter-personal skills, this opportunity may bein your future! Benefits include a salaryto $40,000 and a year -end bonus.

A growing national wholesale companyrequires an experienced manager forthe Northeast location. Qualified pro-fessionals will possess a BS/BA inAccounting or Finance with a minimumof three years of retail inventory relat-ed experience. A strong background invendor relations with good supervisoryskills is preferred. This is a greatopportunity for the professional focusedon career development! Salary to$60,000 includes a great benefitspackage.

Here is the growth opportunity youhave been waiting for! A rapidly grow-ing telecommunications company with$200 million in revenue seeks a one -plus year professional. Ideal candidateswill have a BS/BA in Accounting orFinance with excellent communicationskills and the desire to learn. Proficien-cy in Lotus or Excel required. Greatbenefits and a salary to $32,000.

A rapidly growing public financialservices company has created the idealposition for a growth oriented profes-sional! Create the position as you devel-op into it. Qualified candidate will havea BSBA in Accounting or Finance andbe CPA/CMA eligible with strong com-puter skills. This company provides anexcellent benefits package in a grea tenvironment. Salary to $30,000.

A New England -based grocery chainseeks an analytical, five -plus yearsprofessional. Responsibilities includemonthly management reports, generalledger maintenance, preparation ofyear -end audit schedules and variousspecial projects. BS/BA in Accountingpreferred and Lotus expertise consid-ered a must! Great benefits including asalary to $35,000.

FINANCIAL '

A Fortune 500 company seeks a profes-sional to work in the Controller's groupto specialize in financial research. Re-sponsibilities include research and res-olutions of various financial, account-ing, and reporting transactions and/orissues. In addition, you will lead thecharge for the review, analysis, andevaluation of complex proposals andpronouncements while interpreting theimpact on the financial statements andcurrent accounting policies and proce-dures. Qualifications include six-plusyears "Big 6" experience and a CMA/CPA or MBA. Great benefits including asalary to $60,000.

One of the strongest high technologycompanies in the industry seeks a pro-fessional to grow with the business. Du-ties include accounts payable, purchas-ing analysis, and cost accounting. Thecompany has a well -earned reputationfor promoting dedicated self - starters!The qualified candidate will possess sol-id communication and computer skills.Knowledge of ACCPAC is preferred.Salary to $35,000 with good benefits.

A Classified Section

A prestigious nonprofit organizationseeks Big 6 CPA/MBA with five or moreyears of experience. This highly visiblerole will handle all phases of accountingreporting and analysis. Duties will in-clude supervising five staff accoun-tants, budgets, financial projections, fi-nancial statements and various ad hocspecial projects. This company providesan excellent career track, exceptionalbenefits, and a salary to $85,000.

An interactive technology winner in the hospitality industry has recently expanded in-to the international marketplace! Responsibilities include inventory control and ac-counting and implementationtmaintenance of standard cost system. Requirements in-clude five -plus years in a multinational environment with a background with anautomated purchasetinventory system and familiarity with GAAR Excellent upsidepotential including a salary to $65,000.

Thirty- year -old industrial productsmanufacturer and distributor offersgreat stability and unique managementapproach! Team oriented corporateculture focuses on group projects, costaccounting, monthly close and tax com-pliance. Requirements include three ormore years of similar industry experi-ence in a job cost environment. CMApreferred. Excellent benefits packageincludes year -end bonus, ESOP and asalary to $35,000.

A $20- million Northeast manufacturerseeks an experienced professional forthis highly visible position. Whilespearheading the accounting function,you will assist operations with costmanagement decisions and supervisefour. Report to the Chief Financial Offi-cer while being groomed to advanceinto this position! CPA/CMA and priormanufacturing experience required.Salary to $55,000 with great benefits.

A major international consumer maga-zine publisher seeks a professional witha strong cost accounting background.Initial duties will include report and in-ventory systems analysis. In addition,you will be responsible for sensitivityanalysis as well as establishing depart-ment goals and implementing efficiencyprocedures. Qualified candidates will bepolished and articulate and requireminimal direction. Excellent benefitsincluding a salary to $70,000.

