Towards an Integrated Management Accounting Approach

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Towards an Integrated Management Accounting Approach

1.Introduction:

Accounting data are the most important source in making important executive decisions, advanced management accounting techniques depend on building business models that have feedback loops to evaluate the impact of management decisions on internal and external stakeholders, this loop requires cooperation between customers, shareholders and employees.

Companies in the US and the UK have been slow in adopting the new business models which depends on empowering employees by giving them more responsibility and reward, the reason for the delay is the manipulation in the financial data that undermined the mechanism for rewarding employees, Ezzamel,M, Lilley, S, Wilmott, H and Green, C (1995)

2.Main Text:

2.1-The power of People:

Employees are considered the most important asset in the company. Competitors can copy the company’s technologies, products and management style. But No one, however, can match the highly loyal, dependable and motivated employees who care. People are the firm's stock of knowledge and they are central to any company's competitive strategy and competitive advantage, employees if empowered is more important that machines, investors and suppliers.

Corporations do not talk and do not do jobs, Well educated, empowered, and highly motivated people are critical to the development and execution of the corporate strategies, especially in today's faster-paced and competitive world, where senior management alone can no longer assure your firm's competitiveness.

2.2-Why Employee Empowerment?

People are the firm's most underutilized resource; corporations use the knowledge and the experience of their employees. In the new knowledge economy, independent entrepreneurship and initiative is needed in order to survive the current competitive markets. In today's corporate competitive environment a manager must work hard towards engaging the organization’s employees towards achieving the objectives of the organization. Hierarchical organizational structures and highly skilled workforce are shaping new knowledge-based corporations. Managers are expected to perform more leadership and coaching tasks and work hard in order to provide employees with the necessary resources and working environment that they need to accomplish the goals they've assigned to. In brief, managers work for their staff, and not the opposite.

Empowerment is the oil that runs the process of learning. Talented and empowered intellectual capital is becoming the prime ingredient of organizational success. A critical feature of successful teams, especially in knowledge-based corporations, is that they are invested with a significant degree of empowerment, or decision-making authority.

Equally important, employee empowerment allow the company to gain the co-operation and the compliance of its employees, Hales,C(2000) empowerment changes the managers' priorities and leaves them with more time to engage in more strategic decisions, visioning, and innovation. This intelligent and productive division of duties between visionary leaders, focusing on emerging opportunities, and empowered employees, running the business unit day to day (with oversight on the leader's part) provides for a well-managed enterprise with strong growth potential.

The empowerment theory is not new, it is very old, and many economists have talked about empowering employees as a way of improving the level of output and the profitability of the company.

Empowering employees makes them feel that they are important to the company, it helps develop a positive attitude to employees and reduce staff turnover and increase productivity.

Empowering employees is the only way in which capitalism could survive the crisis of continuing conflict between management and employees, it is the only way to create people’s capitalism, Saunders, P & Harris, C(1994).

2.3Empowerment and philosophy:

The roots of the empowerment had come from philosophy, philosophers always dreamed about achieving justice, democracy and social equality.

For a long time, people lived and they are still living in a society that does not distribute wealth and power evenly among its members.

Empowerment is trying to answer the questions that have been arisen from the political philosophy.

“Human beings always questioned the nature of power, the role of the citizen in the polis, and the achievement of justice in civic life. From this vantage point, empowerment is a continuation of this theoretical search for elusive, but critical, answers to timeless human questions”, Spreitzer, G & Doneson, D (2005).

Many researchers consider empowerment the natural completion of democracy; empowerment most if not all the employees should be seen as the only way to democratising corporations.

Empowerment is not about whether or not to democratise corporations, empowerment is about removing the barriers that prevent employees from participation by changing organizational policies and procedures.

Employees should develop a sense of responsibility and commitment while directors should listen and give real powers to employees.

Employees should exercise their power not because managers have agreed to give it to them but because they are part of the society that give them right to descent standard of life by bearing their responsibilities.

2.4-How to empowering employees and achieve justice:

Empowering employees includes sharing power and wealth in the organization.

  1. Sharing profit: sharing profit is one of the most important tools that management of corporations usually uses in creating incentives to employees to work harder and be a real part of the corporation, sharing profit takes the shapes of “profit sharing schemes”, “stock options”, “Employee stock ownership”, “pensions” and “staff incentive schemes”, Sesil, J, Kruse, D, and Blasi, J(2001).

