By Luis Arciniega

A great number of companies have invested many resources toward establishing a culture of continuous improvement to reduce costs, improve the quality of their products or services and at the same time bring about increased employee commitment. Unfortunately, many of these efforts have failed…

While the mapping of processes and the establishment of specific metrics that provide a detailed picture of the efficiency with which different subprocesses are conducted are generally carried out successfully, employees consider a nightmare to have to calculate and monitor these metrics, and even more so having to hold frequent meetings to monitor the indicators and offer ideas for improvement.

Sometimes the discomfort is generalized and becomes a sort of “coup” that literally leads to the project’s failure, with the consequent loss of time and resources. In technical terms, the social empowerment does not become psychological empowerment. That is, the formal organizational practices and systems designed to transfer the power of monitoring and improvement in processes at the company’s operational levels is not able to become an individual perception that makes the employee feel that the company concedes power to him or her and at the same time that this perception turns into devotion to the company.

A recent study sought to identify the location of the magic link that connects the changes made in the work processes at the level of job positions, and employee commitment to the company (Arciniega and Menon, 2013). The results of the study show that the internalization of goals, meaning the degree to which the employee internalizes the goals of his or her business unit as if they were personal goals, plays a principal role. The following paragraphs detail the study’s findings.

The research was carried out in a huge beverage bottling plant in a city near Caracas. This unit was implementing a continuous improvement process based on the methodology of the multinational company that owns one of the two major brands of soft drinks.

Figure 1 schematically shows the three blocks of variables involved in the study. At far left are the three large variables that capture the effect of social empowerment at job level. In the center are the three dimensions of psychological empowerment, while on the right is the employee commitment to the company. The following sections describe the variables within each of these three blocks which then will allow to describe the relationships among them, and in this way, identify the magical link between the company’s continuous improvement practices and initiatives and the commitment among its employees.

Social empowerment and its effect on jobs

As was already mentioned, empowerment has two major expressions: social and psychological. The first refers to the actions undertaken by a company to transfer or share organizational power with mid-level or operational positions. For example, in many automotive plants, self-directed teams are responsible for a specific set of sub-steps in the manufacture of vehicles. Sometimes, a team also determines matters such as vacations, training periods, shifts, etc. In short, a group of employees is assigned a series of decisions and responsibilities which in another company would fall to a supervisor or manager.

From the view of a traditional model of job design (Hackman and Oldham, 1980), it would be expected that team members would expand both their vision of their actual participation in the overall process of manufacturing the vehicle. That is to say: What is their contribution (task identity), how to measure the contribution of their work (task significance).

Similarly, one would expect that the new tasks associated with the position that arise with an increase in responsibilities make greater use of the incumbent’s skills and knowledge (skill variety). In addition, by delegating power to employees, they would be responsible for monitoring the indicators and even, on occasion, they would have to calculate them, and this would also give them the formal task of generating and receiving timely feedback on their work (task feedback). In the study considered here, a test (Job Diagnostic Survey (JDS), Hackman and Oldham) was used to determine employee perception of changes made in their jobs in relation to the delegation of power.

Psychological empowerment

The other side of empowerment is that which occurs in the employee’s mind, and it goes beyond changes in processes, systems, etc. Psychological empowerment refers to the degree to which employees believe that the company gives them the authority to make decisions that affect the scope of their work, which is termed as perceived control, as well as the perception that the person has with respect to his ability to perform his job, called perceived competence, and lastly to the internalization of goals (Menon, 2001).

It is very important to emphasize that even though an employee perceives that his company has granted him power (social empowerment), this fact does not necessarily lead him or her to feel the psychological benefits of this empowerment (psychological empowerment). The three dimensions of psychological empowerment were also measured through a test (Arciniega and González, 2013; Menon 2001).

Affective commitment

Organizational commitment is the psychological attachment that employees develop toward their company (Meyer and Allen, 1997). That is, it is a link created in the mind of the employee and which can range in intensity. Such psychological attachment has three major dimensions.

The first and the one most studied in the literature on management is called “affective.” It arises through the identification of the employee with the philosophy and values of the company. Thus, the employee remains with the company because he wants to, and he likes it. The second dimension is of a material and instrumental nature because in the employee’s mind there is created a psychological process that weighs everything he or she has through the company (salary, status, reputation, etc.), and everything that would be lost if he or she left the company, as well as analyzing the opportunities available at the moment in the labor market. This dimension is labeled “ongoing commitment.

Lastly, the third dimension of commitment has to do with the moral obligation to remain that an employee can develop toward the company, and which is termed “normative commitment.” (For a detailed description of organizational commitment, review issues 27 and 38 of Dirección Estratégica).

The first decades of research on organizational commitment found that the affective dimension is a powerful predictor of highly desirable work behaviors, such as productivity or employee involvement in company problems. That is why it took on a leading role and why there is a strong interest in knowing the psychological and organizational variables that are associated with the employee and which can stimulate affective commitment, and this explains why the study under discussion here also considered its inclusion as the major leading role.

Given all of the above, and referencing Figure 1, the question arises: What elements of social empowerment, reflected in the work positions, and which psychological empowerment variables most influence the development of affective commitment among employees.

To understand the example given in Figure 2, it is best to analyze it from right to left. The arrows indicate the relationships that actually have significant weight, meaning they have statistical significance. The numbers above the arrows point to the importance of the relationship on a scale of 0 to 1.

The stronger the relationship, the greater the number. If attention is focused on the central variable of the study – affective commitment – it can be seen that there are three variables that have an effect on its generation. Without a doubt, the one with the greatest weight is the internalization of goals, showing twice the weight of both perceived control and task significance (identity plus task significance and range of skills).

So, it can be said that the variable which most impacts the employees’ affective commitment is the degree to which they feel that the goals of the business unit are their own. However, it is of utmost importance to take a step back and see which are the variables that influence the contributor’s feeling that the company goals are his or her own. By checking Figure 2 again, it can be seen that task feedback is the greatest influence, followed closely by task significance.

To summarize the study’s findings, it can be stated that when employees have available the metrics, systems or mechanisms that allow them to objectively measure the effort they put into their work, and at the same time these mechanisms, systems or metrics allow them to quantify the importance of their job and the tasks that they find challenging but gratifying, the collaborators will start to feel that the company’s goals are their own, and that will affect their devotion or development of an affective commitment toward the company.

If we make a comparison to daily life, it is worth reflecting on what it is that makes a person seriously follow a diet. The person starts the diet, but within a week or two sees few results of the effort he or she is making to control food consumption. However, when the person begins to see results through formal metrics such as a scale or a tape measure, he or she starts to take the diet seriously, especially if this is accompanied by social feedback, such as a relative or friend saying, “Hey, you’re looking good. Are you on a diet?”.

This analogy encourages the reader to reflect. If the company is responsible for implementing metrics, systems and other mechanisms that allow collaborators to measure the impact of their effort to improve processes, then who is in charge of doing the comment equivalent to saying, “Hey, you’re looking good …”.?

