Contemporary Management Accounting System - Essay Example

?Contemporary Management Accounting System Table of Contents Overview 3 The Concept of Management Accounting 5 The Drivers for the Changing Role of Management Accounting Practices 7 The Contemporary Business Environment 8 Role of Management Accountants in Contemporary Organizations 10 References 14 Overview Anthony G. Hopwood (1976), in his book ‘Accounting and Human Behaviour” had stated that, “Accountants and other members of the management team searching for means of understanding and improving standard setting and budgeting; must therefore see the process in its entirety and respond to it as a complex human and technical problem rather than one standing in technical isolation.” This implies that there has been a paradigm shift in the principles and practices of management accounting. Management accounting no longer comprises of only the technical aspect of accounting, but also the multifaceted management aspect of the business on the whole. The area of management accounting has undergone considerable changes during the past years. One of the major factors that had influenced the modifications in the management accounting practices have been the dynamically competitive and swiftly altering organizational environment that is prevalent today. Additionally, the present day business settings comprise of ongoing reformation in the working atmosphere, as well as continuing progress in the financial information arrangements. With the advent of new information system practices and the development of the Enterprise Resource Planning (ERP) systems, there has been a vast change in the management as well as financial accounting practices of modern day organizations. The inclusion of the information systems had an effect on the role of management accountants in numerous ways. The execution and adoption of the various information systems by the business organizations had amplified the automation or mechanisation of a numbers of daily work schedules in the accounting departments (Roussoulis, 2007). With the changing times, majority of the organizations were required to upgrade their operational activities in order to sustain their competitiveness. As a result, accounting professional of such organizations were regularly involved in the preliminary execution process in addition to the final employment and preservation of the information systems. Hence, the role of management accounting professional were considerably influenced by the inclusion of various information systems as well as by the use of superior and efficient reporting tools (Roussoulis, 2007). Consequently, it can be stated that owing to these diverse changes in organizations leading to the emergence of modern contemporary organizations, the responsibilities of management accountants has been varying throughout the previous couple of decades. The modern accounting literature has constantly emphasised that there is a strong requirement for management accountants to diverge and deviate from the conventional bookkeeping role, to a more active role, that offers dynamic support to the organization’s management and comprises of rising involvement in business decision-making (Kaplan, 1995; Granlund & Lukka, 1997; Granlund & Lukka, 1998; Jarvenpaa, 2001). Furthermore, it has also been mentioned that the management accountants in the contemporary organizations are endowed with more responsibilities other than the routine categories of accounting tasks (Roussoulis, 2007). Under the prevalent business conditions, the management accountants of contemporary organizations are supposed to act like business partners for the management of the organization in addition to being change agents for the organization (Anthony & Govindarajan, 2007). The Concept of Management Accounting Management Accounting is one of the fundamental segments of the core management role of an organization. The management accounting practices comprises of the recognition, assessment, accretion, scrutiny, research, interpretation and correspondence of information that are required by the management of an organization. The information provided by the management accountants are utilised by the management of the organization to plan, assess and control within the business in addition to ascertaining that there is appropriate utilization of and accountability for its financially viable resources (BPP Professional Education, 2005). The Chartered Institute of Management Accountants (CIMA, 2009) had referred management accounting as a practical discipline for the purpose of value generation within companies in private as well as public sectors. Management accounting merges accounting activities, finance activities as well as management activities with the foremost technique required to impel fruitful business. The conventional functions of the management accounting practices are the formation of the financial as well as non-financial reports for people outside the organization’s management such as shareholders, regulatory bodies, creditors and tax institutions among others. The branch of management accounting broadly comprises of three areas, viz. strategic management, performance management and risk management. The strategic management aspect of accounting has evolved and advanced the role and position of an organization’s management accountant as a strategic associate in the business. The involvement of the management accountants in the strategic decision making related to the business, have integrated their role with the administration of the organization’s overall performance. Under the risk management role, the management accountants of the modern-day organizations play a significant part in the frameworks as well as practices for classifying, assessing, computing, managing and stating risks to the recognition of the goals of the organisation (Bromwich & Bhimani, 1994). The amalgamation of these three facets of management accounting leads to the evolvement of innovative practices of management accounting. These practices endow an organisation with policies that target on the vibrant business environment. The management accounting expertise is determined by the management accountants who compose the management accounting function in an organisation (Shah, 2009). The management accountants make use of their specialized knowledge and proficiency in the formation and presentation of financial reports as well as other decision-making information. This information providing role of management accountants aids the organization’s management in the development of policies and strategies in addition to the development and administration of operations in their organisations. Hence, it can be stated that the management accountants act as value-creators in an organization, since the financial and non-financial information provided by them for the decision making purpose help an organisation to gain competitive lead. It has been stated that the present-day management accountants are much more progressive in their approach and contribute significantly in making decisions that will have an effect on the potential of the business. This is in contrast to the past role where more emphasis was given on the recording and book keeping part of the profession (Ndwiga, 2011). The Drivers for the Changing Role of Management Accounting Practices Wu & Boateng (2010) had stated that the modification in the management accounting practices could have been influenced by various issues, namely, the company size, overseas associates and knowledge and expertise of the management of the company. Several researchers have cited a number of factors that could have impacted the role change of the management accounting practices. The cited factors were mainly associated with moderately current economic as well as technological developments. One of the major factors in this context was globalisation of markets that led to augmented competition. The progress in information as well as production technologies decreased time required to be spent by management accountants in information processing. This had also allowed the employees in the operations segment of the company to carry out certain tasks on their own, that were formerly the maintained by accountants. Furthermore, the operational as well as management inclination towards relationship management, in addition to the emergence of lean organisational structures and organizational processes, also impelled the modifications in the management accounting practices (Holtzman, 2004, Burns & Et. Al., 1999, Johnson & Kaplan, 1987; Macintosh, 1994). D. Hrisak (1996), had considered information technology (IT) as one of the chief factors influencing the function of management accountants as a decision maker as well as a business strategist. The practices of management accounting are changing as the management accountants unite technological apparatus along with creativity to append value to their companies by decreasing expenses. The management accountants are believed to serve their companies as business partners by imbibing financial expertise into their team. Messmer (1999) accentuated that majority of the management accountants consider an assortment of computer systems along with upgraded financial software appliances to be essential. It has been observed that the previous financial arrangements are conceding to innovative IT installations and generating significant execution projects to be managed and supervised (Ashton & Et. Al., 1995; Gray & Et. Al., 1996). The Contemporary Business Environment As a result of internationalization or globalization of business across the world, there has been a considerable transfer of capital as well as information across the boundaries of various countries. Consequently, the choice business location has developed into gradually more immaterial. Furthermore, the management as well as accounting job responsibilities have also become multidisciplinary (Simister & Et. Al., 1998; Russell & Et. Al., 2000; Thorpe & Holloway, 2008). The inclusion of the decision making and management aspect in the core responsibilities of management accountants has increased the market power of non-accounting alliances. For instance, the professional accounting organizations are at present endorsing MBA credentials in conjunction with professional accounting studies to their members. Consequently, banks and other financial organizations are entering into the accounting market; at the same time as some large as well as medium-sized accounting firms have principally stopped focussing on CPA or CA label, so as to position and depict their organization as multidisciplinary industry consultants (Albrecht & Sack, 2000; Thorpe & Holloway, 2008). The prevalent global economy can be considered to be more or less as one that is knowledge-based. This knowledge-based economy is at the moment being put together on the acknowledgment that the income generating influence of companies dwells in the intellectual resources of organizations instead of merely the physical or financial resources. With the advent of the concept knowledge managers, management accountants no longer play only the function of information gatekeeper in companies. The role of management accountants comprises of both financial and non-financial responsibilities to ensure organizational success as well as value for the progressively more information sophisticated clients (Simister & Et. Al., 1998). As an outcome of the progress and advancement of information technology, the regular account as well as budget preparation job does not necessitate particular accounting skill. Consequently, it had facilitated the allotment of the data preparation task to junior level employees and made the management accountants free for additionally sophisticated and complex analytic, consultative, decision-making and management role. Furthermore, information technology growth is also resulting in the introduction of electronic commerce, extended possibility in information transfer assurance services, virtual organisations, and the shift of business information systems professionals into consultative as well as decision making roles (Simister & Et. Al., 1998; Russell & Et. Al., 2000). The present-day consumers are more informed, and have the opportunity to access an infinite collection of product or service alternatives globally. Akin to organisational managers, the customers of accounting services have also started placing relatively less value on conventional accounting, auditing, as well