Management Accounting and the Environment - Term Paper Example

A Management Accounting and the Environment Accounting procedures and processes are very much a product of the organizational and wider environments in which they operate. Recently, the role of management accounting changes because of legal and social influences on the finance and accounting function, and environmental variations resulting from the size of the organization, ownership patterns and organization structure. Management accounting in Charity organizations is the application of accounting techniques to provide management with the information to assist in the processes of planning and control. There is a clear overlap with financial management in that management accounting is concerned with the use of funds, and with financial reporting in that management accounting uses the data collected as a basis for its calculations (Andersen,1989). There are different approaches which help to identify the future goals of Charity organizations and detect the threats. Accountants' examination of Charity organizations gives useful insights into the nature of strategy itself. Management accountancy in Charity organizations is normally associated with more rational approaches to reporting. Perhaps its greatest contribution lies in providing the management accountant strategist a broad framework for analysing the position of organizations at a particular moment in time. It can also be useful in the development of a number of strategic options which attempt to tackle opportunities and threats, build on corporate strengths and avoid weaknesses. An important consideration is that for most management there is a choice of strategy (Collins, Davies, Weetman, 1992). New environment needs the approach based upon the assumption that information is readily available to the accountants and an accurate assessment can be made of its likely impact on organizations. This is not always the case and the entire process is subject to behavioural influences. The so-called rational techniques have been criticized as 'pseudo-science'. Nonetheless this is the basic approach used by many researchers (Kirkham, Loft, 1993). In the 1980s the emergence of an increasingly complex and turbulent business environment called for modifications in the rational approach. The environment plays an important role for charitable organizations, because there are more groups for whom the financial records are of potential interest. These groups include paid staff, volunteers, beneficiaries, donors (including grant making trusts), institutional and corporate funders, government departments, rating authorities, The Charity Commission, the press and the public as well as the Inland Revenue and HM Customs and Excise. As a result of this Charity Accounts can be subject to more requirements than private sector organisations of equivalent size (Parker, 2001). In the light of this it is possible to distinguish three main functions of accountants: the raising of funds or financial management; the contribution of accounting to management control and decision-making; and the function of financial reporting. Accountants in Charitable organizations need to prepare and maintain accounting records. These records must be retained for at least six years (at least three years in the case of charitable companies), and make the accounts available to the public on request. In charitable organizations accounts can be prepared using one of two bases: receipts and payments basis which consists of an account summarising all money received and paid out by the charity in the year in question, and a statement giving details of its assets and liabilities at the end of the year. "Accruals basis contains a balance sheet showing the charity's financial position at the end of the year in question, a statement of financial activities (SOFA) during the year and explanatory notes. They, in accountancy terms, should give a "true and fair view" (Sayer, 1998). Recent years accounting has been seen as a management function which obtains influenced significantly by those who prepare and use accounting information. For example, the determination and disclosure of profit levels will be guided by regulations governing accounting practice. It may also be influenced by forthcoming wage negotiations with trade unions and with a view to minimizing liability for tax. Budgets are determined by management to guide future activities in accordance with plans. The process of budget-setting and resource allocation is also, in many organizations, a product of organizational politics, power and influence (Irvine, 1994). In terms of opportunities, management accounting in Charity organizations assists in the formulation of plans for other functional areas. For example, an assessment of future labour costs will assist the process of manpower planning. An important contribution to the planning process is the assistance offered by management accounting techniques of investment appraisal in selecting the most appropriate course of action from a range of alternatives. Such techniques are more valuable as environments become increasingly complex. According to legislation, Charity organisations with neither an income nor expenditure over 250,000 have a choice regarding the external scrutiny of their accounts. It can be carried out by independent examination, which may be carried out by anyone external to the organisation with experience of accounting and knowledge of the SORP requirements or by a qualified auditor (Hanney, 2002). Today, management accounting plays a very important role in the wider process of management control and detection of weaknesses and threats. It enables clear parameters to be set in the form of budgets and represents a method by which many problems can be sensed and measured. It is especially useful as a control tool for three reasons. First, the data produced offer management one of the few methods of quantifying the effect of their decisions and of the organization's operations. Second, management accounting integrates the information from all the activities of the business and enables management to view operations as a whole. Third, it deals with the control of funds that are essential to an organization's survival (Briston, Kedslie, 1997). Bear in mind the new role of the accounting in Charities it is possible to deal with five aspects of management accounting; budgeting, cost accounting, investment appraisal, the management of cash flows, and the contribution of the management accountant to management decisions. There is considerable overlap between these categories. For example, the control of assets would inevitably involve budgetary control, and the contribution to general management decisions would include all the other four categories. Management accounting is central to strategic planning and many of the issues reappear when we discuss strategy at the end of this chapter. In a charity the expenses are categorised according to what they are for, specifically what fund they relate to. A fund will be either a restricted fund or an unrestricted fund. Restricted funds are funds subject to specific trusts or conditions imposed by the donor and binding on the trustees (Freeman, Shoulders, 1998). The conditions may be stated expressly by the donor or may be implied, as in the case of money sent in response to a special appeal. Unrestricted are funds which, as the name suggests, are not subject to externally imposed restrictions. Provided that they are used in pursuance of the charities objectives, and in a way which is consistent with their charitable status, their use is at the complete discretion of the trustees. They are generally used for day-to-day operations (Freeman, Shoulders, 1998). In all organizations there are often significant difficulties in changing the budget allocations. This is because budgeting is a bargaining process dealing with the allocation of scarce resources and those with most to lose have a vested interest in maintaining the status quo. It is for this reason that increasing attention has been given to the behavioural aspects of budgeting. The bargaining process can be useful in that it can force management to confront long-held assumptions and face