Impact of Fair Value on Creative Accounting

Impact of Fair Value on Creative Accounting 1 Introduction As Blake and Lunt (2000, p.375) rightly surmise within their work on accounting standards, the term â€Å"creative accounting,† was originally coined by the media, and it was particularly prevalent around the time of the Enron financial disaster. It was partially because of the financial collapses of firms like Enron and the major debate that followed these events, that International Accounting Standards were introduced. Amongst the main objectives of these standards, which were intended to make financial statements easier to understand and provide for more transparency (Alfredson et at 2007, p.6), one of the aims was curtail future opportunities for creative accounting. The IASB, when designing these standards started from the premise that corporate business had an obligation to account to investors, creditors and other stakeholder on a regular basis, usually within the annual financial statements, about the â€Å"performance, situation and future prospects of that business† (Alfredson et al 2007, p.4), which the focus being on the accuracy of this information. It thus sought to legalise this obligation and, through the standards, ensure that this result was achieved. However, despite the introduction of the standards and regulations, as Mulford and Comiskev (2002), Blake and Lunt (2000) have observed, irregularities in financial statements are still occurring. Many academic and professional observers are of the opinion that the measurements introduced by the IASB is serving to â€Å"obscure concrete evidence† in financial statements (Swanson and Miller 1989, p.1). In particular these concerns are centred around the boards movement away from historical cost accounting to a system of â€Å"fair value† accounting (Alfredson et al 2007, p.48), the introduction 4 of which was against the wishes of many stakeholders (Williams 2006). Fair value is intended to improve the accounting measurements used in financial statements by ensuring that these reflect relevant and current valuations of the business (Blake and Gowthorpe 1998, p.1). However, the argument against fair value, quite apart from the fact that it takes up an inordinate amount of management time (Scott 2003, p.2), is that it provides opportunity for manipulation and misuse and thus increases the potential for creative accounting. This is particularly prevalent in the area of asset valuation. The intention of this study is to investigate the arguments and debate that continues to surround the concepts and practices of creative accounting and the impact, if any, that â€Å"fair value† has had upon this issue. In particular, the study will concentrate upon these elements in relation to their use in the valuation of property, plant and equipment and investment property, which can in many companies, form a major part of their current balance sheet valuation. The objective is to assess and evaluate whether the introduction of the fair value concept has led to the intended improvement of financial reporting in these specific areas of the financial statements, or if creative accounting methods and processes are still being used to circumvent these improvements. It has been decided to conduct this research by using a literature review format. 2 Definitions, meanings and theories of creative accounting 2.1 Definitions and meanings Before being able to assess the extent to which the concept of â€Å"fair value† has impacted upon the reporting accurate values of assets in financial statements and the reduction of the prevalence creative accounting following the introduction of new standards and measurements, if any, it is important to understand the meaning and theories of creative accounting. Furthermore, understanding the reasons why these actions are being taken by so many corporate organisations is of equal relevance. Within the wealth of literature surrounding accounting and accounting standards, there are a wealth of diverse definitions for the term creative accounting Hey Cunningham, D (2002). For example, from an academic viewpoint Blake and Lunt (2000, p.375) define it as â€Å"that which does not faithfully represent the underlying commercial activity and is therefore not neutral.† Amat et al (1999, p.3) use even stronger terms to define creative ac counting, which they indicate is â€Å"a process whereby accountants use their knowledge of accounting rules to manipulate the figures reported in the accounts of a business.† As is perhaps to be expected, other stakeholders have been more forthright in their definitions and opinions. A business journalist, Ian Griffiths (quoted in Amat et al 1999, p.3), reveals the media view when he stated, â€Å"Every set of published accounts is based on books which have been gently cooked or completely roasted† commenting further that â€Å"It is legitimate. It is creative accounting.† An Investment analyst, Terry Smith, interviewed by the same authors (Amat et al 6 1999), also showed the level of concern felt about creative accounting in this segment of stakeholders. He commented, â€Å"We felt that much of the apparent growth in profits which had occurred in the 1980s was the result of accounting sleight of hand rather that genuine economic growth.† 2.2 Acceptance and reasons Acceptance levels and appropriateness in regards to the performance of creative accounting also show similar differences of opinions depending upon which particular stakeholder views are garnered. Whilst many say that manipulation, which is at the foundation of creative accounting, is an inevitability that cannot be addressed, whilst others believe that is the weakness of rules and measurements that allow this practice to continue (Langendijk et al 2003, p.31 and p.350). It is apparent that the media and investors support the latter of these opinions. However, according to a survey conducted by Amat et al (1999, p.13) as part of their research into creative accounting, the auditor profession not only believed that it was inevitable, with 91% of UK respondents believing that it could not be solve, but also over a third were of the opinion that it was a â€Å"legitimate business tool.