as tax services, and instead assess products or services by means of non-financial in addition to financial operating performance indicators (Simister & Et. Al., 1998; Albrecht & Sack, 2000). In the contemporary environment, the work patterns have altered, because a large number of knowledge-based employees are exceedingly taking over from less skilled workforce as the central employees group. The contemporary organizations value their knowledge-based employees for their analysis and production of information, their incessant re-skilling, and their modernization and flexibility. As a result, the management accountant of at the present time is transforming into a financial as well as strategic manager. Hence, the essential skills for today’s management accountants are strategic, technological, diagnostic, leadership and communication based skills. These are management proficiencies required for advising and generating business development. This indicates a definite role shift for management accountants, from the role of providing financial information to the role of management advisor as well as decision-maker in the organization (Parker, 2002). Role of Management Accountants in Contemporary Organizations There has been a paradigmatic change in the management accounting practices of the contemporary organizations. Fundamentally, there have been two major categories of developments in management accounting practices in general and the role of management accountants in particular. As a result of developments, contemporary management accounting has taken up new instruments and methods. Furthermore, there has been a consultant-led progress in the direction of an evolved role for management accountants. Under the new role, the management accountants are expected to act more in a consultative or advisory position, which is essential for managerial strategic decision making. Earlier, the management accountants performed merely the role of information provider and had no substantial role in the decision making process of an organization (Hopper & Et. Al. 2007) However, with the changing times and evolving economy, the role of management accountants have progressed from their traditional role, which involved providing financial information, to a more contemporary role. The evolved role of management accounts comprise of an advisory responsibility in addition to providing information (Emmanuel & Et. Al., 1992; Bebbington & Et. Al., 2001). The significance of the role of management account in an organization arises from the fact that it is from them that the management of an organization can obtain the management accounting information. The responsibilities of a management accountant are imperative because it deals in the context of resource allocation for a company in addition to controlling and assessing the business performance of the company. In the contemporary organizations, management accountants are directly concerned with endorsing, scheduling, organizing, directing, corresponding and coordinating the decision-making actions of companies in the private as well as the public sector (Scapens, 1991). The two major job responsibilities of management accountants in today’s modern world are the ‘advisory services’ and the ‘information services’. The advisory role of the accountants comprise of offering opinions, and assisting the assessment process of business opportunities. Additionally, the management accountants assist the management of an organization in the development of prospects and the formation of standards as well as objectives of the organization. The information services role of the management accountant entail providing past information as well as future-oriented information related of the company to its higher management. It has been widely acknowledged that the work related to management accounting is influenced by three issues, viz. control, compliance, and competitive support. In the past, management accounting practices of the organizations were impelled by the control as well as compliance issues (Berry & Et. Al. 2005). However, with the passage of time, the focus had shifted on competitive support. In the contemporary organization, the focus on control and compliance is reducing and the management accounting norms of such organizations are more accentuated on competitive support. This can be substantiated from the fact that today’s organization are more exposed to heightened competition amongst peers, enhanced client focus, greater emphasis on quality in addition to the impact of globalization (Hopwood & Miller. 1994; Securities and Exchange Commission of Sri Lanka, 2009). The new role of management accountants can be categorised into the following: considerably less stress is placed on technological knowledge and conventional expertise. The new role depends on further proficiencies in the context of non-financial responsibilities in the management accountant’s job. Now, the accountants are directly involved in an organization’s decision making. The accountant’s are also required to offer advice across all matters of the business, ranging from strategic to operational issues. They have to hence exercise a progressive orientation and approach in performing their role. In the contemporary organizations, the functions of the management accountants are more related to management and leadership activities (Cooper & Dart, 2009). In the quest of these new and varied responsibilities, it is likely that the management accountants working techniques would also alter. This is particularly due to the augmented importance on association outside the accounting and finance function and functioning in cross-functional groups (Bhimani, 2006). References Albrecht, W.S. & Sack, R.J., 2000. Accounting Education, Charting the Course through a Perilous Future. American Accounting Association. Anthony, R. N. & Govindarajan, V., 2007. Management Control Systems. McGraw-Hill Irwin. Ashton, D. & Et. Al., 1995. Issues in Management Accounting. Prentice Hall Bebbington, J. & Et. Al., 2001. Financial Accounting: Practice and Principles. Thomson Learning. Berry, A. & Et. Al., 2005. Management Control, theories, issues and performance, second edition. Palgrave Macmillan. 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