up to underlying tensions which affect decision-making. However there is a danger that conflict will be dysfunctional. This is especially true where budgeting in the form of targets is used as a control device, and more so where it forms the basis of the organization's reward system. In this case and also where scarce resources are at stake there may be a temptation for managers to distort information to place both them and their departments in the most favourable light. Budgeting is therefore inseparable from the process of organizational politics and the way the organization is structured. In some cases this process have been acknowledged and attempts have been made to introduce some form of participation in the budget planning process (Love, Boyd, 1994). Another aspect of management accountancy includes cost accounting which involves the analysis and allocation of costs. In recent years traditional cost-accounting methods, usually based on historic data, have been challenged, first by high rates of inflation in the 1980s and more recently by other changes. Charities heavily involved in fundraising efforts will want to compare the income raised against the cost for each fund-raising technique adopted. Capital investment involves the commitment of funds now with the expectation of acceptable earnings in the future. Such decisions are made about the purchase or renting of new or additional premises, investment in new equipment, or even the acquisition of another business. A careful appraisal of such investments is necessary due to the usually large amounts involved and the key impact such investment^ might have on the future viability of the company. A variety of investment appraisal methods have been devised, including payback, rate of return, net present value (NPV) and yield (Hanney, 2002). On more important aspect of accounting involves the management of cash flows is concerned with the movement of cash into and out of the organization. This is an important activity since the firm needs to ensure that it has sufficient cash to cover its current expenditure (Kochanek, Norgaard. 1988). Cash-flow management can be particularly difficult in times of high inflation, when there is a danger that profits become absorbed by escalating costs. Some firms also experience cash-flow difficulties in expanding economies. A current concern of cash-flow management is the management of stocks. Many Charity organizations are attempting to reduce their outgoings through a better control of inventory Any discussion of the various elements of management activities singly but uses them all in conjunction to assist in the general process of accountant management activity can give the misleading impression that such activities are discrete. In reality the work of the management accountant does not focus on any one of the management decision-making on an on-going basis. The accountant would be expected to contribute to most types of management decision, and certainly would have an input in major decisions. The three functions of finance and accounting represent strategies of financing and controlling operations, of distributing resources and power through budget allocation, and of information disclosure. Additionally, financial tools and information are invariably used in the making of strategic decisions in other functional areas, such as the decision to invest in new products or equipment, or to take on extra staff. Financial analyses form the basis of most acquisition attempts. The finance and accounting function assists management decision-making on a number of key issues that are central to the viability of the firm. These issues include the sources of funds, investment decisions, acceptable levels of debt, the minimization of tax liability and the extent of the pay out to shareholders. Today, there is a growing recognition that the strategies associated with the different activities are linked in some kind of synergistic way. Many changes in the organization of work in Charity organizations in UK since 1990 have been attributed to the large technological improvements and the sharply higher levels of investment in computers and related technologies over the same period (Wilson, Sangster, 1992). Few empirical studies have attempted to empirically examine these relationships. The rapid growth of information technology (IT) is at least partially responsible for one important organizational change, the shift of accounting activity to smaller organisations. Software programs make the process of financial reporting and decision making easier and faster, but as the most important information technology do not change the importance of accountants. PS Financials is particularly committed to the charity sector and is fast becoming the modern financial software of choice for charities. PS Financials charity users range from: Save the Children Fund UK and the Women's Royal Voluntary Service to the National Library for the Blind. The nature of Charity organization impinges significantly upon accounting procedures. This is inevitably shown when changes occur in ownership or in the goals of the enterprise, bringing about changes in the organizational culture. For example, the takeover of one firm by another may well result in the consolidation of accounts and perhaps a change in the accounting practices. One major change has been the withdrawal of local-authority accounting controls and the subsequent elevation of the management accounting function within Charities themselves. Another change affecting all public-sector organizations has been the greater emphasis placed on income generation beyond that normally provided. This places an extra burden upon Charity bodies but may also give them greater flexibility to pursue their own goals. The majority of charities are in fact a collection of differing businesses. For example, "a large number of charities have the financial requirements of: retailers, publishers, subscriptions, membership, donations, property, education and health all mixed into one organization" (Perry, 2002). To get the best benefits the flexibility of the financial accounting system has never been more important. Financial management is concerned with the funding of the business and ensuring such funds can be met by the organization. The major sources of finance are share issues, bank lending, state finance and internally generated funds, usually through the reinvestment of profit. It is this last source that would appear to be most significant for firms in Britain. Management accounting is concerned with assisting management in planning and control. It involves the preparation and control of budgets, the analysis and allocation of costs, the appraisal of capital investments, the management of cash flows and general contribution to strategic decision-making. The accounting function is greatly influenced by the environment in which it operates. Accounting practices vary also with the size of the organization, with large and small companies having their own special problems. As organizations increase in size and develop appropriate structures, decisions will have to be made on the allocation of costs. Accounting information forms the basis for most strategic decisions within the organization. Its value should be placed alongside a number of limitations, not least of which are the subjective nature of accounts and the role played by accounting information to justify organizational political decisions. References 1. AICPA. (2005), Available at: http://www.aicpa.org/members/div/acctstd/index.htm 2. Andersen, A. (1989), Perspectives on Education: Capabilities for Success. Accounting Profession, April. 3. Briston, R. J. and M. J. M. Kedslie (1997), 'The internationalization of British professional accounting: the role of the examination exporting bodies', Accounting, Business & Financial History, Vol. 7, No. 2. 4. Collins, W., Davies E.S. and P. Weetman. (1992), "Management Discussion and Analysis: An Evaluation of Practice in UK and US Companies." Accounting and Business Research 23, no. 90, pp. 123-137. 5. Freeman, R.J. and Shoulders, C.D. (1998), Governmental and Nonprofit Accounting. Prentice Hall; 6 edition. 6. Hanney, B. 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