by Cenen Herrera
Writing from Martinez, San Francisco Bay Area
Granular representation or transparency is opening up the book of your life to others while due professional patience is maintaining your leading-edge professional composure in distressful situations. The purpose of such heroic acts is to provide readers of your life, i.e., your stakeholders, an opportunity to learn from your service experience. Service opportunities after all, are the overarching deliverables for professional auditors. One needs only to embrace the value of due professional patience and granular representation to filter out the best attributes that could make life developmentally meaningful and experience worthy.
Ms. Rosabeth Moss Kanter (Harvard Business School Professor and HBR Editor) once said that there are four Fs that underpin effective organizational management: (i) Focus, (ii) Flexibility, (iii) Fast, and (iv) Friendly. Later on in my governance experience, I learned about the fifth F which is Future Value. To be effective, governance must have a Future value to generate the advantage, i.e., economic, social, environmental or otherwise, in order to sustain a high level of developmental living.
"It is a wise father that knows his own child." - William Shakespeare, The Merchant of Venice, Act 2, Scene 2. Shakespeare's sentiment on parenthood is applicable to due professional patience and granular representation because it is also true to say: "It is a wise person who knows his stakeholders." The relationship between business performance and good governance will always be the subject of interest for professional researchers so long as the business person believes in discipline as an overriding form of developmental living.
Strategy & Stewardship Consultant in International Finance
Our Professional Mantra: Ethical Discipline, Theoretical Grounding, & Winning Values!
Friday, December 15, 2006
Friday, October 27, 2006
Governance and Development Living
by Cenen Herrera
Writing From Martinez, San Francisco Bay Area, CA
Rating is evaluating probabilities. Whenever there is greater than zero probability of losing something, we are faced with risks. In virtually all aspects of life, each of us has greater than zero probability of losing something. The question that arises then is: “what is that something?”
In an attempt to manage well our life's balance sheet, we go for higher risk activities expecting to derive some benefits in the future. Such benefits are the expected returns from the sacrifices or risk-taking activities that we engage in at present. Whether we like it or not, we are rated by our peers and the members of our community, i.e., our family, friends, bosses or subordinates, teachers, students, and practically all the stakeholders of our life. The rating that we get from our stakeholders is actually our shadow. Great, good or not so good, the shadow of our life could spell the difference between success and failure. The important thing to remember is that Best Behavior is Good Governance, and embracing the life-time developmental mode really means being genuinely humble in accepting our mistakes whenever we are engaged in challenging enhancement opportunities.
Development living is caring for others and leveraging from others strengths. Ratings indicate how we are doing in this life. If the rating comes from our loved ones, we would normally attribute them to our genes, i.e., our parents’ traits or character. On the other hand, if the rating comes from our boss, peer or subordinate, we would feel our worth or our worthlessness depending on what level of rating we receive. The good governance mindset continuously allows us to embrace genuine personal humility by possessing that fierce resolve to be professionally patient in transforming our behavioral patterns from mediocrity to first degree perfection.
First degree perfection is the ultimate goal of good governance. It is a state of mind that brings the best out of one’s character and actual works that underpin the driver of creative change.
Writing From Martinez, San Francisco Bay Area, CA
Rating is evaluating probabilities. Whenever there is greater than zero probability of losing something, we are faced with risks. In virtually all aspects of life, each of us has greater than zero probability of losing something. The question that arises then is: “what is that something?”
In an attempt to manage well our life's balance sheet, we go for higher risk activities expecting to derive some benefits in the future. Such benefits are the expected returns from the sacrifices or risk-taking activities that we engage in at present. Whether we like it or not, we are rated by our peers and the members of our community, i.e., our family, friends, bosses or subordinates, teachers, students, and practically all the stakeholders of our life. The rating that we get from our stakeholders is actually our shadow. Great, good or not so good, the shadow of our life could spell the difference between success and failure. The important thing to remember is that Best Behavior is Good Governance, and embracing the life-time developmental mode really means being genuinely humble in accepting our mistakes whenever we are engaged in challenging enhancement opportunities.
Development living is caring for others and leveraging from others strengths. Ratings indicate how we are doing in this life. If the rating comes from our loved ones, we would normally attribute them to our genes, i.e., our parents’ traits or character. On the other hand, if the rating comes from our boss, peer or subordinate, we would feel our worth or our worthlessness depending on what level of rating we receive. The good governance mindset continuously allows us to embrace genuine personal humility by possessing that fierce resolve to be professionally patient in transforming our behavioral patterns from mediocrity to first degree perfection.