† As indicated earlier, it is also felt that the introduction of the â€Å"fair value† concept as a measurement that would reduce the incidence of creative accounting is criticised as not being capable of fulfilling this role. The consensus is that this concept is expensive to implement, difficult to determine and verify, due mainly to objectivity characteristics, and is therefore easy for the opportunistic organisation to manipulate (Benston 12008, p.103). 2.3 Manifestation and methods of creative accounting Historically, creative accounting methods are used in a number of ways, all of which are designed to influence the financial statements and results produced by commercial organisations. Irrespective of whether these are directed towards the profit and loss account or balance sheet, all of these methods will have the effect of altering, or manipulating, the value of the business. One popular method is that known as â€Å"income smoothing† (Alfredson et al 2007, p.682). The objective of this method is to avoid the appearance of volatile changes in profit growth levels. For example, if a business moves from  £1 million profit in one year to  £2 million in the next, but it is expected that the third year profits would fall by 25% in comparison to year two, income smoothing may be implemented in this year. The smoothing effect is designed to show a more controlled and sustained level of growth The smoothing process can be achieved in a number of ways. One of the most obvious routes of achieving this situation is by the manipulation of provisions or accruals (Antill and Lee 2005, p.129). In the case described above increasing accruals or reducing debtors would have the desired effect of moving profit from the second year into the third, thus smoothing out the volatile look of the profit curve that previously existed. As some of these provisions are based upon estimations, manipulation is difficult to verify (Alfredson et al 2007, p.682). For example, within the financial statements of financial institutions such as banks, there is a requirement to provide for existing and potential bad debts. As an significant element of the bad debt provision calculation is based upon judgement, which can be biased, it is possible for these figures to be manipulated to show a more favourable position than might in reality be the case. Another method of manipulating the financial results is related to earnings management. In this case the management of the business will have a particular target in mind (Mulford and Comiskev 2002, p.15). One target might be to move earnings from one year to another with the specific intent of manipulating the profitability of the business for that particular year. An example of this is given in the research of Amat et al (1999), where they took an existing investment that had a historical cost of  £1 million but a current value of  £3 million. As the business managers in this situation have the freedom to choose exactly which year they can sell the investment and realise the profit, they have the ability to manipulate the financial statement results by their decision. Alternatively, sometimes a special â€Å"one off† charge may be included within the accounts, which will depress the profits and earnings. For example, if the payment of a lawsuit has been agreed to be completed over a period of years, it is possible that the management will decide to include all of these payments within one year. The management is then able to explain away part of the poor performance as result from this exceptional event. The difficulty is that, upon further examination of some exceptional items in corporate financial statement, it is often difficult to justify them being excluded from normal business operations. Therefore, it could be argued that they are, in effect, simply attempts to â€Å"window dress† the figures in an effort to put a more positive view on the results (Stolowy and Beton 2004). One element of earnings management that has proven popular with corporate management is the â€Å"big bath† scenario, which is seen by academics as an opportunistic method of creative accounting (Reidl 2004, p.823). The theory behind the â€Å"big bath† is particularly useful when an organisations management can foresee that the results for a current year are going to be poor. To limit the impact that this might have upon the future, and effectively to show that this situation will soon be reversed, management will seek to increase these losses. In other words, they will â€Å"dump† as much expense as they can into the bad year (hence the term big bath) so that the next years profit show a more significant improvement in the companys fortunes. Often this method of creative accounting will be used where there has been a change of management during the year. By affecting the big bath method, the new CEO is able to pass the blame for poor results onto the previous m anagement team (Riahi-Belkaoui 2004 p.58). Of course, the manipulated improvement to the following years profits will have the benefit of improving the new teams reputation with investors and other stakeholders. Another example of creative accounting is apparent in the methods used by corporations to move items off balance sheet, particularly in the case of debt and financing (Pierce-Brown and Steele 1999, p.159). For example, where corporations sell property portfolios through a process of sale and leaseback, profits can be enhanced by manipulating the value of the portfolio. The downside of this process is that increases the rental amount but, the advantages are that this is spread over a number of years and, in addition, the increased values will have an immediate positive effect upon the current value of the business. In addition, companies are also afforded the ability through these processes to violate and circumvent debt covenants (Mulford and Comiskev 2002, p.91). As Pierce-Brown and Steele (1999, p.162) suggest, all it requires to achieve this situation is a change in the accounting policies put in place for the organisation. In a number of creative accounting methods described within this section, particularly those relating to fixed assets, the key element of the method is its reliance upon judgement. If corporations