Profit sharing depends usually in its calculations on accounting values, accounting has been subject to wide manipulations in the last few years, this has created a crisis of confidence between the management and the employees, employees do not trust their managers when it comes to calculating their profit share.

Employees and trade unions are likely to have done their part prior to submitting a profit sharing demand. The question is always 'how much can the company would like to pay?' answering this question will depend on the company’s balance sheet and profit and loss statement. It is assumed that the larger the profits, the more the company can afford to pay? Therefore, company directors instruct their accountants to report lower rather than higher profits in order to minimise the expectations of the employees and their trade unions, Simon, J (1998).

  1. Sharing power: according to the economic literature, employees used to get wages or salaries because they do not take the risk that the capitalist or the entrepreneur usually takes, but things have changed because sharing profit should lead to sharing power, employees should take more responsibility should they want to get some of the profit, employees are assigned more than their traditional roles, employees are assigned more tasks that the middle and the low-level managers used to do, employees see themselves doing more than before and get paid little, this situation has been created by the dependence on accounting information in calculating profit shares for employees..

Employees should share in taking decisions and should be incentivised by sharing in the profit

2.5 What is the impact of accounting manipulation on employee empowerment?

Directors are directly responsible for the undermining of confidence between the employees and the managers.

Directors who consider their corporations a profit-making machine that should exploit everything even their employees are undermining the prospects of their companies in the long-term by lowering the level of commitment and the productivity of the employees to their organization.

Empowering employees depends on encouraging employees to take on more responsibility and authority in order to be more productive and get higher pay.

When employees feel that the profit of the company has been underestimated in order to pay less wages or profit shares to employees, that will create confusion in the corporation, employees will feel that they have been cheated and they have worked for nothing, employees will soon try to pull out of the responsibilities that they have been trying to undertake.

When this happens, change programs will be disrupted, employee’s commitment will be undermined and the resources of the company that have been invested to train the employees will be wasted because the employees of the company will try not to work as hard as before and try to be less productive.

When senior managers realise that their employees are trying to pull out, they will try to force their employees to do what they were not required to do under their contractual commitments. This will make senior managers depend on junior managers to supervise the work of the employees.

Directors will start sending confusing messages to mix the internal commitments of the employees with their external commitments of the employees, Argyris, C (1998).

Internal commitments arise from the motivation that the profit sharing yields; internal commitment stands for empowerment while external commitment arise from the contractual compliance Argyris, C (1998).

Change programmes will fail because directors will tend to reduce the employee autonomy and impose command-type management on them.

Senior and middle managers intervention will create an uncertainty in the meaning of empowerment.

Colin Hales found that senior and middle managers will be uncertain about what to empower, how to empower and when to empower,

Empowering normally will be emptied from its real meaning and it will be turned to redistributing the authority between senior and middle-level managers.

Empowering usually leads to give junior managers more powers and give employees more responsibilities.

Junior and middle-level managers have an intrinsic interest in impeding empowerment because it will cancel their jobs, those managers will try to restrict the freedom of their employees and impede their initiative.

Junior and middle-level managers always misunderstand the policies and the procedures of creating good empowerment atmosphere in the organization.

Not only that but also, middle management tries to rewrite the policies and the procedures in a way that suits its interests and keep its powers.

2.6How Empowerment works in practice?

In case the company was making huge profits, directors will be tempted to underestimate the profits and give the employees less than what they actually deserve.

In case the company was making less than expected profits or losses, directors will put some of the blame on employees and ask them to work harder thus doing more for nothing.

In that sense, empowerment will lead to more tasks and less power to employees.

In any case, the senior management is trying to increase the expectations of the employees in order to increase their contribution to profits prior to their profit sharing demands (financial results) while trying to decrease the expectations of the employees after making profits (financial results). This shift in policy prior and post profit is causing damage to the productivity of labour in the long-term and delaying change in organizations that would benefit all stakeholders.

This shift in policy is attributable to the nature of empowerment, as we explained earlier; empowerment depends on motivation and internal commitment. Motivation and internal commitment could not be specified by contractual relationship between the management and the employees, that is why some CEOs try to exploit the good intensions of their employees.

In several studies, researchers showed that empowerment had failed in enhancing employee autonomy, Harley, B (1999), the uncertainty (policy shift), that the senior and middle managers, have created kept employees unable and unwilling to exercise their new powers.

2.7What is the impact of empowerment on trade unions?

