What Is Accountability?

Accountability is an acceptance of responsibility for honest and ethical conduct towards others. In the corporate world, a company’s accountability extends to its shareholders, employees, and the wider community in which it operates. In a wider sense, accountability implies a willingness to be judged on performance.

Understanding Accountability

Accountability has become an essential concept in corporate finance. It is particularly relevant to the accounting practices that a company adopts when it prepares the financial reports that are submitted to shareholders and the government. Without checks, balances, and consequences for wrongdoing, a company cannot retain the confidence of its customers, regulators, or the markets.

However, in recent years corporate accountability has come to encompass the company’s activities as they affect the community. A company’s environmental impact, its investment decisions, and its treatment of its own employees all have come under public scrutiny.

Types of Accountability

The concept of accountability runs throughout all industries, sectors, companies, and professions. Here is an overview of where accountability is most prevalent in the business sector.

Corporate Accountability

At its most prosaic, accountability is about the numbers. Every public company is required to publish a financial report quarterly and annually detailing its income and expenses. An independent auditor reviewing a company’s financial statements is responsible for obtaining reasonable assurance that the financial statements are free from any material misstatements caused by error or fraud. This auditor is holding the company accountable for its reporting.

Accountability requires corporate accountants to be careful and knowledgeable, as they can be held legally liable for negligence. An accountant is responsible for the integrity and accuracy of the company’s financial statements, even if an error or misstatement was made by others in the organization. This is why independent outside accountants audit the financial statements. Public companies are required to have an audit committee within the board of directors. Their job is to oversee the audit.

Political Accountability

Political accountability can relate to political contributions and how candidates use resources. For example, the non-partisan Center for Political Accountability and the Wharton School at the University of Pennsylvania jointly publish an annual index rating the disclosure and oversight policies of major public corporations regarding their donations to political causes and candidates.

These scandals resulted in tougher regulations, and there are armies of regulators and private watchdogs working to make sure that companies report their earnings correctly, that the exchanges execute trades in a timely fashion, and that information provided to investors is timely and accurate.

The Center shines a spotlight on corporate spending to influence politicians. Recently, the Center reported in-depth on a campaign by the pharmaceutical industry to head off a proposal to allow Medicare to negotiate drug prices with vendors. The report named the names of members of Congress who accepted political donations from drugmakers.

Government Accountability

The role of corporate cash is only one of the global issues regarding government accountability.

USAID, the federal agency that administers civilian foreign aid, defines measures government accountability by these key factors: a free and fair political justice system; protection of human rights; a vibrant civil society; public confidence in the police and courts, and security sector reform.

To aid in protecting citizens, the Government Accountability program protects federal, state, and local whistleblowers who spot problems and report them to appropriate agencies. In this model, governments are held accountable through unofficial, internal audit. Anyone can report anyone else for improper behavior, forcing accountability to be systematic and prevalent throughout organizations.

Media Accountability

The media in the U.S. is uniquely protected by the First Amendment from interference by Congress. This does not mean that it is free from accountability.

The media have long been under the constant scrutiny of a number of watchdogs, internal and external. In the internet era, these have been augmented by independent fact-checking organizations such as FactCheck.org, Snopes, and PolitiFact. These and other organizations monitor the media for bias and errors and publish their findings for all to see.

Now, through the introduction of social media, individuals can now easily contribute to media. There is arguement whether the platforms (i.e. Facebook) it is a publisher or if the users of the platform are the publishers. In either case, social media continues to be under fire for spreading dangerous misinformation, providing a platform for hate speech, and having a generally lacking sense of accountability.

Accountability in the Workplace

For companies to be successful, employees must conduct themselves with accountability. This is done is several ways.

First, there are soft skill aspects of accountability. Accountability includes showing up to work when expected and showing up to work prepared for the tasks for the day. Accountability extends to every department and every employee, as it starts with being present, honest, and engaged in every day tasks outside of one’s job.

There is also a deep rooted sense of accountability in specific positions. Professionals who handle physical or digital money have a standard of accountability to be honest and responsible with funds that do not belong to them personally. Managers have a duty of accountability to properly oversee employees, treat them well, and guide them through growth opportunities.

