October 1, 2020

Are Accounting Firms Accruing Management Debt Off-Balance Sheet?

Once again I found myself at a bit of a loss as to what to write this month. So to get some inspiration (read: procrastinate) I spent Sunday morning reading the latest on Going Concern. I read Caleb’s article, Bob Moritz Has Your Back, Millennials, but was most interested in the comments.

I saw this comment from N.E.R.D  and my brain exploded. I had just finished The Hard Thing About Hard Things by Ben Horowitz. One of the most interesting things he talked about in the book was management debt as a parallel to the commonly understood technical debt metaphor coined by internet pioneer Ward Cunningham:

Technical debt [refers to] the eventual consequences of any system design, software architecture or software development within a codebase. The debt can be thought of as work that needs to be done before a particular job can be considered complete or proper. If the debt is not repaid, then it will keep on accumulating interest, making it hard to implement changes later on.

In his blog and his book, Horowitz takes this metaphor and translates it into a management context:

[M]anagement debt is incurred when you make an expedient, short-term management decision with an expensive, long-term consequence. Also like technical debt, the trade-off sometimes makes sense, but often does not. More importantly, if you incur the management debt without accounting for it, then you will eventually go management bankrupt.

What N.E.R.D. was talking about in his comment, was an example of a management debt. A management decision (or indecision) in pursuit of short-term gain with an expensive long term consequence. This got me thinking about how many and what types of management debt have accounting firms been accruing?

I spent another hour (read: procrastinating) going through GC and the comments to see what management decisions have been made in the profession or by firms. It wasn’t that hard to find them:

All in all it was interesting to see how the concept of management debt overlapped with Thomas Sowell’s, Applied Economics: Thinking Beyond Stage One. Especially when you replace the word politician with management. See:

Sowell discuss [sic] how basic [strategy] is generally misapplied because [managers] think only in Stage One. Stage One is the immediate result of an action, without determining what happens then. He argues that many [managers] cannot see beyond Stage One because they do not think beyond the next [round of bonuses].

Many of the articles listed above go only to Stage One. A great example of Stage Two thinking can be seen here, LessChatMoreHat should be promoted immediately.

Now over to you. What stage one policies have you seen that are accruing management debt?

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