Management Consultancy
- Management consultant, who is qualified by education, experience, technical ability, and temperament to advice or assist
businessmen on a professional basis in identifying, defining and solving specific management problems involving the
organization, planning, direction, control and operation of firm.
- Since he is not an employee of the organization, he can effectively serve as its objective and impartial adviser.
- Management consulting or management consultancy is not limited to CPA. Any professional may practice the same, as
long as he has the required competence, experience and technical ability to solve business problems.
- The practice as well as the practitioners are not licensed or regulated by law, and there are neither admission
requirements nor a board which certifies practitioners.
Factors attributed to the emergence and growth of management consultancy
1. Growth in size and complexity in business firms
2. Complexities in managing and conducting a business
3. Lack of competent staff
4. Trend towards industrialization
5. Need for adequate and timely information in managing decision making
6. Development of techniques for the solution of management problems and the businessmen’s awareness of their
usefulness
Reasons for hiring Management Consultants
- In most cases, businesses hire management consultants to:
a. Help define specific problems and develop solutions
b. Provide specialized skills and experience
c. Provide confidential service in which the identity of the client personnel
d. Train client personnel
e. Provide temporary personnel
f. Help improve intra-company communications
g. Render an independent opinion
h. Help get results
Management Advisory Services (MAS)
- The function of providing professional advisory (consulting) services, the primary purpose of which is to improve the
client’s use of its capabilities and resources to achieve the objectives of the organization
MAS relate to areas such as:
a. The management functions of analysis, planning, organizing and controlling
b. The introduction of new ideas, concepts and methods to management
c. The improvement of policies, procedures, systems, methods and organizational relationships
d. The application and use of managerial accounting control systems, data processing and mathematical techniques and
methods
e. The conduct of special studies, preparation of recommendations, development of plans and programs and provision of
advice and technical assistance in their implementation
In providing this advisory service, the CPA or the independent accounting firm applies an analytical approach and process
which typically involve:
a. Ascertaining the pertinent facts and circumstances
b. Seeking and identifying objectives
c. Defining the problem or opportunity for improvement
d. Evaluating and determining possible solutions
e. Presenting findings and recommendations
In case the client decides that the practitioner may proceed, the MAS consultant may also be involved in:
a. Planning and scheduling actions to achieve the desired results
b. Advising and providing technical assistance in implementing the recommendation
In combination with knowledge and experience in such areas as:
a. Organization and management methods
b. Office and management functions
c. Systems and procedures
d. Data processing methods
e. Quantitative methods (mathematics, statistics, etc.)
f. Financial management
To produce solutions such as:
a. A management information system
b. A sales reporting system
c. A cost accounting system
d. A work measuring program
e. Improved production control
f. An organization plan with statements of duties and responsibilities
Characteristics of MAS
1. Services rendered are for the management
2. It involves problem solving
3. MAS relates to the future
4. It is broad in scope
5. It involves varied assignments
6. Engagements are usually non-recurring
7. Engagements require highly qualified staff
8. Human relations play a vital role in each engagement
Broad Areas of Management Services
A. Areas which are normally related to the accounting and finance functions
1. Preparation of accounting systems and procedure manuals
2. Development of management oriented accounting and reporting systems
3. Evaluation of the applicability and economics of using mechanized equipment
4. Establishment of budgetary controls
5. Cost reduction studies
The field of cost accounting and financial management
1. Cost Accounting
a. Development of standard cost system
b. Cost analysis and control
c. Variance analysis
2. Financial Management
a. Establishment of capital budgeting procedures
b. Study of the cost of capital and cost of debt
c. Financial analysis for project studies
d. Establishment of operating and cash budgets
e. Valuation of common stocks of companies for purposes of mergers and sale
B. Areas which are not normally related to the accounting and finance functions
1. General Management Consultation
a. Management or operations audit
b. Measurement of operating performance
c. Studies of mergers and acquisitions
d. Development of compensation programs
e. Review of pension plans
f. Special studies on industry potential
g. Long range planning
2. Project Feasibility Study
- This involves financial, technical and marketing evaluation of proposed projects
3. Organization and Personnel
a. Review of existing organizational structures
b. Preparation of organization and administrative manuals
c. Job evaluations and salary administrations
d. Development of personnel rating programs
e. Cost determination of alternatives in collective bargaining agreements
f. Study of retirement plans
g. Study of office cost reduction systems
4. Industrial Engineering
a. Production planning, scheduling and control
b. Plant layout studies
c. Inventory management studies
d. Development of materials control systems
e. Development of preventive maintenance systems
f. Development of work standards
g. Purchasing management including value analysis
5. Marketing
a. Product profitability analysis
