Is Management Accounting a Profession?
Management Accounting is an integral component of any business operation. This function is a part of the management core and cannot be replaced by any other service of the company management. The role of the management accounting and its contribution to the overall achievement of the firm’s goals has changed dramatically over the past century, but its importance and its value are beyond any doubt. Management Accounting is directly involved in the basic planning-directing and motivating-controlling cycle of running a business and through this process it adds value to any business.
First managerial accounting concepts and techniques were formulated at the end of the XIX century by the practicing businesses. In the second part of the XX century the emphasis of the development has shifted substantially towards theoretical aspects developed by scholars. Modern managerial accounting is facing a dramatic paradigm shift that reflects the new realities of the XXI century and leading edge has moved to the field again. However, this time the practicing management accountants are organized in several professional organizations such as Institute of Management Accountants (IMA) in the US or Chartered Institute of Management Accountants (CIMA) in Great Britain that often sponsor and lead the research.
The definition of the managerial accounting has evolved over time. The first official definition issued by IMA (then the National Association of Accountants) in 1981 read:
“ the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of financial information used by management to plan, evaluate, and control an organization and to assure appropriate use of and accountability for its resources. Management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies, and tax authorities” (IMA, 2008).
In recognition of the evolution of the management accounting function, IMA has revised this classic definition in 2008 to read:
“Management Accounting is a profession that involves partnering in management decision making, devising planning and performance management systems, and providing expertise in financial reporting and control to assist management in the formulation and implementation of an organization’s strategy” (IMA, 2008).
“Advise managers about the financial implications of projects.
Explain the financial consequences of business decisions.
Formulate business strategy.
Monitor spending and financial control.
Conduct internal business audits.
Explain the impact of the competitive landscape.
Bring a high level of professionalism and integrity to business” (CIMA, n.d.).
The classic and the revised definitions give a good understanding of the transformation the managerial accounting profession has undergone in the recent years. The emphasis has shifted from preparation of financial reports for various users to strategy formulation and management decisions.
Robert S. Kaplan, Professor of Accounting at Carnegie-Mellon University, provided a comprehensive overview of the development of the management accounting and the issues that need to be resolved by the modern accountants in his well-known 1984 article The Evolution of Management Accounting, published in The Accounting Review.
His main idea expressed in the article underlines that the evolution of management accounting was driven by industrial development and corporate structural changes. Large textile mills and railroads of the XIX century developed a need for internal planning and control tools. That need resulted in a cost control system and operating statistics method. Carnegie’s steel company further developed the cost control system into a cost-per-unit accounting method with particular attention to “what today is called prime or direct costs”. The system was extensively used by the top-management, especially in pricing decisions (Kaplan, 1984, p. 392). The overhead allocation and standard cost concepts were developed into a fully functional system by 1923.
The DuPont company, around the same historical time-frame has developed and implemented the Return on Investment (ROI) concept out of necessity to evaluate and control the efficiency of its multiple sub-units in the decentralized structure. General Motors by the year of 1923 had implemented a system of annual operating forecasts, flexible budgets and resource allocation based on uniformed criteria.
In 1984 Kaplan observed: “Virtually all of the practices employed by firms today and explicated in leading cost accounting text-books had been developed by 1925” (Kaplan, 1984, p. 390). However, the managerial accounting principles created in the beginning of the XX century were designed to service the needs of the industrial development of that time. The main features of that period were mass production of identical or similar products with the high volume of labor in the cost structure. However, the world is not the same as it was 90 years ago.
Since that time Just-in-Time and Lean production concepts have been developed. Zero defects, TQM and flexible workstation systems have been implemented. Information technology has automated a number of key functions in both production process and accounting. An Australian Flinders University School of Commerce research paper The Future of the Management Accounting: A South Australian Perspective add the following factors that facilitate a change in management accounting role: globalization of markets, advances in information and production technologies, and increasing competition. (Forsaith, Tilt and Mydias-Lobo, 2004, p. 3). The same research described the change in management accountant function as a move from “bean counter, corporate cop and financial historian” to “valuable business partner” ((Forsaith, Tilt and Mydias-Lobo, 2004, p. 4).