therefore wish to manipulate their results in any of these ways therefore, all they have to do is ensure that the judgement secured is biased in the direction they require (Alfredson et al 2007, p.259). With auditors, actuaries and other experts having differing standards by which they would estimate valuations, for example some would be more cautious than others, influencing financial results in a particular direction is not impossible to achieve. One of the concerns that have been expressed following the change to fair value is that, rather than reducing the opportunity for manipulation and creative accounting that previously existed, in certain areas this measurement has increased the potential. This is particularly seen to be the case in terms of business assets (Antill and Lee (2005) and Stolowy and Breton (2004)). For example, as with other areas of manipulation, the ability to be able to choose between some elements of asset valuations being based upon the historical cost basis, or using the fair value method of revaluation, this area can also be seen to have the potential of being influenced by biased judgements. 2.4 Purpose of creative accounting We have seen that the main result achieved from using the various methods of creative accounting is to change the revenue, earnings and value of the business, but the real question is for what purpose is being employed? In other words, which stakeholders does it benefit or disadvantage? The answer to these questions, as the literature being reviewed has indicated, the purpose of creative accounting has different objectives for each segment of stakeholders (Blake and Lunt 2000). Firstly, many academic have concentrated upon the effect and benefit that creative accounting might have for the one group of stakeholders who are closest to the corporate operations, which would be the management team. The salaries, bonuses and other rewards for most CEOs and senior management are linked to the performance of the business and, if these performance levels are not reached, the rewards will not be forthcoming. However, there is no negative impact on salaries related to the amount by which targets are missed, for example, whether the results are  £1 million of  £5 million below target salaries will remain the same. Therefore, if the CEO believes that in a particular year the business will not reach the required target, it is to his or her advantage to shift earnings from that year into the next in order to enhance and improve the potential size of future rewards (Investopedia 2008). Furthermore, as has already been indicated in the previous section, management earnings manipulation is also a useful tool in enhancing the reputation of the management team itself. In addition to the benefits available to a new CEO and team as outlined, it is also possible that the same process will be used by management teams exiting the business to improve their attraction to future employees (Riahi-Belkaoui 2004). In other words it is being used for self interest purposes by the management (Scott 2003, p.91). Wealth transfer is another popular reason for manipulation (Stolowy and Breton 2004). This is especially prevalent where there is a group situation with a number of subsidiary companies involved, where it is not difficult to manipulate the accounts by moving earnings or assets from one of the businesses to another. Such a scenario might be seen as favourable where part of the corporate assets, in terms of one of the group corporations, might be being groomed for possible tak eover or flotation. Furthermore, in the case of a multinational, this method of Creative accounting is useful in transferring wealth from a business located in one country to that operating in another national location. In this case it can be helpful in combating political pressure that might be being exerted to transfer wealth away from the corporation (Pierce-Brown and Steele 1999, p.161). Further evidence of manipulation for political purposes was examined in the work of Stolowy and Breton (2000, p.13). In this case they looked at this mode of creative accounting as related to corporations within the oil industry. What they found was that, during periods such as the Gulf War, which resulted in increased retail prices of fuel, these corporations adopted accounting policies that were designed to reduce their revenue. The purpose of this exercise was to limit the potential â€Å"political consequences† that might result from their organisations being seen to make higher profits during this period. Finally, and perhaps the most important reason for creative accounting methods, it is the impact that these changes have upon current and potential investors that is often the focus of these actions. Most academic and professional researchers and observers, including Tweedie and Whittington (1990), Antill and Lee (2006), Barker (2001) amongst others, see this purpose as being the prime objective of creative accounting. Manipulating revenues and balance sheet items, as well as earnings management are intended to present the corporation to the investor in a good and positive light, encouraging them to make and/or retain the investment (Stolowy and Breton 2000, p.10). These methods can also be used to have a positive impact upon investors decision making indicators, such as the P/E ratio (Barker 2001, p.2) and cash flow statements (Mulford and Comiskev 2002, p.354). One of the adverse problems of this manipulation process is that it also has an effect upon the â€Å"accounting for risk† (Babbel et al 2003, p.16) and this can affect a whole industry. A typical example of this happening in practice can be witnessed in the current credit crunch (2008). There are those who argue that the effects of this event were exaggerated because of the financial institutions propensity for manipulating bad debts. It can be argued therefore that, whatever the immediate benefits are of creative accounting, and irrespective of which stakeholders receive those benefits, at some future stage there is likely to be witnessed an adverse reaction that will eliminate the short-term benefits. Furthermore, as the current bank crisis has indicated, the potential losses from this future reaction can threaten the continued existence of the corporation. 