There’s a few ways a company builds, manages, and sustains accountable practices, such as:

• Making employees verbally commit to completing certain tasks and ensuring them follow through with these tasks.
• Having upper management set expectations on the duties to be completed and the associated deadlines.
• Creating a safe environment where taking risks is rewarded and learning occurs in a natural, non-threatening way.
• Defining ownership of tasks, projects, or other aspects of work. Should there be a problem, the owner of that task or project must be held accountable.

Benefits of Accountability

Accountability will be different at every company. However, there are overarching benefits that accountability can provide should a business be able to appropriately execute accountability practices:

• Accountability promotes operational excellence. When employees understand that their work is being looked at and will be evaluated, they are more likely to put forth stronger effort as it is understood that what they do matters. This is especially true when employees are rewarded for strong accountability with raises, promotions, and public recognition.
• Accountability safeguards company resources. Accountability is not limited to just doing your job; it is the practice of being honest and responsible for your actions in all situations. When employees are accountable, they are held to a standard that company resources are to be respected, and employees are less like to mistreat company assets as they understand there will be consequences for their actions.
• Accountability yields more accurate results. Companies with a standard of accountability will have boundaries of acceptable deviation. For example, a company may allow for a certain dollar threshold of financial misstatement due to immateriality. If a company holds itself accountable to a low threshold of materiality, it will not accept larger errors, unexplainable variances, or delays in reporting.
• Accountability builds external investor trust. An investor’s confidence in a company is only driven so far based off of the prospect of financial success. Investors must believe that a company is well-run, honest, competent, and efficient with its resources. If a company can demonstrate their accountability, they will be seen more favorable, especially compared against an untrustworthy adversary.

Accountability in the Real World

Corporate accountability can be hard to quantify but that doesn’t stop anyone from trying.

The publication Visual Capitalist ranked the best performing U.S. corporations on environmental, social, and corporate governance issues. The top performer on environmental issues was HP, which has decreased its greenhouse gas emissions by 44% since 2015. General Motors got the highest marks for social responsibility as the only U.S. company with a woman as both CEO and CFO. Qualcomm topped the list in corporate governance due to its introduction of STEM programs for women and minorities.

Some high-profile accounting scandals in the past demonstrated that a public company cannot continue to exist if it loses the trust of the financial markets and regulators.

The erstwhile energy giant Enron collapsed in 2001, taking the venerable accounting firm Arthur Andersen with it after its false accounting methods were exposed. The global financial crisis in 2008–2009 revealed gross financial speculation by some of the nation’s biggest banking institutions. The LIBOR scandal revealed currency rate manipulation by several London banks.

But many leaders have called for the creation of a new culture of accountability in finance—one that comes from within.

The Bottom Line

Accountability can be a management buzzword, or it can be a real framework for evaluating the success or failure of an individual or an entity. The concept of corporate accountability has always meant honest and transparent financial reporting. In recent years that concept has expanded to encompass a corporation’s performance and responsiveness to environmental, social, and community issues.

What Is Activity-Based Costing (ABC)?

Activity-based costing (ABC) is a costing method that assigns overhead and indirect costs to related products and services. This accounting method of costing recognizes the relationship between costs, overhead activities, and manufactured products, assigning indirect costs to products less arbitrarily than traditional costing methods. However, some indirect costs, such as management and office staff salaries, are difficult to assign to a product.

How Activity-Based Costing (ABC) Works

Activity-based costing (ABC) is mostly used in the manufacturing industry since it enhances the reliability of cost data, hence producing nearly true costs and better classifying the costs incurred by the company during its production process.

This costing system is used in target costing, product costing, product line profitability analysis, customer profitability analysis, and service pricing. Activity-based costing is used to get a better grasp on costs, allowing companies to form a more appropriate pricing strategy. 

The formula for activity-based costing is the cost pool total divided by cost driver, which yields the cost driver rate. The cost driver rate is used in activity-based costing to calculate the amount of overhead and indirect costs related to a particular activity. 

The ABC calculation is as follows:  

1. Identify all the activities required to create the product. 
2. Divide the activities into cost pools, which includes all the individual costs related to an activity—such as manufacturing. Calculate the total overhead of each cost pool.
3. Assign each cost pool activity cost drivers, such as hours or units. 
4. Calculate the cost driver rate by dividing the total overhead in each cost pool by the total cost drivers. 
5. Divide the total overhead of each cost pool by the total cost drivers to get the cost driver rate. 
6. Multiply the cost driver rate by the number of cost drivers. 

