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Traditional role 4
Traditional techniques vs. Modern techniques 6
Modern role 8
The dispute that the role of management accountants has been changed in recent years by the development of advanced sophisticated management accounting techniques, tools and systems, is being widely discussed in academic literature. The rapid transformation of contemporary business environment into global, turbulent and competitive environment give crucial impact to how companies operate and people manage their business, either non-manufacturing or manufacturing company. In competitive environment, every company should continuously provide its sustainability in global market. Organizations must able to compete locally and internationally in order to be successful on the market. Management accountings practices have to guarantee that information provided to managers are accurate, relevant and useful in doing their jobs. Academic literature foresees changes in business and organizational environments and new management accounting techniques having significant influence management accountants’ roles. Within modern management accounting techniques, scholars indicate activity-based costing, re-engineering, target costing, benchmarking, life-cycle costing, total quality management, economic value analysis. Considering the employment of these innovative management accounting techniques and systems in companies and strive for broader skills, knowledge, people get the notion that the changing role of management accountants have, by large, evolved in recent decades from traditional costing functions and “bean-counter” to a business partner and strategic planner. This essay will provide an overview of the management accountant role in the organization, the reasons that lead to the changing role of management accountant and usefulness of modern management accounting methods in competitive world.
Management accountants were considered as experts in the interpretation and preparation of business information for control and decision-making. Traditionally their responsibilities included undertaking routine ‘scorekeeping’ tasks, for example, collecting performance data and providing to business managers for financial targets (Jablonsky et al., 1993). A management accountant generally produces and analyzes paper reports and numerical calculations, resulting not small set of management accounting reports. Using techniques such as budgeting, capital appraisal methods, product costing, variance analysis and standard costing would be a commonplace day-to-day routine activity. These accounting tools characterize management accountant as “attention director”. It can be explained that traditional accounting-based control practices provide quantitative standards of company performance, that by comparing with actual performance indicate some deviations. Generally, management accountant trying to solve every issue or problem requires investigation and the determination of potential directions of action out of which he must choose the best alternative. Management accountants are often relied on, either specific analysis of significant data or the elaboration of regular reports, to provide information that identifies and develops these alternative course of action and helps the manager in selecting the optimum one. It can involve production pricing decisions and cost comparisons. Essentially, management accountant is responsible to provide the required information to management in order to support them in their decision making process. Traditionally, management accountants have also been regarded as objective and independent assessors of the performance of different financial functions (Hopper, 1980). This responsibility as a supplier of financial figures to management assumes a rather passive role for the management accountant, distanced from primary activities with limited participation. Individual responsibility has been used as a precondition for the success of management control tools supported by different organizational institutions and structures (Anthony and Govindarajan, 1998). To achieve the required financial responsibility, budgets are created for responsibility centers so that the performance of departments and individual managers can be controlled and rewarded. Therefore, a key role of the management accountant was to control and monitor others’ performance. The reviewed literature highlights few factors that have enhanced, directly or indirectly, the importance of management accountants’ role. They are globalization, technology, accounting scandals and corporate trends.
The globalization of business over the last years has significantly impacted on the management accountant’s role. Because of cheaper and faster transportation, global distribution networks and real-time information, most contemporary companies face international competition rather than local.
The increasing change in technological sphere has also definitely influenced the roles of management accountants. For instance, there has been substantial effect from accounting systems like SAP system, which automatically generates some significant reports, or advances in production technologies, including flexible manufacturing systems and advanced manufacturing technologies.
A lot of the financial scandals during recent decades have raised questions about failings of the auditing and accounting profession. It is popular to think that accounting and accountants are now closely associated to ethical failures in the business world. The Enron wave of accounting scandals, such as WorldCom, Tyco, put thousands of people out of work, waste billions of shareholder value, and eroded confidence in the capital markets. Trust has been gravely undermined regarding accountants and the information they produce (Copeland, 2005).
Corporate trends can also affect business information needs, and consequently the roles of management accountants. For example, during the 1970s there was a wave of mergers and acquisitions within the industrialized world that created more and larger global conglomerates. It brought changes in how organizations collected and managed information.
