This is an extract from the book: Titled Inactivity Based Cost Management [IBCM]: Sub-titled: Measurement of Intangible: Governance, Ethical & Fiscal Responsibility and Accountability. This extract is on cost consequence and the readers shall note that there is no separate chapter on Cost Consequence in the book but finds its way to several chapters.
Activity is a cost incidence whereas inactivity a cost consequence, measure it.
Measuring and reporting of cost consequence is the fulcrum between responsibility and accountability, between the Government and the governed, without which Governance does not take place. The moment an activity takes place there is a cost incidence, the moment there is a lack of Governance there is an occurrence of inactivity, leading to cost consequence. When an auditor discovers today a ‘fraud or misfeasance’ it means Governance was missing yesterday.
Amartya Sen quotes in his book, Idea of Justice: “Justice Stephen Breyer has brought out with much force and clarity the importance of paying ‘attention to purpose and consequence’ in interpreting a democratic constitution, emphasizing the role of ‘consequences as an important yardstick to measure a given interpretation’s faithfulness to these democratic purposes.” What judiciary takes cognizance of, executive does not. If a cost consequence of tomorrow has to be assessed then the existence of Governance today has to be measured. Governance is the direct responsibility of the executive authority.
Measurement
In the human form of Governance, eye represents the long- and short- term objectives of a visionary, focussing on cost consequence whereas the foot represents the measurement. Statement of accountability is submitted to the people who are the ultimate recipients. If millions could watch the Olympic record and easily appreciate the record being broken live, the statement of accountability can be as simple to deliver the message online. Accountability if not measured, then what is Governance for? Governance to-day is a blind man riding on the lame.
Impairment of assets is a cost incidence written off in the Profit and Loss Account, whereas future economic loss is a cost consequence which is never considered for a Balance Sheet. Financial Crisis 2009 can be summed up by one sentence, as mentioned by Timothy Geithner the then President and CEO of Fed. Reserve Bank of New York: “The scale of long-term risky and relatively illiquid assets financed by very short-term liabilities made many of the vehicles and institutions in this parallel financial system vulnerable to a classic type of run, but without the protections such as deposit insurance that the banking system has in place to reduce such risks.” [Ref. 23] Intangible assets had played a major role based on which the parallel financial system made itself vulnerable and collapsed taking with it the banking system as a whole.
A regulatory framework will however have to be necessarily established. Why IASB during the deliberation between 1995 and 1998, when IAS 38 was released, did not discuss and ultimately left the term ‘intangible’ undefined? When International Standards are issued every word, particularly the title, needs to be defined to the utmost care and diligence. By not defining the term ‘intangible’ IASB has also failed to discuss the cost consequence of ignoring a term of reference. Would brand value of Cadillac have helped GM the needed finance from the bankers or investors instead of taking the amount from the government?
Timothy Geithner again: “This crisis exposed very significant problems in the financial systems of the United States and some other major economies. Innovation got too far out in front of the knowledge of risk.” [Ref. 24]
If Sir David Tweedie, IASB Chairman, wants to ‘fix this once, fix it comprehensively, and fix it in an urgent and responsible manner’, then IFRS should deliberate on cost consequence, during the Exposure Draft stage itself, so that fixing mechanism and troubleshooting clauses are sent with the manual under the heading ‘Governance’. Cost consequence analysis opens up the risk factors on account of misuse of the term propounded by the accounting standards at the time of deliberations rather afterwards. Mechanism for management of cost consequence is Governance. Intangible Asset is a nightmare for Governance.
A loophole provided however insignificant it could be, is enough to break the dam of confidence and deluge the entire system of Governance. That loophole when exploited by men of greed the one that is never get examined is the cost consequence. The cost consequence of inadequate or no governance is unchecked corruption that has already inundated the earth. Study of corrupt practices follows next [please note refers to the next chapter in the book] towards understanding the depth of the malice that needs to be remedied with Governance as the X-ray, capturing the cancerous growth.
Intangible was examined, followed by the use in the term Intangible Assets & its consequences and in this chapter it is presented that Governance means:
a. Real-time Monitoring,
b. Cost Consequence and
c. People Participation.
Chart 9 4.03 Three Criteria of Governance
Cost consequence is an opportunity the Action Process offers continuously. Substance with quality and action is managed by Governance and the progress status is the real-time monitoring, enabling the study of cost consequence.
`Governance of Accountability:
“For the sin ye do by two and two, ye must pay for one by one!”” Rudyard Kipling
The ineluctable law of physics governing cause and effect, action and reaction is inevitable. Governance is the measure of cost consequence.
