Wednesday, March 5, 2008

Using cost accounting to rate good works

Dear Colleagues

Accounting has the potential to be used much more effectively than what has been happening for the past 20 odd years.

I recently listened to a presentation about a company that was very committed to doing global social good as well as being a profitable company. But it was disconcerting that while there was a complete system of accounting metrics that related to the profit performance of the company ... there were really no metrics whatsoever about the performance characteristics of the social good activities.

The company had identified the problem of orphans in Africa as a priority ... and more specifically the orphans in Rwanda. The company has chosen to fund an orphanage in Rwanda along the lines of the orphan establishments that were organized in Israel afer the Second World War.

There is no question that assistance for orphans is worthy of support ... but the challenge of determining what is best to do should probably be done with considerably more rigor than is now normal.

The number of orphans in Sub-Sahara Africa is huge. The crisis of war and violence, and the crisis of AIDS has resulted in an orphan population of many millions ... probably as many as 20 million (this may be very wrong ... low ... need to check!) compared to a total population around 500 million.

A residential orphanage that serves 100 orphans at a cost per orphan per year of (say) $1,000 works for a small population, but does not work for the size of orphan population there is in Africa. Rather, programs need to be supported that will give orphan children an opportunity at (say) $50 per orphan per year. This cannot be a residential program, but rather must be a community program.

Planners from New York, or San Francisco, or London, or Geneva may not appreciate the potential of the community itself to help the people who live in the community ... but the biggest resource is not external money or external talent but the talent and energy of local people.

And traditional accountancy has failed to do accounting that takes into consideration the value of goods and services that are "costless" because they are freely given.

The conclusion

This Rwanda orphanage is certainly justified in terms of value for a few orphans ... but the cost effectiveness is very low compared to what would have been possible using the same funds in the optimal way for the broader society. A much greater societal value would have been obtained using a community based program that served thousands rather than hundreds.


Peter Burgess

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