As an activity-based costing example, consider Company ABC that has a $50,000 per year electricity bill. The number of labor hours has a direct impact on the electric bill. For the year, there were 2,500 labor hours worked, which in this example is the cost driver. Calculating the cost driver rate is done by dividing the $50,000 a year electric bill by the 2,500 hours, yielding a cost driver rate of $20. For Product XYZ, the company uses electricity for 10 hours. The overhead costs for the product are $200, or $20 times 10.

Requirements for Activity-Based Costing (ABC)

The ABC system of cost accounting is based on activities, which are any events, units of work, or tasks with a specific goal, such as setting up machines for production, designing products, distributing finished goods, or operating machines. Activities consume overhead resources and are considered cost objects.

Under the ABC system, an activity can also be considered as any transaction or event that is a cost driver. A cost driver, also known as an activity driver, is used to refer to an allocation base. Examples of cost drivers include machine setups, maintenance requests, consumed power, purchase orders, quality inspections, or production orders.

There are two categories of activity measures: transaction drivers, which involves counting how many times an activity occurs, and duration drivers, which measure how long an activity takes to complete.

Unlike traditional cost measurement systems that depend on volume count, such as machine hours and/or direct labor hours to allocate indirect or overhead costs to products, the ABC system classifies five broad levels of activity that are, to a certain extent, unrelated to how many units are produced. These levels include batch-level activity, unit-level activity, customer-level activity, organization-sustaining activity, and product-level activity.

Benefits of Activity-Based Costing (ABC)

Activity-based costing (ABC) enhances the costing process in three ways. First, it expands the number of cost pools that can be used to assemble overhead costs. Instead of accumulating all costs in one company-wide pool, it pools costs by activity. 

Second, it creates new bases for assigning overhead costs to items such that costs are allocated based on the activities that generate costs instead of on volume measures, such as machine hours or direct labor costs. 

Finally, ABC alters the nature of several indirect costs, making costs previously considered indirect—such as depreciation, utilities, or salaries—traceable to certain activities. Alternatively, ABC transfers overhead costs from high-volume products to low-volume products, raising the unit cost of low-volume products.

What Is the Adjusted Closing Price?

The adjusted closing price amends a stock’s closing price to reflect that stock’s value after accounting for any corporate actions. It is often used when examining historical returns or doing a detailed analysis of past performance.

Understanding the Adjusted Closing Price

Stock values are stated in terms of the closing price and the adjusted closing price. The closing price is the raw price, which is just the cash value of the last transacted price before the market closes. The adjusted closing price factors in anything that might affect the stock price after the market closes.

A stock’s price is typically affected by supply and demand of market participants. However, some corporate actions, such as stock splits, dividends, and rights offerings, affect a stock’s price. Adjustments allow investors to obtain an accurate record of the stock’s performance. Investors should understand how corporate actions are accounted for in a stock’s adjusted closing price. It is especially useful when examining historical returns because it gives analysts an accurate representation of the firm’s equity value.

Types of Adjustments

Adjusting Prices for Stock Splits

A stock split is a corporate action intended to make the firm’s shares more affordable for average investors. A stock split does not change a company’s total market capitalization, but it does affect the company’s stock price.

For example, a company’s board of directors may decide to split the company’s stock 3-for-1. Therefore, the company’s shares outstanding increase by a multiple of three, while its share price is divided by three. Suppose a stock closed at $300 the day before its stock split. In this case, the closing price is adjusted to $100 ($300 divided by 3) per share to maintain a consistent standard of comparison. Similarly, all other previous closing prices for that company would be divided by three to obtain the adjusted closing prices.

Adjusting for Dividends

Common distributions that affect a stock’s price include cash dividends and stock dividends. The difference between cash dividends and stock dividends is that shareholders are entitled to a predetermined price per share and additional shares, respectively.

For example, assume a company declared a $1 cash dividend and was trading at $51 per share before then. All other things being equal, the stock price would fall to $50 because that $1 per share is no longer part of the company’s assets. However, the dividends are still part of the investor’s returns. By subtracting dividends from previous stock prices, we obtain the adjusted closing prices and a better picture of returns.