A Northern Midwest public publishingfirm seeks an experienced professionalwith strong interpersonal skills andproactive management style. Whileworking closely with publishers and op-erations, this position is responsible forfinancial management reports, budgets,financial analysis, and cash manage-ment. Excellent benefits include asalary to $55,000 plus a year -endbonus.

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Closing Date: Deadline for copyis 21 days preceding month ofpublication.Copy:All advertising must be sub-mitted in typewritten, double -spaced form. No telephone or-ders accepted. Copy may befaxed to Alice Schulman at (201)573 -0639.Acceptance: Publisher reservesthe right to accept or reject ad-vertisements for MANAGEMENTACCOUNTING®Classified.Payments: Payment in U.S. fundsmust accompany each order.Mall copy to MANAGEMENT Ac-COUNTING", Attn: Alice Schulman,10 Paragon Drive, Montvale, NJ07645 -1760. Tel. 1- 800 - 638.4427,Ext. 280.Display Classified: One- twelfthpage 11 13/16- x 4- ) is available at$822.

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18 Accountants on Call 74 Aetna 95 Andersen Consulting 5

11 Armstrong Laing, Inc. 1520 Best Software Inc. 13

BNA Software 31 & 32CFM Program 47CMA Program 18Corporate Photography Direct 71

17 Decision Support Technology Inc. 4016 F1exiInternational C -421 GBA Systems C -2

IMA CPE Self -Study Quiz 28IMA Executive Education Programs 24aIMA Regional Education Assistance Programs 24aIMA Research Publication Service / CAM -I Books 65

19 Lambers 6222 Maxwell Business Systems 53

Nheroflex Medical Corporation 7110 Micro Analysis & Design 44

MicroMash 2715 Minolta 1

7 Open Systems 19Padgett Business Services 70Pendock Mallorn Ltd. 36

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25 RIA 231 Robert, Half International Inc. 25

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14 SoftEx 59Southern Research Institute 71

13 SYNEX Systems 61World Congress of Accountants 39

9 Zebra Tech 11

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CPAnalyatCan you create financial re-ports including charts, graphs,and written analysis in lessthan 30 minutes? With CPAn-alyst you can!! CPAnalyst pro-vides a professionally pre-pared, 15 -20 page report thatis clear and easy to under-stand.

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FINANCIAL MANAGERSouthern Research Institute , a contract research organization withover $40 million in revenue, is seeking a dynamic and aggressiveindividual for the position of Manager of Financial Planning, Bud-geting and Analys is, reporting to the President and responsible forthe financial analys is of all business units . This pos ition providesan attractive compensation package and excellent advancementopportunities.

This position requires an MBA with strong financial analysiscapabilities, good computer, communication, presentation,consensus - building, and leadership skills, and the ability to makefinancial information available and understandable to technicalmanagers . Familiarity with alternate organizational s tructures (e.g,joint ventures, partnerships), government contracting experience,and a technical background are desirable but not essential.

Duties will include analyzing and justifying capita l expenditures,preparing P &L and ROI analyses of bus iness unit operations,providing effective project management information, developingcompetitive pricing systems, recommending capital /labor resourceallocations, and managing availability of financial resources tomeet strategic objectives.

Interes ted candidates should send a resume which mus t includesalary requirements to J a me s G. Kerr, Manager, HumanResources , P. O. Box 55305, Birmingham, AL 35255.

9 Southern Research Institute

We are an Affirmative Action /Equal Opportunity Employer

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(212) 242 -2000

!IMF- O- R-T -U-N -E of Columbia is an authority in the placement of

Manufacturing Management Acc ounting profess ionals nation-

wide. We conduct searches for CFO, VP Finance, Controller, Cost

Manager and Financia l Analys t pos itions in the $40,000 to$150,000 range. To discuss our current opportunities , call (803)

788 -8877. You may fax your resume to (803) 788 -1509 or mail to:

F- O- R- T-U -N -EPerson nel Co nsultants o f Col umbia, Inc.