3 Accounting measurements and controversial issues The international financial reporting standards, as indicated previously, were designed to reduce creative accounting. Two areas which were singled out for particular attention within this situation were the accounting standards to be used for the valuation of property, plant and equipment and investment property as these were seen as areas of the financial statements that have a significant influence upon the value of a corporation (IASB 2008). 3.1 Methods of measurements There have been a number of measurements used in the past to arrive at a realistic value for these assets. The most commonly used was the historical cost method. This method used the initial cost of the asset as a starting point and then, as it was used within the business, depreciated that asset over what was considered its useful life, often using what was known as the direct line method of depreciation or amortisation. Foe example, if a particular item of equipment cost  £10,000 and its life expectancy within the firm was set at 5 years, that asset would depreciate at  £2,000 per annum. However, as Mulford and Comiskev (2002, p.321) rightly observe, the drawback to this system is that it often does not â€Å"correlate with assets whose value did not diminish predictably over time.† In the case of the  £10,000 item used above, it might be that, at the end of its useful life to the company it was sold for  £2,500, which means that, if this is received at the end of th e useful life period, profits for the business for that year were enhanced by this amount. The argument against this system is that during the course of the previous four years the true value of the asset was not being reflected in the financial statements and this had an adverse effect on the value of the firm (Blake and Lunt 2000). Another method of measurement that was used within some financial accounting environments was replacement value (Lindsell 2005). This method takes the cost of replacement as its marker for valuation rather than the historical price paid. It also relies upon the current value of the used equipment to provide a calculation of the difference. Using the example of the  £10,000 asset as an example, if the replacement cost was  £11,000 and the amount receivable should the used asset be sold is  £9,000, there is a difference of  £2,000 to be accounted for. This differential would effectively replace the depreciation reserve used within the historical cost method and was deemed by some to be more appropriate in that it reflected known values (Bens and Heltzer 2004). The only risk element in using this method is taking into account the judgement on the sale of the used asset. A further method of measurement was introduced that relied upon exit value. The basic concept of this method was that it used the sales value of the corporations assets (Barker 2001, p.87). The calculation of this value might for example, be used in the case of the business being acquired by another or its value upon failure. The difficulty with both of these situations is that unless either situation was imminent, judgements and estimations had to be used to assess these values. One issue that arose with exit value, particularly in respect of the valuation of assets such as property, was the inclination to undervalue the asset for tax reasons (Mulford and Comiskev 2002, p.131). Others have referred to the asset sale element of this measurement as the net realisable value (NRV). This takes into account the market for the asset, the maximum return likely to be achieved, then deducts the cost of transportation and other ancillary disposal costs before arriving at the NRV value (Van Zij i and Whittington 2006, p.3). Prior to the settlement on fair value as being the most appropriate measurements, one measure that most academics thought would be favoured by the â€Å"Standard setters† was the deprival value approach (Van Ziji and Whittington 2006, p.3.). The intention of this process was to determine the cost of the asset based upon the removal effect that it would have upon the business, in other words what cost would the business incur if it was deprived of that asset. As indicated, many academics thought this method would produce the accurate results. However, the professionals were not of the same opinion (Van Ziji and Whittington 2006) and, through the process of consultation and lobbying it was their voice that one the day. One has to wonder whether to threat to manipulation and creative accounting had any influence upon the decisions made by professionals. Fair value was the concept introduced with the introduction of the IASB standards and measurements. The intention of fair value is to ensure that the financial statements produced by a corporation are a true representation of the physical values that could be achieved for the business assets and liabilities should these be liquidated at the date those statements were submitted. In this respect it differs from the historical cost method in that the most important statement under fair value is the balance sheet rather than the profit and loss account (Penman 2007, p. 8-9). Similarly, it favours realism rather than the conservative approach that was apparent in some of the previous methods (Swanson and Miller 1989, p.93). As most academics and professional observers are agreed, fair value has now become the most popular choice of all the available methods used within financial reporting statements (Stolowy and Breton 2000, Bens and Heltzer 2004, Staff team 2004 and Blake and Lunt 2000). However, one of its main disadvantages is its subjectivity. Those opposed to this method argue that â€Å"subjective valuations do not work when account objective values are what is needed† (Penman 2007, p.14). Although some believe that fair value has a use for investors (Schroeder et al 2005, p.310), there are others that argue the â€Å"lack of verifiability of the inputs necessary to implement such a system potentially adds noise and bias over and above the more traditional historical cost estimates† (Bens and Heltzer 2004, p.2). Even the fact that, in appropriate instances, the fair