ADMS Accounting PDF

“Exploring the Functions of Business” ADMS 1010 Petrenko Anton, PhD Office Hours: By appointment E-Mail: [email protected]  Course Objectives This lecture will introduce students to causal claims. We will look into various ways...

“Exploring the Functions of Business” ADMS 1010 Petrenko Anton, PhD Office Hours: By appointment E-Mail: [email protected]  Course Objectives This lecture will introduce students to causal claims. We will look into various ways of assessing causal claims. We will also get an introduction into the area of accounting and finance, and discuss articles by Kaplan R. S and D. P. Norton (The Balanced Scorecard--Measures That Drive Performance), Bakker, P. (Accountants Will Save the World), and chapter from a book by Korten, D. C. “When Corporations Rule the World” (The money game).  Language and Meaning What point does this passage make? Whenever there is a full moon, the number of violent crimes and admissions to emergency wards and psychiatric units skyrockets. It is obvious that the full moon has an adverse effect on people’s behaviour.  Causal Claims Causal inference involves drawing a connection between two states of affairs and inferring that one caused the other. The problem is that causal connections MULTIPLE can be very complicated, and figuring CAUSES EVENT B them out can be difficult. EFFECT COUNTERVAILING One problem is that an event may have a CAUSES number of causes that together bring it. Another issue is that an event might have causes that can bring it about separately on EVENT A different occasions. CAUSE Finally, an event might have countervailing causes—causes that prevent the effect from occurring. For instance, smoking can cause cancer, but it does not cause it necessarily because individuals might be doing other things (exercise?) that reduce the impact from tobacco. Therefore, not every smoker develops cancer.  Causal Claims: Post Hoc Ergo Propter Fallacy EVENT A EVENT B CAUSE No, inferring causal connection So, what evidence do you need to simply because two events occurred make an inference about a causal one after another is an error called connection that is true or very Post Hoc Ergo Propter Fallacy (after probable? it therefore because of it). Is it enough to infer causal connection if one event Clearly, there could be many other follows the other? rival explanations for the increase in crime rate. Ever since the capital punishment was abolished, the crime rate has been increasing. The abolishment of capital punishment is the reason for more crime.  Causal Claims: Correlation and Reverse Causation EVENT A EVENT B CAUSE No. Correlation is not a OK. What if the events in question guarantee of a causal typically go together? Does this connection. not guarantee that they are causally connected? Often, events that are causally connected do not have a perfect correlation (as in the case of smoking and cancer.) Moreover, events that are perfectly correlated (always go together) might not be causally connected. For example, sitting at the front of the class is often correlated with high academic performance. Thus, this does not mean that sitting at the front improves (causes) the performance. It could be due to the fact that students who want to do better prefer to have better access to information. (Reverse causation: being better performers causes them to sit in front) Correlation After 1750 then, England had no labour shortage, indeed she had so many children she hardly knew what to do. Were they a burden or on the contrary a source of energy? Consequence or cause? … we need to establish a correlation. The population explosion and the wave of industrialization were two mighty processes taking place side by side. But did one determine the other? (F. Braudel) Phyllis Deane writes, ‘that without the growth of output dating the 1740s, the associated growth in population would eventually have been checked by a rise in the death rate due to declining standards of living…’ If true, this simple observation is proof in itself that the demographic revolution followed the rise of industry and was, in large measure, created by it.  Causal Claims: Third Factor EVENT A EVENT B THIRD FACTOR CAUSE Heart attacks and ice-cream consumptions are correlated— increase in ice-cream consumption is correlated with increase in heart attacks.. The problem is that sometimes correlation comes about due to a OK. What if the events in common third factor that regularly question always go causes both events. together? Does this not Thus, ice-cream does not cause guarantee that they are heart attacks. Both are caused by causally connected? high temperature in the summer.  Experimental Research: Establishing Co-variation A newspaper report of a scientific research study: Psychologists have discovered that most male scientists make their major discoveries in their late twenties and thirties, which is also the period when their sexual interest is at its peak. Therefore, the psychologists concluded, male scientists strive to achieve to attract the attention of women. Scientific inquiry is driven by sexual desire. This is an example of a correlation without covariance. There could be a third factor as a cause responsible for both discoveries and sexual interest—age. Ideally, to establish a causal connection you need to establish if there is co-variation So, what do we need between the vents—if A event happens then then? the B event happens, and if A event does not happen, the B event does not happen. One can determine co-variation through experimentations where all variables are controlled (held constant), allowing variation only for the alleged cause and effect. Spurious Covariations  Assessing Causal Arguments To establish a cause one must rule out rival causal explanations, show that cause-event precedes the effect-event, and that this effect would not occur without the cause (even though if it could potentially occur due to another cause). Ideally, one need to identify the causal mechanism. The ideal situation is to conduct an experiment that establishes co- variation while controlling for all other factors (rival causes) 1. Temporal priority: event A (the alleged cause) always precedes event B (the alleged effect). 