Sunday, August 25, 2013

Cost Accountant linking Internal Audit through Balanced Scorecard

Four pillars of the balanced score card have been discussed many times through my pen. Balanced score card needs to be linked with the enterprise value of the organization. Enterprise valuation means in simple formula
Enterprise value = Equity value + market value of debt + minority interest + pension and other similar provisions+ other claims.

I have found that cost accountants being deployed as an internal auditor would create immense opportunity for growth of the EV and shareholders returns over the long term. Further in my research I have found that bookish knowledge is hardly being implemented in a correct format. Today I will focus on implementing balance scorecard into the internal audit process. The subject might turn out to be complicated but I have tried my best to depict a easy process for implementing the same.  I find that cost accountants being deployed as internal auditors could be game changers for the organization. Its not about cost management but it is about developing business models and strategies for the organizations through internal audit and control process.. Many managers fail to link programs, such as total quality management, cycle time reduction, re-engineering, and employee empowerment, to outcomes that directly influence customers and that deliver future financial performance.  But the failure is achieved due to only giving focus on statutory auditors and numbers. But focus on increasing the return on capital and EV is hardly being focused.  I will provide a case study of a bank which resembles with many companies in the financial sector of India.

I put the following case study to have a better understanding of developing the tools of achieving Enterprise value through Balanced Scorecard. Return on capital employment and generating growth for the EV is the key aspect of the balanced score card implementation and internal audit/control aspect.

A bank used to deal with one product for its customers (fixed deposits) and high cost of servicing clients but with little client satisfaction. The bank blamed the system and market for the falling margins and profitability. Employee’s wise profitability was also collapsing. Whereas the market was good and other competitors were very much productive.

The bank decided to recruit a Cost Accountant as an internal auditor since the statutory audit failed to provide business model for the plummeting business of the bank.  Upon inspection/internal audit it was found that the bank required introduction of more products like selling insurance, mutual funds and wealth management based products apart from the traditional products like fixed deposits). The bank also needed significant focus on human man power and internal process. Under the customer perspective of the balanced score Card the bank required cross selling products to its clients and enhance the customer perspective of the bank. The cost Accountant further drilled and found that the bank required expert knowledge about selling those products. Since, the bank never dealt with those products apart from the fixed deposits which it used to sell.

The cost Accountant advised the bank to develop programmes where the incentive structure and promotion of the banks were linked with some successful completion of some courses. The courses were linked with the products being sold by the bank. These lead to a significant growth in employee wise income retention and also well trained staff for the banks. This also lead to create a culture of education and professionalism for the staff. This lead to successful achievement of revenue for the banks and also the learning and growth objective of balanced score card.  Good advertising plus good location brought the customers to the banks. The branch personnel were reactive, helping customers open accounts and providing ongoing service. The bank did not have a selling culture.

The improvement in margins and profitability spooked up the confidence of the shareholders and also the return of capital employed. Efficiency of the employees leads to achievement of the internal process of the organization. Well appointment of the cost accountants as an internal auditor for the bank lead to an stupendous growth for the share holders return on capital. Now it’s well clear that how accountant and internal audit cost is linked together. Cost Management tools when implemented judiciously could create wonders for the organizations.  I find that cost accountants being deployed as an internal auditor is key driver for every organization.


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