value still allows corporations to use the historical cost approach, as is the case with some asset valuations, rather than reducing the concerns over this method, it is felt that the mixed measurement can do more harm to values (Swanson and Miller 1989, p.90 and p.160). One of the major elements of the subjective argument is that fair values relies upon expert judgements and opinions, and that bias or error could lead to increased â€Å"volatility in financial statements† (Barth 2006, p.323) and also reduce the ability to be able to compare results across a specific industry or range of industries (Staff team 2004). As Antill and Lee (2005, p.67), the fact that fair value is reliant in most cases to expert opinion and natural bias means that the estimations included within the financial statements may differ from the actual values received for the assets, a position that will not be realised until the sale has taken place. Therefore, from the literature reviewed it is true to say that, irrespective of its increasing popularity, issues remain to be addressed in respect of the fair value method (Alfredson et al 2007, p.48). As Barker (2001, p.148) indicates, although the intention of this process is either to ensure there is a genuine relations hip between the asset and the profitability of the corporation or, by indicating an overpayment eliminate its value, the current concerns relating to judgement and verification of values brings the practical implementation of these objectives into question. 3.2 IFRS standards and measurements In its introductory framework document to the IFRS standards, the IASB (2001) identified the four main characteristics of quality to be exhibited within financial statements as being â€Å"understandability, relevance reliability and comparability.† It further identified that the elements of the statements to be concentrated upon were: a) An asset is a resource controlled by the entity because of past events and from which future economic benefits are expected to flow to the entity. b) A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. c) Equity is the residual interest in the assets of the entity after deducting all its liabilities. in relation to the balance sheet and, in terms of the profit and loss account â€Å" The elements of income and expenses are defined as follows:† a) Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. b) Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of l iabilities that result in decreases in equity, other than those relating to distributions to equity participants. In the early editions of the standards, references and definitions of the â€Å"fair value† method of measurement to be used were sparse. However, following consultations (IASB 2007 a and 2007 b), efforts were made to address this situation. This resulted in the creation of the following fair value definition: That fair value is â€Å"the amount for which an asset could be exchanged between knowledgeable, willing parties in an arms length transaction† (Van Ziji and Whittington 2006, p.6). The previous lack of guidance available was seen as a flaw in the standards (Alfedson et al 2007, p.7). This, together with the fact that the ISAB gave in to pressure from American corporations to give up on many of the changes that would have affected the asset of goodwill (Weil 2000 and Mard and Hitchner 2007), did not endear the system and standards to any experts, as continuing criticism from all sides has evidenced (Lee 2006). Both prior to and since the definition of fair value being introduced there has been strong criticism of the measurement systems and advice give for the need to resolve these issues (Tweedie and Whittington 1900 and Lindell 2005). Although regular consultations and improvements to the standards are ongoing, to date it is felt that the measurements still fail in their intention to increase transparency and comparability. This is particularly felt to be the case in terms of property, plant and equipment, and investment property, which will be discussed in th e following sections. 3.2.1 Measurements of property, plant and equipment The measurement and its definition relating to assets that belong within the group entitled as â€Å"Property, Plant and Equipment† are outlined within the summary of International Accounting Standard (IAS) 16. In this standard it defines the assets to be included in the financial statements in this section as being those which will produce a â€Å"future economic benefit† to the business. In terms of cost upon acquisition, the standard indicates that this will be calculated to include its purchase price and any other costs that are associated with transporting and installing the asset at the corporations premises. In relation to the measurement to be used in financial statements subsequent to the date of cost, the standard allows corporations to choose between the cost (historical approach) or the revaluation method (fair value) (IAS 16). The revaluation method requires an expert judgement of what the asset value would be at a given date. From this would be deducted any depreciation and impairment losses that had attached to the asset to the date of revaluation. It is also advised that this process should be carried out at regular intervals and certainly close to the date of the financial statements preparation. The fair value definition in this case is considered as being reliant upon the definition given in the previous section of this study (see page 19). 3.2.2 Measurements of investment property In many respects, for example, with the choice of measurements, the IAS 40 standard relating to investment property is similar to IAS 16. For example, in this case the choice is between: a) A fair value model, under which an investment property is measured, after initial measurement, at fair value with changes in fair value recognised in profit or loss; or b) A cost model. The cost model is specified in IAS 16 and requires an investment property to be measured after initial measurement at depreciated cost (less any accumulated impairment losses). An entity that chooses the cost model discloses the fair value of its investment property. The definition of investment property is considered to be â€Å"property (land or a building—or part of a building—or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for: a. use in the production or supply of goods or services or for administrative purposes; or b. sale in the ordinary course of business.† (IASB 2008). It should be noted at this point that the fair value indicated within this IAS standard would incorporated the same revaluation process as was explained within the previous section regarding IAS. 3.3 Issues arising from IAS 16

