The document discusses the importance of rules for business success. It states that rules serve four main purposes: operations, reporting, compliance, and protection. Rules ensure consistent and efficient operational processes. They also establish standardized definitions and measures to provide reliable reporting to executives. Businesses must comply with various legal rules, and rules help protect assets from fraud by implementing controls like segregation of duties. The author argues that establishing clear, well-defined rules is critical for business infrastructure and performance.

1.
THE BUSINESS ODYSSEY
Rules – Success Needs a Playbook
8 May 2015 Issue 12
Andrew C. Harvey
C.T. Moffitt & Company
This issue is my final installment devoted to business infrastructure. In my experience people respond to
rules in two very different ways – they rebel or they embrace. Two opposing perspectives that imply rules
function to consent or restrict a particular action. The job of the business leader is to harmonize these
two seemingly conflicting viewpoints so that the business’s fundamental objectives are satisfied. To do
so it is beneficial to have a context for rules. That is my ambition with this issue of The Business Odyssey.
I use the term Rules to convey clear and unambiguous standards not a convenient excuse to impose
autocratic, arbitrary, or oppressive authority. Quite to the contrary, rules should serve as the foundation
to thoughtfully empower people. Rules do so with explicit interpretations or appropriate actions the
business has adopted to guide the response warranted for a particular circumstance. Rules enable the
confident delegation of responsibilities as well as the preservation and routine replication of actions.
The discussion that follows focuses on business infrastructure’s dependency on rules. Previous issues
have described people and things; those responsible and the tools used to effect an action. Rules are the
explicit guidelines specifying what to do and when to do it. When People, Things and Rules are properly
designed and effectively functioning this infrastructure improves performance and protects assets. So
how I am going to define rules?
Business rules are the acceptable or approved actions expected to be applied to specific
transactions, activities or decisions.
Business executives expect that certain routine activities will be handled consistently, correctly and
timely. Rules are an explicit statement, best in writing, expressing the allowable or acceptable treatment
to be applied to a specific action. Rules serve four distinct business needs: operations, reporting,
compliance and protection.
Operational
The senior business executive’s primary concern is typically focused on making money. Making money is
obviously accomplished with operations that create customer satisfaction, do so efficiently and is
adaptable to change. The business’s operational activities convert the promise the company makes to its
customers into the satisfaction the customer expects. Managing the operations ensures that the fidelity
of the product or service the customer receives is consistent with the customer’s expectations. Moreover,
doing so efficiently is required so that the business is profitable and capable of delivering the return
expected by owners and providers of capital. Nevertheless, the executive can’t subordinate other
important responsibilities to a single‐minded focus on making money.
Senior executives need a frequent barometer to monitor operational effectiveness. The integrity of this
barometer depends on the contributions of others and a common understanding of its meaning.

2.
THE BUSINESS ODYSSEY
Rules – Success Needs a Playbook
8 May 2015 Issue 12
Page 2 of 4
Monitoring operations requires a shared understanding of the rules and how those rules are applied. A
few examples of routine operational issues that require adherence to specific rules.
 Order processing
 Collecting money owed
 Scheduling production
 Manufacturing or production methods
 Product packaging
 Customer service
 Routine financial performance
 Selling