P.O. Box 23728, Dept. MA ■ Columbia , SC 29224

Our client companies pay our fees.

We s pec ial ize in th e p lace men t o f Acco unt ing

pro fe ss i on als n ati on wid e.

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Controller to $90K

Cost Manager to $60KSr. Financia l Analys t to $55K

Cost Accountant to $50K

Please call to discuss current position openings at

1 -800- 700 -0103 and mail your resume to:

Steve Newton — PresidentCha rte r C are er Con sul tan ts

8318 Pineville- Matthews Rd.Box 708 -273 ■ Charlotte , NC 28226

Fax: (803) 635-7749

Our client companies pay our fees.

Blue skies , c lean a ir and majestic mountains will surround

you at our RenofLake Tahoe, Nevada headquarters . Renohas it a ll and our company is booming!

We are a rock solid medical company experiencing tremen-

dous growth. We have an extremely s trong work e thic and

are seeking profess ionals of the highes t caliber. Come join

our Reno management team in this career opportunity.

Seeking an aggre ss ive Co ntrolle r who ha s the knowledge

and experience to take our company to the next level. Must

be superb at ins tituting and monitoring SDP's. Direct a ll as-

pects of accounting with an eye toward cost reduction: A/R,A/P, G/L, banking/vendor re la tions , le tters of credit , risk

management, budgeting /forecas ting, cash management and

capita l inves tment plans . Must he familiar with a ll aspectsof b anki ng and an expert a t projections for bank and

spreadsheet analys is . Qualified candidate will possess 3 -5

,years re la ted experience, s trong management skills and ex-pert knowledge of Microsoft Word and Excel. Mas ters de-

gree or CPA with an undergraduate degree req uired. IPO

experience preferred.

If you are career oriented, committed to hard work and success

and will accept nothing less than excellence, Microflex is the

employer you have been seeking. Relocation to Reno, Nevada

required, assistance available. For confidential consideration,please mail or fax your resume with salary history to:

Micro flex Med ical Corpora tion

P.O. Box 32000Reno, NV 89533.2000

Fax: (702) 746.6553


ontinuingEducation

Linda Mitchusson, Editor

IMA -YOUR "BEST PRACTICES" SOURCE OFCONTINUING EDUCATIONOrganizations that operate according tothe best practices provide quality prod-ucts and services at reasonable prices.Successful organizations add value fortheir customers by supplying diversityin their product lines. As the leadingprovider of Continuing Professional Ed-ucation (CPE) in accounting and finan-cial management, IMA offers a wide ar-ray of quality educational products,services, and programs. IMA is continu-ally expanding and updating its educa-tion products, offering programs in dif-ferent locations, and utilizing a varietyof delivery formats. This month's col-umn will highlight IMA Group Studyeducation programs that are led byspeakers, instructors, or facilitators.The December column will focus onIMA products and services providedthrough alternative delivery systems.

Chapters and Councils. IMA's 24 region-al councils and over 300 local chaptersare major providers of CPE. Virtuallyall chapters offer at least 10 hours ofProfessional Development to their com-munities each year, and most provideeven more. In addition, many regionalcouncils offer full -day or half -day semi-nars at various times throughout theyear. Chapter and council programsare a low -cost way for members to ob-tain CPE because travel and lodgingexpenses, as well as time away fromthe office, are minimized. Some IMAchapters and councils also sponsorCMA/CFM review courses. The formatof these review cources varies from in-structor -led classes to facilitated inter-

72 MANAGEMENT A(COUIMNG NOVEMBER 1996

active workshops. CMA/CFM reviewcourses allow members to earn CPEwhile preparing for certification.

