The following is a transcript of a video
This video explores the vital role of accounting in one of the world's largest firms. Aon is a reinsurance broker, insurance broker, and employee benefits consultant operating in more than 120 countries. Its goal of being the world's most responsive and client-focused insurance company means it must integrate thousands of professionals in hundreds of disciplines in many countries.
Many view accounting as a primary business language. It is of little use, however, unless you know how to "speak" it. Fortunately, the fundamentalsĆ¢ĀĀthe accounting equation and the double-entry bookkeeping systemĆ¢ĀĀare not difficult to learn.
0:01Clearly, in the financial world,
0:03if you want to be an effective accountant,
0:05you just can't be a numbers person.
0:07You also have to understand people.
0:09You need to know how to debate and hold your
0:11position on the arguments that you take.
0:14Ć¢ĀĀŖĆ¢ĀĀŖ
0:34-Narr: You might not have heard of Aon.
0:36They've brokered deals between clients
0:38and more famous insurance companies.
0:40They often even insure
0:42those insurance companies.
0:45In fact, the only building taller than the
0:47Aon building in Chicago is the Sears Tower.
0:50With over 550 offices in 130 countries,
0:55there's a lot of money involved
0:56and a lot of numbers to keep straight.
0:58So who does all that math?
1:00Well, that's easy.
1:01The pencil pushers, the number crunchers,
1:03bean counters, right?
1:05Accountants are traditionally thought of as
1:07humorless people who type into
1:09pocket calculators all day.
1:11Nothing could be farther from the truth.
1:13Accountants are actually some of the most
1:15important and influential people in business,
1:18and Joe Prochaska is probably
1:20the most important accountant at Aon.
1:23Accounting is the process of recording,
1:25categorizing and interpreting financial
1:28transactions, but there are more creative
1:30aspects to accounting than mere bookkeeping.
1:32That's why Joe is usually smiling.
1:35-Oh, yeah, and my staff is learning to smile.
1:37It's very rarely that they see
1:39me frown, okay, but there are
1:40different kinds of smiles.
1:42-At Aon, managerial accountants interpret
1:46financial data for a company's internal use.
1:49Financial accountants such as CPAs summarize
1:52that information for outside parties
1:54like potential investors.
1:56At the end of the year, Joe uses
1:58a tax accountant to assure that
2:00Aon is in full compliance with
2:02changing tax laws, and to assure that Aon is
2:05taking advantage of the best tax strategies.
2:08But Joe gets the lion's share of the duties
2:10when it comes to Aon's financial information.
2:13-The role I play in the process of handling
2:16all these inputs is reviewing all the reports
2:20that come in so that when our management
2:22takes a look at those financial statements,
2:24they can have some assurance that they're
2:26looking at this as our shareholders will be
2:30looking at it when we
2:31present the information.
2:34-Did you know that every book
2:35you've ever read,
2:36every comic strip, poem and Web page,
2:39has its roots in accounting?
2:40That's because the earliest
2:42written languages were created
2:44to keep track of financial transactions.
2:46Every world culture engages
2:48in some form of trade,
2:49and Aon operates in most of those places.
2:53-The information we get
2:54on a monthly and a quarterly basis
2:56from our different operations around the globe
2:59is stated in a variety of currencies,
3:01yet Aon is a U.S.-based company that publishes
3:05its financials in U.S. dollars.
3:07There's a requirement for some assurance from
3:11a party outside the management
3:12of the company that you've done
3:15a fair job in presenting your financials,
3:17that they've been presented reasonably
3:20and in a consistent manner.
3:23-That's why the
3:24Financial Accounting Standards Board created
3:26the Generally Accepted Accounting Principles,
3:29to help everyone get on the same page
3:31with their accountant.
3:32The Generally Accepted Accounting Principles
3:34and the interpretation are one
3:36of my key functions at Aon.
3:38The Securities and Exchange Commission makes
3:41sure that companies stay on that page.
3:44-In its most adverse reaction,
3:46the SEC also is capable of doing
3:49what they would call an enforcement action.
3:52Many of you have heard of Enron,
3:53okay, and WorldCom.
3:56-The core of those principles is
3:58the six-step accountant cycle.
4:00Pretend you're on Joe's staff for a moment.
4:02First, a hundred different people
4:04send you transaction records
4:06from a dozen different departments.
4:08You collect and organize that pile of
4:10receipts, invoices, bank statements and
4:12purchase orders, account by account,
4:15into a book called a journal.
4:17Now divide all those
4:18transactions into purchases, sales,
4:21investments and so on, in a ledger.
4:24When that's done, do a trial balance
4:26to check your work.
4:28If it's off, go back and find the error.
4:31If it's okay, you can now begin
4:33the real task of accounting,
4:35reporting and analysis.
4:36-The mechanics of doing the accounting,
4:39that doesn't excite me too much.
4:41But going through the philosophy
4:42of what you're trying to accomplish
4:44and how you match revenue and expenses,
4:47which is really the underlying philosophy behind
4:50Generally Accepted Accounting Principles,
4:52to make sure when you recognize the revenue,
4:54you recognize the proportion of the expense.