References

• Arciniega, L.M. y Menon, S.T. (2013). The Power of Goal Internalization: Studying Psychological empowerment in a Venezuelan Plant. International Journal of Human Resource Management, 24, 2948-2967.
• Hackman, J.R., y Oldham, G.R. (1980). Work redesign. Reading, MA.: Addison Wesley.
• Menon, S.T. (2001). Employee empowerment: An Integrative Psychological Approach. Applied Psychology: An International Review, 50(1),153-180.
• Meyer, J.P. y Allen, N.J. (1997). Commitment in the workplace: Theory, research and application. Thousand Oaks, CA.: Sage.

El plan de negocios ha sido, desde hace varios años, una herramienta sumamente popular. Aunque su naturaleza es precisamente esa, establecer un plan de negocio, ha sido utilizado con objetivos muy diversos…

El plan de negocios ha sido, desde hace varios años, una herramienta sumamente popular. Aunque su naturaleza es precisamente esa, establecer un plan de negocio, ha sido utilizado con objetivos muy diversos: desde para evaluar a estudiantes en las escuelas de negocios; realizar concursos entre emprendedores o estudiantes; seleccionar a los sujetos de apoyo de programas gubernamentales para emprendedores, hasta para tomar decisiones de inversión por parte de fondos de capital de riesgo o posibles accionistas.

De hecho, podría decirse que durante mucho tiempo se consideró que escribir un plan de negocio era el paso más importante para comenzar una empresa.

Sin embargo, en los últimos años, la elaboración de este documento ha comenzado a caer en desuso. Algunas universidades que están a la vanguardia en el tema del emprendimiento han eliminado cursos enfocados únicamente en el desarrollo y ejecución de planes y los han sustituido por otros enfocados en diversas herramientas menos laboriosas que permitan al emprendedor validar su idea, ajustar su modelo de negocio y tomar decisiones de una manera mucho más veloz. Incluso los concursos nacionales e internacionales han dejado de solicitar un exhaustivo plan de negocio para pedir únicamente el modelo de negocio o un estudio de factibilidad.

Ahora bien, ni el modelo de negocio ni el estudio de factibilidad deben considerarse herramientas que sustituyen por completo al plan de negocio; de hecho, son los pasos previos e indispensables. Por un lado, el modelo de negocio debe concebirse después de haber identificado la oportunidad de negocio para describir los fundamentos de cómo la organización planea crear, desarrollar y capturar valor. Una vez definido el modelo de negocio, se recomienda realizar el estudio de factibilidad y solamente en el caso de que éste resulte favorable entonces se recomienda proceder a escribir el plan de negocio.

La mayor parte de los emprendedores está familiarizada con los conceptos de modelo de negocio y plan de negocios; sin embargo, no todos tienen claridad en cuanto a lo que debe evaluar un estudio de factibilidad. Por lo tanto, este artículo se centrará en las principales diferencias entre el plan de negocio y el estudio de factibilidad, así como en las cuatro secciones que componen a este último.

La primera diferencia importante entre ambos documentos es el objetivo que buscan cumplir. Uno de los principales objetivos del plan de negocio es vender la idea a inversionistas potenciales para levantar capital, mientras que el estudio de factibilidad tiene la finalidad de investigar y descubrir si la idea de negocio es realmente viable. Lo anterior podría considerarse como una diferencia menor; sin embargo, tiene implicaciones importantes tanto para el proceso de su elaboración como para el resultado final.

Cuando el emprendedor está realizando el estudio de factibilidad se encuentra todavía en proceso de preguntarse si realmente vale la pena perseguir la oportunidad, mientras que cuando escribe el plan de negocio está tratando de convencerse a sí mismo y a los demás del potencial y éxito del negocio. Ésta es una de las razones por las que en muchas ocasiones el plan de negocio presenta un plan financiero con ganancias más exageradas que las que se proyectan en un estudio de factibilidad.

Otra diferencia importante tiene que ver con el lector principal de cada uno de los documentos. Por lo general, el plan de negocio sirve para comunicar a los diversos grupos de interés, tales como empleados e inversionistas, el modelo de negocio y el plan estratégico que los emprendedores consideran adecuados para crear valor. En cambio, el principal interesado en un estudio de factibilidad debe ser el mismo emprendedor, pues mediante ese documento revisa y redefine su idea de negocio conforme a la información recopilada en el estudio. Este proceso le servirá para ajustar el modelo de negocio y las estrategias para ponerlo en marcha.

Así, el estudio de factibilidad es el paso previo para escribir el plan de negocios. Si se realiza escrupulosamente, es muy posible que el resultado de este último sea significativamente mejor. El estudio de factibilidad debe evaluar la factibilidad de cuatro rubros principales: producto o servicio, mercado e industria, organización y finanzas.

1) Producto o servicio

Para evaluar la factibilidad del producto o servicio, el emprendedor debe corroborar si sus beneficios serán valorados por el mercado meta. El primer paso para obtener esta información es simplemente pedir a los clientes su opinión. Aunque parecería obvio, en muchas ocasiones los emprendedores cometen el error de crear un producto con las características que ellos mismos consideran relevantes y se olvidan de preguntar la opinión de los clientes potenciales, quienes son los que interesa realmente que utilicen y compren el producto.

Esta recopilación de datos se puede efectuar a través de aplicar a 20 o 30 personas que cumplan con las características del mercado meta, una prueba de concepto mostrando una descripción preliminar de la idea de negocio y definiendo los beneficios del producto. No es necesario aplicar un número elevado de pruebas, ya que no se trata de obtener una muestra representativa, sino, más bien, de conocer la opinión de algunos clientes potenciales. Una vez recabada la información, debe ponderarse si el concepto presentado resulta atractivo y si coinciden las opiniones. Si son negativas o se trata de recomendaciones, indican que es necesario redefinir o ajustar el producto. También pueden realizarse uno o dos grupos focales para conocer más sobre la percepción del producto o servicio.

Para completar la información anterior, se pueden realizar una o dos entrevistas con expertos de la industria. Esta información puede resultar muy valiosa para validar información y redefinir el modelo de negocio.

Finalmente, puede abundarse en la información con encuestas de intención de compra y con una investigación de fuentes secundarias.

2) Mercado e industria

A diferencia del plan de negocios, en el estudio de factibilidad no se pretende realizar una investigación exhaustiva del mercado, sino únicamente entender la estructura de la industria en la que se quiere participar y los retos que presenta. El análisis de la estructura y rentabilidad de la industria puede realizarse utilizando el modelo de las cinco fuerzas de Porter a través de evaluar el poder de los competidores, clientes y proveedores, así como las barreras de entrada y la rivalidad de la industria. El emprendedor debe utilizar estos resultados para definir un plan estratégico para su negocio.

Asimismo, el emprendedor debe evaluar si la industria en la que desea participar es atractiva, para lo cual tiene que identificar algunas de las siguientes características: que la industria se encuentre todavía en una etapa de crecimiento, que no se encuentre en etapa de madurez, que esté fragmentada en cuanto al número de competidores, que tenga altos márgenes operativos o que no se encuentre saturada. Si las características de la industria no son atractivas, el emprendedor deberá considerar otras estrategias para competir mejor o bien deberá decidir si realmente vale la pena competir en ella. Asimismo, el emprendedor debe investigar el tamaño de la industria y el mercado, y los competidores a los que se enfrentará.