2. Covariance: The two events must vary together; as one varies (e.g. increases or decreases), the other also varies (increases or decreases). 3. A reasonable mechanism should be conceivable that enables the causal relation between two events. 4. Have other possible causes been ruled out?  Examples of Causal Arguments Overall grade profiles at the university started to decline when we started admitting more non-traditional students (mature students, foreign students, students whose family members had never attended university). The non-traditional students are responsible for the decline in grade profiles. Fourteen people came down with food poisoning after eating the potato salad at the family picnic. No one who did not eat the potato salad suffered from food poisoning, and there was nothing else that those fourteen people all ate. The potato salad probably caused the food poisoning. It is being tested now. Incidents of violence among people twelve through twenty-one have been increasing over the past twenty years. During that same period, The Simpsons has become one of the most popular TV shows among people in that age group. By teaching a disrespect for authority, The Simpsons is clearly contributing to the rise in violence. 1. Temporal priority 2. Reasonable mechanism 3. Covariance? 4. Rival causes?  Causal Argument The theory of evolution was not widely taught in American schools until 1963, with the introduction of new biology textbooks. Throughout the 1950s, there was little social upheaval and disorder in American society. Everyone knew the rules for a well- ordered society and followed them. Immediately after the widespread teaching of evolutionary theory, society disintegrated into chaos—crime rates rose; blacks, women, adolescents began challenging all authority and engaging in violent protests; pornography became rampant; abortion became legal; illegitimacy rates rose dramatically. It is clear that teaching evolutionary theory destroys any sense of morality. 1. Temporal priority: event A (the alleged cause) always precedes event B (the alleged effect). 2. Reasonable mechanism (spatial connection): a reasonable mechanism should be conceivable that enables the causal relation between two events (intervening cause). 3. Covariance: The two events must vary together; as one varies (e.g. increases or decreases), the other also varies (increases or decreases). 4. Have other possible causes (other potential causal factors) been ruled out (controlled)?  Causal Argument The theory of evolution was not widely taught in American schools until 1963, with the introduction of new biology textbooks. Throughout the 1950s, there was little social upheaval and disorder in American society. Everyone knew the rules for a well-ordered society and followed them. Immediately after the widespread teaching of evolutionary theory, society disintegrated into chaos—crime rates rose; blacks, women, adolescents began challenging all authority and engaging in violent protests; pornography became rampant; abortion became legal; illegitimacy rates rose dramatically. It is clear that teaching evolutionary theory destroys any sense of morality. 1. Temporal priority: event A (the alleged cause) always precedes event B (the alleged effect). Temporal priority is not clearly established. It is not clear from the evidence when exactly the social upheavals began. There is reason to doubt that they started precisely after the introduction of evolutionary theory in textbooks—bitniks, mods, bikers in US were challenging authority before that date. 2. Reasonable mechanism (spatial connection): a reasonable mechanism should be conceivable that enables the causal relation between two events (intervening cause). The author seems to suggest that lack of faith in God led to lack of believe in moral right and wrong. Theoretically, it is possible that in a society where the right and wrong is grounded in the believe in God, loss of faith might undermine confidence in moral values. Although it is conceivable, there are many atheistic societies who hold strong believes in right and wrong (communism, secular civil societies) 3. Covariance: The two events must vary together; as one varies (e.g. increases or decreases), the other also varies (increases or decreases). There is no evidence of covariation—only loose evidence of correlation. We do not have evidence that if evolutionary theory is remved from the books it restores moral values or eliminates social protest. We only have information that loosely at the same time as evolutionary theory was introduced, there were social upheavals and protests. 