4:57There's a lot of judgment and
4:58interpretation of what goes into
4:59an individual company in doing that.
5:05The two most basic reports you'll do are the
5:07balance sheet and income statement.
5:10The balance sheet contains the
5:12fundamental accounting equation.
5:14Assets are all the things Aon owns,
5:16like furniture and investments.
5:18Liabilities are how much the company owes
5:21others in the form of loans,
5:22bonds or unpaid bills.
5:24Equity is a little trickier to understand.
5:27Say that Aon owns $100,000, although we can
5:30pretty much guarantee they made a lot more.
5:33If they owe $70,000 in bills and loans to
5:36run the business, the $30,000 difference
5:39is called owners' equity.
5:42That's the amount of actual value
5:43that Aon's stockholders divide up
5:45between them to see how much their
5:47investment is worth at the moment.
5:49The income statement covers a specific period
5:52such as a quarter or year.
5:53It starts with revenue, which is all
5:56of Aon's earnings for the period,
5:58including sales, licensing fees
6:00and gains on investments.
6:02By subtracting the cost of goods sold,
6:04which is the amount of money applied
6:06to producing and distributing a product,
6:09you come up with a gross margin,
6:11or the profit and loss for the period.
6:18Okay, we've been throwing a lot of terms
6:20around, so let's take a break and learn a
6:22little bit more about what Aon does.
6:25One particularly interesting service
6:27has to do with extreme weather.
6:28-For instance, we do catastrophe modeling
6:32for hurricanes so that some of our insurance
6:35clients that may insure a whole lot
6:36of homes along the Gulf Coast to Florida
6:39what happens if a certain hurricane comes?
6:41What type of insurance or reinsurance
6:43protections do they need to make sure
6:46that they're still financially solvent
6:47if a big wind blows and takes out a
6:49lot of their clients' homes?
6:53In addition to that,
6:54one of the things that we innovated,
6:55we were one of the first people
6:56to provide a terrorism model.
7:00And you may be aware that Aon lost
7:02its major operations in New York,
7:04and we lost 175 of our associates
7:06in the World Trade Center disaster.
7:08That certainly spurred us into taking a look
7:11at what can we do to help companies manage
7:14and monitor their exposure to terrorism acts,
7:18and we've done a - have a strategic
7:20partnership with Rudy Giuliani and his group
7:23to try and help companies
7:25prevent and prepare for
7:27if a disaster like that would ever occur again.
7:34Okay, back to the income statement.
7:37Subtract the operating expenses of the company
7:39- that's salaries, electricity and stuff -
7:42from the gross margin to reveal
7:44net income before taxes.
7:46Then, obviously, subtract the taxes,
7:48and you get Aon's net income or net loss.
7:52That figure is what's known as
7:53the bottom line.
7:54If these two reports seem similar,
7:58just remember that the balance sheet is
8:00like a snapshot of the business at any
8:02particular moment, while the income statement
8:05is more like a movie of the company's
8:07performance over a certain period of time.
8:09Now you're at the final and most important
8:12step of the accounting cycle, analysis.
8:15A good example of analysis is budgeting,
8:18which looks at Aon's history to
8:19find ideas for the future.
8:22The budgeting and the planning process
8:23help us analyze and understand that
8:25and create a consensus among management
8:28of what are reasonable expectations
8:30for the coming years,
8:32and it also helps us to give some guidance to
8:34our shareholders on what they should expect
8:36for earnings from our company, which then
8:39I think also helps give people guidance
8:41on what reasonable valuations of our
8:43companies are for our shares.
8:45There are a host of other analyses
8:47you can do, financial ratios
8:49and activity ratios and liquidity tests.
8:52Of course, you don't have to do
8:53all of this math in your head; these days,
8:56most of it can be done by computer software.
8:58I can't think of anybody in our
9:01financial shop that doesn't have a computer
9:03on their desk, and I'm probably one of the
9:04biggest dinosaurs in that I can read all these
9:07financial reports and I can manipulate them,
9:09but I'm too far away from them
9:11to actually create them anymore.
9:13But clearly, the analysis and
9:15the financial reporting is definitely enhanced
9:18by the reporting tools that exist in computers.
9:22Well, your first day as an
9:23accountant went pretty well.
9:25You made a few decisions and learned a little
9:27about how Aon functions financially.
9:29If you're interested in learning more about
9:31accounting as a career,
9:32talk to your instructor.
9:34On the other hand, if accounting isn't for you,
9:36don't worry; your day hasn't been wasted.
9:39Understanding and applying the
9:41basic fundamentals of accounting is a skill that
9:43will help you in almost any
9:45business endeavor you pursue.
9:47Clearly, if you want to do
9:48anything in business - and I am biased,
9:51but there is no better foundation than
9:53having an accounting background,
9:55because that's how businesses are
9:57measured at the end of the day, and the
10:00intrepretation of those numbers are critical.
Question:
The value of the owners' interests is the same as
short-term liabilities.
equity.
revenue minus costs.
liabilities minus assets.
profits plus revenue.