3) Factibilidad organizacional

La meta de la factibilidad organizacional es evaluar si las destrezas y habilidades del equipo actual son las necesarias y suficientes para poder ejecutar la idea exitosamente.

El emprendedor debe tener el liderazgo para reconocer si se debe reforzar al equipo, ya sea invitando a nuevos socios o a través de la contratación de empleados clave. En el caso de que sea necesario buscar nuevos integrantes, el emprendedor debe hacer una valoración honesta sobre las habilidades que le hacen falta al equipo para poder atraer a la persona correcta, asegurándose que esta persona comparta la visión y pasión por el negocio.

Aún cuando el equipo sea pequeño, es indispensable que se escriban las responsabilidades de cada una de las personas que trabajarán en la empresa, así como los sueldos (sin importar si al inicio no se percibirán) y la jerarquía de cada uno de los puestos.

También es importante listar de seis a doce recursos no financieros cruciales para comenzar el negocio y evaluar si el equipo es capaz de conseguirlos. Estos recursos pueden incluir desde la atracción de talento y la localización de un terreno hasta la obtención de los permisos legales, patentes y propiedad intelectual.

4) Factibilidad financiera

Aquí se establece también una diferencia con respecto al plan de negocio, pues el estudio de factibilidad no busca realizar un plan financiero completo. Es decir, en este apartado no es necesario elaborar los tres estados financieros, ni realizar proyecciones ni incluir una valuación. El objetivo de esta sección es detallar el monto de la inversión inicial requerida para comenzar la empresa, para lo cual es necesario considerar todos los gastos e inversiones que se necesitan antes de comenzar a operar. Algunos gastos pre-operativos e inversiones comunes son la compra de activos fijos, el desarrollo de un software o una página de internet, depósitos en garantía, gastos legales, gastos de remodelación y capital de trabajo inicial. Este ejercicio obligará al emprendedor a realizar las cotizaciones indispensables, para hacerse una idea clara de la inversión que requiere para comenzar.

Asimismo, es importante que el emprendedor realice un estimado de los gastos mensuales fijos en los que incurrirá el negocio, tales como sueldos, luz, rentas, gastos de mercadotecnia, teléfono y otros. Se recomienda incluir todos los gastos posibles, independientemente que no se efectúen. Por ejemplo, aun cuando los emprendedores decidan no pagarse sueldos o no rentar oficina, es mejor incluir esos montos para que el emprendedor tenga una idea clara de los gastos reales en los que incurriría si operara de manera formal.

Si fuera posible, la última recomendación sería obtener información del desempeño financiero de empresas similares. Las razones financieras, como el margen de operación, el margen bruto y el margen neto, así como la utilidad operativa o el crecimiento anual de las ventas de una empresa similar, pueden darle al emprendedor un panorama del desempeño y los retos financieros a los que se enfrentaría su empresa.

Al finalizar esta sección, el emprendedor debe preguntarse: ¿Puedo conseguir el dinero de la inversión inicial? ¿Cuánto tengo que vender mensualmente para cubrir los gastos fijos? ¿Es posible bajar los gastos fijos? ¿Las empresas similares son rentables?

Una vez analizadas las cuatro secciones, el emprendedor debe utilizar la información recabada para redefinir y mejorar la idea de negocio original. Así, sólo después de haber realizado este análisis de factibilidad, se recomienda proceder a escribir el plan de negocios. De esta manera, es muy probable que sea más sólido y que tenga más oportunidades de éxito.?

Referencias

• Barringer e Ireland (2010), Entrepreneurship: Successfully Launching New Ventures, Pearson Prentice Hall, 3a. ed.
• Bygrave y Zacharakis; Entrepreneurship; John Wiley & Sons, 2a. ed.
• Osterwalder, Alexander (2010), Business Model Generation; Wiley.

By: Francisco Alvarado
Senior Consulting Manager of Finance and Business Performance

The current dynamics in organizations with Shared Services Centers (SSC) have led them to ask which roads lead to a better evolution of the services that they provide.

In this sense, Accenture, along with a market research company, conducted 100 surveys in 16 countries among professionals responsible for managing shared services. Thanks to the extensive experience of these experts, the study presented a clear picture of the trends, opportunities and key factors of change of the organizations that make maximum benefit of SSC.

More than 50% of the companies that were surveyed reported annual revenues topping $5 billion dollars and had been operating for more than three years using shared services. Specifically, we found that the organizations seek progress in order to reduce their operating costs, simplify their process and provide better serviceto their customers.

These objectives are achieved through an evolutionary process consisting of five stages:

1. Excellence of the processes

This stage provides a global vision for the simplification and standardization of the organization’s processes and technologies.

However, even these days many organizations have not attained this first stage because of some of the following reasons:

• Only half of the current SSC reached the desirable level of standardization.
• Advances are not possible without excellence in the processes.
• Applying a methodology of excellence to the processes (for example, Lean Six Sigma) is a necessary condition for the transformation of the Shared Services Centers.

2. Excellence of the services

This stage leads organizations to operate like a business with a specialized, comprehensive service. In our study, leaders of the shared service organizations affirmed that the excellence of the processes is more than providing the core service:

• A firm step toward the next stage is that the excellence in services be greater than the excellence of the processes.
• Managing expectations is a fundamental principle. It is important to ask what are the services and responsibilities of both the client and the service provider.
• The excellence in services encompasses the processes of managing demand, relationships, communication, performance, and others.
• It is possible to reduce costs by improving the services.

3. Continuous Improvement

This stage is known as the driver of organizational performance. An earlier study revealed that top performers plan ahead and they fund and vigorously pursue opportunities for continuous improvement.

• Continuous improvement is linked to the value perceived by the customer and to the viability of existing shared services organizations.
• More and more organizations invest in continuous improvement and they attain higher levels of development.
• The percentage of the operating budget dedicated to continuous improvement has increased.
• Almost 25% of those surveyed have acquired a formal ability of the Lean Six Sigma type.

4. Value added marketing

Value and confidence are generated at this point. Many shared services organizations seek to take on more strategic roles; this means moving from efficiency (reduction in operating costs) to the effectiveness of the processes (improving business results). However, it is necessary to make an intense and extensive marketing of generated value, which means that knowing how to demonstrate success is a key factor for shared services organizations to be able to create and maintain trust and motivate their customers.

• Communicating positive performance results has become predictable and is no longer valued.
• High performance organizations still struggle to convince customers that they are able to provide value-added services.
• The marketing of value becomes a key strategy to offer integrated business services

5. Integrated Business Services (IBS):

IBS is the most developed stage of organizations and is currently a trend among the service models. It requires adaptation to the market, languages, decision-making processes and specialization among the people. At this stage, the service unit:

• Is an independent entity subordinated to front-line senior managers.
• Manages multifunctional services operated by a combination of dependent and outsourced providers that respond to a common organization and to a framework of service management that is coherent.
• Is a strategic asset and manages processes from start to finish. It manages according to the rules of global processes and with the coordination of common systems.
• Is responsible for reducing costs and improving the services it provides on its own itself or managed through partners.

Three years ago, 8% of the leaders of the shared services organizations were accountable to the CEO. Today, this number has risen to 17%, which shows the maturity of shared services and their ability to begin to offer integrated business services.

Conclusions

The models of services of organizations have evolved in recent years, principally because they face situations that decrease their value before the business.

