Forensic Systems Engineering

5The Materiality of Operations

CHAPTER MENU

1. 5.1 Rationale for Financial Metrics
2. 5.1.1 Sarbanes–Oxley
3. 5.1.1.1 Title III: Corporate Responsibility
4. 5.1.1.2 Title IV: Enhanced Financial Disclosures
5. 5.1.2 Internal Control
6. 5.1.3 The Materiality of Quality
7. 5.2 Mapping Operations to Finance
8. 5.2.1 The Liability of Quality
9. 5.2.2 The Forensic View
10. Credits
11. References

In this book, “operations” refers to the productive and service processes used in business and “quality” refers to the degree of conformity to which the resulting products and services meet customer requirements. Generally, the connection between the processes and the goodness of delivered product or service is hard to make because many of the processes occur early on in the system. As a result, the contribution to product quality made by the various processes in the stream of activity is often misunderstood.

As an example, suppose that a printer has been using a perfectly good three‐color printer that has satisfied the customer base for years. Then a new customer arrives who insists on four colors. The printer does not want to lose this customer and buys a new four‐color printer. This is usually considered a cost of production. It is not. It is a cost of quality. It is the cost of meeting customer requirements—the fundamental task of quality.

Hendricks and Singhal (1999) explain the financial advantage that quality brings to those who practice it diligently, as opposed to those who don’t. However, I believe the case ...