Analysts are expected to develop forecasts that are realistic, objective, and un

Question

Analysts are expected to develop forecasts that are realistic, objective, and unbiased. Describe a specific risk or incentive that a manager, accountant, or analyst might face. After you have given a complete description of the specific risk or incentive then explain how the specific risk or incentive might lead them to different biases when predicting certain outcomes.

Read the articles below to incorporate into your discussion on the topic above:

http://www.cgma.org/magazine/features/pages/20138989.aspx?TestCookiesEnabled=redirect (To better understand this article you may not recall from Cost Accounting but CGMA stands for Chartered Global Management Accounting. You can become certified as a CGMA or certified as a CMA through the Institute of Management Accountants. Should you decide to take or not take the CPA exam you should also consider management certification if you are primarily interested in working in industry instead of public accounting.)

http://smallbusiness.chron.com/risks-sales-forecasting-47339.html

Explanation / Answer

Analysts are expected to be realistic while developing sales forecasts. The forecast has to be not only realistic but also unbiased as well as objective. This will help the management to plan for its operations and determine the scale of its production.

The specific risk that the manager might face is that the business may end up taking wrong strategic decisions if the forecasts are not realistic and unbiased. Strategic decisions are taken based on sales forecasts by the managers of an organization. The decisions can be to expand into new geographies, or to increase/decrease the gross margin ratio or to go for brand extensions or not. Suppose that the forecast is slightly unrealistic and shows sales to be increasing at a healthy rate over a long horizon. This will encourage the manager to increase the profit margin by a small amount or to expand its asset base.

Now this specific risk of taking wrong strategic decisions might lead to different biases when predicting certain outcomes. Here, in the example given above, an upward bias is being developed in the organization regarding its future activities. The unrealistic higher forecast has led the managers to believe and develop a bias that its commercial activities will be better in the defined planning horizon.

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