We have learned from an employee of Windfall, Ltd., that its accounti

Question:

The following appeared in a memorandum from a member of a financial management and consulting firm:

“We have learned from an employee of Windfall, Ltd., that its accounting department, by checking about 10 percent of the last month’s purchasing invoices for errors and inconsistencies, saved the company some $10,000 in overpayments. In order to help our clients increase their net gains, we should advise each of them to institute a policy of checking all purchasing invoices for errors. Such a recommendation could also help us get the Windfall account by demonstrating to Windfall the rigorousness of our methods.”

Answer:

The firm's memorandum mentions that Windfall, ltd's accounting department saved money by checking 10% of their last month's purchasing invoices for errors and inconsistencies. This information is used to argue that to help the firm's clients increase their net gains they should check all purchasing invoices for errors and that this policy implementation would also help them get Windfall as a client by showing the rigourusness of their methods. This logic is flawed because it rests on the assumption that this is a problem in most companies, that the cost of implementing a policy as the one considered by the firm will not increase their client's costs so much that it affects their net gains, and that Windfall is looking not only to hire a consulting firm but also that they prioritize rigourusness in their hiring criteria. These assumptions make the conclusion of the firm's argument weak and not based in known fact.

First, the memorandum mentions that, since Windfall saved money by checking 10% of their purchasing invoices, implementing a policy to check every purchasing invoice will help their clients. This assumes that their clients' invoice are full of errors and that they will surely find enough of them to increase their net gains. This assumption, however, is wrong because it may be the case that Windfall is particularly prone to missing errors in their invoices due to internal issues, or that the people specifically issuing those invoices are doing a poor job. We would need to know more information about the company and it's suppliers to better evaluate if it would be a problem that most other businesses, and especially the firm's clients have.

Second, the memorandum assumed that by implementing a policy of checking every single purchasing invoice for errors, than their client's net gains will be increased but fails to consider the cost of such policy. It may as well be that checking all invoices will produce some gains by not overpaying on their invoices, but it is also possible that the added cost of checking all the invoices will in fact offset the gains made by overpaying and result in reduced net gains or even net losses. It would be helpful to compare the extra cost of checking those invoices with the expected savings from overpaying on those invoices to see if it would make sense to implement the policy as presented.

Third, the firm mentions that showing rigorousness in their methods they would be able to get Windfall as a client. This claim rests on a couple of assumptions, it assumes that Windfall is looking to hire a consulting firm and that it is interested in rigorousness rather than other qualities. It may be that Windfall is not looking to hire a consulting firm at all, but even if it is, it may be that the company is more interested in a firm with other qualities and it does not prioritize rigorousness when considering a firm to hire. We would need to know more information about the company and what they look for in a consulting firm before making the assumption that rogorousness will be beneficial in getting them as a client.

In conclusion, The firm makes broad assumptions without much data to back up their conclusion that they should recommend that their clients implement an exhaustive policy of checking invoice for errors simply because it helped another company save money by checking a small fraction of their invoices. The firm also assumes that doing this will increase net gains for their clients without considering the cost of such a policy and they conclude that by recomending this policy they will that they are very rigorous and that this is important for Windfall, a compnay which they assume is looking to hire a consulting firm. These arguments without any more information to back them up rest on pure conjecture and not on fact and it is for this reason that the conclusion is flawed.