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Nowadays, corporate management accounting system become common term of economics and finance in modern age and has been raised the concern about effectiveness. Some people believe that the current system can be used to manage organisation successfully, some others argue that the corporate management accounting system can be obsolence and insufficent in these day and age.
Corporate management accounting system is the process of ensuring that a corporation follow its plan and fulfil its objectives. There are "controls" which means measurement and information, "control" means direction (Druker 1964).
Based on contingency theory, the essay focus on whether the corporate management accounting can control the organisation in nowadays.
Type of controls
'Control is the process by which managers assure that resources are obtained and used effectively and efficiently in the accomplishment of the organization's objectives' (Anthony, 1988).
Companies may use different control method, in general it can be classified using Ouchi (1979) and Merchant (1998) as follow:
Personal, Social and Culture Controls
Corporate Management Accounting Control
It was developed in various areas so that it can control the corporate as functional. Looking at the company as whole process, manager can react immediately when the problem occurs. Firstly, the management accounting observing the actions or behaviour of employees to make sure they do the job appropriately, follow the plan correctly and any cause and affected relationships (Merchant 1998). The aim of this stage is to prevent people from making problem to organisation.
The second type is social controls based on the belief, commitment of individuals toward organisation. The best example would be the Japanese in World War II, they sacrificed themselves to eliminated enemy in order to serve the need of Japan and Emperior (Macintosh 1985). Besides, the managers need to support the employees in order to motivate their work and also help people to adapt with the environment. By doing so employees can strengthened their performance and organisation output in overall. The most difficult to control is culture represent the set of value, social and belief. As Ouchi suggest, they organisation can used the group based reward, code of conduct and internal transfers. Consequently, the employees gain their sense of organisation culture.
The final type of controls in three categories is performance which is including all the relevant information about outcome and work effort. By using the established information from financial accounting, the performance can be measured, the objective can be analysed as achieved or not and company can provide reward or punishment.
Advantage of using management accounting system for controlling
First of all using management accountants can improve the profitability of organisation by carefully monitoring each operational process such as allocating cost, reducing waste and increase efficiency that may have significant impact on a company's profits (Drury 2001 p.g 672-769). By monitoring the action of people, the manager can minimize the waste and motivate employees to work more efficient. Performance review will determine whether production is too slow or having too much material waste.
Secondly, the management system supports executive managers on decision making process by producing a review on the potential financial impact of the decision. Accountants may also give sales forecasting or cash flow budget to determine the development potential which business decisions can achieve (Drury 2001)
In addition, management accounting systems may improve financial reporting by involving with the collecting and producing financial information. Through management system, manager can correct the financial statements before it can be prepared and released to external stakeholders. Improved financial reporting means the company not only secure debt or equity investments from outside sources but also helps companies expand or improve operations. Besides, a strong financing operation is one of the competitive advantages over competitors. This strength can be used to gain market share and improve overall profitability (CIMA, 2002).Proactive Risk Management model
As the Chicken and Posner (1998) suggest the risk can be measure through the management system. By measuring the risk, organisation can try to eliminate those risks through the operation control. Limitation of the system
Using management process to control the system can reduces certainty risk of performance and management. However, the control system might not eliminate all the risk of organisation including uncertainty risk of economic, nature and interdependence factors.
Risk classification (COSO, 2004)
The second problem is control system can only be effective when the managers know what actions should be taken. In others words, the cause and effect of actions need to be well understood for example the supervisor monitor workers on production line to make product according to the blueprint. However, when the work become more complicated such as accounting or management decision the cause and effect might not be clear. (Merchant 1998)
Culture problem happened when the controls motivate employees to engage in behaviour that bring harmful to organisation (Otley 1987). In addition, "An agency theory suggests that principals have lack reasons to trust their agents. The owner will find to resolve these concerns by putting nontrivial monitoring costs to align the interests of agents with principals and to reduce the scope for information asymmetries and opportunistic behaviour". (ICAEW 2004) Therefore
The management system is used depend on size, purpose and objective of the organisation. Byrne (2007), states that organisations are experiencing, highly competitive environments, sophisticated information systems, structural changes and innovation. Thus through the correlation between the role of an accountant as a provider of information and the changing context of the organisations, it can be argued that accountants design of the information systems (i.e. MCS) is contingent upon the variables stated above. This perception of MCS is supported by Chenhall (2003), who argued that MCS are contingent upon factors such as changes in the environment, competition, organizational structures, and technology.
Consequently, this means that accounting systems will differ from situation to situation as each country, organisation and government will face different contingent variables (Otley, 1980). Thus, explaining why there is no 'universally "best" design for a management accounting information system, but that "it all depends" upon situational factors' (Otley, 1980, p416). These assumptions can be explained by contingent theory, which is based on the continuous and dynamic process of which an organisation attempts on find the appropriate structure to fit the levels of uncertainty in the environment (Chenhall, 2003).
E.g. technology, environment
e.g. shape, centralisation, interdependencies
Type of accounting information system
e.g. technical and behavioural characteristics
Various frameworks have been developed by academics from empirical research with contingent control variables differing from each framework (Otley, 1980).
Moreover, the organisation might not afford to use all three types of management control since it might cost too much and put the company to the loss.
The economics theories are developing rapidly in order to adapt with the change of globalisation environment. Even though, the risk may occurs on their own way, the accountants can help the managers to reduce the effect of problem by increase the quality of risk measurement. In order to do so, the system of management needed to be improved, the accountants need to be aware of what is going on in the market and take into accounts.