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300 PART 4 • STRATEGY EVALUATION

5. Assess the counterimpact of each contingency plan. That is, estimate how
much each contingency plan will capitalize on or cancel out its associated
contingent event. Doing this will quantify the potential value of each contingency
plan.
6. Determine early warning signals for key contingent events. Monitor the early warning
signals.
7. For contingent events with reliable early warning signals, develop advance action
plans to take advantage of the available lead time. 11

Auditing

A frequently used tool in strategy evaluation is the audit. Auditing is defined by the
American Accounting Association (AAA) as “a systematic process of objectively obtain-
ing and evaluating evidence regarding assertions about economic actions and events to
ascertain the degree of correspondence between these assertions and established criteria,
and communicating the results to interested users.” 12
Auditors examine the financial statement of firms to determine whether they have
been prepared according to generally accepted accounting principles (GAAP) and whether
they fairly represent the activities of the firm. Independent auditors use a set of standards
called generally accepted auditing standards (GAAS). Public accounting firms often have
a consulting arm that provides strategy-evaluation services. The SEC in late 2009 charged
General Electric with accounting fraud, specifically for inflating its earnings and revenues
in prior years. GE has agreed to pay $50 million to settle the charges. (Students—when
preparing projected financial statements as described in Chapter 8, do not inflate the
numbers.)
The new era of international financial reporting standards (IFRS) appears unstop-
pable, and businesses need to go ahead and get ready to use IFRS. Many U.S. companies
now report their finances using both the old generally accepted accounting standards
(GAAP) and the new IFRS. “If companies don’t prepare, if they don’t start three years in
advance,” warns business professor Donna Street at the University of Dayton, “they’re
going to be in big trouble.” GAAP standards comprised 25,000 pages, whereas IFRS
comprises only 5,000 pages, so in that sense IFRS is less cumbersome.
This accounting switch from GAAP to IFRS in the United States is going to cost busi-
nesses millions of dollars in fees and upgraded software systems and training. U.S. CPAs
need to study global accounting principles intensely, and business schools should go ahead
and begin teaching students the new accounting standards.
All companies have the option to use the IFRS procedures in 2011, and then all com-
panies are required to use IFRS in 2014, unless that timetable is changed. The U.S.
Chamber of Commerce supports the change, saying it will lead to much more cross-border
commerce and will help the United States compete in the world economy. Already the
European Union and 113 nations have adopted or soon plan to use international rules,
including Australia, China, India, Mexico, and Canada. So the United States likely will
also adopt IFRS rules on schedule, but this switch could unleash a legal and regulatory
nightmare. The United States lags the rest of the world in global accounting. But a few
U.S. multinational firms already use IFRS for their foreign subsidiaries, such as United
Technologies (UT). UT derives more than 60 percent of its revenues from abroad and is
already training its entire staff to use IFRS. UT has redone its 2007 through 2009 financial
statements in the IFRS format.
Movement to IFRS from GAAP encompasses a company’s entire operations, includ-
ing auditing, oversight, cash management, taxes, technology, software, investing, acquir-
ing, merging, importing, exporting, pension planning, and partnering. Switching from
GAAP to IFRS is also likely to be plagued by gaping differences in business customs,
financial regulations, tax laws, politics, and other factors. One critic of the upcoming
switch is Charles Niemeier of the Public Company Accounting Oversight Board, who says
the switch “has the potential to be a Tower of Babel,” costing firms millions when they do
not even have thousands to spend.