Employee profit participation schemes should be designed to weaken trade unions and build a more co-operative approach between the management and the employees.

We have to remember that the corporation and the employee (players) prefer to play a competitive game if each one of them prefers to minimize the gain of the other while the corporation and its employees (players) prefer to play a co-operative game when they could both maximise their gains Rapoport, A (1966).

In many European countries, trade unions have opposed profit-sharing scheme because it individualise the relationship between the employee and the management and it weakens solidarity and collectivism, D’Art, D & Turner, T (2002).

Empirical research showed that empowerment has led to the weakening of trade unions in Scandinavian countries when power and wealth were distributed in a just way among employees.

In the ideal case of no manipulation and perfect justice, employee empowerment should lead to the elimination of trade unions and maximising the gains of each side, it is true that trade unions disturb production and try to minimize the gains of the management in order to get more gains to the employees.

Manipulating financial data is a source of strengthening trade unions and causing conflict between the management and the employees.

2.8 Why depending on accounting information fails empowerment:

Depending on accounting information is not enough; accounting looks to the employees as an expense.

We have explained above that employees are now considered part of the assets that the company possesses.

Assets are usually investments that yield income beyond one accounting period.

Shareholders that have financed the purchasing of the long-term assets are rewarded with a larger share of profits and they are rewarded for more than one accounting period.

If management would like to get the full co-operation of the employees, it should reward its employees with substantial profit shares in order to show appreciation for all the effort that its employee have put in the organization, Leonard, B(1994).

Empowerment will make employees work on tasks that would pay off beyond the current accounting period.

When these tasks pay off, employees may not be rewarded for them because the management would not know that employees have contributed positively to this profit that has been made.

The management should look for more just measure of employee contribution, accounting in its current shape and reputation is not the best way to reward employees.

3.Conclusion:

The conflict between management and employees is not over yet; it has been renewed after the accounting financial scandals, which happened in the aftermath of Enron collapse.

Directors are still trying to maximise the short-term profit of their organizations by exploiting empowerment and making employees do more work for nothing.

Employee participation in internal auditing of the organization, which includes the accounting side and the non-accounting side, will improve the confidence between the two sides.

Employees and their trade unions should start putting pressure on the management in order to measure the contributions of labour that pay off beyond one accounting period and try to find ways of remunerating that labour.

Increasing the confidence in the accounting data will sideline the middle and junior management, which is trying to put difficulties in the face of empowerment, and open the door open in the face of more democratic and fair corporations.

Our findings coincide with Hardy C.; Leiba-O'Sullivan S (1998) findings, eliminating the misunderstanding between the employees and the management will make the empowerment process succeed.

Reference:

  1. Colin Hales (2000): Management and Empowerment Programme's. In "Work, Employment & Society" vol. 14 no. 3, pp. 501-519.
  2. D’Art, D & Turner, T (2002): A comparative Analysis of profit sharing, performance and unionisation in selected European countries, Katholieke Universitate, Brussels.
  3. Ezzamel,M, Lilley, S, Wilmott, H and Green, C (1995): Changing Managers and Managing Change, CIMA publishing (I have looked in the journal of management studies and have not found the article that you indicated because you have not given me a title and the deadline is tight, so I should not be liable for that, I have used this one instead).
  4. Harley, B (1999): the myth of empowerment: work organisation, hierarchy and employee autonomy in contemporary Australian workplaces. Work, Employment and Society, 13, 1999, pp. 41-66.
  5. Hardy C.; Leiba-O'Sullivan S: The power behind empowerment: implications for research and practice, Human Relations, page 451-483, 1998.
  6. Leonard, B(1994): Big return for award bucks-rewarding employees with cash, HR Magazine.
  7. Sesil, J, Kruse, D, and Blasi, J(2001): Sharing Ownership Via Employee Stock ownership, Discussions Paper No. 2001/25, United Nations University.
  8. Simon, J (1998): Why do companies use creative accounting?, accaglobal.com
  9. Argyris, C( 1998): Empowerment: The Emperor's New Clothes, Harvard Business Review, May-June 1998 pp. 98-105.
  10. Rapoport, A (1996): Two Person Game theory, Dover Publications.
  11. Saunders, P & Harris, C(1994): Privatisation and Popular Capitalism, Buckingham Philadelphia: open University press.
  12. Spreitzer, G & Doneson, D (2005): Musings on the past and future of employee empowerment, the handbook of organizational development, Thousands Oaks: Sage.

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