Systems Thinking in the Context of Applied Accounting Systems

As business practices and projects become increasingly complex leaders and managers are finding it more and more challenging to identify or detect root causes of profit loss. On a surface level, leaders may take a reactionary approach to the problem by laying off employees, reducing production, or even closing the business altogether. However, systems thinking takes a different approach by looking beneath the surface of an issue or problem to examine possible root causes that may or may not comprise an interrelationship between complex contributors. Systems thinking experts suggest that “incidents are not caused by a single catastrophic event, but by dynamic interactions between people, tasks, and technology and working condition including management, regulation and policy”.

My intent in this short article is to present specific accounting principles as segments of the larger more complex business issue as opposed to an isolated occurrence. In fact, the various subject matter topic in accounting can be viewed as a collection of systems within its category of systems impacting the larger whole of an incident. The subject itself is a system among a myriad of possible systems examining accounting financial system and the detailed component analysis of financial statements, performance evaluation, and simple to complex auditing.

Financial Accounting

???????????Accountants and those who utilize accounting principles apply a precise and structured set of rules and processes laid out according to General Acceptable Accounting Principles (GAAP) and other validating agencies. These agencies have established practices that enable businesses, investors, and governing agencies conduct businesses with a sense of confidence with minimal fear of fraudulent activities. The principles follow the general public pattern of establishing standards that ensure continuity between the myriad of businesses empowering interested parties to examine an organization’s performance in a timely fashion. Interested parties typically examine four key financial documents: Income statement, balance sheet, statement of cash flows, and retained earnings. Each document is co-dependent on the other.

???????????Regarding systems thinking, a business leader will want to dig deeper according to the severity of the problem. If the company is running low on cash each month and is losing customers despite a robust report detailing increasing sales over a time period the leader will endeavor to understand base issues. A trained leader or an accounting team is aware that an accounts receivable report analysis, for instance, will not reveal a company’s actual cash on hand. To gain a deeper understanding of the company’s financial status, an examination of the company’s cashflow statement using either what is known as an indirect or direct method. The statement of cashflows is comprised of three main activities: operations, financing, and investing. ?

Returning to the accounts receivable report, the leader/manager may conduct an accounts receivable analysis report and discover that collections are taking an unusually long time resulting in monthly income. The leader perhaps ponders the results asking if extending credit to customers with poor credit or because is it an absence of customer incentives such as discounts or customer service reminders. Even further, the leader/manager may want to examine the actual product or products for quality issues. Systems thinking may prompt the business team to conduct statistical analysis to reexamine the product’s marketing strategy and/or target market, which may lead to a rechanneling of resources. A multitude of national crisis between 2020 and 2022 is an example of the challenges businesses face addressing financial accounting issues.

Accounting Performance Analysis

???????????Again, if an organization is baffled by cashflows wishes to apply systems thinking in an evaluation process it may also consider examination of consumer behavior based on revenue recognition principles. This process involves the application of payment and/or expenses at an appropriate period in a year. Payment misapplication can result in over or understating an organization’s performance in a given period. Similarly, expense misapplication can either drain an organization’s resources cause the entity to be in default of short- or long-term account transactions. ?

???????????Systems thinking may involve reexamining what it termed the revenue recognition model, which consists of five steps. Essentially, it allows the leader and his accounting team to determine where, when, and if a contract exists between the business and a customer and the contract obligations. This is especially important with cash transactions where the agreement is implied by law-cash exchange in return for a product or service. Systems thinking may involve utilizing statistical analysis to examine accounts receivable historical records. This can reveal sales performance and customer behavior leading policy changes in addition to what degree both parties have satisfied performance obligations.

Auditing Assurance

???????????In the process of examining the company’s accounts and contractual agreements, a leader or manager may discover fraudulent activity via an internal or external audit. In many cases, it is advisable that an organization create an internal audit team that answers to board of directors for the sake of accountability and public trust. The Sarbanes Oxley Act was created as a deterrent to criminal activity as a result of the Enron-Arthur Anderson financial scandal back in the early 2000’s in which thousands lost their life saving due inadequate accounting oversight.

???????????Systems thinking may prompt a leader to examine the company’s internal accounting control systems. If the organization is sizable, this will most likely involve scrutinizing unusually large transactions, determining if the company’s separation of accounting duties is up to standards and no collusion is taking place. If an auditing situation uncovers insufficient internal control then a systems thinking cognitive model is most appropriate, which is merely an alignment with standard auditing protocol to reign in the loose ends. However, systems thinking considers any additional cost or manpower needed to execute the investigation and possible adjustments. In addition, will the adjustments impact current or future project plans and expected/anticipated revenue.

Summary

???????????Numerous studies validate the need for business leaders to elevate their view and approach to solving complex business problems via a systems thinking approach. The ability to inspire and motivate teams with an understanding and skill of biblical principles is especially needed in a Christ rejecting world. Merging the two cognitive skillsets is not uncommon as evidenced in world history. However, it is much more complex in contemporary society yet no less dependent on the power of the one true God, Jesus Christ:

5“I am the vine; you are the branches. If you remain in me and I in you, you will bear much fruit; apart from me you can do nothing.?6If you do not remain in me, you are like a branch that is thrown away and withers; such branches are picked up, thrown into the fire and burned.?7If you remain in me and my words remain in you, ask whatever you wish, and it will be done for you.?8This is to my Father’s glory, that you bear much fruit, showing yourselves to be my disciples. (John 15:5-8)

Combining systems thinking with accounting and financial services to address contemporary business complexities is a powerful tool that can empower organizations to simply increasingly complex realities. The impact is increasing profitability and competitive advantage.