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Quality management and innovation accounting

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By Nicos Sykas

The General Manager of the Institute of Certified Public Accountants of Cyprus Kyriakos Iordanou, timely and correctly suggested the creation of a single national oversight authority for financial services in Cyprus.

Such an important reform would strengthen the operational resilience and greatly enhance the agility of this crucial sector and its ability to navigate change in times of uncertainty and exponential risk.

In the era of interconnected challenges, there will be new definitions demanded by shareholders and stakeholders for what constitutes sustainable growth or acceptable investment. Value will be measured differently with social impact-weighted accounting taking its place, alongside traditional profit-and-loss balance sheets. This shift can give us the chance to measure and evaluate not just risk and rewards but results, particularly social impact.

Policy-makers must actively create and shape an economy that delivers on goals that are critical to human and planetary wellbeing. The main objective is to place domestic and global economies on the path to high inclusive and sustainable prosperity. Simultaneous movement on all three results in multiplicative gains that quickly compound.

The International Standard on Quality Management (ISQM) deals with a firm’s responsibilities to design, implement and operate a system of quality management for audits or reviews of financial statements, or other assurance or related services engagements. A system of quality management operates in a continual and iterative manner and is responsive to changes in the nature and circumstances of the firm and its engagements. It also does not operate in a linear manner.

ISQM addresses the following eight components: a) The firm’s risk assessment process; b) Governance and leadership; c) Relevant ethical requirements; d) Acceptance and continuance of client relationships and specific engagements; e) Engagement performance; f) Resources; g) Information and communication; and h) The monitoring and remediation process.

Furthermore, the firm may establish additional quality objectives beyond the eight mentioned above. Audit firms must perform risk assessment procedures to establish quality objectives, identify and assess quality risks that may adversely impact the achievement of the quality objectives, and implement responses to address the identified risks. The new quality management standards move the emphasis away from quality control to a more proactive quality management system (proactively identifying and responding to risks to quality).

Great impact

Given that innovations have a great impact on gaining competitive advantage and long-term growth of the company’s value, it is important to find ways to fully and correctly reflect them in the accounting and reporting system to provide users with the necessary information to make effective decisions.

Innovation Accounting is an organized system of principles and Key Performance Indicators established to gather, analyse and present data about a company’s breakthrough and disruptive innovation efforts – working to complement the existing financial accounting system. Innovations are able to provide higher indicators of competitiveness, profitability and, consequently, the value of the business.

To make informed investment decisions on corporate startups and ventures, managers need accounting metrics that are fact-based, and that reflect the entire process of innovation rather than just the financial outcome. Managers need an accounting system that is designed to complement the shortcomings of a financial accounting system when it comes to measuring innovation.

To start doing so, we can use a combination of the innovation thesis, strategic goals, and the need to create a balanced portfolio. Innovation Accounting can then be used to measure and manage the progress of these corporate ventures from great idea to validated business model. Management wants to know how the innovation efforts are being translated into their portfolio strategy, so specific metrics are needed for that.

Innovation Accounting focusses on managing the following three innovation activities:

  1. Making investment decisions on different ventures at different points in their innovation journey.
  2. Tracking and measuring the success of specific innovation projects.
  3. Assessing the impact that innovation is having on the business as a whole.

Innovation strategy fit for a nonlinear future

One of the main barriers to the implementation of Quality Management and Innovation is that nonlinear, multidimensional problems are approached in a linear manner. In today’s nonlinear world, the focus should be on the detection and exploitation of exponential opportunities and the avoidance of catastrophic dangers.

The new innovation model I created provides a solution to this challenge. This new approach to the innovation process takes into account asymmetries, nonlinearities and exponential change. It is described in detail in a step-by-step Guide I have prepared which, among other includes:

  1. A pioneering ‘Resilience Toolbox’ that describes a total of 153 strategic tools, frameworks, mechanisms, creativity techniques, methods and standards that can help public and private companies and organizations, communities and all products and services modify their exposure accordingly in order to exploit positive asymmetries (be open to opportunities) and avoid negative asymmetries (decrease exposure to catastrophic dangers). The detection and exploitation of positive asymmetries captures exponential multiplicative returns whilst the avoidance of negative asymmetries lessens potential damage and eliminates the risk of ruin.
  2. Application examples of this novel nonlinear innovation framework in 60 different areas / sectors combined with: a) Strategy canvas and templates, b) creativity (nonlinear thinking) workshop, c) innovation resilience test, d) strategies for branding and differentiation and e) guidelines for risk and uncertainty analysis.

This novel cross-cutting tool can contribute to:

a) Maximizing returns of public and private investments.

b) Building economic, social and environmental resilience.

c) Accelerating research to find solutions to complex multisource, multilayer problems (financial crises, supply chain disruptions, climate crisis, natural disasters, biodiversity loss, pandemics, cancer etc.) characterized by nonlinear interactions and emergent properties. This can be achieved by integrating Artificial Intelligence and Graph Theory into the new nonlinear innovation framework.

This unique approach to complex problems is presented analytically in a practical Toolkit I have developed titled ‘A new Innovation Model for a Nonlinear world’.

 

Nicos G. Sykas is a strategy, communication and innovation consultant

[email protected]