First degree perfection is the ultimate goal of good governance. It is a state of mind that brings the best out of one’s character and actual works that underpin the driver of creative change.
Sunday, October 01, 2006
Is Compliance a Governance Issue?
by Cenen herrera
Writing from Martinez, San Francisco Bay Area
As a result of some uncontrolled deviations from good human behavior in the early part of this new millennium, Compliance has become an overarching objective of regulatory bodies in the banking industry. The regulatory alphabet soup provides a list of all the compliance rules that a national bank should adhere to in its operations. Some of the core principles that underpin most of these regulations focus on the following:
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(i)Consumer Protection – Banks are public institutions which have extensive dealings with people in the community where it is of service. Some banks may be serving several communities even though these communities are not located within their business office, i.e. electronic banking transactions. Thus, it is important that certain rules are adopted in order to protect public interest and to preserve the integrity of legitimate financial transactions.
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(ii)Bank Secrecy, Anti-Money Laundering and Security – In any fiduciary undertaking, security is of great interest. Building relationship is the primary business of any banking institution. That relationship is anchored on trust which provides the public a baseline confidence for enabling depositors and borrowers to carry out their business with the bank of their choice. A good society will always encourage the preservation of ethical transactions in its banking industry, meaning, it will prohibit banking transactions that arise out of illegitimate or illegal sources. Further, legitimate banking transactions should be afforded not only with top-of-the line security measures but treated with respect in terms of preserving the secrets of a prudent Bank client.
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(iii)Social Responsibility – In the Consumer Reinvestment Act, banks are provided guidelines on how to demonstrate the parental care that is expected from a responsible business partner in the community. Banks are social institutions that provide ample opportunities to the community it serves in terms of employment, housing and other developmental projects.
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At the end of the day, compliance is a governance issue. This implies that there must be some basic rules that players in a particular industry should observe to meet the expectations of a Good Society. Banks are generators of intermediary benefits and how they allocate the benefits that they generate from their operations is of great interest to its stakeholders.
Writing from Martinez, San Francisco Bay Area
As a result of some uncontrolled deviations from good human behavior in the early part of this new millennium, Compliance has become an overarching objective of regulatory bodies in the banking industry. The regulatory alphabet soup provides a list of all the compliance rules that a national bank should adhere to in its operations. Some of the core principles that underpin most of these regulations focus on the following:
.
(i)Consumer Protection – Banks are public institutions which have extensive dealings with people in the community where it is of service. Some banks may be serving several communities even though these communities are not located within their business office, i.e. electronic banking transactions. Thus, it is important that certain rules are adopted in order to protect public interest and to preserve the integrity of legitimate financial transactions.
.
(ii)Bank Secrecy, Anti-Money Laundering and Security – In any fiduciary undertaking, security is of great interest. Building relationship is the primary business of any banking institution. That relationship is anchored on trust which provides the public a baseline confidence for enabling depositors and borrowers to carry out their business with the bank of their choice. A good society will always encourage the preservation of ethical transactions in its banking industry, meaning, it will prohibit banking transactions that arise out of illegitimate or illegal sources. Further, legitimate banking transactions should be afforded not only with top-of-the line security measures but treated with respect in terms of preserving the secrets of a prudent Bank client.
.
(iii)Social Responsibility – In the Consumer Reinvestment Act, banks are provided guidelines on how to demonstrate the parental care that is expected from a responsible business partner in the community. Banks are social institutions that provide ample opportunities to the community it serves in terms of employment, housing and other developmental projects.
.
At the end of the day, compliance is a governance issue. This implies that there must be some basic rules that players in a particular industry should observe to meet the expectations of a Good Society. Banks are generators of intermediary benefits and how they allocate the benefits that they generate from their operations is of great interest to its stakeholders.
Tuesday, August 01, 2006
Why Organizational Governance is Important
by Cenen herrera
Writing from Martinez, San Francisco Bay Area, CA
Writing from Martinez, San Francisco Bay Area, CA
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Let me borrow the definition of the Institute of Internal Auditors in defining organizational governance (commonly known as corporate governance) as the policies, processes and structures used by organizations to control and monitor its activities, achieve its objectives, and protect the interest of its stakeholders in a manner consistent with appropriate ethical standards. Indeed, organizational governance has gone a long way since it was formally recognized as an important component of scientific management.
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In our doctoral class at De La Salle University, we debated much on how a third world country such as the Philippines could effectively adopt an organizational governance structure that could satisfy the needs of all stakeholders of a company given that family based organizations dominate the great majority of Philippine companies. There are two good reasons why organizational governance is difficult to apply in the Philippines. First, like other corporate rules of business, regulatory guidance on Philippine governance is a codified version of the US governance code, which has been developed to cater mostly on the needs of a country which has a different level of business maturity and exposure. Second, while the Philippine governance code is aligned with internationally accepted good governance principles, e.g. the Cadbury Report and Sarbanes Oxley Act, experience on good governance among business players in the international field is substantially varied. This means that institutional differences could arise merely as a result of cross-cultural upbringing.
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The question that arises at this point is whether organizational governance could be viewed as a principal - agent relationship that traditionally characterized the Anglo-American model or the Franco-German model of organizational governance, which focuses on the stakeholder approach. Existing literature cites these concepts as the Agency Theory, i.e., principal-agent relationship, or the Stewardship Theory, i.e., the stakeholder approach.
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We have learned from our management doctoral class under Dr. Benito Teehankee (DBA Director of De La Salle University) that agency theory is the Governance Champion's choice of organizational relationship in Corporate Philippines. We also learned from Dr. Ben's class about the intricacies that evolve over time when organizations embrace the principles of stakeholder theory, i.e., where each stakeholder plays a pivotal role in influencing the organizational structure of the entity.
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Chris Argyris once said that integrative thinking means that your theory in use, i.e., actual performance, should be aligned with your espoused values. Experience generated from actual performance should serve as the foundation for crafting policy directions that could help achieve one's vision in life. Against this backdrop, during our class with Bro. Rafe Donato, FSC at De La Salle, I came to know the true meaning of integrity, and that is "doing what is right." Integrity is an important component of Good Governance. The other three equally important components are possessing an independent mind, transparency and accountability. These governance attributes form the foundation of Good Moral Character, which is the only critical requirement for winning the championship anchor that most people call Luck.
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I was extremely privileged to be given a rare opportunity to renew my professional career in what Vincent Paele considers as the greatest country where one could live today, i.e., the United States of America. It is only now that I have come to realize the value of the third discipline, i.e., 1.) possessing an intense professional will; 2.) embracing extreme humility; and 3.) learning to balance the paradoxes of developmental living. Indeed, in Corporate America each staff is called upon to act as a true catalyst of change, i.e., one who appreciates diversity, one who provides equal service opportunity, and one who embraces the life-time learning mode.
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The Governance Champion in Corporate America is an assurance provider. An assurance provider creates strategic service opportunities that leads to transformational change, i.e., enhancements in the efficiency, effectiveness and economy of an organization's operations. The resulting paradigm is full compliance and continuous improvement.
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The greatest challenge to organizational governance is how to create synergy across physical boundaries. The resounding response from the Governance Champion is to create an inter-generational and inter-class society grounded not on the traditional income engine that characterizes the corporate world, but in producing comprehensive benefits that collective human efforts can deliver, i.e., benefit engine.
Tuesday, June 06, 2006
Promised Value or Expected Value
by Cenen Reyes Herrera
Writing from Martinez, San Francisco Bay Area
Which would you prefer: a promised value or an expected value?
There seems to be a contradicting premise on the values that both paradigms would suggest. When I read the proceedings on the review of FAS no. 7 on the use of present value accounting, two of the members of the Board issued dissenting views on the use of present value as a measure for estimating fair value.
What could be the main distinction between a promised value and an expected value?
A promised value refers to the nominal cash flows that are indicated in the contractual agreement. The main difficulty of this paradigm is that under the promised value concept, a $100 received today is the same as the $100 received at a future date after considering the implicit interest of the contract. On the other hand, the expected value concept presents the realistic view that future cash flows could vary in terms of amount and timing. The word "expected" connotes a probabilistic view that is aligned with the concept of risk. Risk represents an exposure to an adverse consequence. That adverse consequence, however, could happen anytime depending on a number of variables. The timing of payment and the actual amount of payment could be estimated using a number of porbabilistic models that are available in financial markets.