Normative Leadership Style

In this article have analyzed Normative Leadership theory, a theory that is theoretically elegant and characteristically practical. Even in today’s increasingly changing global business scenarios, this robust theory enables Leader to select one of the five leadership styles namely decide, consult individually, consult group, facilitate and delegate by using the model’s time-driven and development-driven decision tree. Trait and Behavioural Theory Timeline: In the 1930s leadership theories were based on leaders’ traits. Two dimensional behavioral theory (autocratic versus democratic) was published at University of Iowa in 1939.In 1940s University of Michigan published Job centered versus employee centered theories and in mid 1950s University of Ohio published considerations versus structure theories. In 1960s Fredrick came out with two factor theory maintenance or extrinsic factor versus motivators or intrinsic factors. In 1967 McGregor suggested leadership behavi ors based on different assumptions on employee motivations in describing his â€Å"Theory X† and â€Å"Theory Y†. Birth of Contingency Leadership Theory: In 1970s, it became evident that no single leadership style is best for all situations; leaders need to change their leadership style to suit situation.Researchers then started working on situational and contingency factors which led to the development of contingency theories such as Fiedler theory (1967), Leadership continuum theory (Tannenbaum & Schmidt, 1973), Path goal theory (House & Mitchell, 1974) and Normative theory (Vroom & Yetton, 1973; Vroom & Jago, 1988, 1995). While Fiedler theory recommends changing the situation rather than changing leadership style, rest of the contingency theories recommend using right style at right situation to deliver effective leadership.Normative Leadership Theory: In 1973 Vroom and Yetton developed a contingency model based on the leader’s choice of autocratic versus par ticipative responses to decision making situations. Extensive validation research of the model resulted in the development of Vroom-Jago model in 1988 (again updated in 1995). The research aimed to develop taxonomy for describing leadership situations, which could be used in a normative model linking situations to the leadership styles.A set of seven situational variables were used (Vroom & Yetton, 1973) to predict which among the five leadership styles would be the most effective to deal with the situation. Vroom conducted extensive empirical studies to investigate how leader’s behavior is affected by situation faced by leader keep. The studies were conducted with a focus on the leadership role and on how differences in the challenges that leader face would affect leader’s behavior. The five leadership styles are (1) Decide: The leader makes the decision and announces it or sells it to the followers.Leader may gather information from others within the group and outsid e the group without specifying the problem, (2) Consult Individually: The leader explains follower individually about the problem, gathers information and suggestions and then makes the decision, (3) Consult Group: The leader holds a group meeting, explains followers the problems, gathers information and suggestions and then makes the decision, (4) Facilitate: The leader holds a group meeting and acts as a facilitator to define the problem and the limits within which a decision must be made.The leader seeks participation and concurrence on the decision without pushing his or her ideas and (5) Delegate: The leader lets the group diagnose the problem and make the decision within stated limits. The role of the leader is to answer questions, provide encouragement and resources. Originally seven situational variables were identified to answer the questions with high (H) or low (L) score. These are (1) Decision significance: How important is the decision to the success of the project or o rganization high or low? 2) Importance of Commitment: How important is the follower commitment to implement the decision high or low? (3) Leader Expertise: How much knowledge and expertise does the leader have with this specific decision high or low? (4) Likelihood of commitment: If the leader were to make the decision alone, is the certainty that the followers would be committed to the decision high or low? (5) Group support for objectives: Do followers have high or low support for the team or organizational goals to be attained in solving the problems? 6) Group Expertise: How much knowledge and expertise do the individual followers have with this specific decision high or low? and (7) Team Competence: Is the ability of the individuals to work together as a team to solve the problem high or low? Not all seven variables/ questions above are relevant to all decisions. A minimum of two and maximum of seven questions are needed to select the most appropriate leadership style in a given situation.During year 2000, Vroom revised the model with eleven variables. Each of these eleven is a moderator variables linking leadership style with components of decision effectiveness. Most of these eleven variables have also been used in empirical studies to investigate how leader behavior is affected by the situation faced by the leader. Both Time-Driven Model and Development-Driven Model using seven variables are presented in Appendix 1 along-with instruction how to use the model.Vroom’s theory has also been criticized by many raising questions such as (1) whether small set of seven or eleven factors really determines how one should use the answers (2) will answers depend on the quality of the person who is answering (3) will answer vary from person to person and time to time and (4) will use of tacit knowledge in evaluating a situation; weaken the outcome of the model? These criticisms have resulted in further research and deliberation on the model.All parties (both followers and critics) agreed on the importance of matching of personal qualities and situational requirement towards delivering effective leadership in an Organization. They also agreed that leadership effectiveness will depend on the use of realistic scenarios describing actual situations confronting a leader in an organization. Conclusion: The powerful model which Vroom and his colleagues at Yale University developed after interacting with more than 100,000 managers making decisions has proved to be a robust and useful model even in today’s dynamic business context.The model has identified the following three distinct roles that situational variables play in the leadership process. 