Traditional techniques vs. Modern techniques
Business environment changes in the last decades included the increased global competition, deregulation of markets, increased product lines and shortened product life cycles (Innes and Mitchell, 1998). Companies responded to these changes by implementing automated information systems and manufacturing technologies and adopting new philosophies, strategies of production management. The automated manufacturing technology significantly impacted how companies operated and placed new demands on information systems, while management accounting systems remained the same. Critics argue that traditional management accounting practices fails to support the demands of the new production environment, especially in the areas of performance evaluation, investment appraisal and product costing. Management accounting systems were blamed in providing insufficient, relevant information for managers making strategic decisions. A lot of studies suggest that since the mid-1980s, important improvements have been made in the techniques and tools applied for management accounting practices in companies (Crenhall and Langfield-Smith 1998). These involve techniques such as the activity based costing, balanced scorecard, brand evaluation, life cycle costing, customer profitability, transfer pricing, quality costing, environmental costing, target costing and value chain costing (Cadez and Guilding 2008) with increasing attention on accurate budgeting, just-in-time and total quality management, most of which are particularly common among large corporations (Tillmann and Goddard, 2008). For example, modern companies are undertaking new, more complex actions to enlarge their competitive position on the market (Miller and Vollman, 1985). Product range and quality have become core factors in business success. Additionally, studies indicate that in many industrial areas overhead costs have vastly increased in relative and absolute terms, accompanied by direct labor costs which, in turn, have decreased in the proportion (Innes and Mitchell, 1998). Moreover, overhead costs tend to vary more with the complexity of firms’ activities and less with production and sales volume (Cooper, 1990). According to Miller and Vollman (1985) overheads have risen significantly due to the growing number of ‘transactions’ within companies (exchanges of materials and information required to assist production). The traditional use of product volume-related bases to allocate overheads to products was criticized for inappropriate identifying the consumption of overheads by products (Cooper, 1990). Activity-based costing (ABC) proponents claim that direct labor costs and direct labor hours, the most popular cost allocation bases, were useful when product volume was used as the most important determinant of overhead costs. Since modern overheads are mainly driven by complexity, they offer more appropriate alternative bases (Miller and Vollman, 1985). Applying ABC does not only help management accountants to link each cost attribute with an relevant activity driver, but also to forecast the resource demand for each customer, product (Cardinaels, Roodhooft and Warlock 2004). Another modern technique is the balanced scorecard that has increased its importance to a comprehensive strategic planning system from its earlier practice as a performance measurement basis. It allows management accountants to understand how the company should service its customers, sustain its ability to improve and transform, and focus on the threatening business processes (Kaplan and Norton 1992). Transfer pricing helps management accountants not only to understand the process or product costs of various departments or subsidiaries within an company, but also the production capacity, internal negotiation mechanisms, tax regulations, the potential external markets and their reflections to different calls (Becker and Fuest 2009). Due to their intrinsic relationships with a number of management techniques, systems (Emsley 2005), one would be prone to considering that the application of these tools would definitely expand the responsibilities of management accountants from scorekeeping, “bean-counting” and cost controlling to strategic and wider multidisciplinary roles (Crenhall and Langfield-Smith 1998).
Academic literature provides a strong understanding that the management accountant’s role is transforming beyond the traditional scorekeeping and controllership role. Modern roles are more ‘consulting-based’ and ‘exciting’, and include minimal day-to-day routine tasks. Increasingly, information systems automatically solve such accounting tasks. For example, reconciliations, transaction processing and accounting reports can be performed by information systems on a largely automatic base. However, professional and technical accounting expertise remains basically important for management accountants. Indeed, as mentioned above, following recent and well-known corporate scandals, as Enron, and increased public interest in social and governance reporting, expertise in management accounting and its technical aspects are more crucial than before. Nevertheless, due to the decentering of accounting knowledge and advances in information technology, such roles now take less of the management accountant’s time. Increased use of non-financial information in accounting environment has significantly impact management accountants’ roles. Important change in the working concepts of management accountants is a switch to a feed-forward orientation (projecting from actual results to forecasted results from ‘feed-backward’ orientation (comparing budgeted results to actual results) (Scapens et al., 2003). Today, prediction can be more vital than the comparison of budgets against actuals. It implies a leaning towards less “past-view analysis” and more forward-looking, real-time orientation (Granlund and Lukka, 1997). Financial measures, as cost-related measures, are no less significant. Indeed, profit is the main goal for all commercial and private organizations, but is increasingly considered as part of a wider set of financial performance indicators aligned to business value creation and corporate strategy (Scapens et al., 2003). Moreover, causal links between financial and non-financial performance are being studied and used through strategically focused and holistic measurement systems such as the balanced scorecard. Complex view implies a management accounting role different to the traditional scorekeeping role described above. A traditional role included management accountants being objective and independent monitors of the financial results of different business areas, generally within a system of responsibility accounting and with a concentrate on cost control. In contrast, the modern management accountant is likely to be more concerned with consolidating different sources of information and describing interconnections between management accounting information and non-financial performance measures by using some modern techniques such as benchmarking, life-cycle costing, re-engineering, target costing, total quality management etc. It is important because it allows individual managers to clearly understand the linkages between their day-to-day transactions reflected in weekly/monthly management accounts and their relationship to the complex strategy of the company represented in non-financial measures. Therefore, integration is now a key task for the management accountant, but still requires ‘technical’ expertise to integrate financial and non-financial performance measures into a coherent and comprehensive picture of the business (Scapens et al., 2003). Moreover, well-qualified management accountants are likely to be the main source of implementing new techniques in company. For example, my Deloitte ex-colleagues, who moved to industrial companies as management accountants, successfully implement modern methods and create more accurate management accounting system. Today business sectors have provided a productive environment for the renewed interest and focus on the role of management accounting in competitive business world.
Business is a dynamic environment that is always in process of change. Organization in modern, turbulent environment needs to adopt a more realistic approach to management. The modern management accounting techniques lead to the understanding that the modern role of management accountants has evolved in the last decades and their importance in the companies has definitely increased, if not from a scorekeeper to a strategic partner, then at least to a important contact responsible for analyzing, planning, controlling and classifying costs, for coordinating the results to the top to help in strategy creation, implementation by demonstrating possible hindrances and shortfalls before they arise. Traditional and non-traditional management accounting methods give management accountant a potential to play a key role in reporting for management control, the generating of quality strategy and in evaluating, prioritizing and identifying the different quality improvement projects which indicates improved profit results. Their greater application will certainly further enlarge the importance of management accountants’ role in companies in the future. Robert Anthony, management accounting expert, says that it is evolution of management accounting that “should be exciting time” (Brinberg 2003).