A parable of materiality: the Peter Principle in the controller’s department

Citation

Murtuza, A. (2014), "A parable of materiality: the Peter Principle in the controller’s department", Accounting, Auditing & Accountability Journal, Vol. 27 No. 1. https://doi.org/10.1108/AAAJ-06-2013-1391

A parable of materiality: the Peter Principle in the controller’s department

Article Type: Literature and insights From: Accounting, Auditing & Accountability Journal, Volume 27, Issue 1

Project objectives

In the 1980s, Mr Benjamin Smith was the assistant controller at Northwest Illumination, a firm with over 300 employees and a monthly production budget of several million dollars. It made light fixtures in the Northwest US. Mr Smith was known for his care and attention to details, no matter how minute, since his days as a bookkeeper. Over the years he rose through the ranks to become the assistant controller. Even after that, Mr Smith was unable to give up his diligent approach. This report explores why, nonetheless, there was a shortage of Scotch tape at the recent inventory.

The supply of Scotch tape ran out within 24 hours after the inventory had started, though by Smith’s calculations it should have sufficed the entire duration of inventory. Smith, as he acknowledged, had arrived at the quantity needed after elaborate experimentations, careful calculation, and considerable investment of time, energy, and effort. What is worse, the tremendous effort invested by him to maximize savings in fact led to the more expensive filament tape being used for most of the duration of the inventory. That tape cost several times the amount of Scotch or masking tape.

Mr Smith had determined 4 inches of tape per inventory ticket as being necessary. Then he estimated the number of tickets necessary, multiplied that by the total number of tickets needed, and then divided the total inches of tape by the inches per spool of Scotch tape. Based on these calculations, Mr Smith personally ordered the supply, and yet it had proved highly insufficient.

The resulting shortfall in the supply of tape led Mr Smith as assistant controller to ask the author to undertake this project. The author, who had been hired to help move the firm’s cost system from manual calculators to IBM computer, wrote the report during the last hours of his 11 months of employment by the firm. He was then let go.

Method of observation used for the project

In order to carry out the project assigned by Mr Smith, inventory tickets were observed during the trips to the floor during and after the inventory. Based on these observations, the conclusions presented in this report were reached.

Conclusions

• Based on the sample of inventory tickets observed, it appeared that in almost all cases more than four inches of tape were used to attach the ticket. Whether this alone could have caused the shortfall cannot be established on the basis of available evidence.

• Some of the tape may have been diverted to other uses; it is said that Scotch proves highly useful while wrapping gifts. Inventory was taken rather close to Christmas, when it is alleged that a great amount of gift-wrapping is undertaken. To prevent such diversified uses of Scotch tape, Mr Smith may want to use numbered and especially marked tape or even tape that will self-destruct when used for purposes other than intended.

• It is quite possible, notwithstanding the care and diligence of Mr Smith to forecast and estimate the amount of tape needed, that the 4 inches of tape allowed by him was not enough to support the weight of the inventory tickets.

• It is suggested that further experiments be carried out – by Mr Smith himself or his designated representatives – to determine how much tape is needed to support the weight of the inventory tickets under differing environmental, atmospheric, and climatic conditions (if possible, both indoor and outdoor). Given what is at stake, further research is warranted.

• It is possible that the inventory crews did not know how long four inches is, which fact led to their using more than four inches. Even when the crews knew how long four inches were, they were not exercising fiduciary care and due diligence to insure that the right amount per Mr Smith’s calculation was used.

• One cannot rule out the possibility that not having some form of device with which to measure four inches as called for by Mr Smith, the crews ended up using more than what Mr Smith considered necessary, hence proving his estimate to be in error.

Recommendations

A number of steps can be taken to insure that the tape estimated, calculated, and ordered by Mr Smith does prove adequate and that in the future we do not have the problem. It is understood that a somewhat similar problem occurred last year when Mr Smith, to save cost, ordered check blanks without carbon copies included. As a result, he had the secretary spend a good part of her working day making photocopies of the checks written by Northwest Illumination in order to have adequate back up. However, the question of checks does not concern us here. That, as well known writer Rudyard Kipling would have said, is “another story” [in the context of what Kipling also described as life liberty and happiness of pursuit].

Because of the conclusions reached above, a few steps have already been suggested, such as: using numbered and marked tape; using tape which will self-destruct when used in contexts other than inventory; doing further experiments to find out how much tape is in fact needed to hold the inventory ticket in place.

The aforementioned steps are in addition to those being recommended below. The implementation of these recommended steps is bound to have a very beneficial impact on the company’s cash flow, profit potential, and stock price. It is of utmost import that they be carried out:

• The efficient and optimum use of Scotch tape requires that someone be appointed as the chief tape inspector and that he/she be provided with enough de facto and de jure authority so that she/he can carry out his/her assigned duties and responsibilities, and that he/she can do so in a diligent manner.

• He/she should also be given sufficient full-time and part-time staff to insure that he/she has sufficient assistants. The complete scope of the project will be beyond the capacity of chief tape inspector single-handed.

