CHAPTER

3 AREAS OF MANAGEMENT
ADVISORY SERVICES - PART II

LEARNING OBJECTIVES

After studying Chapter 3, you should be able to:

1. State the traditional as well as the emerging

consultancy services of CPAs.

2. Discuss the guidelines in selecting the scope of

services that a CPA may render to the clients.

3. Describe the types of clients served.

4. Explain how consulting adds value to the client.

 CHAPTER 3

AREAS OF MANAGEMENT ADVISORY

SERVICES PART II
Management Consultancy Services by CPAs
Management consultancy services by CPAs can be categorized as follows:
Traditional Services:

1. Managerial Accounting
This engagement involves providing assistance to management
related to planning and controlling business operations as well as
decision making. Examples are
a) Financial statements analysis.
b) Budgets and their preparation.
c) Cost analysis planning and control.
d) Variance analysis.
e) Cost analysis for managerial decisions.
f) Development and installation of responsibility accounting
and evaluation of responsibility center.
g) Establishment of internal reporting system.
h) Assistance in preparation of reports to employees,
stockholders, SEC and others.
2. Design and appraisal of accounting system
This will involve
a) Development of an accounting system for a newly-organized
firm.
b) Revision, partial or complete, of an existing accounting
system.
c) Extension of the present accounting system to cover new
business activities.
d) Accounting service in general.
e) Accounting machines installation.
f) Internal control studies and installations.
34 Chapter 3
3. Financial Management-related services
Examples are:
a) Study of working capital requirements.
b) Study of methods of financing asset acquisitions.
c) Credit and collection practice studies and advice.
d) Analysis of capital investment proposals.
e) Study of alternative methods of financing expansion.
f) Survey of pension, retirement and profit sharing plans.
g) Preparation of feasibility studies for new projects.
h) Valuation of capital stock of companies for purposes of
merger or sale.
4. Project Feasibility Studies
Emerging Consultancy Services
5. Global Risk Management Solution
This involves managing the totality of risks - financial, operational
and systems, and strategic to improve financial and business
performance.
It also covers determination of critical risks that the firm faces,
development of recommendation to reduce risk exposure and
identification of opportunities for growth and expansion. Areas of
risk management services include
a. Financial risk management
Examples: (1) measurement of risk-adjusted return on capital and
link performance evaluation to creation of
shareholder value
(2) model reviews of derivative valuations
b. Strategic risk management
Example: Review of a whole business unit, departures, function
or process so that senior management can fully
understand the risks of the operation
c. Operational and systems risk management
Examples: (1) controls and assurance services
(2) technology risk services
(3) operational risk services, corporate governance
d. Compliance risk management
Example: (1) review of compliance with regulatory requirement
and ethical conduct standards
 Areas of Management Advisory Services — Part II 35

e. Internal audit services

Examples: (1) assessment of the units' performance against
professional standards and peer organization
(2) development of new internal audit function
(3) review of controls of key business processes

6. Transaction services
These involve services related to mergers, acquisition, divestitures,
joint ventures, spin-off, and strategic alliance. Examples: Due
diligence services to uncover potential financial and strategic risks
and rewards.

7. Financial Advisory Services

CPAs provide comprehensive, financial, economic and strategic
advice to companies with complex business problems and disputes.
Examples are services related to investment banking, fraud and
dispute analysis, intellectual property disputes, etc.

8. Project Finance and Privatization

This involves management advisory services related to partnership
between the public and private sectors in delivering infrastructure
and services or privatization and project finance. Examples of these
services are (1) development of the commercial structure for a deal,
including risk mitigation and contracts, (2) development of a
financial structure to get the right mix of financial instrument in a tax
efficient package.

9. Valuation services
These include service that guide clients through complex business
transactions such as acquisition or divestiture of investment, debt
structuring and finance-raising, entry to major stock exchange,
mergers.

10. Business Recovery Services

CPAs provide services to troubled businesses by emphasizing on the
implementation and rationalization and recovery programs designed
to rebuild value. Examples of these services are creditor services,
business regeneration, hands on turnaround, insolvency/executory
services, insurance services such as collectibility of reinsurance
recoveries, collections, disputed claims, etc.
36 Chapter 3

11. Dispute Analysis and Investigations

Most common types of services under this category are
environmental analysis, real estate damage, investigative services,
construction disputes, investigative services, economic and financial
analysis.

12. Computer Risk Management

Management consultants help client understand and manage their
business risks relating to the implementation and use of technology.
Examples are implementing mission critical business systems such as
electronic commerce, network sensitivity, etc.

13. Application Software Selection and Implementation

The management consultant assists clients in prioritizing their needs,
identifying the right software (from groupware to decision support)
and tailoring it to meet their specific requirement.

Determining the Scope of Service

Generally, CPAs may perform the entire range of MAS as long as it is consistent
with their professional competence, ethical standards, and responsibility. The
independent accounting firm in reaching a decision as to the scope of its
management advisory services should be guided by certain criteria such as
competence and independence. It should likewise consider its depth of
knowledge and experience required in the various subject areas and kinds of
problems and solutions with which the firm might become involved.

1. Responsibility to establish scope of services

The accounting firm has the responsibility to determine the scope of
services it is competent to offer to the public.

2. Independence
The accounting firm, when providing MAS should give particular
consideration to both independence and the appearance of independence.
It is suggested that a CPA rendering MAS and at the same time serving
the same client as independent auditor should not make management
decisions or take positions which might impair his objectivity and
independence.
 Areas of Management Advisory Services — Part II 37

3. Competence
Independent accounting firms have the responsibility of evaluating their
ability to render MAS of a professional quality in each specific area.
Competence in professional work involves both the technical
qualifications of staff personnel and the firm's ability to supervise and
evaluate the quality of the work performed.

4. Requirements for specialization

The requirements for specialization in certain areas may limit the scope
of MAS offered by any given independent accounting firm. As a
consequence, the firm may decide to exclude areas of service which are
already provided by others in the profession.

5. Identification and resolution of client's basic problems

The scope of services offered by the independent accounting firm should
be adequate to identify and resolve the basic client's problems and not
just problem symptoms.

6. Referrals
Referral of MAS work to other independent accounting firms is another
way of developing that firm's capability. The referral arrangement may
also provide for an effective means by which independent accounting
firms could develop cooperation thereby expanding their knowledge and
scope of service toward providing the full range of MAS.

7. Code of professional ethics

It is the responsibility of the independent accounting firm to assure itself
that the nature and scope of the MAS it elects to offer are in conformity
with the code of professional ethics.

Types of Clients Served

Process consulting can be enhanced by an appreciation of the different types of

client involved. It is suggested that the consultant interacts with a number of
individuals within the client organization and that the concept of the individual
client may be problematic. Rather, the consultant interacts with a network of
individuals who play subtly different roses. The proposed six client types are:
38 Chapter 3
Contact clients
The contact client is the person, who first approaches the consultant and
proposes that the consultant addresses a problem or issue on behalf of the
organization.

Intermediate clients
Intermediate clients are members of the organization who become involved
in the consulting project. They will work with the consultant and provide
information. They will sit on meetings and influence the way the project
unfolds. Intermediate clients may be the actual recipients of me final report.

Primary clients
The primary client is the person or persons who have identified the problem
or issue the consultant has been called in to address and who are most
immediately affected by it. It is they who will be willing to pay in order to
have the issue resolved.

Unwitting clients
Unwitting clients are members of the organization who will be affected by
the intervention of the consultant. They do not initiate the project and have
no direct or formal control over it. They are not aware that they will be
affected by the project.

Indirect clients
Indirect clients are members of the organization who will be affected by the
intervention of the consultant and who are aware that they will be affected.
However, the consultant is not aware that the project will have an impact on
them. Indirect clients may feel either positive or negative about the
consultant's intervention. They can be very influential behind the scenes
and, unbeknown to the consultant, can facilitate or hinder the progress of the
project.

Ultimate clients
Ultimate clients are the total community that will be affected by the
consultant's intervention. This will include members of the organization
and, possibly, members of the organizations which come into contact with
the client organization. The ultimate client group forms the universe of
whose interests the consultant must take account when progressing with the
project.
 Areas of Management Advisory Services — Part II 39

Groups of clients that CPAs can provide MAS are

1. Privately-owned business firms
Business enterprises involved in merchandising, manufacturing, banking,
transportation, insurance, food services, education, telecommunications
and others are potential consultancy clients.
2. Governmental agencies and organizations
Many governmental organizations engage management consultants at
one time or another. For instance, management consultants have been
engaged by the BIR, SEC, Bureau of Customs, Department of Health,
Department of Environmental and Natural Resources and many more.
3. Not-for-profit nongovernmental organizations
Organizations such as hospitals, research institutions and charitable
institutions are increasingly using management advisory and consu1ting
services particularly on areas of proper raising of funds and revenues while
reducing costs.
4. Professionalassociations
Associations organized by professionals (lawyers, medical doctors, etc.) often
need advice and assistance with respect to management and organizational
problems.
•
5. Others
A catchall category to include such groups as labor unions, sports
organizations, and religious organizations will also provide potential
clients of management consultants.

How Consulting Adds Value

The Decision to Use a Consultant

Many are asking, why should a business manager ask the advice of an
independent consultant? Hiring a consultant involves
(a) an immediate financial cost, e.g., daily time charges of the team assigned
to the project, expenses incurred in undertaking marketing research, etc.
(b) disruption of a manager's routine, e.g., need to dedicate management
time for briefing sessions and regular review meetings.
40 Chapter 3

The decision to call in consultants happens after a consideration of the costs and
benefits involved and a conclusion that the benefits must have outweighed the
costs. This is not a one-off decision but something that the client business
constantly assesses. It is a critical responsibility for the consultant to maintain
client's confidence and the belief that the consultancy exercise has something of
value to offer. This presents a particular challenge for management's
consultants. Management consultants must constantly ask three fundamental
questions:
(a) What can I offer the client business that will enhance its performance and
help it achieve its objectives?
(b) Why will my contribution be more valuable than that which existing
managers and potential recruits, can contribute?
(c) How can I communicate to the client business that what 1 offer is
valuable?

To answer these three questions, the consultant should apply analytical, project
management and relationship-building skills. This book aims to set the scene for
discussion of how these skills may be developed and applied by considering what
a management consultant has to offer the client business.

The actual output of a consulting exercise centers on providing one or more of

the following:
(1) Provision of information
(2) Provision of specialist expertise
(3) Provision of new perspective
(4) Provision of support for internal arguments
(5) Provision of support in gaining a critical resource
(6) Facilitating organizational change

Provision of Information
Information is valuable to a business. As a result it has a cost. Information is a
resource that must be managed. Much information has a direct cost — that
obtained from market researchers, for example — while if there is no direct cost
there may be a hidden cost in the management time and effort in gathering
information. Even if managers are willing to face this cost they can do so only if
they know what information is available, where it is stored and how it can be
accessed.
 Areas of Management Advisory Services — Part II 41

The consultant can offer the small business manager a service in providing him
or her with information which can help the business. The consultant can add
value by analyzing and presenting information in a way that enables the business
manager to make effective decisions from it. Some areas of information that are
critical to a business include:
 the business's customers: their needs and buying behavior;
 the business's products: their design, technology and development;
 the markets in which the business operates: their size, growth and
dynamics;
 outside organizations (including suppliers) that can offer support: who
they are, what they offer and how they can be contacted;
 the business's competitors: who they are, their strengths and the threat
they pose.
Provision of Specialist Expertise
Certain projects require the application of technical knowledge and an ability to
use specialist analysis techniques. Rather than have to learn these themselves
managers will often call upon the support of consultants.
Some important areas of management that can benefit from the insights and
ideas of a specialist are:
 business strategy: its development. evaluation and planning;
 marketing strategy development: defining a successful marketing mix;
 marketing research studies: utilizing sophisticated research
methodologies;
 promotional campaign development: how to ensure that promotional
drives are well designed and cost effective;
 new product development programmes: converting customer needs into a
successful product offering;
 developing proposals for financial support: identifying and approaching
backers and making a good case for their support;
 information systems development: enabling managers to get th,
information they need to make decisions.
 planning exporting and international marketing: providing the business
with a valuable route to growth.
42 Chapter 3

Provision of a New Perspective

Managers are not decision-making automata. They are human beings who must
analyze complex environments, use well-developed but necessarily limited
cognitive skills and then make decisions in the face of uncertainty.

