Managerial Accounting Concept - Essay Example

Managerial Accounting Concept Managerial Accounting Concept Managerial accounting covers a broad array of a firm’s functional spheres including finance and marketing, among other disciplines. Ultimately, managerial accounting information depends upon internal financial data specifications. Great care is required in preparation and maintenance of such internal financial specifications and reports, in order to guarantee utmost clarity and consistency. The latter are crucial aspects if resultant reports are to be adequately logical to facilitate proper decision making.

Further, forecasts derived from managerial accounting are critical for organizational planning, while cost information enables managers to focus on and be held responsible for their respective business segments. The significance of proper managerial accounting is best exemplified by the recent Tesco case, in which the renowned British supermarket overstated its profits, resulting in dire consequences for its market stature and some of its executives. The article that provides insight into the importance of proper managerial accounting is titled “Tesco Suspends 3 More Executives” authored by Jenny Anderson.

Just as the title of the article suggests, it focuses on Tesco, a supermarket deemed the largest in Britain. Anderson explores the aftermath of Tesco’s disclosure that there had been a 250 million pound overstatement in its earnings forecast issued earlier in the year. The author denotes that while investigation continues into the supermarket group’s accounting practices, it has suspended three additional executives bringing the number of dismissed executives to eight. Anderson points out that the company attributed the accounting discrepancy to hasty booking of promotional income from its suppliers, coupled with pushing its costs further than usual to the future.

The article highlights the consequences of the accounting problem, which was brought to light by a whistle-blower from within the company. These costs include loss of market share, as budget-oriented shoppers shift towards supermarkets that offer significant discounts, and a significant drop in share value. Investigation by Britain’s Financial Conduct Authority (FCA), Deloitte, and Freshfields, is also exerting further pressure on the already negatively affected company in terms of poor reputation and subsequent loss of credibility.

The article concludes by stating that interim investigation results are yet to be released, which implies that the uncertainty still remains a threat to the company’s standing. From Anderson’s article, it is apparent that Tesco’s error stemmed from failure to observe a fundamental accounting principle, which requires matching an establishment’s revenue to its costs. Matching earnings and cost constitutes a universal rule of accounting, irrespective of a company’s geographical location.

Even though matching revenues with marketing promotions of multiple months is complex, it is a common practice in the retail sector and the discrepancy should have been detected early enough. The other detail that emerges from the article is the belated full disclosure of the company’s financial status. The latter is an accounting requisite, which Tesco failed to meet and one that it would have perhaps kept secret, had the whistle blower not come forth with the information. Anderson’s article provides significant insight into the consequences of improper managerial accounting.

The significant loss of market share and share value shows how easily the public reacts to adverse reports of a company’s financial status. This is especially considering the fact that Tesco remained profitable even after proper earnings adjustment. The volatility of public reaction shows why proper accounting measures are crucial to promoting public confidence in a company, thus guaranteeing its financial stability. In addition to these consequences, there is also the implementation of disciplinary measures for executives found culpable with accounting discrepancies.

The suspension of some executives shows Tesco’s commitment to restoring the public’s and investors’ confidence in its operations. The disciplinary measures are crucial to reconstruction of the supermarket’s reputation and consequent gradual recovery. Anderson’s article, therefore, makes significant assertions, particularly the importance of proper accounting practices, and adoption of disciplinary measures, in order to ensure accountability among executives entrusted with finance management responsibilities.

Outlined costs of accounting discrepancies also serve as a reminder of the essence of proper accounting controls and proper administration structure. There is a wide array of lessons that can be derived from the Tesco case, as outlined by Anderson. Key among these lessons is the need for a company, whether public or private, to adopt a robust corporate administration culture, characterized by strong internal controls, meant to prevent accounting and governance problems. In addition, as a prospective leader, one must strive to uphold extant standard practices, since it is preferable to minimize and manage risk, rather than respond later to accounts and management related crises.

Another primary lesson drawn from the Tesco case and would be pertinent to averting reputation and financial crises is the need to automate ordinary tasks. This is because it is clear that the suspended executives were highly qualified in finance and management issues, but were perhaps distracted by mundane managerial duties. Automation would allow executives to focus exclusively on identifying irregularities, analyzing accounting decisions, and making credible forecasts, as well as, logical financial reports.

In addition to embracing a stringent corporate culture and automation efforts, it is important for an executive, current and prospective, to strengthen the accounts regulatory framework. This would not only aid in early identification of risks by internal auditors, but also afford the responsible finance management team and other executives enough time to address issues noted. It would also be important for the involved audit committee, the chief financial officer (CFO), and other managerial staff to sign-off on accounting decisions made within a firm, in order to prevent similar judgment related errors in future.

It would also be imperative to maintain comprehensive financial records of a firm, and uphold a culture of complete financial disclosure in order to avoid accounting discrepancies like that of Tesco. The final most important lesson drawn from Tesco’s situation is the need for executives and other organizational partisans to heighten examination of a company, when business conditions exhibit deterioration. When managers, directors, and other executives increase scrutiny of financial and other business results, they convey the need for a corporate culture of transparency, accuracy, discipline, and integrity in the entire organization.

Combinative application of these lessons would enable one, as a high ranking future leader, to steer the organization towards financial stability through keen adherence to standard accounting practices, as well as, striking balance between strategic risk taking and financial management. Reference Anderson, J. (October 14, 2014). Tesco Suspends 3 More Executives. New York Times. Retrieved from http://www.nytimes.com/2014/10/15/business/international/tesco-suspends-3-more-executives.html?_r=2