IMA Management Accounting Quarterly Magazine in the article The Role of the Management Accountant: 2003-2012 adds to the list of events that necessitate a revision of a management accountant role in the modern industry environment. The events include:
Development of the International Financial Reporting Standards (IFRS) that has globalized the perspectives of accountants around the world
Operationalization of Sarbanes-Oxley Act of 2002 (SOX) compliance and expansion of financial statements audit to include report on internal controls
The occurrence of major financial frauds and failures such as home mortgage collapse, Lehman Brothers, Bernard Madoff, and others (Clinton and White, 2012).
Many practicing managerial accountants feel the same imminent change in their role even without consulting with leading professional organizations’ research. Advances in IT technology has made financial reports compilation an easy and mostly automated job. A document that required an elaborate manual process several years ago can now be automatically generated in real-time mode. No wonder that some accountants may feel that their profession is becoming obsolete.
However, the changes in both technology and world economic environment does not signify the end of the management accounting. It brings new and exciting opportunities to the profession. There is no other function in company’s management structure that is in a better position to analyze and understand the business as a whole. To see if the company is moving in the right direction, if the strategic decisions taken by the management are working. Management accountant, in the new capacity, has to participate in the processes of strategy formulation, control and change facilitation. It is clearly a value-adding function. The role of management accountant has to expand to provide expert opinion or advice, to lead cross-functional teams that target change and innovation, to show leadership in using analytical and statistical methods. The profession has moved from being mostly “technical” to being more “managerial”. The change opens new venues for creativity, top-level analysis and freedom to bring value to the company.
How exactly should these new and exciting opportunities be tackled? Text books and scholar studies have not yet come up with a solid theoretical base. Most managerial accounting university courses offer the classic approach that has not changed since 1920s. But some changes are visible. IMA’s Management Accounting Quarterly describes one such new initiative: “Several years ago, the business program at La Salle University adopted an integrative approach to teaching management accounting by substantively linking Introduction to Managerial Accounting and Fundamentals of Financial Management courses together with the objective of illustrating the natural link and interdependence of accounting and finance in practice” (Leauby and Wentzel, 2012).
Another recent article in Management Accounting Quarterly gives more specific advice to the management accountants ready to embrace the change. Kristine Brands and Mark Holtzblatt provide five main areas of business analytics that the accountants should focus on: “(1) franchise sales analysis, (2) accounts receivables, (3) accounts payable analysis and payment monitoring, (4) mergers and acquisitions (M&A) due diligence, and (5) forensic accounting” (Brands and Holtzblatt, 2015). There is little doubt that more studies like this will appear in the near future. However, management accountants in the field have to take the leading role in re-shaping the profession. It is a great challenge and a great opportunity for the accounting community.
The true role of the management accounting in the new industrial era is best summarized by Robert Kaplan: “Management accounting must serve the strategic objectives of the firm. It cannot exist as a separate discipline, developing its own set of procedures and measurement systems and applying these universally to all firms without regard to the underlying values, goals, and strategies of particular firms” (Kaplan, 1984, p. 414).
Management accounting undergoes a dramatic change. The role of this function will be completely re-designed in the coming years. At the same time, the role of management accountants in the structure of the business operations is going to become even greater than it was before, bringing more importance and value. It should be a very exciting and rewarding journey for all accounting professionals.
References.
Chartered Institute of Management Accountants (n.d.). What is Management Accounting? Retrieved March 17, 2016 from: http://www.cimaglobal.com/About-us/What-is-management-accounting/
Kaplan, Robert S. (1984) The Evolution of Management Accounting. The Accounting Review.
Forsaith, David, Carol Tilt, and Maria Xydias-Lobo (2004) The Future of Management Accounting: A South Australian Perspective. Retrieved March 17, 2016 from: https://www.researchgate.net/publication/239923424_THE_FUTURE_OF_MANAGEMENT_ACCOUNTING_A_SOUTH_AUSTRALIAN_PERSPECTIVE
Clinton, Douglas and White, Larry R. (2012). The Role of the Management Accountant: 2003-2012. Management Accounting Quarterly. Fall 2012, Vol. 14, No. 1
Leauby, Bruce A. and Wentzel, Kristin. (2012). Linking Management Accounting and Finance: Assessing Student Perceptions. Management Accounting Quarterly. Winter 2012, Vol. 13, No. 2
Brands, Kristine and Holtzblatt, Mark. (2015). Business Analytics: Transforming the Role of Management Accountants. Management Accounting Quarterly. Spring 2015, Vol. 16, No. 3
