What Should an Aqueduct, Space Telescope, and CFOs Have in Common?

Why can’t most CFOs and their accountants design methods and tools the way engineers have in the past decades and even centuries? Let’s look at two examples.

Aqueducts

The first aqueducts were built in around 700 BCE in Egypt and India for irrigation of agriculture. The first Roman aqueduct, the Aqua Appia, was built in 312 BC. It delivered spring water 10 miles into the city of Rome. You recognize them as like a roadbed on a series of arches.

As the Roman Empire expanded aqueducts brought water from outside sources into cities and towns. Aqueducts supplied water to public baths, fountains, private households, gardens, and farms.

Aqueducts moved water through gravity alone along a slight downward gradient slope. The steeper the slope, the faster the water flow and vice versa.

The engineers who constructed them had amazing mathematical skills. For example, as the water flow reached its destination, they would heighten the slope at the just right angles to prevent a gushing wave of water at the destination. What a mastery to control what nature provides us – water.

Space Telescopes

We all marvel at the pictures produced by the Hubble Space Telescope. It was launched into a low Earth orbit in 1990 to escape the atmospheric distortion with ground-based telescopes caused by air that limited the view of stars from blurred light.

The Hubble had several tools to view the different wavelengths of light. Examples of light wavelengths are infrared, ultraviolet, gamma rays, and X-rays in addition to the wavelengths we see with our eyes and with earth grounded telescopes.

Then in 2021 the James Webb Space Telescope was launched. Like a next version of an iPhone it had more power and features than the Hubble.

But now we have the latest – The Nancy Grace Roman Telescope named for a pioneering American astronomer. She is known as the “Mother of Hubble” for her vital role in planning and securing funding for the Hubble Space Telescope. 

This instrument is designed to study dark energy, dark matter, and exoplanets and answer other questions of astrophysics and cosmology including the origins of the Big Bang. Its primary instrument is the Wide Field Instrument that is a camera that can capture a range of light spectra. It can survey regions of the sky over 1,000 times faster than the Hubble with same resolution performance and in never-before-seen detail. Included with these tools is the High-Latitude-Time-Domain Survey. It will increase tenfold the catalog of observations like supernovae when stars explode. 

Inferences and Deductions

OK. Probably more than you needed to know. My point is that engineers can be amazing with what they design for the betterment of people and learning. I will spare you writing more about engineering advances in medicine, drugs, and healthcare. (I have had a hip replacement and can now walk without pain.)

Now What About Most CFOs and Accountants?

I have often said most CFOs and accountants are in the 1980s. They are reluctant to adopt progressive management accounting methods such as activity-based costing (ABC) and other enterprise and corporate performance management (EPM/CPM) methods (e.g., driver-based budgeting and rolling financial forecasts; strategy management with a Balanced Scorecard with its KPIs.

My message here is that an organization’s executives and line managers (e.g., sales, marketing, operations, supply chain) deserve much better financial information from their CFO and accountants. The accountants typically provide flawed and misleading management accounting information. The accountants are underserving their managers. It is borderline irresponsible.

For example, many CFOs and accountants take the convenient route when allocating indirect expenses (commonly called “overhead”) to calculate product or standard service-lines costs. They allocate expenses (e.g., salaries, purchases) into costs like “spreading butter across bread”. They use broadly averaged cost allocation factors that violate costing’s universal “causality principle”. Examples of these cost allocation factors are sales volume, number of employees, square feet, or number of direct labor input hours. There is no cause-and-effect relationship! The result is their calculated costs are substantially inaccurate compared to reality. Yes, the expenses do reconcile exactly for compliance with the external financial accounting for government regulatory agencies, but they are wrong with the parts. Activity-based costing [ABC] resolves this problem for the internal management accounting

This problem begins with the imbalance of emphasis of external statutory and compliance financial reporting for government regulatory agencies (e.g., the USA’s SEC) dominating over internal management accounting. The purpose of the former is for “valuation” (e.g., inventories, cost of goods sold) whereas the latter’s purpose is for “creating financial value” for shareholders and owners by providing insights for making better decisions. Most CFOs and accountants place their emphasis on the former rather than the latter.

What Should Aqueducts, Space Telescopes, and CFOs Have in Common?

This subheading above is the title of my article. Note I did not title it “What Do” they have in common but “What Should” they have in common. “Should” versus “Do”.

I am in awe of the creativity, ingenuity, and skills of engineers. In 300 BC the Romans achieving the correct slope of a several miles long water aqueduct to arrive at the destination with the perfect speed. The engineers with NASA and their contractors (e.g., Boeing, Lockheed Martin) building space telescopes that can “see” light years into the past.

Barriers and Obstacles

So, what is holding most CFOs and their accountants back from progressive performance improvement methods? What are the barriers and obstacles?

A major barrier is human behavior’s natural resistance to change. Most people like the status quo – the current state. Don’t rock my boat. Another barrier is the belief that the benefits from applying progressive management accounting will not exceed the extra administrative effort to calculate the costs. That is, it is just not worth the trouble. Sadly, this barrier is due to the misunderstanding and misperception by most CFOs and accountants that applying progressive management accounting methods is too complex and complicated. It is not. (To learn why it is not that complex, do an internet search for the term “rapid prototyping implementation for activity-based costing”. ABC can be implemented in three weeks, not many months, with 95+% accuracy compared to often 50% accuracy from the traditional “butter spreading” cost allocation method.

What is My Concluding Message?

My concluding message is this to accountants: "Think like an engineer.” (Full disclosure … I have a 1971 BSc in Industrial Engineering. But I did initially serve as a financial Controller followed by 4 decades as a consultant in the CFO domain.)

The role of CFOs and their accountants is to “grow the beans and not just count the beans”.