Adjusting for Rights Offerings

A stock’s adjusted closing price also reflects rights offerings that may occur. A rights offering is an issue of rights given to existing shareholders, which entitles the shareholders to subscribe to the rights issue in proportion to their shares. That will lower the value of existing shares because supply increases have a dilutive effect on the existing shares.

For example, assume a company declares a rights offering, in which existing shareholders are entitled to one additional share for every two shares owned. Assume the stock is trading at $50, and existing shareholders can purchase additional shares at a subscription price of $45. After the rights offering, the adjusted closing price is calculated based on the adjusting factor and the closing price.

Benefits of the Adjusted Closing Price

The main advantage of adjusted closing prices is that they make it easier to evaluate stock performance. Firstly, the adjusted closing price helps investors understand how much they would have made by investing in a given asset. Most obviously, a 2-for-1 stock split does not cause investors to lose half their money. Since successful stocks often split repeatedly, graphs of their performance would be hard to interpret without adjusted closing prices.

Secondly, the adjusted closing price allows investors to compare the performance of two or more assets. Aside from the clear issues with stock splits, failing to account for dividends tends to understate the profitability of value stocks and dividend growth stocks. Using the adjusted closing price is also essential when comparing the returns of different asset classes over the long term. For example, the prices of high-yield bonds tend to fall in the long run. That does not mean these bonds are necessarily poor investments. Their high yields offset the losses and more, which can be seen by looking at the adjusted closing prices of high-yield bond funds.

Criticism of the Adjusted Closing Price

The nominal closing price of a stock or other asset can convey useful information. This information is destroyed by converting that price into an adjusted closing price. In actual practice, many speculators place buy and sell orders at certain prices, such as $100. As a result, a sort of tug of war can take place between bulls and bears at these key prices. If the bulls win, a breakout may occur and send the asset price soaring. Similarly, a win for the bears can lead to a breakdown and further losses. The adjusted close stock price obscures these events.

By looking at the actual closing price at the time, investors can get a better idea of what was going on and understand contemporary accounts. If investors look at historical records, they will find many examples of tremendous public interest in nominal levels. Perhaps the most famous is the role that Dow 1,000 played in the 1966 to 1982 secular bear market. During that period, the Dow Jones Industrial Average (DJIA) repeatedly hit 1,000, only to fall back shortly after that. The breakout finally took place in 1982, and the Dow never dropped below 1,000 again. This phenomenon is covered up somewhat by adding dividends to obtain the adjusted closing prices.

In general, adjusted closing prices are less useful for more speculative stocks. Jesse Livermore provided an excellent account of the impact of key nominal prices, such as $100 and $300, on Anaconda Copper in the early 20th century. In the early 21st century, similar patterns occurred with Netflix (NFLX) and Tesla (TSLA). William J. O’Neil gave examples where stock splits, far from being irrelevant, marked the beginnings of real declines in the stock price. While arguably irrational, the impact of nominal prices on stocks could be an example of a self-fulfilling prophecy.

What Is an Amortization Schedule?

Amortizing loans feature level payment amounts over the life of the loan, but with varying proportions of interest and principal making up each payment. A traditional mortgage is a prime example of such a loan.

A loan amortization schedule represents the complete table of periodic loan payments, showing the amount of principal and interest that comprise each level payment until the loan is paid off at the end of its term. Early in the schedule, the majority of each payment goes toward interest; later in the schedule, the majority of each payment begins to cover the loan’s remaining principal.

Understanding an Amortization Schedule

If you are taking out a mortgage or auto loan, your lender should provide you with a copy of your loan amortization schedule so you can see at a glance what the loan will cost and how the principal and interest will be broken down over its life.

In a loan amortization schedule, the percentage of each payment that goes toward interest diminishes a bit with each payment and the percentage that goes toward principal increases. Take, for example, a loan amortization schedule for a $165,000, 30-year fixed-rate mortgage with a 4.5% interest rate:

Amortization schedules can be customized based on your loan and your personal circumstances. With more sophisticated amortization calculators, like the templates you can find in Excel you can compare how making accelerated payments can accelerate your amortization. If for example, you are expecting an inheritance, or you get a set yearly bonus, you can use these tools to compare how applying that windfall to your debt can affect your loan’s maturity date and your interest cost over the life of the loan.