4. Have other possible causes (other potential causal factors) been ruled out (controlled)? There are no controls on other factors. The civil rights movement, antiwar protests, and challenges to the past social and moral arrangement could be due to the spread of post war liberal ideas, the growth of the younger, baby boomer generation with their own ideas about social justice, and growing US prosperity that enabled younger generations to be concerned moral and civil rights rather than just survival. Even bigger problem in the argument is the view that civil rights protests represent a collapse of morality, rather than its growth. Its likely the protesters were concerned with moral questions more than previous generations. Accounting  Accounting Accounting or accountancy is the measurement, processing and communication of financial information about economic entities. Accounting, which has been called the "language of business", measures the results of an organization's economic activities and conveys this information to a variety of users, including investors, creditors, management, and regulators. Practitioners of accounting are known as accountants. The terms 'accounting' and 'financial reporting' are often used as synonyms. Accounting includes the following fields: 1. Financial accounting summary, analysis and reporting of financial transactions; 2. Management accounting use of accounting information to make better management decisions; 3. Auditing independent examination of an organizations account’s; 4. Tax accounting for tax purposes.  Financial reporting Prepared according to Generally Accepted Accounting Principles (GAAP): National and International standards Financial statements: 1. Balance sheet: - Statement of financial position at a given point in time - Reports: - Assets: Economic resources (Things of value) - Liabilities: Economic obligations (Things owed) - Ownership equity: Residual value after liabilities are paid 2. Income statement: Statement of income, expenses, and profits over a given period 3. Cash flow statement: Reports on cash flow activities, particularly operating, investing, financing activities The Big 4 Accounting in SAS  Accounting in SAS BAS required courses: – ADMS 2500. Introduction to Financial Accounting (Required) An overview of the accounting discipline, useful to both majors and non -majors. Includes accounting history, the uses of accounting information in personal and business contexts and the rudiments of financial reporting. – ADMS 2510. Introduction to Management Accounting (Required) Managers require relevant information for planning, controlling and decision -making purposes. This course examines the accounting techniques available to satisfy those needs. Accounting stream courses: – ADMS 3510. Managerial Cost Accounting and Analysis – ADMS 3520. An Overview of Canadian Income Taxation – ADMS 3585. Intermediate Financial Accounting I – ADMS 3595. Intermediate Financial Accounting II – ADMS 4525. Internal Audit – ADMS 4551. Auditing and Other Assurance Services – ADMS 4562. Corporate Taxation in Canada – ADMS 4590. Comprehensive and Multi-subject Accounting Problems – ADMS 4510. Accounting Theory and Contemporary Issues – ADMS 4520. Advanced Financial Accounting – ADMS 4540. Financial Management – ADMS 4552. Information Systems Audits – ADMS 4553. Auditing: Advanced Topics – ADMS 4561. Taxation of Personal Income in Canada – ADMS 4570. Management Planning and Control Systems Finance  Finance Finance, also known as science of money management, is a field that deals with the allocation of assets and liabilities over time under conditions of certainty and uncertainty. A key point in finance is the time value of money, which states that purchasing power of one unit of currency can vary over time. Finance aims to price assets based on their risk level and their expected rate of return. It can be broken into three different sub-categories: 1 Public finance: Addresses the role of government in the economy Corporate finance: Funding and capital structure of corporations 2 Investment banking Personal finance: Financial management for individuals and families (a 3 specialty within SAS!)  Global financial system 1. International financial institutions: – International Monetary Fund Came out of the Bretton Woods Conference following WWII Promotes global monetary cooperation and financial stability – World Bank An international financial institution of the United Nations Provides loans to developing countries 2. Governments: – Regulatory agencies Sets the rules for the ‘players’ in the financial system USA: (U.S. Securities and Exchange Commission (SEC); Federal Reserve System (“Fed) Canada: Office of the Superintendent of Financial Institutions (OSFI) – Central Banks Manages a state’s currency, money supply, interest rates Operates at arms length from government  Global financial system 3. Banks: – Retail banks: General full-service banking services for individuals and businesses – Investment banks: Help clients raise financial capital by underwriting or acting as the client’s agent in the issuance of securities (or both). Securities = tradable financial asset (stocks, bonds, derivatives, etc.) 4. Stock markets: – Exchanges where stocks are bought/sold – NYSE; NASDAQ; TSX; etc. Size of the US Financial sector Finance in SAS  Finance in SAS BAS required courses: – ADMS 3530. Finance: The role of financial managers in accomplishing organizational objectives, uses of financial statements, present value theory, risk/return analysis, leverage, cost of capital, resource allocation models. Finance stream courses: – ADMS 3531. Personal Investment Management – ADMS 3541. Personal Financial Planning – ADMS 4501. Advanced Portfolio Management – ADMS 4502. Ethics for Investment Managers – ADMS 4503. Derivative Securities – ADMS 4504. Fixed Income Securities and Risk Management – ADMS 4505. Retirement and Estate Planning – ADMS 4506. Professional