As revealed in IMA sponsored surveys over the past two decades, organizations continue to use invalid cost models to develop the cost information their managers use to support decision making despite the fact that these organizations’ financial executives know that information is inaccurate. So why don’t these financial executives step in and correct those models? Could it be they’re practicing “willful ignorance?”
Willful ignorance is the state and practice of ignoring any sensory input that appears to contradict one’s inner model of reality. It’s one of three types of ignorance as categorized by psychologists: ordinary ignorance, willful ignorance and higher ignorance. Ordinary ignorance means that somebody doesn’t know something. There’s nothing wrong with that; we all don’t know a lot more stuff than we do know. Higher ignorance is an appreciation for the type of knowledge that is hard to achieve – a kind of reverence for the unknown or unknowable. It recognizes that, no matter how much one knows about something, there are still more details that one does not know. There is nothing wrong with that either – at least I hope not. I’ve been working in the managerial costing arena for over four decades and I still learn something new almost every day.
Willful ignorance, on the other hand, has a very negative connotation. Consider the way it is rather bluntly defined in the Urban Dictionary. It defines willful ignorance as, “The practice or act of intentional and blatant avoidance, disregard or disagreement with facts, empirical evidence and well-founded arguments because they oppose or contradict your own existing personal beliefs.” It goes on to say that “Many times it is practiced due to laziness--people not wanting to have to do the work to rethink their opinions, the fear of the unknown, the fear of being wrong, or sometimes simply close-mindedness.”
The following are four of the most frequent excuses I get from financial executives for their failure to correct cost information that is known to be inaccurate together with my brief responses to those excuses:
“Our management is happy with our current practices and haven’t directed us to change.” Isn’t it the responsibility of a ship’s navigator to inform the Captain when he discovers that his navigational tools are miscalibrated? Or does he wait until the Captain runs the ship onto a reef?
“Changing our cost accounting system would be a major undertaking involving hundreds of man-hours and thousands of dollars in software costs.” The purpose of a company’s cost accounting system is not to support management decisions; it’s to facilitate financial reporting under GAAP. You don’t need to change your cost accounting system to develop accurate and relevant decision support information.
“If we’re the only ones in our industry to adopt more accurate and relevant managerial costing practices, we might quote higher prices on some of our products and lose the business to competitors.” This remark is so inane that it requires no response.
“We’re profitable, so why does it matter?” So as long as you earn a profit, it doesn’t matter if you failed to maximize the profits that were available to your organization?
It’s been over thirty-five years since the alarm bells went off warning of the way traditional costing undermines profitability. Every financial executive that hasn’t been hiding under a rock since 1985 should know of the problem. Could their inaction actually be the result of willful ignorance? What do you think?
Bravo Doug! A very insightful observation. I've recently read a lot of studies by major accounting firms and major accounting associations about the finance professional of the future needing to be more analytical in regard to the totality of business, create better/actionable business insights, and become a more valuable business partner.
What is not often observed is that these studies tend to survey only financial professionals about the performance of finance professionals, not our customers within the organization. Even with accountants surveying accountants, our evaluation of ourselves as "meeting the needs of our internal customers for business insight" seldom gets above 60%. Imagine what our score might be from those internal customers????
The knowledge exists to do much better. Does the profession have the will to adopt a different perspective?
This is a great post Doug, I was ignorant (ouch!) of all these types of ignorance before reading this! Seriously, I think the corollary question is why such extensive willful ignorance persists. Research by IMA and others on the evolution of the finance function point to its expanding "remit" - it is still responsible for traditional external reporting, oversight, etc. functions but now also involved in areas such as risk management and strategy formulation. Key to getting adoption of better managerial costing practices is being able to build the business case for doing so in the face of competing priorities. Better managerial costing practices, combined with the principles of revenue management, i.e., profitability analytics, has tremendous potential for enhancing organizational profitability. Once managers understand that their "ignorance" may disappear! ,