Raymond N. Johnson, CPA Key Issues u Crisis of Confidence in the Professions u Reflection-in-Action

Raymond N. Johnson, CPARaymond N. Johnson, CPA

Key IssuesKey Issues

Crisis of Confidence in the ProfessionsCrisis of Confidence in the Professions Reflection-in-ActionReflection-in-Action


Crisis of Confidence Crisis of Confidence in the Professionsin the Professions

Challenger AccidentChallenger Accident Litigation in the Medical Profession and Litigation in the Medical Profession and

Public AccountingPublic Accounting Fraudulent Financial StatementsFraudulent Financial Statements

» The derivative crisis in Orange CountyThe derivative crisis in Orange County» ZZZ BestZZZ Best


Public ExpectationsPublic Expectations

Technical Rationality & PositivistsTechnical Rationality & Positivists


Public ExpectationsPublic Expectations

Technical Rationality & PositivistsTechnical Rationality & Positivists Positivist thought: The world can be Positivist thought: The world can be

explained with the exactness of science.explained with the exactness of science. The precision of Newtonian Physics can The precision of Newtonian Physics can

be attained in all matters if we obtain be attained in all matters if we obtain sufficient knowledge.sufficient knowledge.


How precise are How precise are financial statements?financial statements?


How precise are How precise are financial statements?financial statements?

CashCash Accounts PayableAccounts Payable Accounts ReceivableAccounts Receivable Allowance for Doubtful AccountsAllowance for Doubtful Accounts InventoryInventory Fixed AssetsFixed Assets Warranty ExpenseWarranty Expense


SchonSchon

High Ground: Precise but relatively unimportant problems.

Low Ground: Swampy, messy, problems of important human concern.

Complex, unstable, uncertain


What is Knowing-In-What is Knowing-In-Action?Action?


What is Knowing-In-What is Knowing-In-Action?Action?

Knowledge is revealed through actionKnowledge is revealed through action ExamplesExamples

» Response to trial balance that doesn’t balance.Response to trial balance that doesn’t balance.» Preparation of statement of cash flowsPreparation of statement of cash flows» Instant analysis: current liabilities exceed Instant analysis: current liabilities exceed

current assetscurrent assets» Instant analysis: Heavy proportion of fixed Instant analysis: Heavy proportion of fixed

assets on balance sheet => capital intensive assets on balance sheet => capital intensive company.company.

Characterized by expected responsesCharacterized by expected responses


What is Reflection - in - What is Reflection - in - Action?Action?


What is Reflection - in - What is Reflection - in - Action?Action?

Characterized by ends that are unstable.Characterized by ends that are unstable. ““Managing Messes”: AckoffManaging Messes”: Ackoff ““professional practitioners often think professional practitioners often think

about what they are doing, sometimes about what they are doing, sometimes even while they are doing it. ... What even while they are doing it. ... What features do I notice when I recognize this features do I notice when I recognize this thing? What are the criteria by which I thing? What are the criteria by which I make this judgment?” make this judgment?”


Reflection - in - ActionReflection - in - Action

Level ISubject Matter of Accounting




Level II

Thinking, about your thinking, while you are thinking,

to improve your thinking




Level II

What features do I notice when I recognizethis thing?

How am I framing the problem that I am trying to solve?


Reflection-in-actionReflection-in-action

There is a situation of action to which we There is a situation of action to which we bring spontaneous, routinized responses.bring spontaneous, routinized responses.» Preparing journal entries, preparing financial Preparing journal entries, preparing financial

statements, analyzing financial statementsstatements, analyzing financial statements

Routine responses produce a surpriseRoutine responses produce a surprise» Book value of asset is negativeBook value of asset is negative» Why is working capital so high?Why is working capital so high?» Why is return on assets greater than return on Why is return on assets greater than return on

equity?equity?


Reflection-in-actionReflection-in-action Surprise leads to reflection within an Surprise leads to reflection within an

action-present.action-present.» Review journal entriesReview journal entries» Review general ledger activityReview general ledger activity» Pull apart calculations: sub-analysisPull apart calculations: sub-analysis

Question underlying assumption:Question underlying assumption:» Cash flow forecast yields unexpected Cash flow forecast yields unexpected

projected negative cashprojected negative cash


Reflection-in-actionReflection-in-action

Reflection gives rise to on-the-spot Reflection gives rise to on-the-spot experiment.experiment.» What if these were the numbers?What if these were the numbers?

» If a company pays a current liability on If a company pays a current liability on 12/31/96, what is the effect on working capital 12/31/96, what is the effect on working capital and on the current ratio?and on the current ratio?