Financial Planning – ADMS 4507. Insurance and Other Finance Topics – ADMS 4535. Financial Statement Analysis – ADMS 4536. Security Valuation – ADMS 4540. Financial Management – ADMS 4541. Applied Corporate Finance – ADMS 4542. International Financial Management SAS Finance 3530 Program Note: the courses 3520, 3585, 3595 3531 + 3541 et 4561 are not required for your major but are highly recommended Financial Planning Stream (CFP) 3520 - 4501 - 4505 - 4506 4507 - 4561 + two more electives* Investment Management Stream (CFA) 3585 - 3595 - 4501 - 4502 - 4503 4504 - 4535 - 4536 Financial Management 4540 - 4541 - 4542 + two more finance courses Prepared by Finance Professor, Dr. Nabil Tahani The Balanced Scorecard  The Balanced Scorecard Kaplan and Norton recognize the limitations of financial measures but argue against the recent trend to abandon financial measures in favour of operational measures. They argue for a balanced approach. Based on a year long research with 12 leading companies, Kaplan and Norton developed a scorecard to provide managers with a balanced yet The traditional financial performance comprehensive view of the business. measures worked well for the industrial era, but they are out of step with the skills and competencies companies are trying to we devised a "balanced scorecard"-a set of master today.. measures that gives top managers a fast but comprehensive view of the business...no single measure can provide a clear performance target or focus attention on the critical areas of the business. Managers want a balanced presentation of both financial and operational measures.  The Balanced Scorecard Scorecard provides financial measures on action taken. It provides operational measures on customer satisfaction, internal processes, and innovation activities. The operational measures are drivers of future financial performance. The balanced scorecard includes financial The scorecard minimizes measures that tell the results of actions already informational overload. taken. And it complements the financial measures with operational measures on customer It allows mangers to locate the satisfaction, internal processes, and the source of improvements and to organization's innovation and improvement see if some improvements were activities--operational measures that are the made at the cost of another. drivers of future financial performance. Kaplan and Norton argue that traditional The scorecard puts strategy and vision, measurement system has control bias: not control, at the center. It establishes managers set objectives and measured to goals but assumes that people will adopt whatever behaviors and take whatever see if employees took action. Instead, the actions are necessary to arrive at those balanced scorecard replaces control with goals. The measures are designed to strategy, enabling all employees to act pull people toward the overall vision. towards the overall strategic vision.  4. How do we look to shareholders? (financial perspective) 1. How do customers see us? (customer 2. What must we perspective) excel at? (internal perspective) The balanced scorecard allows managers to look at the business from four important perspectives. It provides answers to four basic questions: 3. Can we continue to improve and create value? (innovation and learning perspective)  Customer Perspective Companies must translate their customer oriented mission statements into concrete goals and measures of what matters to customers (time, quality, performance/service, and cost). Customers' concerns tend to fall into four categories: time, quality, performance and service, and cost. To put the balanced scorecard to work, companies should articulate goals for time, quality, and performance and service and then translate these goals into specific measures. Companies determine goals for time, quality, performance, and cost, and translate them into concrete measures. Companies can also benefit from obtaining data on customer expectations from external sources (customers)  Internal Business Perspective The internal perspective focuses on processes that drive customer satisfaction as well as core competencies necessary for market leadership. To achieve goals in these areas, managers must connect them to measures of employee action at local levels. The internal measures for the balanced scorecard should stem from the business processes that have the greatest impact on customer satisfaction-factors that affect cycle time, quality, employee skills, and productivity, for example. Companies should also attempt to identify and measure their company's core competencies, the critical technologies needed to ensure continued market leadership. To achieve goals on cycle time, quality, productivity, and cost, managers must devise measures that are influenced by employees' actions.  Innovation and Learning Perspective Due to intense global competition, companies must constantly monitor its ability to introduce new products and capabilities as well as make continual improvements to its existing products and processes. Intense global competition requires that companies make continual improvements to their existing products and processes and have the ability to introduce entirely new products with expanded capabilities. A company's ability to innovate, improve, and learn ties directly to the company's value. That is, only through the ability to launch new products, create more value for customers, and improve operating efficiencies continually can a company penetrate new markets and increase revenues and margins – in short, grow and thereby increase shareholder value.  