Decision Workshops

Making financial reform happen: Confidence Accounting:

Our financial institutions are failing….

 

Most people in the city know that many of the ways in which financial activities are carried out are (to use a euphemism) “sub-optimal”. However, they are just too wrapped up in their day-to-day jobs dealing with immediate crises to think long term.

 

In an attempt counter this, in 2005 the City of London financial think-tank Z/Yen started the Long Finance initiative to ask the question:

CAParties Smile Smile Smile Smile Smile NonSmile NonSmile NonSmile NonSmile NonSmile NonSmile NonSmile NonSmile NonSmile NonSmile NonSmile NonSmile NonSmile NonSmile NonSmile

“When would we know our financial system is working?”

The initiative is trying to improve society’s understanding and use of finance over the long-term (decades) as opposed to that short-termism that characterizes most financial activity.

 

The initiative has come up with many great ideas to encourage long term financial stability.  One of these is the Confidence Accounting initiative.  Accounts (especially for large companies) contain a large amount of information that is at best a rough estimate, and at worst just guesswork.  

To see the details about each of the actors click on their icon in the table below (flash and popups must be enabled)

Test

Compete

Mandate

Legislate

Buy

In this scenario the universities teach students about confidence accounting and it spreads from that....

Here the smaller accountacy firms adopt Confidence Accounting for competative advantage against the "Big 4".  Seeing the threat to their market share the "Big 4 later also adopt the ideas......

In this scenario the bodies that set accountancy standards mandate it, by introducing new standards requiring Confidence Accounting. For accounts to pass muster, they must use Confidence Accounting methodology......

Here it is the government that mandates confidence accounting.  Harried by the Financial press to "do something" to make a more stable financial system, the government that something should be Confidence Accounting.......

In this case it is investors, such as Pension funds, that start asking for confidence accounting.  Companies, egar to please investors, comply anyway and force their accountants to do so.....

Note that this stakeholder mapping illustrates a difficulty that often occurs when trying to get things done in complex organizations:  There is often a lack of “players”, that is people with both high power and high Interest in getting things done.  Instead there is a myriad of small players each with a very narrow area of responsibility.  Nobody is big or powerful and interested enough to institute radical change. This was sadly illustrated in our analysis where the top right quadrant was empty.  This is also a common result when examining Government departments.  Nowhere are there people with the power and influence to effect radical change.

 

Nevertheless, things can change, so we examined six possible strategies to instigate reform. In all of these strategies we looked at how the institutions could gain interest in Confidence Accouting (raise up the table) and become supportive of Confidence Accounting (get a "smiley" face)

However there is a big difference between having a good idea and getting it to happen. Z/Yen therefore asked Decision Workshops to investigate different scenarios in which confidence accounting could actually be made to happen.  What were the possible routes to improve the system?

 

Unlike most other work Decision Workshops has done, rather than working out how to resolve the client’s dilemmas, we spent a considerable time identifying  the parties who could have dilemmas induced in them.  

 

Decision Workshops therefore performed a Stakeholder Analysis.  In this the particular entities involved in accounting were plotted on a matrix showing their power and their interest. The “smiley” faces show institutions that are broadly supportive of confidence accounting; the “straight” faces those with no opinion. This was the table we came up with:

Confidence Accounting says that figures published in accounts should therefore explicitly reflect this uncertainty, with outputs presented as probability distributions rather than exact numbers with spurious levels of accuracy.  This is exactly the way all other scientific estimates are done.  Why should this not be done for accounting? Indeed many financial analysts spend lot of time looking at accounts and trying to unpick them to work out what these distributions actually are.

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Conclusions:

The initial stakeholder analysis illustrated these six different strategies.  Of these a combination of the "Compete" and "Buy" seemed to be the best way of getting the change to actually happen.  Our efforts must therefore concentrate on ensuring that these scenarios happen.

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