The objective of the service models is to optimize the provision of services to customers at a low cost and with more flexibility. This is why the service models try to evolve along with the business to establish their value and relevance.

In many cases it has been shown that the IBS operating model solves challenges successfully and has turned into the most advanced stage of Shared Services Centers, so it is a key to achieve a high performance.?

Esperanza Huerta and TerryAnn Glandon
The University of Texas at El Paso

Fraud committed by company employees is a growing concern among business owners and regulatory entities, given the steady increase in both the number and the scale of cases.¹

To counteract this trend, companies can introduce technological solutions to detect fraud. For example, there are information systems that identify suspicious patterns of financial transactions that can be due to fraud.

Detecting fraud when committed serves to punish fraudsters and communicate to the rest of the employees that such crime will be prosecuted, but with a fraud already committed, the damage is done and the possibility of repairing the harm is reduced. It is more efficient and less costly to prevent fraud, to detect it before it happens. If one could identify the employee who is planning to commit a fraud, what measures would management take? It sounds like science fiction, not to mention the ethical implications of doing so.

However, there are non-invasive ways to infer what is on a person’s mind. Our communications reflect what we think and feel. The written word, on paper or in electronic form, endures and reveals our intentions and reasoning. Electronic communications (texts and e-mails) have been entered into evidence in trials. For example, in the Enron trials, the prosecution used as evidence e-mails exchanged by the auditors and senior managers to show that they had knowledge of the accounting strategies that were employed². Recently, the e-mail message that Fabrice Tourré (former employee of Goldman Sachs) sent to his girlfriend, in which he said that the mortgage market was about to collapse, was presented as evidence that he made misleading recommendations to investors.³

If e-mails express what we think, then they could be examined to identify employees who are planning to commit fraud. This way, the e-mails would serve not as evidence after the fraud, but as an indicator that a possibility exists that fraud may be committed and actions could be taken to prevent it. This is the aim of new information systems to prevent frauds that are already on the market. These systems analyze thousands of employee e-mails to detect clues about potential fraud.

What does a potential fraudster state in his or her communications that can give him away? It is unlikely that an employee would send an e-mail that says: “I am going to defraud the company.” Experts know that fraud is a complex phenomenon involving the convergence of many factors that set the conditions so that fraud can be committed. Fraud occurs when three elements – known as the “fraud triangle”- are present: motivation, opportunity and rationalization.

Motivation refers to a real or perceived need to commit fraud. Besides the obvious goal of obtaining money, a fraudster may commit fraud because of the psychological need to be admired or to always be a winner. Opportunity refers to the real possibility to commit fraud, with or without help of another person or employee. Rationalization is the mental process that the fraudster follows to justify an action that is unethical. For example, an employee may rationalize that what he or she takes wrongfully from the company is not actually theft, but a way to make up for how poorly paid he or she is.

The systems conduct a linguistic analysis of the e-mails, seeking subtle clues that indicate rationalization, motives or collusion. For example, an employee can constantly express his or her dissatisfaction with the company, which can be a form of rationalization. The employee may also talk about a money problem that calls for an immediate solution, or he or she carries on personal associations with employees who are responsible for areas which perform tasks that are separated by internal controls.

The linguistic analysis that systems carry out is much more than a keyword search as they have to take into account the context in which the words are used and discern sarcasm or jokes. After analyzing the e-mail messages, the system yields a report on those authors of messages that point to potential fraud. Based on the report, management should determine if the analysis is on target and what to do if it is suspected that fraud might take place.

Systems that analyze emails to detect potential fraud are a step forward in the prevention of fraud. However, they also pose many challenges for companies. Next we will consider five decisions that management must make before using these systems. As with all management decisions, there are no right or wrong answers. The business person should assess the advantages and disadvantages of each option and decide what is most appropriate for his company.

Privacy of electronic mail

Management should make sure that the use of these systems is not illegal in the country where it wants to utilize them. In some countries, like the United States, there are specific laws that state that communications by way of the company’s e-mail system belong to the company, and employees, as such, have no privacy rights. In Mexico there is no law that specifically provides that the company owns electronic communications that employees send by internal mail, but the general consensus is that if the communication is done with company resources, it is subject to scrutiny.

Disclosing the use of the system

Management must decide if it will tell employees that it is using a system that analyses e-mail. Any decision can create a negative work atmosphere. If the use of the systems is revealed, employees may perceive top management as a big brother who wants to observe and control them. If the system is not announced, employees who find out will resent that they were not informed.

Responsibility inside or outside of the company

Management must decide whether the e-mail analysis system should be controlled by an internal department or whether to hire a third party. This decision is similar to any outsourcing decision where the cost of each option is weighed. For example, the costs of hardware and software should be considered, as well as the hiring of qualified personnel. A risk is taken with these systems when a third party is allowed access to the company’s private communications. The company’s decisions and business operations are carried via e-mail; a leak of this information can have huge negative consequences.

Continuous or specific evaluation

Management must decide if the e-mail analysis should be done consistently, at a specific time or with a specific frequency. A continuous analysis is costly, but it increases the chances of detecting the possibility of fraud being committed – in time to prevent it. An analysis at a given moment or during a specific period of time is cheaper, but it can detect potential fraud too late.

Following up on reports

Management should establish a procedure when potential fraud is identified. Who will be responsible for monitoring? What resources will be used for monitoring? A system needs to be put in place to assess the risk of fraud and to respond quickly to prevent it.

Uncertainty in reports

When using these systems, it is important to understand that there is a margin of error in the detection of potential fraudsters given that linguistic interpretation is very subjective. Besides, the presence in the messages of expressions that reflect motivation or rationalization does not mean that it is certain that fraud will be committed. There are employees who may feel constantly unhappy with the company, but who would not commit a fraud. Conversely, employees who never express dissatisfaction or elements of rationalization can commit fraud.

The reports generated by these systems do not indicate with full certainty that there is some possibility that a fraud will be committed. Management must make decisions based on reports that reflect ambiguous situations: the message is suspicious and may imply fraud, but not necessarily. When evaluating a report, management must determine whether there is sufficient evidence to commit resources to a follow-up investigation. To the contrary, management may consider the evidence is not enough and not follow it.

Whatever decision management makes based on reports bearing uncertain results has implications for the allocation of resources to follow up the case and to detect fraud. For this reason, we conducted a study to determine the effect that this uncertainty has on management decisions. In our next article we will describe the results we obtained and the implications for business management.?

References

1. ACFE. 2010 Report to the Nations on Occupational Fraud and Abuse, 2010, cited 20 de julio de 2011, , accessed at ACFE.

2. Hunter, P., Email meets Enron to bring lawyers down on big corporations. Computer Fraud and Security, 2007. 2007(5): 18-20.

3. Baer, J., C. Bray, y J. Eaglesham, ‘Fab’ Trader Liable in Fraud — Jury Finds Ex-Goldman Aide Tourre Misled Participants in Mortgage Security, Wall Street Journal, 2013.

By: Sandra Minaburo Villar

As most of us know, since 2012, publicly-traded companies in Mexico have been required to present their financial information in accordance with International Financial Reporting Standards (IFRS). This obligation was imposed by the National Banking and Securities Commission (CNBV) in its Press Bulletin number 56/2008, issued and published on November 11, 2008.