The main problem in the shift towards the present value accounting is on the impact on liabilities. FAS 7 indicates that diseenting views focused on the fact that it would appear that changes in the effective interest rates of liabilities could impact on equity and that in an environment of rising interest cost of borrowings, there would be a tendency to increase equity. This is something that could create some difficulties in financial reporting. My long years of experience in accounting also point to a need to clarify how the changes in present values of both assets and liabilities could be handled or treated in a transparent manner, i.e., should they be treated as an activity account or a resource account?
Writing from Martinez, San Francisco Bay Area
Which would you prefer: a promised value or an expected value?
There seems to be a contradicting premise on the values that both paradigms would suggest. When I read the proceedings on the review of FAS no. 7 on the use of present value accounting, two of the members of the Board issued dissenting views on the use of present value as a measure for estimating fair value.
What could be the main distinction between a promised value and an expected value?
A promised value refers to the nominal cash flows that are indicated in the contractual agreement. The main difficulty of this paradigm is that under the promised value concept, a $100 received today is the same as the $100 received at a future date after considering the implicit interest of the contract. On the other hand, the expected value concept presents the realistic view that future cash flows could vary in terms of amount and timing. The word "expected" connotes a probabilistic view that is aligned with the concept of risk. Risk represents an exposure to an adverse consequence. That adverse consequence, however, could happen anytime depending on a number of variables. The timing of payment and the actual amount of payment could be estimated using a number of porbabilistic models that are available in financial markets.
The main problem in the shift towards the present value accounting is on the impact on liabilities. FAS 7 indicates that diseenting views focused on the fact that it would appear that changes in the effective interest rates of liabilities could impact on equity and that in an environment of rising interest cost of borrowings, there would be a tendency to increase equity. This is something that could create some difficulties in financial reporting. My long years of experience in accounting also point to a need to clarify how the changes in present values of both assets and liabilities could be handled or treated in a transparent manner, i.e., should they be treated as an activity account or a resource account?
Monday, June 05, 2006
The Accounting Profession - Emerging Issues
by Cenen Herrera
Writing from Martinez, San Francisco Bay Area
Financial Accounting Concept No. 7
Accounting Measurement Using Cash Flow Information and Present Value
The FASB guideline finally recognizes the importance of the time-value of money in measuring assets or liabilities.
After reading the FASB guide, I am surprised at the length of time that the accounting professionals have come to realize the value of measuring the economic differences that result from changes in the amount and timing of expected cash flows.
Highlights:
OMDA - the use of observable marketplace-determined amount reflects the importance of measuring company assets or liabilities with a view towards integrating the market forces that influence a company's resources.
Expected versus Present Value Cash Flows - The distinction might not be quite clear to all accountants, but again the underlying principle is to recognize that whenever we speak of economic differences, it is not only the timing and the amount that matter, but we also need to consider the probabilistic nature of valuing company assets and liabilities.
3. Accounting Measurements could be classified into three (hccnp):
a. Historical Cost - The cost that is usually reflected in our invoice when we buy a certain asset.
b. Current Cost - The replacement cost of the asset.
c. Current Market Price - The price of the asset in the market today.
d. Net realizable value - The amount that would remain after deducting all selling expenses.
e. Present Value - Expected cash flows discounted at the risk-free interest rate.
The guideline offers a framework for financial accounting and reporting assets and liabilities in the financial statements.
The conceptual framework is expected to lead to consistent standards and that prescribes the nature, function and limits of financial accounting and reporting.
Financial accounting concepts are necessary in (EIA) establishing, interpreting, and applying accounting and reporting standards.
Fair value as defined in this conceptual framework is the amount at which an asset or liability could be bought or sold between willing parties (I find the definition quite simple compare to many definitions elsewhere in the FASB pronouncements).
Fresh-Start Measurement - Pertains to subsequent periods.
It is quite explicit in the guideline that it does not cover recognition principles (while it might be directly related to measurement issues). Further, it says that recognition is the process of formally recording or incorporating an item into the financial statemetns as an asset, liability, revenue or expense.
The conclusions reached in this Statement apply only to measurements at initiail recognition, fres-start-measurements, and amortization techniques based on future cash flows (para 15).
Present value should attempt to capture teh elements that taken together could comprise a market price.
The objective of the present value is to capture the economic difference between sets fo future cash flows.
Present value must represent some observable measurement atttribute of assets or liabilities.