Regional Education Assistance Pro-grams (REAP). In this program, chap-ters and councils co- sponsor CPE withthe IMA national office to bring qualityprograms to all areas of the country atminimal cost to participants. Theseone -day courses present the latest in-formation, methods, and technology inaccounting, finance, management, andadvisory services. REAP courses areupdated continuously, and instructorsare carefully selected based on presen-tation skills and practical experience.Courses combine lecture, discussion,interactive exercises, and case studiesto provide maximum learning opportu-nities. The May 1996 issue of this col-umn contains more information on theREAP program. A catalog of courses isavailable by calling Marie Cardinale at1- 800 - 638 -4427, Ext. 189.

Annual Conference. Every June, IMAhosts a four -day conference that bringsnationally prominent experts togetherto speak on a variety of cutting -edge is-sues. The conferences are held in dif-ferent locations each year, and becausemembers often combine vacations withthe Conference, IMA schedules a fullslate of activities for spouses and chil-dren. Attendees can earn up to 30 CPEhours during the Annual Conference.The 78th Annual Conference is sched-uled for June 22 -25, 1997, in Orlando,Florida.

In -HouseGroup Study Programs. IMAprovides specialized programs, specifi-cally targeted to our member's employ-ees. IMA in -house programs work wellfor companies with 10 or more partici-pants. Most IMA seminars and coursesare available as in -house presenta-tions, and IMA will customize the for-mat and content to meet the needs ofthe company.

Executive Education Program.This se-ries of high -level conferences andworkshops provides executive -level ed-ucation on financial reporting, con-trollership, cost management, and oth-er leading-edge topics. Theseconferences are designed for decisionmakers and are scheduled in variouslocations during the year.

Continuous Improvement Center (CIC).The CIC maintains a database and of-fers workshops on benchmarking of fi-nancial and accounting functions.These workshops are available to bothCIC members and nonmembers. CICrecently launched its Global Bench-marking System, a user friendly soft-ware application that supports datacollection for internal, external, andbest - practices benchmarking.

Member Interest Groups (MIGS). IMAhas two MIGs that focus on key issuesand emerging trends and provide a fo-rum for networking with peersthroughout the nation. IMA publishesmonthly newsletters, sponsors confer-ences, and conducts roundtables forMIG members. These interactiveroundtables are structured around crit-ical issues and are led by experts inthe field. Currently, roundtables arescheduled in April and May 1997. AStrategic Cost Management Confer-ence will be held in Atlanta in March1997, and the Controllers Conferencewill be in Chicago, May 1997. The Sep-tember 1996 issue of this column con-tains more details about MIGs. ■

For more information on any IMA program,call 1- 800 - 6384427. Information is also avail-able through IMA's web site athttpJ/ www. rutgers.edulaccounting/raw /ima.

Linda Mitchusson is dean, School of Busi-ness, East Central University, Ada, Okla. Sheis a former IMA vice president and now servesas chair of the IMA Committee on Education.She can be reached by phone, (405) 332 -8000,ext. 274; fax, (405) 436.5196; or Internet,[email protected].

T H E R E ' S A R E A S O N W H Y

F O R T U N E 1 0 0 0 C O M P A N I E S

A R E C H O O S I N G XMS'" F O R

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1 - 8 0 0 - 4 7 5 - 5 9 8 2

Circle No. 2

3 * * V " _

06\� ma.

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Flexilnternational Software. Inc , is a member of the Object Management Group and is an independent software partner of IBM, Microsoft. Grade, SybMir -SI f>IMormix. Flexilnternational,the Flexllmemattonal Software logo. FlexilInancials, FlexiAssels, FlexiPayables. FlexiPurchasing, FlexiReceivables. FlexiDeslgher and FlexiDeveloper are trademarks and FlexlLedger ,s a regsteredtrademark of Flexllnternational Software, Inc. All other trademarks and registered trademarks are the property of their respective holders. ®1996 Flexilnternational Software. Inc

Circle No. 16

1996-11-Management-Accounting-v78-n5 - Strategic Finance

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