• The chief tape inspector and his staff of diligent, foresighted, free of moral hazards, and intelligent assistants will estimate the tape needed for each inventory.

• They could also monitor the tape used during the inventory itself and, as needed, carry out follow up studies, such as this one.

• Obviously the chief tape inspector and his/her staff of assistants should have adequate and sufficient systems and data processing support available, involving both the hardware and software.

• The tape inspector would see to it that the tape is not wasted, pilfered, mutilated, or in any other way whatsoever misused.

• The tape inspector would also write procedures and policies affecting Scotch tape use.

• It is quite conceivable that the chief tape inspector and his assistants would come to be known as tapeworms. However, such derision would only be temporary, and would not occur once the chief tape inspector and his/her staff have demonstrated their usefulness and value insofar as the profit potential and cash flow is considered. In fact, they are likely to win the admiration, respect, and gratitude of their co-workers for their loyalty and efficiency-related relevance.

• Given Mr Smith’s great and abiding interest, experience, and expertise as regards Scotch tape, he would be the most natural, likely, suitable, and obvious candidate for the job of chief tape inspector. In fact, one would hope that he would volunteer for the demanding and crucial position, even going so far as to give up his current position. Surely the importance of chief tape inspector, not to mention the accompanying prestige, outweighs any other task Mr Smith may be capable of and is performing.

His appointment as the chief tape inspector would insure that the goals associated with the job are reached.

Among the steps that Mr Smith as the chief tape inspector for life could take would include holding training sessions before, during and after each inventory. These training sessions would be used to teach the inventory crews, by force if needed, the efficient, optimum, and diligent use of Scotch tape during the inventory. The fact that four inches and only 4 inches ought to be used should be conveyed to the crews.

It is possible that these training sessions would require that crews be taught the measuring system so that they know what four inches are. It seems that they do not teach that in schools anymore, notwithstanding the ever-increasing tax burdens for the bottom 99 percent of the population. One could also make knowing how long four inches is a condition of employment at Northwest Illumination in general, and for Mr Smith in particular.

One may need to consult the labor unions and affirmative action-related laws before requiring that employees be tested so that their ability to measure 4 inches under varying conditions can be determined, correctly, positively, and effectively. The crews should be provided with electronic devices to insure the measurement is correct. These devices should be issued and collected individually from the crews. The chief tape inspector should see to it. In his ongoing efforts to improve tape use materially, the chief tape inspector can develop a set of positive inducements and negative deterrents that will promote the proper use of tape. In coming up with such motivation mechanisms, the sticks and the carrots (preferably unmodified genetically), Mr Smith may want to work with other departments, such as personnel, engineering, production planning, unions, and, of course, data processing:

• It may come to pass that the workers be paid on the basis of tape they do not use, instead of straight hourly wages.

• Ongoing computer files may be developed that record and store the amounts of tape used by various individuals at each inventory. Such ongoing records could be used while evaluating the employee’s performance.

• With the advent of new computer system, there is capacity available for such files.

• The development of motivating mechanisms and data files, as listed above, may require that Mr Smith as the chief tape inspector to attend such training seminars as may be needed.

• As a long-range goal, Mr Smith could develop or hire a consultant to develop a performance profile of those most likely to misuse and waste precious resources such as Scotch tape. This profile could be used to screen those most likely to misuse tape.

• One may want to look into using masking tape instead of Scotch. Masking tape is heavier and better able to support the weight of the inventory tickets; it is less likely to be used to wrap gift packages; and it is much cheaper than the filament tape that was used by the order of Mr Smith during the last inventory.

To summarize, the selection of Mr Smith as the chief tape inspector is likely to go a long way in insuring that a valuable resource such as Scotch tape is used in a proper manner, so as to have a material impact on the profits of the company.

Evaluating the project

The project, as assigned by Mr Smith, was highly beneficial. There is no reason to suppose that accounting concepts of materiality and relevance, let alone common sense, were in any way whatsoever denied, given the obsession with 4 inches of Scotch tape per inventory ticket. Any insinuation that four inches may have Freudian relevance is also to be denied. The quantity of Scotch tape used during an inventory constitutes virtually the major portion of the total cost of an inventory. It should be the overriding task of assistant controller and chief tape inspector to insure that only the calculated length of tape is used; otherwise, the profit potential and cash flow as well as the earnings per share and the value of the company’s stock could all be negatively and materially impacted.

Such projects – along with the insistence of Mr Smith to calculate every number in the Schedule 38, used to calculate the operating variance and production costs each month to the second place after decimal, even though the amounts involved millions of dollars – speaks well of the diligence, care, and professional expertise of Mr Smith as the assistant controller.

Athar Murtuza
Department of Accounting, Stillman School of Business, Seton Hall University, South Orange, New Jersey, USA

Corresponding author

Athar Murtuza can be contacted at: mailto:athar.murtuza@shu.edu