In addition to mortgages, car loans and personal loans are also amortizing for a term set in advance, at a fixed interest rate with a set monthly payment. The terms vary depending on the asset. Most conventional home loans are 15- or 30-year terms. Car owners often get an auto loan that will be repaid over five years or less. For personal loans, three years is a common term.

Formulas Used in Amortization Schedules

Borrowers and lenders use amortization schedules for installment loans that have payoff dates that are known at the time the loan is taken out, such as a mortgage or a car loan. There are specific formulas that are used to develop a loan amortization schedule. These formulas may be built into the software you are using, or you may need to set up your amortization schedule from scratch.

If you know the term of a loan and the total periodic payment amount, there is an easy way to calculate a loan amortization schedule without resorting to the use of an online amortization schedule or calculator. The formula to calculate the monthly principal due on an amortized loan is as follows:

Principal Payment = Total Monthly Payment – [Outstanding Loan Balance x (Interest Rate / 12 Months)]

To illustrate, imagine a loan has a 30-year term, a 4.5% interest rate, and a monthly payment of $1,266.71. Starting in month one, multiply the loan balance ($250,000) by the periodic interest rate. The periodic interest rate is one-twelfth of 4.5% (or 0.00375), so the resulting equation is $250,000 x 0.00375 = $937.50. The result is the first month’s interest payment. Subtract that amount from the periodic payment ($1,266.71 – $937.50) to calculate the portion of the loan payment allocated to the principal of the loan’s balance ($329.21).

To calculate the next month’s interest and principal payments, subtract the principal payment made in month one ($329.21) from the loan balance ($250,000) to get the new loan balance ($249,670.79), and then repeat the steps above to calculate which portion of the second payment is allocated to interest and which is allocated to the principal. You can repeat these steps until you have created an amortization schedule for the full life of the loan.

An Easier Way to Calculate an Amortization Schedule

Calculating an amortization schedule is as simple as entering the principal, interest rate, and loan term into a loan amortization calculator. But you can also calculate it by hand if you know the rate on the loan, the principal amount borrowed, and the loan term.

How to Calculate the Total Monthly Payment

Typically, the total monthly payment is specified by your lender when you take out a loan. However, if you are attempting to estimate or compare monthly payments based on a given set of factors, such as loan amount and interest rate, you may need to calculate the monthly payment as well.

If you need to calculate the total monthly payment for any reason, the formula is as follows:

Total Monthly Payment = Loan Amount [ i (1+i) ^ n / ((1+i) ^ n) – 1) ]

where:

• i = monthly interest rate. You’ll need to divide your annual interest rate by 12. For example, if your annual interest rate is 6%, your monthly interest rate will be .005 (.06 annual interest rate / 12 months).
• n = number of payments over the loan’s lifetime. Multiply the number of years in your loan term by 12. For example, a 30-year mortgage loan would have 360 payments (30 years x 12 months).

Using the same example from above, we will calculate the monthly payment on a $250,000 loan with a 30-year term and a 4.5% interest rate. The equation gives us $250,000 [(0.00375 (1.00375) ^ 360) / ((1.00375) ^ 360) – 1) ] = $1,266.71. The result is the total monthly payment due on the loan, including both principal and interest charges.

30-Year vs. 15-Year Amortization Table

If a borrower chooses a shorter amortization period for their mortgage—for example, 15 years—they will save considerably on interest over the life of the loan, and they will own the house sooner. That’s because they’ll make fewer payments for which interest will be amortized. Additionally, interest rates on shorter-term loans are often at a discount compared to longer-term loans.

There is a tradeoff, however. A shorter amortization window increases the monthly payment due on the loan. Short amortization mortgages are good options for borrowers who can handle higher monthly payments without hardship; they still involve making 180 sequential payments (15 years x 12 months).

It’s important to consider whether or not you can maintain that level of payment based on your current income and budget.

Using an amortization calculator can help you compare loan payments against potential interest savings for a shorter amortization to decide which option suits you best. Here’s what a $500,000 loan with a 6% interest rate would look like, with a hypothetical 30-year and 15-year schedule to compare: