The changing accounting landscape

Management accounting is continuously evolving, with the emphasis shifting from a cost determination and financial control focus, to the provision of advice that results in addition or creation of value, to taking part in decision making and strategy formation.

In general, the post war era was characterised by rational expectations about human behaviour and beliefs in linear progress, upward mobility and equal opportunity. The over and under absorption of cost in traditional cost accounting systems gave way to standard costing. It was viewed as the key accounting tool in cost control and few questioned its ability to provide effective managerial control.

Throughout the first two thirds of the 20th century, variance accounting, in the shape of standard costing and then budgetary control, was strongly promoted by both academics and professional organisations. Along with net profit and return on investment, cost variance became a primary financial measure for evaluating managerial performance.

The 1970s brought about a re-examination of most assumptions underpinning management accountancy. The effectiveness of large organisations that stressed individual accountability, measured through standard costs, was widely questioned. Standard costing’s relevance was challenged. Its focus on efficiency rather than effectiveness was exposed. Management accounting was about to change again.

A constant theme in management accounting is that its role is to provide what the business requires, what managers need and want. This contrasts strongly with the way in which financial accounting is governed by external laws and standards.

This business centred approach has meant that management accounting has been willing to adopt techniques and approaches developed by other disciplines and to move away into any area that offers the means to satisfy management priorities. As a result, a series of developments have led to an emphasis on management itself. For example:

• Information management has succeeded information technology management, which developed out of computing, which itself originated in data processing;
• Decision support models of all kinds started with investment appraisal, that included discounting, probability, and forecasting tools, after beginnings in general management mathematics with an emphasis on techniques like batch and order quantity;
• Performance management builds on performance measurement techniques, enhanced by incorporating non-financial measures from early beginnings in financial ratio analysis and variance accounting for control;
• Financial strategy has built on financial management, which started in treasury management, itself preceded by cash forecasting and working capital control;
• Organisational and people management topics were taken on;
• Business strategy, covering all aspects of the business, grew out of largely process based corporate planning.

The 1990s saw various factors, both internal and external to organisations motivating change. Externally:

• Globalisation of markets;
• Increased competition;
• Significant technological breakthroughs; and
• Changes in methods of production.

Most organisations reacted during this decade by downsizing, outsourcing, de-layering and team-building. More importantly, globalisation of markets has been met by globalisation of businesses. This led, on the one hand, to concentration of businesses within each industry into a small number of global players. On the other hand, these de-merged large parts of their businesses that did not fit a definition of the focus they wish to achieve, either to other global businesses seeking to consolidate their positions or through management buyouts.

Shaping global businesses required strategic management, organisation skills, communications as well as information infrastructures. Information and information management were now key issues for the management accountant, with technology encouraging faster and widely dispersed information flows around the organisation. This gave rise to a ‘de-centring’ of accounting knowledge, with managers performing tasks previously in the accountant’s domain; such as preparing budgets, analysing performance and calculating variances. This might have been a threat to management accountants. However, it became an opportunity and accountants began to play a broader role within the organisation.

There may also be an element of opportunism. Professionals trained to be flexible in their approach are those most likely to be the ones that move into new territories or who are asked to take on new remits.

Management Accounting in the 21st Century
As the International Federation of Accountant’s International Accounting Practice 1 (IMAP) established, the directions in which management accounting practices are developing involve a broad spectrum of cross-functional disciplines. Specific directions include:

• Performance management
• Asset management
• Business control management
• Environmental management
• Financial management
• Intellectual capital management
• Information management
• Quality management, and
• Strategic management.

Flexibility and adaptability of management approach to business will be driven by the organisational context. There will be an increasing need to develop new business models to address the changing environment. Everyone is confronted with the power of E-commerce – businesses must adapt to interface with the Internet world.

The contextual features of the business, particularly the size and nature of the industry, and individual business needs, would be critical in determining the level of emphasis placed on each of these directions. For example, in the public sector, there is increasing pressure for accountability, to be run on business-like lines and to achieve value for money. And, throughout organisations there is increasing attention to corporate governance issues.

Today, a company’s “licence to operate” and its competitiveness are closely linked. The process of maintaining confidence can be as positive for company performance as the loss of confidence can be detrimental. A company which undermines its “licence to operate” by the wrong behaviour exposes itself to a range of sanctions. The environment provides a compelling example. Companies which fail to accept responsibility for the environmental impact of their operations risk punitive regulation and taxation as well as public hostility.

Some have predicted that there will be fewer accountants in the future but they will be able to take more senior positions. The predictions have to be accepted cautiously. There may well be fewer accountants in each organisation, but the increase in economic activity initiated by out-sourcing, globalisation, privatisation and deregulation in former controlled economies is demanding more business accountants, as is the growth of global consultancies. It is not so much the number that is required that may change but the role they will be required to play.

In recognising the important role of management accounting in the performance of businesses, both the Malaysian Institute of Accountants and CIMA, The Chartered Institute of Management Accountants, have organised the National Award for Management Accounting (NAfMA). The 2005 awards are now open for participation by public-listed and non-listed companies, including small and medium-sized enterprises with an annual sales turnover not exceeding RM 25 million. The closing date for entries is 25 August 2005. Please contact CIMA (T: 03-7803 5531) or MIA (T: 03-2279 9200) for more information.

This article is an excerpt from a CIMA Technical Briefing on “Transforming the Profession – Management Accounting is Changing” by Anita Allott, Paul Weymouth and Jake Claret.