Present value formula is a tool used to incorporate the time value of money in a measurement.
Present value helps to distinguish between unlike items that might otherwise appear similar.
If there is no observable market price, use estimates of future cash flows in measuring assts or liabilities.
3 Objectives of Financial Statements:
a. Usefulness
b. Assesses amounts, timing and uncertainty of cash flows
c. Resource Information
Marketplace is the final arbiter of asset & liability values.
Conclusion: Expected Cash Flow Approach is a more effective measurement than the traditional approach because of the computational limitations of the traditional approach. The expected cash flow approach offers computational transparency which makes the measurement issue clear to users of Financial statements. It further argues that developing cash flow scenarios is critical for present value applications.
I find this financial accounting concept paper of FASB to be reader-friendly despite its very technical subject matter. The subject has become a point of contention between accountants and economists, and I have come across several instances where such differences could lead to a clarification note by the external auditor. The guideline certainly helped in threshing out any differences that long existed in measuring the financial resources of an organization.
5 June 2006 USA
Writing from Martinez, San Francisco Bay Area
Financial Accounting Concept No. 7
Accounting Measurement Using Cash Flow Information and Present Value
The FASB guideline finally recognizes the importance of the time-value of money in measuring assets or liabilities.
After reading the FASB guide, I am surprised at the length of time that the accounting professionals have come to realize the value of measuring the economic differences that result from changes in the amount and timing of expected cash flows.
Highlights:
OMDA - the use of observable marketplace-determined amount reflects the importance of measuring company assets or liabilities with a view towards integrating the market forces that influence a company's resources.
Expected versus Present Value Cash Flows - The distinction might not be quite clear to all accountants, but again the underlying principle is to recognize that whenever we speak of economic differences, it is not only the timing and the amount that matter, but we also need to consider the probabilistic nature of valuing company assets and liabilities.
3. Accounting Measurements could be classified into three (hccnp):
a. Historical Cost - The cost that is usually reflected in our invoice when we buy a certain asset.
b. Current Cost - The replacement cost of the asset.
c. Current Market Price - The price of the asset in the market today.
d. Net realizable value - The amount that would remain after deducting all selling expenses.
e. Present Value - Expected cash flows discounted at the risk-free interest rate.
The guideline offers a framework for financial accounting and reporting assets and liabilities in the financial statements.
The conceptual framework is expected to lead to consistent standards and that prescribes the nature, function and limits of financial accounting and reporting.
Financial accounting concepts are necessary in (EIA) establishing, interpreting, and applying accounting and reporting standards.
Fair value as defined in this conceptual framework is the amount at which an asset or liability could be bought or sold between willing parties (I find the definition quite simple compare to many definitions elsewhere in the FASB pronouncements).
Fresh-Start Measurement - Pertains to subsequent periods.
It is quite explicit in the guideline that it does not cover recognition principles (while it might be directly related to measurement issues). Further, it says that recognition is the process of formally recording or incorporating an item into the financial statemetns as an asset, liability, revenue or expense.
The conclusions reached in this Statement apply only to measurements at initiail recognition, fres-start-measurements, and amortization techniques based on future cash flows (para 15).
Present value should attempt to capture teh elements that taken together could comprise a market price.
The objective of the present value is to capture the economic difference between sets fo future cash flows.
Present value must represent some observable measurement atttribute of assets or liabilities.
Present value formula is a tool used to incorporate the time value of money in a measurement.
Present value helps to distinguish between unlike items that might otherwise appear similar.
If there is no observable market price, use estimates of future cash flows in measuring assts or liabilities.
3 Objectives of Financial Statements:
a. Usefulness
b. Assesses amounts, timing and uncertainty of cash flows
c. Resource Information
Marketplace is the final arbiter of asset & liability values.
Conclusion: Expected Cash Flow Approach is a more effective measurement than the traditional approach because of the computational limitations of the traditional approach. The expected cash flow approach offers computational transparency which makes the measurement issue clear to users of Financial statements. It further argues that developing cash flow scenarios is critical for present value applications.
I find this financial accounting concept paper of FASB to be reader-friendly despite its very technical subject matter. The subject has become a point of contention between accountants and economists, and I have come across several instances where such differences could lead to a clarification note by the external auditor. The guideline certainly helped in threshing out any differences that long existed in measuring the financial resources of an organization.
5 June 2006 USA
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