Letters

Financial Management, Oct 2003

Financial Management, 26 Chapter Street, London SW1P 4NP; financialmanagement@cimaglobal.com

Hospitality bent

The article "Hotels plan sector-wide ABC model" (September) was interesting. Decision-makers need to appreciate that traditional standard accounting systems are of limited use for decision-making, because they do not factor in customer-driven costs. This ability is crucial for any system that measures, analyses, monitors and manages customer profitability.

Customers are diverse, with different resource-consumption habits. These must be recognised to determine their contribution to the company's margins. One key element of an effective commercial strategy is to identify profit- and loss-makers in a client portfolio. It may shock decision-makers to realise that high turnover does not necessarily affect the bottom line. Small customers may subsidise the giants, since they have weaker bargaining power for discounts and demandfewer resources. Unless such dynamics are systematically measured, they remain unknown and cannot be managed.

The costs of introducing such a model are high, but the benefits cannot be underestimated. In the competitive hospitality industry, margins can be improved by managing customers' resource consumption. The ABC data can then be used to determine discounting strategies to suit the client's demand patterns. This minimises the impact of repeated price adjustments. I would like to know the outcome of this project and whether there is ABC software available for this industry.

Link Jongwe ACMA

Johannesburg, South Africa

The cheques for the posts

"Spent forces" (September) argues that shareholders have become "willing to do something" about excessive payments to failed directors. I fear that this is complacent. There have been a few outcries against outrageous abuses, and many more are not challenged because of the wide belief that this is the way of the world.

Here are some of the excuses:

* The number of two-year contracts has reduced, and most firms now recruit directors on one-year contracts. But, if the director is not made responsible for doing the job satisfactorily, the company may have to pay a year's wages to a failure. Such one-sided contracts are irresponsible and stupid.

* CEOs need to take risks to maximise their firm's value. But, if they are not prepared to do what the job requires, they shouldn't take it on. It's also claimed that they have little job security. The average tenure of a CEO of a FTSE-100 company is actually four years. This may not be long enough to complete a turnaround, but it isn't short either. Most people have little job security and no massive payoff.

* There aren't enough good senior executives, so they must be well rewarded. Not all CEOs are motivated solely by money and not all want to emigrate to the US. It is easy to survive on L600,000 a year.

* You pay for what you get. Too many companies are paying for what they don't get. Directors who do a top job should be well paid. For 20 times the national average pay you should be able to find exceptional people.

The benefits of good management are sustained profits and increased shareholder value. It is easy enough to manage short-term earnings. I believe in rewarding real success with shares or share options, but super rewards should be for sustained improvements. It should not be possible to sell the shares within, say, 12 months. If a director leaves before the end of his contract, or does not give the contractual notice, he should be paid his basic salary with normal deductions for tax, pension, national insurance etc each month, in return for asigned declaration that he has not done other paid work in that month. This should continue until the next meeting of shareholders, who could be asked to ratify the agreement.

Of course, these changes will not be introduced - there are far too many influential people who do well at the shareholders' expense.

RS Fraser FCMA

Wilmslow, Cheshire

Material whirl

I recently attended an accounting hygiene course - a new form of evangelism that involves revising basic accounting principles to re-emphasise good practice. There was a section on the relevant Gaap rules, updated to include emerging issues, but the hottest topic, of course, was fraud and ethical behaviour. It was followed by the obligatory encouragement to act with professionalism.

The aim was to ensure that we were fully aware of our responsibilities over financial integrity. Integrity used to be a given in accountancy; now we need a certificate to prove we still have it. It used to be that when reviewing the ledgers you could rely on materiality. Not any more. If there's an error, the process isn't working. This could lead to other processes not working. This will lead to financial misstatement of the accounts. This cannot be allowed.

Of course, it would be good to have the time, money and resources to fix all these issues. Materiality allows scope to make do and focus on more pressing matters, such as profitability. One definition of materiality is that if information is of such magnitude that it has no influence on the user's judgment and decision-making over a set of accounts, it can be left out of the figures. But what level of magnitude? How can we get the right material level? Simple: set a materiality level of zero. Is this where accounting scandals will lead us in the future?