Sustainable value creation through cost efficiency

• Two-day CMA International Management Accounting Conference 2013 kicks off

By Shabiya Ali Ahlam

In the current economic context where in most instances costs are higher than revenue, top industry experts yesterday emphasised the need to get this situation under control if sustainable growth and value creation are to be achieved in Sri Lanka.

“We need practices that are relevant to the South Asia region and those which will benefit the public and will change the business culture and society,” said Institute of Certified Management Accountants Sri Lanka (CMA) President Lakshman R. Watawala at the inauguration session of the CMA International Management Accounting Conference 2013, which kicked off yesterday.

He noted that the applicability of mandatory costs accounting records which would provide relief to consumers was an important aspect that would be addressed at the two-day conference, which featured speakers from India, Pakistan, Bangladesh, Nepal, Maldives and Bhutan to present their expert views.

The event was also attended by SAFA President Adbul Mannan, ADB Sri Lanka Resident Mission Country Director Rita O’Sullivan, Senior Minister and Committee on Public Enterprises Chairman D.E.W. Gunasekera and Member of Parliament Ravi Karunanayake, who presented key insights on achieving cost efficiencies and value creation.

Sustainable economic development

Expressing that there were two ways of looking at value creation, O’Sullivan pointed out that increasing sales strategy was effective when an economy was expanding, but the cost effective strategy was what was most relevant for economies in recession, where market expansion was limited.

Acknowledging that cost efficiency was the most appropriate strategy for Sri Lanka, at firm level, she said that organisations should look at cost cutting, minimising stocks and downsizing staff and should conduct energy audits, while at sector level, sustainable reporting should be implemented.

“Organisations should mainstream along with mandatory financial reporting to cover environmental impacts, energy efficiency and waste management systems and must take target measures to improve good governance structures,” she stated.

O’Sullivan added that cost efficiencies supported strong economic performance by corporations while it helped develop human capital within the organisation in the process.

“It looks at how the organisation impacts the local community. So everyone is involved at various levels. Meanwhile, the Government needs to impose standards and must have strong legal systems and policies in place,” she said.

Stressing that the private sector played an important role in this matrix, O’Sullivan explained that the ADB extended a helping hand to sustain operations and in Sri Lanka a three pillar approach was used.

While the first pillar is towards inclusive and sustainable economic growth, which mostly deals with infrastructure development, transport, energy, water supply and urban development, the second pillar is about catalysing private investments and enhancing the effectiveness of public investment, whereas the third addresses human resource and knowledge development.

Focusing on trade facilitation, O’Sullivan pointed that with improved infrastructure in Sri Lanka, the implementation of ASYCUDA at Customs was noted to bringing benefits to all traders who can now process documents online, making exporters more globally competitive.

O’Sullivan opined that the mentioned actions have helped Sri Lanka to have an improved ranking in the World Bank Logistics Performance Index, where it has moved to the position of 81 from 137 in 2012.

Presenting the vision for the future, she noted that investments in infrastructure would create tremendous opportunities to design, finance and manage more sustainable outcomes.

While conventional infrastructures have locked regional economies into unsustainable patterns of resource use for many decades, O’Sullivan said it was vital for planners and policymakers to take advantage of this crucial window of opportunity to change resource-use patterns.

Stating that the nation was well situated to take advantage of its development stage to enhance its future operations, O’Sullivan said: “Sri Lanka can avoid pollution and other externalities to leapfrog to be an advanced sustainable economy that is cost efficient.”  

Role of management accountants in achieving cost efficiency

Pointing out that the economic recession is taking place all over the world, Karunanayake expressed that as revenues could not be increased easily, cost reductions had become essential.

“The role of a management accountant has become inevitably important and difficult and it is like skating on thin ice,” he said, stating that the role of an accountant was also to ensure that the company was steered in the right direction during turbulent times.

“Experts do not know exactly what they have to be doing since decision makers use these professionals to play different roles to fulfil their requirements and we are seeing so much of this in Sri Lanka.”

Adding that this was common in the South Asia region, Karunanayake said that accountants were not doing what was expected from them. “The role of a management accountant is to give an unbiased opinion to help the company. The absence of this is felt at large today,” he asserted.

With blue-chip companies being sub-optimised and State-Owned Enterprises going through turbulent times, he pointed that this indicated that the country’s economy was going through difficulties.

“Today, the biggest problem we have is the massive corruption that is taking place.  This is due to the lack of information that is presented. We as accountants need to ensure that there is value for money. Politicising decision making is just one of the challenges faced by us,” Karunanayake said.

Expressing that management accountants must act with caution in the mentioned areas, he charged that “all the accounting bodies have failed in their duties”.

“When the Central Bank has been knowingly misrepresenting facts, concealing information and highlighting distorted statistics, no accountant came forward and presented a professional view,” he asserted, stating that if sustainability development and cost efficiencies were to be achieved, inefficiencies had to be eradicated and it was mandatory for such to be brought into the public domain.

Sustainable value creation

Stating that the conference was taking place at an appropriate time, as the country has its attention focused on public finance, Gunasekera stressed the need for improvements in environment, social and economic performances.

“Sustainable economic development has become an impending global challenge in the context of erosion of natural resources,” he said, adding that changes had to be made in business culture and practices.

Highlighting that the services and industry sector accounts for 89%-90% of the country’s GDP, Gunasekera said this was precisely the reason why the accounting profession had surfaced as a guiding profession in the economy.

“My view is that the administrative, planning and accounting service should equally and collectively guide economic affairs of our country,” he expressed.

During his address, Gunasekera revealed that out of 60 public commercial enterprises, 17 were noted to be running at a loss. “From the total loss, 95% relate to the four major State institutions,” he elaborated and went on to say that matters regarding the institutions in question were better than before.

“The contributing factors to the losses are many. In my view, there were deficiencies in the accounting standards used by these institutions,” Gunasekera shared and clarified that in the case of the losses incurred by SriLankan Airlines and Mihin Air, the reasons were due to undercapitalisation.

Stating that every household in Sri Lanka would soon become an electricity consumer, he added: “This is the highest stage of development achieved by any emerging economy.”

Admitting that when introducing the concept of electricity for all, the economic aspects of the project and its impact on the National Budget were “perhaps not” taken into account, Gunasekera brought to light that the question of sustainability had now surfaced.

“We have lost sight of the fact that 62% of the workforce come under the informal economy with poor purchasing power and spending capacity. The question has been raised if the cost of production is distributed in proportion to their earning capacity and level of consumption,” he noted.

Regional sustainability

With the South Asian region striving to achieve value creation in sustainability, SAFA President Mannan opined that this was a new concept where conclusions could be derived for the betterment of trade and commerce.

Stating that value creation came from basic costs, Mannan stressed that it was important for all value additions to be sustainable in order to achieve success.

“To achieve cost efficiency we must establish ethical behaviour and judgment in accounting, and it is important to have ethical standards,” he said, adding that cost cutting alone did not give profits and sales and marketing should also be given equal consideration.

He went on to say that where there is no cost, there is no pricing and value and ethical standard must be integrated into the two aspects.

“When we talk about cost efficiency, we need to incorporate ethical behaviour into it as well. As professional accountants we must have judicial judgment,” he asserted, adding that while cost and value were two different items, one could not exist without the other and stressed that cost should always be presented first in the equation before value.

Mannan noted that as management accountants, those in the profession should ensure that transactions should be monitored in a systemic manner so taxes were not avoided. “You have to be rational,” he added.

Stating that economies can be supported through accounting ways and systems, he called for cooperation among the SAARC countries to create benefits and win-win situations for all.

Following the inauguration session, the CMA Awards for professional excellence were presented to 11 renowned industry professionals who have contributed to the field of Management Accounting in Sri Lanka.

While the technical sessions are spread over two days, a prolific panel discussion took place yesterday which addressed the topic, ‘Role of Professional Accountants in Business in Sustainable Value Creation’.

 Moderated by SAFA Past President and Member of CMA Advisory Council A. N. Raman, eminent speakers who contributed to the discussion included representatives from the Institute of Chartered Accountants (ICA) of India CA. K. Raghu, ICA Sri Lanka Sujeewa Rajapakse, Institute of Cost Accountants of Nepal Madhu Bir Pande, ICA Bangladesh Md. Abdus Salam, Institute of Cost Accountants India T. C. A. Srinivasa Prasad, ICA Pakistan Yacoob Suttar, and CMA Sri Lanka Adrian Perera.

Preceding the fruitful discussion was the session regarding achieving sustainable cost efficiencies in the electricity power industry in South Asia, for which the session chairman was Public Utilities Commission Sri Lanka Deputy Chairman C. T. S Bandula Perera.

To give deep insights on the situation prevailing in this area in the South Asia region, K. Narasimha Murthy from India, Abid Latif Lodhi from Pakistan, and Ceylon Electricty Board Additional General Manager Corporate Strategy Bandula S. Tilaksena and Energy Sector Specialist Tilak Siyambalapitiya from Sri Lanka, expressed their expert views on the subject.

While the remaining sessions spill over day two, areas such as, ‘Enabling Cost and Management Tools for Sustainable Value Creation’, ‘Sustainable Cost Competitiveness in the Country’, and ‘Management Accounting Strategies for Sustainable Growth’, will be covered today.

Pix by Daminda Harsha Perera