Because these were the first financial statements presented under these international standards, publicly traded Mexican companies had to incorporate the effects of the application of the exceptions imposed and the exemptions permitted under IFRS 1, First-time Adoption of International Financial Reporting Standards.

Companies that correctly applied IFRS 1 were to use January 1, 2011 as their transition date, and therefore, had to present their opening statement of financial position as of that date and as of the adoption date on January 1, 2012, in addition to presenting those financial statements as the first prepared under IFRS.

Accordingly, in the 2012 annual report they had to present the following information: I) three statements of financial position (one of them the opening statement); II) two statements of comprehensive income; III) two statements of cash flows; andIV) two statements of changes in equity.

Following the rules established by IFRS 1, companies that adopted IFRS for the first time had to do so as if these standards were always applied; in other words, the general rule obliged them to restate their accounting from their origin or founding under international standards rather than Mexican financial reporting standards (MFRS). Obviously, tracing the history of a company can be complicated and costly , so the IFRS 1 allows for certain exceptions and exemptions from this general rule. Thus, each company had to apply the exceptions corresponding to it and choose the exemptions most appropriate for it.

The exceptions and exemptions had to be applied to both the opening balance as well as the statement of financial position as of December 31, 2011, so the financial information for these years could be compared against the information presented in the statement of financial position as of December 31, 2012, under IFRS. This meant that the effects produced in the 2011 financial statements were not shown again in subsequent years, so it is important to understand what choices each company made for the opening balance financial statements, in order to understand the starting point for the year 2012.

There has been a great deal of speculation about the effects and impact of the transition to IFRS on publicly traded companies in Mexico, so the purpose of this article is to conduct a detailed analysis of one specific case: the effects of transition to international standards on the financial information reported by Grupo Modelo. By analyzing the numbers for 2010 and 2011, users of financial information can understand the impact of the initial transition to IFRS, since we can take the 2011 figures calculated based on MFRS and compare them with the figures presented for the same year, but prepared under IFRS and presented in the 2012 annual report. We will complement our analysis with information from the Reconciliation Note that IFRS 1 requires companies to include with their first financial statements prepared under IFRS.

All the financial information used here was obtained from the annual reports for the years 2011 and 2012 that Grupo Modelo published on its webpage; in other words, this is public information, validated by both the company and the independent auditing firm, in this case, PriceWaterhouseCoopers, S.C.

First, we will analyze the opening statement of financial position, which was presented on January 1, 2011 and corresponds to the fiscal year ended December 31, 2010, prepared under IFRS, and compared with the statement of financial position as of December 31, 2010 prepared under MFRS. Since the basis for presentation differs, in order to make the two statements of financial position comparable, we made the following modifications in the presentation of the balances for both years (see Table 1 and Table 2):

1. In the “Accounts and notes receivable” account, we subtracted income tax credits and presented these on a separate line under current assets.
2. In the “Property, Plant and Equipment” account, we broke out the amount corresponding to assets available for sale on a separate line under current assets.
3. In the “Other assets” accounts, we broke out the employee benefit asset and left the name of the account as “Intangible assets, net.”
4. The “Suppliers” and “Accounts payable and other accumulated expenses” accounts were combined into a single account under current liabilities.
5. The “Excise Tax, Employee Profit Sharing and Income Tax payable” accounts were combined into a single account under current liabilities.
6. In the “Deferred taxes and employee profit sharing” account, we broke out the liabilities for parent company tax credits and presented it on a separate line under current liabilities.
7. In the “Retained earnings” accounts, we broke out the amount of reserves and presented them on a separate line under stockholders’ equity.

Below we present both statements of financial position (SFP), having explained the changes in presentation, as well as the calculation of differences (increases or decreases) in each of the accounts (figures are stated in thousands of Mexican pesos) and our interpretation of the effects of the corresponding transition:

Table 1. Analysis of the effects of transition on the opening SFP

From this comparison, we can conclude that the effects of transition on the opening balance was a net reduction of $814,265 thousand pesos in assets, but comparing the information presented by Grupo Modelo in its Note 29, we find that the effects of transition amounted to an increase of $370,766. To what can we attribute this difference? The explanation is as follows:

a) Note 29 states that the transition resulted in a reduction of $3,279,787 pesos in “Current assets”, and that this reduction was due solely to inventories. In our comparison, we obtained this reduction by adding the $2,683,357 reduction in “Inventories” and the $596,429 reduction in “Advanced payments for advertising.” Grupo Modelo reclassified returnable bottles and upfront payments to suppliers, which under IFRS should be entered under property, plant and equipment, in the case of the former, and advanced payments, in the case of the latter.

b) The second significant impact on assets was in the “Properties, plant and equipment” account, which, according to Note 29, amounted to an increase of $4,594,622 pesos. According to our analysis, this amount corresponds to an increase of $5,134,892 in “Properties, plant and equipment” and a reduction of $540,270 in “Advanced payments for long-term advertising.” The increase was due primarily to Grupo Modelo’s decision to apply a combined valuation policy on this line, determining the value of land and buildings on the basis of a reasonable value obtained through an appraisal, and the rest of the property, plant and equipment according to its inflation-adjusted value as of December 31, 2007. The reduction results from the group’s reclassification of advances paid to acquire these assets, which must be entered on this line and not under advanced payments.

c) The last significant impact in the asset accounts explained in Note 29 refers to “Intangible assets,” which declined by $944,069. In our analysis, we found that this difference was the net result of a $370,292 peso increase in “Intangible assets” and a $1,314,362 reduction in “Employee benefit assets.” The increase was due primarily to a reversal of the effects of inflationary restatements of licenses and the fact that under IFRS, licenses are an asset with an indefinite useful life and should not be amortized, so the amortization that had been recognized under MFRS was canceled. The reduction in “Employee benefit assets” was due to the elimination of transition assets/liabilities, as well as the effects of eliminating the corridor approach and termination benefits liabilities.

d) To conclude our study of the asset side of the statement, Note 29 offers no clarification on the fact that the asset that had been presented under “Tax credit from controlled companies” was reclassified to current liabilities and was shown net of the effect of “deferred income taxes” and of the “Parent company liability in tax consolidation.” In our analysis, this amount represented a reduction of $1,185,031 in assets.

e) On the liability side, the first effect discussed in Note 29 is the reduction in “Deferred income taxes” of $68,743. This reduction is due, according to the note, solely to the elimination of deferred employee profit sharing, since for the group there were no differences in the way deferred taxes are determined. In our analysis, what we found was a reduction in “Assets” (increase in liabilities) of $1,185,031 (see point d), a reduction in “Deferred income taxes” amounting to $1,382,082, and a $128,309 increase in “Parent company liability in tax consolidation,” which effectively represents a net reduction of $68,742.

f) The next effect on liabilities mentioned in Note 29 has to do with “Employee benefits,” which coincides perfectly with our analysis and represents an increase of $473,713 in this liability.

g) Under IFRS, the financial liability with the non-controlling interest should be presented in the non-controlling interest account, so it was reclassified to stockholders equity. This effect corresponds to Constellation Beers Ltd.’s option to purchase Crown Imports LLC, resulting in an effect of $1,524,906 that is presented net of the other effects of transition ($1,516,953 corresponding to the non-controlling interest); an amount that coincides with our comparative analysis

h) Note 29 specifies that the effects of inflation on “Capital stock” totaling $6,439,292 were eliminated, an amount that coincides perfectly with our analysis.

i) All the effects of adoption, except for the entries that were reclassified, were recognized in the retained earnings account. The effects discussed in Note 29 coincide with our analysis, in which the transition adjustments resulted in a net increase of $6,413,038 in “Retained earnings”.