SchonSchon





Schon & JohnsonSchon & Johnson


Economic SubstanceMeasurementDisclosureAnalysis




Business / Accounting CycleBusiness / Accounting Cycle

Resources

Goals and Investing

Deploy Resources



Resources

Goals and Investing

Deploy Resources

KeyProcesses

Outcomes•Profitability

•Growth

Markets

Customers



Cash Flow

Resources

Goals and Investing

Deploy Resources

KeyProcesses Accrual

to CashOutcomes•Profitability

•Growth

Markets

Customers



Cash Flow

ResourcesResource

Developmentand Value

Goals and Investing

Deploy Resources



•Growth

Liquidity, Solvency

Markets

Customers


Financial FootprintsFinancial Footprints

An example of a messy problem

How do you practice “reflection - in - action?”



What features do I notice when I recognize this thing?



CasesCases

First Draft when DueFirst Draft when Due Turn in both original and rewrite at the next Turn in both original and rewrite at the next

classclass» Rewrite may just address the items you missed.Rewrite may just address the items you missed.

For material that was incorrect in the first draftFor material that was incorrect in the first draft» Clearly articulate “best” solutionClearly articulate “best” solution» Clearly articulate the logic behind the “best” solutionClearly articulate the logic behind the “best” solution» Discuss what you learned by correcting the first draft Discuss what you learned by correcting the first draft

(knowledge and learning process)(knowledge and learning process)



InventoryInventory Without InventoryWithout Inventory



With InventoryWith Inventory PharmaceuticalPharmaceutical OilOil BreweryBrewery Supermarket ChainSupermarket Chain Department StoreDepartment Store Home BuilderHome Builder Japanese Trading Co.Japanese Trading Co.

Without InventoryWithout Inventory InsuranceInsurance AirlineAirline Money Center BankMoney Center Bank Hotel / CasinoHotel / Casino Fast Food FranchisingFast Food Franchising Advertising AgencyAdvertising Agency



With InventoryWith Inventory PharmaceuticalPharmaceutical OilOil BreweryBrewery Supermarket ChainSupermarket Chain Department StoreDepartment Store Home BuilderHome Builder Japanese Trading Co.Japanese Trading Co.

Higher Profitability

Lower Asset Turnover

Lower ProfitabilityHigher Asset Turnover



With InventoryWith Inventory OilOil BreweryBrewery Department StoreDepartment Store Home BuilderHome Builder Japanese Trading Co.Japanese Trading Co.

Higher Profitability

Lower Asset Turnover

Lower ProfitabilityHigher Asset Turnover

Pharmaceutical

Supermarket Chain




Which two companiesare the most fixed asset

intensive?




Which two companiesare the most fixed asset

intensive?

Which company has the highest inventory turnover?



With InventoryWith Inventory Department StoreDepartment Store Home BuilderHome Builder Japanese Trading Co.Japanese Trading Co.



With InventoryWith Inventory Department StoreDepartment Store Home BuilderHome Builder Japanese Trading Co.Japanese Trading Co.







What Assets / Capital is What Assets / Capital is

needed to deliver service?needed to deliver service? InvestmentsInvestments Fixed Asset IntensiveFixed Asset Intensive Current Liabilities / Rec.Current Liabilities / Rec. Fixed Asset IntensiveFixed Asset Intensive Fixed Asset IntensiveFixed Asset Intensive Human Resource IntensiveHuman Resource Intensive



Without InventoryWithout Inventory InsuranceInsurance Money Center BankMoney Center Bank

Advertising AgencyAdvertising Agency


needed to deliver service?needed to deliver service? InvestmentsInvestments

Current Liabilities / Rec.Current Liabilities / Rec.

Human Resource IntensiveHuman Resource Intensive



Without InventoryWithout Inventory

AirlineAirline

Hotel / CasinoHotel / Casino Fast Food FranchisingFast Food Franchising


needed to deliver service?needed to deliver service?

Fixed Asset IntensiveFixed Asset Intensive

Fixed Asset IntensiveFixed Asset Intensive Fixed Asset IntensiveFixed Asset Intensive

Rank Order In Terms of Profitability



Resources

Goals and Investing

Deploy Resources



Resources

Goals and Investing

Deploy Resources

KeyProcesses

Outcomes•Profitability

•Growth

Markets

Customers



Cash Flow

Resources

Goals and Investing

Deploy Resources



•Growth

Markets

Customers



Cash Flow

ResourcesResource

Developmentand Value

Goals and Investing

Deploy Resources



•Growth

Liquidity, Solvency

Markets

Customers



What features do I notice when I recognize this thing?


Documents

Raymond N. Johnson, CPA Key Issues u Crisis of Confidence in the Professions u Reflection-in-Action