Financial Perspective Some criticize financial measures for backward looking focus, arguing that companies should focus on operations, which will determine financial success. Financial performance measures indicate whether the company's strategy, implementation, and execution are contributing to bottom-line improvement. Typical financial goals have to do with profitability, growth, and shareholder value. The problem is that sometimes operational improvements do not translate into financial improvements due, for example, to bottlenecks elsewhere. One needs financial measures to alert executives to such problems. Financial measures also necessary to ensure that strategy on goals and measures is successful (leads to increased value). Ideally, companies should specify how operational goals and measure connect to financial goals. ESG Is oversold?  ESG Is oversold?... Hopes What was hoped: 1. Individual companies’ social, environmental, and governance (ESG) performance would improve (because what gets measured gets managed). 2. A link tying companies with better sustainability records to better equity returns would emerge. 3. Investors and consumers would reward companies with strong sustainability performance—and put pressure on those that lagged. 4. Ways to measure social and environmental impact would become more rigorous, accurate, and widely accepted Over time, this virtuous cycle would result in a more sustainable form of capitalism. Sure. socially responsible investment has grown to more than $30 trillion—one-third of all professionally managed assets. BUT During this same 20-year period carbon emissions have continued to rise, and environmental damage has accelerated. (Social inequity, too, is increasing. the gap between median CEO compensation and median worker pay has widened nonstandard, incomplete, imprecise, and misleading. Greenwashing.  ESG Is oversold?... Problems in reporting Problems reporting: Lack of mandates and auditing. Discretion over what information to include in their sustainability reports. Little third-party validation (input data is misleading and incomplete). Specious targets: most companies set goals based on their capabilities or aspirations not taking into accounts limits of development (not constraining). Complexity: Complete picture of its carbon footprint requires to measure three types of emissions: those produced and controlled by its own facilities (classified as scope 1); those associated with its purchased electricity (scope 2); and all its other upstream and downstream emissions (suppliers and distributors) (scope 3). Opaque supply chains: 85% of the brand’s production is overseas, supply chains have become multitiered (contractors outsourced to subcontractors); that’s made traceability problematic for scope 3 (often greatest amount of emissions). Confusing information: Consumers cannot interpret information coming from reports. (fleece jackets generates 20 pounds of CO2 but what does this mean?) Inattention to developing countries: the greatest increases in consumption, emissions, and social impacts in the coming decades will occur in Asia and Africa.  ESG Is oversold?... Problems in using reports A 2020 study by Barclay’s looked at two decades of ESG investing and found no difference between the holdings of sustainable and traditional funds Unreliable ratings: The growth in the number of ESG raters has not improved reliability: there are structural measurement and reporting problems because the data is voluntarily shared, largely unaudited, and incomplete. Lack of comparability: impossible to compare companies on the basis of ESG performance. Out of 51 relevant GRI indicators, only four appear in more than three- quarters of the companies’ GRI reports. Challenges in assessing the success of socially responsible investing: the vast majority of ESG investment is allocated to mutual funds that either stay away from specific industries (mainly tobacco and weapons). Parameters tweaking: Firms are mostly focused on tweaking parameters—dials that can be turned up and down to change performance without altering the structure of the larger system. They are rarely sources of real impact…  ESG Is oversold?... What to do… But if we are to bend the global emissions curve downward and address growing environmental and social challenges effectively, a more aggressive approach is needed. Measure less, better. No matter what standard ultimately prevails, sustainability reports must be mandated and audited by an empowered referee. Mobilize. Vested interests and system inertia have been formidable obstacles to progress (activism = good trouble.) Spend government funds on the right things. According to the IMF, global subsidies for fossil fuels topped $5 trillion in 2017. Change the system. Executives and investors operate in keeping with the rules and incentives of the system. If their behavior is to change, the rules that governments set and enforce also need to change…. Carbon emissions should be capped or taxed to account for their social costs; the agriculture industry should be incentivized to transition from spewing carbon to sequestering it; and lawmakers should ban the building of new thermal coal plants as a source of primary energy. A sustainable system will ultimately require a paradigm shift from the prevailing goal of wealth creation to one of well-being, and a shift in focus away from GDP and toward something akin to the OECD’s Better Life Index. Commitments to concepts such as regenerative agriculture, reuse, and collective value represent first steps in the right direction.