Now we will perform the same analysis with the balances from the statement of financial position as of December 31, 2011, since once again Note 29 states that for the purposes of transition, assets were increased by $197,793. In the analysis shown below, the effects of transition resulted in a reduction of $1,296,672.

Table 2. Analysis of the effects of transition on SFP for 2011.

The balance sheet as of December 31, 2011 shows practically the same effects and reclassifications as the opening balance sheet. These are:

a) Note 29 states that the transition resulted in a reduction of $2,890,405 in “Current assets”, and that this reduction was due solely to inventories. In our comparison, we obtained this reduction by adding the $2,743,197 reduction in “Inventories” and the $147,208 reduction in “Advanced payments for advertising.” Grupo Modelo reclassified returnable bottles and upfront payments to suppliers, which under IFRS should be entered under property, plant and equipment, in the case of the former, and advanced payments, in the case of the latter.

b) The second significant impact on assets was in the “Properties, plant and equipment” account, which, according to Note 29, amounted to an increase of $3,845,972. According to our analysis, this amount corresponds to an increase of $4,590,398 in “Properties, plant and equipment” and a reduction of $744,425 in “Advanced payments for long-term advertising.” The increase was due primarily to Grupo Modelo’s decision to apply a combined valuation policy on this line, determining the value of land and buildings on the basis of a reasonable value obtained through an appraisal, and the rest of the property, plant and equipment according to its inflation-adjusted value as of December 31, 2007. The reduction results from the group’s reclassification of advances paid to acquire these assets, which must be entered on this line and not under advanced payments.

c) The last significant impact in the asset accounts explained in Note 29 refers to “Intangible assets,” which declined by $757,774. In our analysis, we found that this difference was the net result of a $373,991 increase in “Intangible assets” and a $1,233,473 reduction in “Employee benefit assets.” The increase was due primarily to a reversal of the effects of inflationary restatements of licenses and the fact that under IFRS, licenses are an asset with an indefinite useful life and should not be amortized, so the amortization that had been recognized under MFRS was canceled. The reduction in “Employee benefit assets” was due to the elimination of transition assets/liabilities, as well as the effects of eliminating the corridor approach and termination benefits liabilities.

d) To conclude our study of the asset side of the statement, Note 29 offers no clarification on the fact that the asset that had been presented under “Tax credit from controlled companies” was reclassified to current liabilities and was shown net of the effect of “deferred income taxes” and of the “Parent company liability in tax consolidation.” In our analysis, this amount represented a reduction of $1,296,672 in assets.

e) On the liability side, the first effect discussed in Note 29 is the reduction in “Deferred income taxes” of $143,004. This reduction is due, according to the note, solely to the elimination of deferred employee profit sharing, since for the group there were no differences in the way deferred taxes are determined. In our analysis, what we found was a reduction in “Assets” (increase in liabilities) of $1,494,465 (see point d), a reduction in “Deferred income taxes” amounting to $1,300,458, and a $337,011 increase in “Parent company liability in tax consolidation,” which effectively represents a net reduction of $143,004.

f) The next effect on liabilities mentioned in Note 29 has to do with “Employee benefits,” which coincides perfectly with our analysis and represents an increase of $686,258 in this liability.

g) Under IFRS, the financial liability with the non-controlling interest should be presented in the non-controlling interest account, so it was reclassified to stockholders equity. This effect corresponds to Constellation Beers Ltd.’s option to purchase Crown Imports LLC, resulting in an effect of $1,706,832 that is presented net of the other effects of transition ($1,626,512 corresponding to the non-controlling interest); an amount that coincides with our comparative analysis.

h) Note 29 specifies that the effects of inflation on “Capital stock” totaling $6,439,292 were eliminated, an amount that coincides perfectly with our analysis.

i) All the effects of adoption , except for the entries that were reclassified, were recognized in the retained earnings account. The effects discussed in Note 29 coincide with our analysis, in which the transition adjustments resulted in a net increase of $6,293,457 in “Retained earnings” and a $119,306 reduction in “Fiscal-year earnings,” as explained below in our analysis of the comprehensive income statement for 2011.

In our comparative analysis of the two reports, there are differences that do not require an explanation since they are obviously reclassifications that have no effect on the data in the SFP. They are, however, effects of the transition to IFRS. For example, the increase in “Accounts and notes receivable, net” and the reduction in “Income tax credit,” or the reduction in “Suppliers and provisions” and the increase in “Excise tax, employee profit-sharing and income tax payable.”

We will apply the same procedure for analyzing the comprehensive income statement (CIS), but only for the year 2011, since IFRS 1 does not require companies to present comprehensive income statements for three years as a comparison. We compared the 2011 CIS prepared under IFRS with the same CIS prepared under MFRS. Table 3 shows the results of this comparison:

Table 3. Analysis of the effects of transition on CIS for 2011

The only effects of transition on the CIS mentioned in Note 29 were the following:

a) Effect on OCI (other comprehensive income) from adjustments in reduction of consolidated net profits due to “Employee Benefits” and “Cash flow hedges” totaling $119,584 and $31,964 respectively. This results in a net reduction of $151,548, a difference of $3,900 against our analysis. This difference is not specified in Note 29, but Note 17 refers to a stock repurchase reserve in the same amount, and because these amounts coincide, we can assume that the increase in this reserve came from consolidated net profits rather than retained earnings.

b) Parent company net profit was increased by $41,084in “Deferred taxes”, $39,899 in “Inflation effects” and $24,192 in “Employee benefits. Parent company net profit was diminished by $10,348 in “Deferred employee profit-sharing” and $214,133 in “Net depreciation and others.” These differences yield a net reduction of 119,306, which coincides with the amount presented in Note 29.

In the CIS, the effects of transition resulted in a reduction of 155,448 in consolidated net profit. The only amount that is not reconciled in Note 29 is the authorization to create a stock repurchase reserve of 3,900 pesos, as we mentioned, although this difference is not necessarily the result of the transition to IFRS.

The conclusion is that, broadly speaking, Grupo Modelo’s financial statements were not significantly affected by the transition to IFRS, but if we carefully analyzed the following financial ratios, perhaps we will have a different perspective on the effects of adoption:

Table 4. Comparison of Financial Ratios (in-house calculations)

The financial ratios we used are those that are generally used to conduct a basic fundamental analysis of financial information. As Table 4 shows, for the year 2010 we were unable to compare some of the ratios calculated under IFRS with their calculation under MFRS, because we do not have the CIS under IFRS for that year.

Obviously, some effects are more relevant than others when comparing financial ratios calculated under IFRS and MFRS. For example, the number of days Grupo Modelo took to move its inventory in 2011 was 27.02% lower (approximately 26 days less) under IFRS than under MFRS. The difference in the number of days affects both the operating cycle and the cash cycle ratio, so comparing the historical performance of both cycles with their levels in the year 2011, we become more aware of the reclassifications and effects of the transition on inventories.