1. Leadership effectiveness leading to Organizational effectiveness is affected by situational factors not under leader’s control 2. Situations shape how leaders behave and 3. Situations influence the consequences of leader behavior. Appendix 1 Instruction how to use the model: 1. Select one of the two models based on whether the situation is driven by importance of time or development of followers, i. e. short term or long term. 2. Define problem statement. 3.Answer the question from left to right skipping question not appropriate to the situation and avoiding crossing any horizontal line. The last column will prescribe the appropriate leadership participation decision-making style for the situation. Normative Leadership Time-Driven Model | Decision Significance? | Importance of Commitment? | Leader Expertise? | Likelihood of Commitment? | Group Support? | Group Expertise? | Team Competence? | | PROBLEMSTATEMENT| H| H| H| H| -| -| -| Decide| LEADERSHIPSTYLE| | | | | L| H| H| H| Delegate| | | | | | | | | L| Consult (Group)| | | | | | | | L| -| | | | | | | L| -| -| | | | | | L| H| H| H| H| Facilitate| | | | | | | | | L| Consult (Individually)| | | | | | | | L| -| | | | | | | | L| -| -| | | | | | | L| H| H| H| Facilitate| | | | | | | | | L| Consult (Group)| | | | | | | | L| -| | | | | | | | L| -| -| | | | | L| H| -| -| -| -| Decide| | | | | L| -| H| H| H| Facilitate| | | | | | | | | L| Consult (Individually)| | | | | | | | L| -| | | | | | | | L| -| -| | | | L| H| -| H| | -| -| Decide| | | | | | L| -| -| H| Delegate| | | | | | | | | L| Facilitate| | | | L| -| -| -| -| -| Decide| | Normative Leadership Development-Driven Model | Decision Significance? Importance of Commitment? | Leader Expertise? | Likelihood of Commitment? | Group Support? | Group Expertise? | Team Competence? | | PROBLEMSTATEMENT| H| H| -| H| H| H| H| Delegate| LEADERSHIPSTYLE| | | | | | | | L| Facilitate| | | | | | | | L| -| Consult (Group)| | | | | | | L| -| -| | | | | | | L| H| H| H| Delegate| | | | | | | | | L| Facilitate| | | | | | | | L| -| | | | | | | | L| -| -| Consult (Group)| | | | L| -| -| H| H| H| Delegate| | | | | | | | | L| Facilitate| | | | | | | | L| -| Consult (Group)| | | | | | | L| -| -| | | | L| H| -| H| -| -| -| Decide| | | | | | L| -| -| -| Delegate| | | L| -| -| -| -| -| Decide| | References: Achua, Christopher F and Lussier, Robert N. : Effective Leadership, 4th Edition, South- Western Cengage Learning Chan, Patrick Dr. , Class Lecture Notes Palanski, Michael E. and Yammarino, Francis J. : Integrity and Leadership: A multi-level conceptual framework: The Leadership Quarterly 20 (2009) 405-420 Vroom, Victor H, Yale University and Jago, Arthur G, University of Missouri. Situation Effects and Levels of Analysis in the Study of Leader Participation: Leadership Quarterly Vol. 6 No. 2 1995 Vroom, Victor H. Research: A New Look at Managerial Decision Making

South Africa As A Language Of Instruction - 941 Words

Due to apartheid era, South Africa as a country had suffered from different forms of displacement. This fact is no news as many sectors suffer from the isolation that generated from this displacement. Universities in South Africa have immensely been affected. Historically, the problem of ethnicity and race affected every area of their education. Debate on what language to use as a language of instruction became irresolvable. Most of the support was in favor of the mother tongue as language of instruction while little support was giving to Afrikaans and English languages. This disapproval created setback for the Afrikaans and English speaking universities in the social and cultural space. Also, the segregation of the black (majority) and white (minority) was said to be resolved but it is still creating separation in South African universities. Consequently, South Africa’s response to GATS has been negative. South Africa’s minister of education, Kadel Asmal, states that â€Å"We must avoid at all costs a GAT in education that puts our education, our future in peril...Trade considerations cannot be allowed to erode the public good agenda for higher education†. Form this statement, the minister of education focuses more on what the foreign partnered countries will benefit and less on the benefits GATs can add to not only the institution but the country at large. As the demand of higher education increases at every measure, the ability of the public university to meet the demand ofShow MoreRelatedImportance of Oral Tradition963 Words   |  4 Pageswritten instruction. The messages or testimony are verbally transmitted in speech or song and may take the form, for example, of folktales, sayings, ballads, songs, or chants. In this way, it is possible for a society to transmit oral history, oral literature, oral law and other knowledges across generations without a writing system. 