PACE Causality Poll - Results and Analysis

Causality plays a critical role in creating models to understand the costs and profitability of an organization; however, causality is not widely taught in accounting education. To collect some insight into the current application of causality in practice, the Profitability Analytics Center of Excellence created an on-line poll. Here is the question and the results:

What role does causality (cause-and-effect) play in your organization's financial modeling?

A. None (10%)

B. We inject causal modeling in our special studies and analyses (41%)

C. We build in causality where it does not conflict with accounting standards (14%)

D. We try to ensure our projections and distributions reflect causal factors (34%)

The results indicate 75% of the respondents use causality for decision making information. This shows a wide awareness of the importance of causal information in practice. I really wish we had asked how many organizations have a separate causal monetary model to support internal decision making. While it is good to review information for causal clarity and make adjustments to improve the quality of information, this “review” is subjective based on the skill and knowledge of the reviewer. The lack of an established organizational causal decision support system also places the reviewer on the “hot seat” as the defender of the application of causality, and it pits his or her judgement against the judgement of a senior decision maker. This can be a difficult position since more than logic is often in play.

The response to answers A and C is very concerning, 24% either don’t use causality at all or place it well below accounting standards in terms of importance for information and analytics. I hope these respondents only work in financial reporting and have no role in general business analytics or advice. It would be like having a business partner with no “common sense”.

Understanding and applying causal relationships is critical to logical, scientific thinking and obtaining a deep understanding of anything you observe and wish to influence or change. Cause and effect in business is fundamentally operational; based on resources, processes, and how they interact to meet customer demands. Money follows changes in resources, processes, or sales; and must be viewed and analyzed causally to create powerful and persuasive internal decision support information, not just through the lens of external financial reporting standards. The Profitability Analytics Framework brings causality and internal decision support into the forefront of decision-making and analysis – where it belongs!