Other change we noticed had to do with leverage and debt to equity ratios. For both 2010 and 2011, both of these were lower under MFRS than under IFRS. The reason for the reduction is primarily (but not exclusively) the elimination of employee benefit liabilities, the elimination of deferred profit-sharing and the reclassification of the liability with investors with non-controlling shares.

As regards the financial ratios that tell us about the group’s profitability, all of them weaken under the effects of IFRS. The most heavily affected of these was ROE, which was reduced by 3.12%.

Finally, the ratio that changed the most, as could be expected, was the capital growth ratio, which was increased by 67.37% in 2010 and 66.97% in 2011, because the net effect of all the transition adjustments was entered against retained earnings. In Grupo Modelo’s case, this adjustment resulted in an increase in profits (TablEs 1 and 2) of $6,413,040 and $6,297,457 , respectively.

For Grupo Modelo, the transition to IFRS for presentation of its financial statements, and its effect on performance indicators, do not imply a significant change in its financial information or its analysis. This situation may be different for other companies, so we suggest information users conduct a detailed analysis of the transition based on the effects explained in the reconciliation note.

^{Note:All the differences and interpretations were made considering the numbers in thousands of pesos.}

References

• Bolsa Mexicana de Valores. 2013. Sección: Empresas emisoras. Subsección: Grupo Modelo. Apartado: Reportes Anuales. Informe Anual en formato pdf del año 2012. Consultado en junio 2013. Disponible en http://www.bmv.com.mx/infoanua/infoanua_450914_2012_1.pdf.
• Grupo Modelo. 2013. “Informe Anual 2012″. Consultado en junio 2013. Disponible en: http://www.gmodelo.com.mx/download_/informe_anual/Modelo_IA2012_esp_sinFir.pdf
• IFRS Foundation. 2013. “International Financial Reporting Standards (IFRS) – IFRS 1, First-time adoption of IFRS”. Londres, IFRS Foundation.
• Ormiston, A. y Fraser, L. “Understanding Financial Statements”. Prentice Hall, 10a. ed., 2013.

By: María Candelas

For some years now, financial information has undergone a number of changes in an effort to bring Mexican accounting standards into line with international practice. The process of creating a more transparent, objective and reliable set of standards that are useful for those who prepare and use financial information will take several years more, and standards must be constantly adapted to the new ways of doing business in the world.

Work is underway on modifying the standards issued by the International Accounting Standards Board (IASB) in areas like financial instruments, leasing, insurance contracts and revenue recognition. On this last matter, the Mexican Financial Information Standards Council (CINIF) will shortly be issuing Financial Information Standards, (NIF, its acronym in Spanish) such as NIF D-1, Revenue, and NIF C-16, Impairment of Financial Instruments, among other projects.

In order to be useful, financial information must be comparable, a quality that results from the consistent application of accounting treatment to similar transactions carried out by the company. Both the NIF and the IFRS include a standard that indicates how to proceed when there is a lack of consistency resulting from changes that have occurred primarily in the valuation of various components of financial information, as a consequence of changes in standards or because of internal decisions to adopt a method that better reflects the company’s financial situation. In Mexican accounting practice, this rule is NIF B-1, Accounting Changes and Error Correction; in international accounting, it is International Accounting Standard (IAS) 8, Accounting Policies, Changes in Accounting Estimates and Errors.

As the names of both these standards suggest, they also deal with the effect of errors in financial information, which can cause inconsistencies and a lack of comparability. They also establish that the pursuit of comparability should not be permitted to restrain the evolution and improvement of financial information quality, and that any change that is made to maintain the usefulness of accounting information can be justified and commented on in the financial statements and notes.

NIF B-1, Accounting Changes and Error Correction establishes the following types of accounting changes:

• Change of specific standard
• Reclassifications
• Change in the structure of an economic entity
• Change in accounting estimates

NIF B-1 defines these accounting changes as follows:

Change of specific standard is a modification to the application of a specific standard due to: a) selection of a different method or procedure used for complying with an NIF, and or) the issuance, modification or repeal of a NIF.

Reclassifications are changes in the presentation of entries that make up financial statements which do not modify the total amounts of net profit (loss) or net change in equity.

Change in the structure of an economic entity is defined as a modification in the number of entities that are consolidated or combined into an economic entity, which results in the publication of financial statements that, given this new structure, are effectively a different company.

Change in accounting estimates is an adjustment to the book value of an asset due to a current assessment of its future benefits or adjustment in the book value of a liability provision resulting from a current assessment of obligations. Changes in accounting estimates are the result of modifications in the economic environment, new information, or technological change, among other factors, which increase the amount of information available for developing projections.

The first two types of accounting change–change of specific standard and reclassifications–should be applied retrospectively, in other words, the financial information should recognize the effects on profits or losses generated by the change in prior periods, less income taxes, in addition to their effect in the current period, as if the new method or procedure had always been applied.

The other two types of accounting change–change in the structure of an economic entity and change in accounting estimates–should be applied prospectively, meaning the financial information should recognize the effect of the change from the time it was adopted.

Errors that have been committed in the information on prior periods due to the incorrect application of some standard, an error in calculation or interpretation of information, or omission, should also be treated retrospectively, as if the error had not occurred.

Figure 1 sums up the application of NIF B-1, Accounting Changes and Error Correction:

Figure 1. Accounting changes and error correction

Companies are permitted to argue “impracticality” in retroactively applicable accounting changes and error correction when certain conditions are present, for example, if it is impossible to determine the cumulative effects even after an effort has been made to do so. However, the balances should be adjusted as of the start of the earliest period for which comparable information is presented.

The notes to the financial statements should disclose the causes of the accounting change or error, its effects on the financial information and, if such is the case, the reason why the principle of “impracticality” is being cited.

In subsequent periods, the new methods or procedures adopted will be applied in keeping with the basic concept or postulate of consistency, so that the financial information possesses the quality of comparability and is consistent with its basic purpose of being useful for its users.?

References

CINIF-IMCP (2013). Normas de Información Financiera (NIF), NIF B-1 Cambios Contables y Correcciones de Errores, 8a. ed., México, IMCP.

IFRS (2012). International Financial Reporting Standards (IFRS) – IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, IFRS Foundation. Londres, Reino Unido, IFRS Foundation.

IFRS

Cinif

Cinif. News

By Annapaola Llanas Mejía y Jesús Rodolfo Jiménez Andrade

Since the present is borne of the past, it is of great importance to know and learn lessons derived from experience in order to face current circumstances and, at the same time, set the foundations for the future.

To understand the current tax situation, one must go back to the origins of the income tax (IT). The consequences of tax policy must be taken into account because they are highly significant to life in the nation, for taxes have undergone major changes to adapt to the dynamism of Mexican society and to address factors not previously considered.

The antecedents of taxation

The direct antecedent of the income tax dates back to 1921, to the Centennial Act (so named because it was enacted during the 100th anniversary of Mexico’s Independence), which went into effect on July 20 of that year. The law was promulgated by President Álvaro Obregón and Finance Minister Adolfo de la Huerta.