Accountability is directly proportional to the inactivity by each resource owner. The inactivity is derived by Governance as of to-day. The inactivity is the primary source of examining the cost consequence.
“Activity is a cost incidence, Inactivity a cost consequence”
Activity is a cost, what’s done cannot be undone, beyond one’s control, is tangible, is measurable in terms of money; Inactivity a cost consequence, what’s not done, connotation beyond perspective of money, is intangible, controlled by Governance, can be undone.
The cost consequence is relevant for only one day, i.e. to-day and as a corollary Governance is feasible for only one day, i.e. to-day, neither by the dateless past nor of the infinite future.
There are two observations to note from the Index of Inactivity.
1. Cost consequence: During the action process the repercussion due to lack of governance gives a better opportunity to correct the course of events without a severe dent in the project undertaken in advance.
2. In an organization with several resource areas working in unison, a rank less than the optimum will expose the weakest link, who invariably would be the cause of such a leisurely measure of performance, affecting a range of process areas at the same time. Either way the reason for the inactivity is lack of governance.
The alarming proportion of massive corruption today is the result of failure to assess the cost consequence of actions not monitored in the past.
The cost consequence of yesterday’s inaction on anti-corruption is too big a burden to bear for the future, no doubt.
The return on investment is the main criteria for all the investments decision, the return being tangible. In study of cost consequence the returns are more expansive based on intangible. Investment in study of cost consequence is worth more than all the other investments put together, for such returns are more valuable than cash that transforms good intentions into a humane society by Governance. Finance, the last of the five resource areas selected for study of UNCAC, is next.
Central to the Management of Public Finances is the Public Reporting of Cost Consequence, during its journey from good intentions to wasteful expenditure.
Finance as the resource area has the responsibility to establish the systems of procurement, Internal Control, Risks Management, Maintenance of Records, Accountability of Public Finances that the body or bodies established to oversee the preventive measures under Chapter II of UNCAC recognize the preparation of cost consequence reporting.
Index of Inactivity by resource area and by process area, is the basis of study on cost consequence open to public.
If Siemens case is anything to go by a robust and comprehensive ethics policy created by the company could be kept in abeyance without any action being taken. The findings and recommendations for the two banks of Midwest Independent Bancshares Inc. include operating efficiency and ethical standards. Operating efficiency is always a post-mortem. Any loss or financial scandals that come into open today is due to injudicious decisions taken in the past, meaning cost consequence of to-day is the lack of governance of the past. When ethical standards are not administered governance has not taken place. Ethical standards have a lot of bearing on the operating efficiency. Credit Risk or Operational Risk or Fiduciary Risk for a bank is tempered by the application of ethical standards. Without it there is no governance. Business enterprise is an expression of freedom. Ethical standards are its threshold values.
Budgeting for Business Ethics ~ Budgeting for Cost Consequence
Study of cost consequence clearly indicates the formation of a bubble in its subtlest form. Fiscal Responsibility does not have any risks attached to it as the Ethical Responsibility shoulders the consequence of all good intentions and wasteful expenditure; the risks in its entirety are of Ethical Responsibility. Any number of BPs and Union Carbides would come and pass by, but the damage is inflicted on the people. The essence of Business Ethics lies in the disclosure of the study on cost consequence.
Budgeting for the cost consequence is the very essence of Business Ethics, be it a BP or a Lehman Brothers or Baring Brothers, to provide for the threshold values of the entrepreneurial enterprise. Governance is the substance providing, Budgeting for cost consequence with threshold values stated clearly as Quality and Accountability as Action. The Budget of Cost
Consequence, be it corporate or provincial state would start with the Action Process Framework.
Sovereign Ratings of a nation consist of different aspects of management of national resources and industry is one among the many. Budgeting for and Governance of cost consequence would provide a single Accountability rating of Index of Inactivity, with a real-time monitoring and people participation.
Governance leads to study of cost consequence enabling to observe the bubble at its subtlest form, long before bubble bursts.
Indifference is the inactivity, leading to cost consequence. Contemplate on this deeply, the Ethical Responsibility needs to discriminate action, to discriminate forbidden action, to discriminate inaction, but inscrutable indeed is not subject to accountability for its indiscriminate indifference.
Is it not the Ethical Responsibility of every citizen to create an International Ethical Standards Board?
Reference:
[Ref. 23] http://www.newyorkfed.org/newsevents/speeches/2008/tfg080609.html; Reducing Systemic Risk in a Dynamic Financial System June 9, 2008.
[Ref. 24] ibid
Jayaraman Rajah Iyer
email: jayar.ibcm@gmail.com
Twitter: @jayaribcm
Author of Inactivity Based Cost Management:
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