Managers use 'cognitive maps', 'mindsets' or 'dominant logics' through which

they see their managerial world. These act to focus the manager's attention on
certain aspects of their environment, select particular facts as relevant, link
causes to effects and then suggest courses of action. Such cognitive schema are
not rational decision-making devices. They manifest themselves as the
manager's interest, priorities, prejudices and judgment.

The consultant can offer a fresh mind to an issue. Better still, the consultant can
contribute some conceptual frameworks that open up thinking and aid the
development of the manager's cognitive schema. Consultants can also offer
support in helping individuals and groups become more innovative in their
thinking by using the creativity techniques.

Provision of &rapport for Internal Arguments

A lot of times managers do not always agree with each other. Disagreements
arise over a wide range of issues. Conflicts of opinion take a variety of form.
They range from open, honest exploration of different options to often quite
nefarious political intriguing. They can be seen as a refreshing opening of
possibilities or they may lead to smoldering resentment.
A consultant's opinion is of clear value here. It can be presented as
`independent' and as coming from an 'expert.' How should a consultant react to
being used in this way? A few useful ground rules are as follows:
 Understand the 'politics' of the consulting exercise.
 Be sensitive to who is supporting different positions in the organization.
 Recognize who will benefit and who will lose from the different options
under discussion.
 Make sure the objectives of the consulting exercise are clear and in the
open.
 Make sure any information used can be legitimated and any analysis
undertaken justified.
 Build rapport with the client and be honest with the client about the
strengths and weaknesses of his or her argument.
 Areas of Management Advisory Services - Part II 43

 Introduce and explore options which reconcile different positions in a

win-win way.
 Provide the client manager with information and insights but allow him
or her to make a particular case within the business - don't be tempted to
advocate it on his or her behalf.
 If put in a position where credibility might be lost, remind the manager
that a loss of impartiality and credibility will defeat the point of using
independent consultants in the first place!
Provision of Support in Gaining a Critical Resource
An organization must attract resources in order to survive. One of the manager's
most critical functions is attracting resources on behalf of the firm. Some
important resources for the business include:
 the goodwill of customers;
 capital from investors;
 capital from government support agencies;
 people with particular skills and knowledge;
 specialist materials, equipment and services.

The consultant can offer the client business valuable support in gaining these
resources. Key tasks involve identifying who can supply the particular resources,
how they might be contacted and the issues involved in working with them. The
consultant can be particularly valuable by working with the client and developing
a communication strategy, which helps the business be successful in its approach
to suppliers of critical resources.

The consultant can be of great value in structuring a proposal and advising on

how it might be delivered.

Facilitating Organizational Change

Organizations undergo change all the time. Sometimes this is a `natures;'
response to the internal dynamics of organizational growth. At other times it
may be in response to an external impetus or shock that forces the organization to
modify the way in which it does things. All of the types of project above may, if
they are to be implemented successfully, demand some degree of change in the
structures and operating practices of the business. They may also demand that
managers change their roles and responsibilities.
44 Chapter 3

Change usually meets resistance. Managers, like most human beings, tend to be
conservative when it comes to altering the way things are done. This is only to
be expected. Although change may offer new possibilities, it also presents
uncertainties. It is only natural that a manager tries to hold on to what he or she
knows to be reliable and rewarding.

The effective management of organizational change demands that these questions

be addressed. Sometimes organizations call for change as the primary goal of the
consulting exercise. In response to this, change management has developed as a
specialist consulting area. More often, though, change management is required
as a subsidiary area in order to effect the implementation of more specific
organizational projects, such as business expansion or structural reorganization.
Whatever the motive and source of the change, the effective consultant must be
aware of the human dimensions to the change he or she is advocating and be
competent in addressing the issues it creates.