This tax was of a temporary nature, being in effect for only five months, during which time it brought in to the treasury 1,078,000 pesos.¹ The amount was earmarked for the acquisition of ships for the nation’s merchant marine and for improvements to commercial ports to improve Mexico’s maritime communications.

The law was divided into four chapters known as cédulas or schedules: 1) the tax year of trade or industry, 2) the tax year for one who is self-employed or in a literary, artistic or unnamed profession, 3) salaried professionals, 4) placement of money or securities for profit, equity or dividends.

The tax was based on gross income. Those subject to the tax were both Mexicans and foreigners, provided that their source of income was located within the nation. Each cédula or schedule had its own rate divided into three or four categories. The rates ranged from between 1% and 4% for schedules s one and two, and 1% to 3% for schedule three. The calculated tax had to be paid in the first two weeks of September of 1921 by use of canceled stamps bearing the word Centenario.

On February 21, 1924, while Álvaro Obregón was still president and his finance minister Alberto J. Pani was still in office, a law similar to the Centennial Act was created, although it was of a permanent nature: the Law for the Collection of Taxes Established in the Law of Income in Effect upon Wages, Salaries, Emoluments, Fees and Profits of Companies and Businesses.

As Treasury Secretary, Pani’s essential objective was to amend the economic errors caused by the prior secretary (by turning a growing deficit into a surplus), which is why the tax reform planned by the new treasury policy and the previously mentioned tax was created as a regulatory crux. Pani dared call this treasury policy “the New Regime” because in the tax and banking sectors there was a tendency toward the equitable redistribution of taxes and the democratization of credit, which for the first time went against the Porfirian tendency that favored a small group of the rich to the detriment of the lower classes².

^{1 José Iturriaga de la Fuente, La revolución hacendaria, México, SEP, 1987, p. 76.}

^{2 Alberto J. Pani, Apuntes autobiográficos, México, Instituto Nacional de Estudios Históricos de la Revolución Mexicana, primera edición facsimilar, 2003, tomo I, p. 332.}

As the name of this regulation indicates, a chapter or schedule (cédula) was set up for individuals who obtained income from their work in the form of wages, salaries, fees or emoluments, and another schedule for companies and businesses. From that moment on and for the first time in history, the employers retained their salaried employees’ taxes, and they were responsible for the payment of these taxes. Thus, they served as assistants to the tax authorities by exercising powers of surveillance and control. This was very useful and practical for the authorities, since they could focus only on employers rather than on each particular employee. The income earned from personal employment was taxed using progressive rates, which ranged from 1% to 2% (lower than the percentages of the Centennial Law), with a steady increase in the tax base.

As to the income tax for companies and businesses, it was determined according to the profit earned in cash or in kind for one year, excepting those that originated through agricultural deals belonging to private individuals.

Specified in the regulations were the types of taxpayers, the way in which the statements should be filled out, and how to make the tax payment. Companies had to make a temporary payment (as it is still done) in the first semester. The final statement had to be delivered in January, unlike now when it is done in March.

This tax also was to be paid with stamps, and the statements were to be submitted on the forms approved by the recent Ministry of Finance and Public Credit (SHCP). At that time a deadline of up to five years was established for the government to collect fines, surcharges and taxes, which gave rise to the concept of expiration and prescription. Of all taxes collected, 10% was given to the federal entity and another 10% to the municipality where the taxable income originated. Through this law, the first experiences were gained that helped set the foundations for a new methodology for a new tax.

Design and origin of the income tax

On March 18, 1925, President Plutarco Elías Calles and Alberto J. Pani, the Secretary of Finance and Public Credit, enacted the first Income Tax Law. The law was in effect from 1925 to 1941, and over the years sustained a series of changes to adapt it to the economic phenomenon that the country was witnessing.

During this period the special idea of “tax participation” was perfected. Established in the 1924 law, it specified that 10% went to the local state and 10% to the municipality, on the condition that these entities not tax the same sources of wealth as the Income Tax Law did, and if they were taxed by municipalities or federal entities, these would reduce their rates by an amount equal to 10% allowed by the federal government. This avoided concurrent taxation (federal, state and municipal) of the same taxable item.

At that time taxpayers could choose a payment method as it could be done with stamps, cash or in any other form specified in the regulations.

As time passed the number and scope of the cédulas was modified. When the criteria and specifications grew, these schedules increased to seven: 1) trade, 2) industry, 3) agriculture, 4) capital imports, 5) exploitation of the subsoil or concessions granted by the state, 6) salaried employees, and 7) professionals, craftsmen and artists.

The regulations specified the allowable deductions, the rules regarding the statements that taxpayers were required to provide and the deadlines for submission, as well as the requirements that had to be met for the deductions for “dependents.” It established the need to accumulate the income earned from two or more companies that were taxed within the same schedule and which belonged to the same owner (similar to the current consolidation regime).

In that period it was noted that there was already a clear distinction among taxpayers and that proportionality and fairness would exist in the collections, as the Constitution calls for now, given that if assets increase, it is required that a tax be paid, regardless of the size of the taxpayer.

Since then, and thanks to the foundations that were set with the creation of this tax, an ability to adapt was allowed. In particular, the intrinsic capability to adjust the tax to the economic conditions of Mexican society that have periodically shaped the particularities of the environment. Each time that a rule modification is needed, it is the same original foundations that shape it.

Reflections on the adaptation of the tax

Since its creation, the income tax has undergone considerable changes, which range from an elementary model of a temporary tax to a modern tax model and whose complexity is proof of its permanence. The success of the Calles and Pani income tax is such that it is now the most important non-oil revenue source for the treasury.

The law became a very useful extra tool for obtaining resources and balancing government budgets, as it afforded procuring the resources needed to balance expenses and revenues, as well as to build roads and irrigation works.

The tax policy of the government of General Calles, which was created by Pani, is today the scheme that governs national taxation. With his initiative, Pani showed ability and vision in relation to the tax environment, and assurances can be made that from that moment on, a new phase began in Mexico – one in which the permanent search for equitable taxation began, and the type of taxpayer, the source of income, the tax rate, the tax base and the mode of payment are specified in detail.?

Bibliografía

• Calvo Nicolau, Enrique. Tratado del Impuesto Sobre la Renta, México, Themis, 1995, Tomo I, 516 pp.
• Iturriaga de la Fuente, José. La Revolución Hacendaria, México, SEP, 1987, 150 pp.
• Krauze, Enrique. Reformar desde el origen: Plutarco E. Calles, México, Fondo de Cultura Económica, 1987, 154 pp.
• Manero, Antonio. La revolución bancaria en México 1965-1955, México, Talleres Gráficos de la Nación, 1957, 354 pp.
• Margáin, Hugo B. Compilación de Leyes del Impuesto sobre la Renta (1921-1953), México, SHCP, 1957. 78 pp.
• Pani, Alberto J. Apuntes autobiográficos, México, Instituto Nacional de Estudios Históricos de la Revolución Mexicana, primera edición facsimilar, 2003, tomos I y II, 345 y 446 pp.
• SHCP, Ley del Impuesto sobre la Renta. Suplemento a la Ley General del Timbre, México, S. Galas, 1925, 148 pp.