b. Determination of pricing policy
c. Market forecasting
d. Distribution cost analysis
e. Evaluation of salesmen’s incentive compensations
6. Operations Research
- This is an area of management science which uses mathematical techniques like linear programming, queuing theory,
simulation to solve operational problems and PERT/CPM technique in preparing plans and schedules
MAS Classification based on Required Expertise
1. Usual Services
- These may be offered readily by the practitioner based on his basic training and background
a. Evaluation of form of business organizations:
- Sole proprietorship
- Partnership
- Corporation
b. Analysis of financial and operating statements for management, stockholders, banks and others:
- Comparative statistical by year
- Ratios and percentages
- Funds of statements
- Break-even analysis
c. Design and installation of accounting systems:
- Design and establishment of books of original entry (journals) and books of final entry (ledgers) to facilitate presentation
of financial statements
- Revision of system to conform with uniform chart of accounts for industry or regulatory body
- Installation or revision of the payroll systems
d. Design of filing systems for storing the accounting records
e. Suggestions for improvement in internal control system:
- Minimization of possible embezzlement opportunities
- Minimization or elimination of problems caused by absences of employees
f. Establishment of control for cash, receivables, inventory, plant, property and equipment, and other items to assist
management and expedite the audit process
g. Preparation of insurance claims in case of business interruption such as fire loss
h. Research and evaluating of alternative methods of handling a transaction for its effect on finance and tax consequences:
- Make or buy decisions
- Accept or reject decisions
- Buy or lease decisions
- Continue or discontinue decisions
i. Assistance in the preparation of forecasts and budgets:
- Cash budget
- Operating budget
- Working capital requirements
- Long term capital requirements
j. Presentation and explanation of statements at stockholders’ meetings and conferences:
- Use of charts and graphs
k. Assisting clients in purchase or sale of business:
- Analysis of financial condition of the business under consideration
- Preparation and analysis of projected statements
l. Testifying on clients’ behalf
- Tax cases
- Merger or sale
m. Determination of the effect of various employee compensation plans on net income
n. Aid in labor union negotiations:
- Costing fringe benefits
- Calculation of the overall effect of pay increases
2. Somewhat Specialized Services
- These are extensions of the usual accounting work and require additional training and/or experience
a. Assisting in the installation of mechanized accounting systems:
- Designing forms
- Integrating the machine system with the regular system of accounts
b. Making a cost analysis of operations including solutions to such problems as proper basis for distribution of factory
expenses and overhead
c. Finding sources of capital and figuring the approximate cost:
- Small business loans
- Bond issue
- Stock issuance
d. Giving advice on dividend policy and plans for expansion:
- Assist in outlining long-range financial requirements
- Assist in forecasting net income and dividend requirements
e. Calculations on government contracts and allocating costs in compliance with reporting requirements
f. Advising on accounting and tax matters relative to estate planning in cooperation with legal and insurance counsel:
- Valuation of the real estate and composition of assets
- Calculation of real estate tax and provision of payments
g. Surveying credit losses
h. Assisting in bankruptcy and receivership proceedings
- Calculation of estimated amounts available to satisfy creditors and disposition of funds
i. Recruiting accounting or bookkeeping personnel for client
j. Preparing an analysis of paper flow to determine who handles what and why
k. Presenting and analyzing the pros and cons of various retirement and profit sharing plans, including their tax
consequences
l. Advising on various wage incentive plans
3. Highly Specialized Services
- These require special skills, aptitude and training which CPAs do not normally possess
a. Reviewing the organization structure to determine if the duties and responsibilities are assigned logically and
efficiently:
- Interview employees
- Effectiveness of communication
- Work flow analysis
- Work standard and job classification
b. Auditing management policies for their effectiveness
c. Conducting motion studies for standard cost system
d. Surveying an industry or trade for current trends
e. Evaluating the desirability of a particular area for plant location
- Accessibility to raw materials and labor
- Local cost of labor
- Real estate values and taxes
f. Preparing market analysis of products and services
- Setting up quotas
- Per capita consumption
- Territorial differences
g. Reviewing an insurance program to determine if the coverage is adequate
h. Advising on a data processing installations:
- Forms and procedures
- Adapting conventional accounting data to computer language
Determination of Scope of Services (guidelines to consider)
1. Responsibility to establish scope of services
2. Independence
3. Competence
4. Requirements for specialization
5. Attention to the client’s basic problems
6. Referral arrangements
7. The Code of Professional Ethics
MAS Practice Standards
1. Personal Characteristics
- In performing management advisory services, a practitioner must act with integrity and objectivity and be independent in
mental attitude
2. Competence
- Engagements are to be performed by practitioners having competence in the analytical approach and process, and in the
technical subject matter under consideration
3. Due Care
- Due professional care is to be exercised in the performance of a management advisory services engagement
4. Client Benefit