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Each racial group was segregated from other races within South Africa. These groups consisted of whites, blacks and coloreds (Asians and Indians). The minority white population had the rule over the whole country. Apartheid did not only detach whites from non-whites, but it also set apart the Blacks from the Coloreds. When apartheid ended in 1994 a legacy was leftRead MoreAfrikaner Nationalism1744 Words   |  7 Pageslabelled as undeveloped indigenous races all which were non-white ( Wilson and Thompson, 365). With this fear rose nationalism. Afrikaner nationalism is a political ideology that was born in the late 19th century around the idea that Afrikaners in South Africa were a chosen people. It was also influenced by anti-British sentiments that grew among Afrikaners especially because of the Boer Wars which did more to unite Afrikanerdom and infuse it with purpose and determination (Wilson and Thompson, 367)Read MoreThe Soweto Uprising of 1976 an education Related Outcry by Students1237 Words   |  5 PagesA system of legal separation amongst races dominated the Republic of South Africa, namely apartheid between 1948 until 1993. Apartheid led to the separation and discrimination between whites against people of colour. Not only was this racism commonly accepted between whites against blacks, but it was also legally enforced as white’s maintained priority in terms of housing, education, political power and jobs. I will be examining a particular even t, The Soweto Uprising of 1976 which was an educationRead MoreArticle Critique : Promoting Mother Infant Book Sharing And Infant Attention And Language Development Essay889 Words   |  4 Pagesand Language Development in an Impoverished South African Population: A Pilot Study. Early Childhood Education Journal, 42(2), 143-152. doi:10.1007/s10643-013-0591-8 PURPOSE: This pilot study was completed to see if a successful study in the developed world would extend to an impoverished community in South Africa. The present successful study that was completed in the developed world was about parents sharing of picture books with infants and young children is beneficial for child language andRead MoreEnglish Language Is Globally Important982 Words   |  4 PagesEnglish Language is Globally Important ï  ® English is the major language in such fields as international diplomacy, business and commerce, science and technology, and the travel industry. How did English become such an important global language? ï  ® British Colonialism ï‚ ¨ Took English to North America, the Caribbean, Africa, Australia, New Zealand, and the Indian sub-continent U.S. rise as a strong economic and strategic power ï  ® Pop Culture ï  ® English became the language of diplomacyRead MoreOutline Of A Book Disney Planes The Inscription Of Signs And Symbols1655 Words   |  7 PagesTask 1 1. Look up the meanings to these words, in your dictionary, and write the meanings below. Text Writing, communication that represents language through the inscription of signs and symbols Features Essay, film, telecommunications Call attention to, signify Purpose Aim, usefulness, will Aim at, undertake Audience Captive audience, claque, full house, theatre, turnout Communication Dissemination, joining, message, revealing Context Surroundings Article Condition, deed, essay, goods, particularsRead MoreSelecting The Type Of Learner Using English1187 Words   |  5 Pageshave always thought of it as ELL – English Language Learner, specifically considering my personal experiences at school, which definitely creates a much more complex reading program to consider. The variables in reading is complex for the young English learners. There is much to consider such as the age, class size, curriculum and materials, delivery of instruction, trained teachers, amount of time to commit to English learning, learners first language knowledge, and the cost. 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Creative and Critical Thinking Essay - 1254 Words

Knowledge is generated through critical and creative thinking. Creative thinking is something new or original that is created with value. Critical thinking is a type of thinking that questions assumptions and validates or invalidates a current belief or something that is said to be previously true. Knowledge is created through the culmination of generally accepted assumptions and creativity. How do you separate general assumptions and creativity? These two types of thinking can be easily separated in regards to concrete or realistic ideas compared to abstract or original ideas however to generate new, acceptable knowledge critical and creative thinking must interact together. The questioning of established beliefs with the creation of†¦show more content†¦Knowledge must have background facts to be considered true and mathematics must use reason to justify their formulas or methods. For example, memorizing the area under a bell curve is very different from understanding how i t is derived. Proofs are useful when proving mathematical concepts although they are not concrete and harder to understand. Creative aspects must be considered when trying to derive a difficult proof. Creative problem solving involving mathematics can use sense perception as a way of knowing. In these problems, real life situations allow for the organization of ideas and require that the student’s attention be focused on the actual understanding of the concepts rather than the usual memorization of facts from concrete problems. For example, calculating the replanting of trees in a forest would depend on the circumstances surrounding the problems and factors would be dependant on the situation. Is creating a personal solution to the problems more effective than searching for existing solutions? In regards to mathematics, if a solution is known to exist using methods already established, there is no need to search for additional or new solutions. There are always exceptions to any case and new knowledge could form from a completely new and personal solution. This could create new knowledge using creative thinking and could also create a more efficient solution to the one previously used. Applied mathematics uses bothShow MoreRelatedCritical and Creative Thinking2382 Words   |  10 PagesCritical and creative thinking is regaining its popularity in the global education scene. This resurgence in popularity can be attributed to the demands of the evolving economic, political, social and technological world in the 21st century. The competitiveness of the global market demands corporations to constantly innovate. To do so, corporations need employees who are able to think critically and creatively. 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