Reporting
Business executives depend on reliable and timely information. This information may be diagnostic or
strategic. Regardless of the application the business executive depends on the veracity of the information
relied upon to make decisions. Business executives depend on knowing what it is that they are looking
at.
A recent client had the accounting staff produce a weekly operating report for its senior executives.
Included as part of this operating report was the cash balance of each bank account. Pretty simple right?
Well maybe not. As it turns out the executives thought they were looking at a cash balance reported by
the bank at the end of the banking day. The accounting staff on‐the‐other hand was reporting the cash
balance showing at the time (most often mid‐day) and was adjusted by deducting outstanding
disbursements. Either one of these was legitimate. In this case however, two different definitions of cash
balance was used. Executives thought cash balance meant one thing and the accounting staff was
reporting something different. This is not an example of accounting incompetence but rather an example
of ambiguity arising from the absence of clearly defined rules. And no one, that is until I looked at it,
thought to consider the possibility that a discrepancy of meaning existed. A discrepancy that was
compromising the reporting of cash balance. This observation naturally led to suspicion towards other
reported numbers.
Another example from the same client. I was asked by the CEO to provide a comparison of current year
billings to previous year billings. Despite the CEO’s impatience and dismissive demeanor I had a pretty
good idea of what he was looking for. Nevertheless, my job was to advise him and the President of
operational deficiencies and vulnerabilities, and I recognized that this simple request would allow me to
expose just that. So I decided to ask a few of the accounting staff, who, had I not been there, would have
been the target of that question, what was meant by billings. This was not a formal term the company
used. And as no surprise to me, I got as many definitions of billings as people I asked, all different I will
add.
The point is clear, the absence of rules, in this case the measure of dollars committed to the company
collected or promised, would produce misleading information. The absence of rules dictating what things
mean will result in people making‐up their own definitions. Some of these definitions will be
approximately correct but there will be subtle and not so subtle differences. One of the roles that rules
play is to eliminate misunderstandings, ambiguities and misinterpretations. Standardized definitions are
but one form rules can be found.

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THE BUSINESS ODYSSEY
Rules – Success Needs a Playbook
8 May 2015 Issue 12
Page 3 of 4
But this application is critical especially when looking at financial reports. Most of the accounting
standards that exist are simply detailed statements of what a term or phrase means. It is critical that all
financial reports be free of ambiguity, errors and other misleading information. Similarly estimates or
projections are often required. This should be clearly recognizable and qualified with the underlying
assumptions. For a report to be reliable it must be free of ambiguity and errors. Rules establish the
standards used when reports are prepared. Without these standards the integrity of what is reported is
severely compromised.
Compliance
Businesses are expected to comply with many different kinds of legal requirements. This legal
requirements include taxes, human resources, contracts, environmental and safety regulations as well as
countless others. Most of these legal requirements include reporting obligations together with an
agency’s right to verify compliance. When a failure to comply is discovered there are often serious fines
and penalties. Thus businesses are oftentimes required to verify that they operate in a lawful manner
and have satisfied legal obligations. Meaning a business needs to demonstrate convincingly to an outsider
that is adhering to legal rules.
Protection
Rules also serve to protect the assets of the business from fraud, manipulation, or threat. The following
are examples of rules applied for purposes of protection.
 Segregation of duties – separating authorization, custody, and record keeping roles to prevent fraud
or error by one person.
 Authorization of transactions – review of particular transactions by an appropriate person.
 Retention of records – maintaining documentation to substantiate transactions.
 Supervision or monitoring of operations – observation or review of ongoing operational activity.
 Physical safeguards – usage of cameras, locks, or physical barriers to protect property, such as
merchandise inventory.
 Top‐level reviews – analysis of actual results versus organizational goals or plans, periodic and regular
operational reviews, metrics, and other routine diagnostic indicators.
 IT general controls – security, to ensure access to systems and data is restricted to authorized
personnel, such as usage of passwords and review of access logs; and change management, to ensure
program code is properly controlled, such as separation of production and test environments, system
and user testing of changes prior to acceptance, and controls over migration of code into production.
 IT application controls – Controls over information processing enforced by IT applications, such as
edit checks to validate data entry, accounting for transactions in numerical sequences, and comparing
file totals with control accounts.

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THE BUSINESS ODYSSEY
Rules – Success Needs a Playbook
8 May 2015 Issue 12
Page 4 of 4
Rules take many forms and serve multiple purposes. It is the responsibility of senior executives, owners
and directors to ensure that the business infrastructure incorporates rules that are clear, unambiguous
and properly conceived.