- Before accepting an engagement, a practitioner is to notify the client of any reservations he has regarding anticipated
benefits
5. Understanding with the Client
- Before undertaking an engagement, a practitioner is to inform his client of all significant matters related to the
engagement
6. Planning, Supervision and Control
- Engagements are to be adequately planned, supervised and controlled
7. Sufficient Relevant Data
- Sufficient relevant data is to be obtained, documented and evaluated in developing conclusions and recommendations
8. Communication of Results
- All significant matters relating to the results of the engagement are to be communicated to the client
Steps in MAS Engagements
1. Negotiating the engagement
2. Preparing for and starting the engagement
3. Conducting the engagement
4. Preparing and presenting the reports and recommendations
5. Implementing the recommendations
6. Evaluating the engagement
7. Post engagement follow-up
1 - Pre-engagement Considerations
2 - Engagement Planning
3 to 5 - Engagement Management and Execution
6 to 7 - Engagement Conclusion
Steps in Negotiating the Engagement
1. Ascertain the real problem and what is required to reach a solution
2. Identify the end product of the assignment
3. Agree on the role to be performed by the CPA
4. Agree on the basis for establishing and billing fees
5. Confirm the understanding in writing
Steps in Problem Definition
1. Collection and analysis of the facts needed to define or describe precisely the problem that requires solution
2. Further analysis to discover the conditions which have created and are sustaining the problem
3. Determination of the conditions for its solution and the end results which should be achieved by the solution
Review of the background
- A study of available pertinent background materials about the prospective client is useful in defining the real problem
Preliminary survey
- The practitioner may also conduct a preliminary survey of the client-firm’s situation by touring the client’s premises,
interviewing client’s personnel and other members of the organization, and gathering any other pertinent materials from
the client and studying the same
Determination of the engagements’ nature, scope and objective
- Once the practitioner has set a tentative definition of the problem based on facts gathered from the background review
and preliminary surveys and has decided that the engagement is an acceptable one, he may continue to conduct the
negotiations and hold preliminary discussions with the client to come up with a common understanding as to the
suggested/requested end product of the engagement, the roles to be played by each party (practitioner and client) in case
the engagement is conducted
Basis for establishing and billing fees (Fee Arrangements)
a. Per diem
- The amount of fees to be charged is determined by applying an hourly/daily rate to the number of hours/days consumed
by the practitioner and/or his staff in conducting the engagement
b. Bracket quotation
- The practitioner quotes a minimum and maximum fee, with the understanding that the work will be accomplished within
this range, unless unexpected or foreseen conditions are encountered, or redefinitions of the situation become necessary
during the course of the engagement
c. Lump sum or fixed amount
- The practitioner estimates, aside from the per diem fees of the persons who will work on the engagement, other expenses
and overhead that may be incurred, which may include travel, living expenses away from home, and cost of services such
as stenographic, charting, report typing, statistical work, special research and printing
d. Retainer
- Usually made for continuous or year-long engagements, whereby the client reserves a certain amount of the
practitioner’s/ consultant’s time, usually for a year, where the work contemplated cannot be detailed in advance
Confirmation of the understanding in writing
a. Proposal letter
b. Confirmation letter
c. Engagement letter
d. Contract
e. File memorandum
Engagement Plan
- The translation of the problem/engagement definition into steps required to attain the objectives of the proposed project
- Lays the foundation upon which an engagement work program is built
Engagement Work Program or Engagement Program
- The master plan for the engagement which serves as a framework for controlling its progress
- Used as a planning tool that documents how the engagement will be carried out, organizes the engagement into
scheduled and logical sequences and indicates the various tasks necessary to achieve the objectives of the engagement
- Generally includes:
a. A statement of objectives and scope of the engagement
b. The approach to be used in attaining the objectives
c. A breakdown of what is to be studied and the different activities and tasks to be performed, the data to be gathered,
client contracts, supervision and output
d. Staffing requirements and schedules showing the assignments and responsibilities of each staff as well as the
allocations of time to perform each task, including starting and completion dates
e. Schedule of the tasks and responsibilities of the client’s representatives who will participate in the various engagement
activities
Conducting the Engagement
- Information Gathering
- Information Analysis
- Use of Work Papers
- Interim Communications
Preparing and Presenting the Report
- Advantages of Making Supplementary Oral Presentations
- The Written Report
- Types of Written Report
Implementation or Installation of Recommendations
- When the scope of the engagement covers the consultant’s assistance in implementing the recommendations, the
practitioner should undertake this activity without impairing his independence bearing in mind his appropriate role as a
mere adviser or consultant
Major Phases in Implementation
1. General Design
2. Detailed Design
3. Testing
4. Conversion
5. Monitored Performance and Follow-up
Criteria for Evaluation
1. Proposal 4. Source data and documentation
2. Engagement program 5. Reports
3. Work program and schedule 6. Results
