Management Accounting Innovation - Essay Example

Management Accounting Innovation Name: Course: Tutor: Date: Introduction Management accounting deals with the application and provisions of an organisation’s accounting information to enable the management of the organisation reach informed decisions concerning the business. Information on management accounting is designed for and intended to be used by the organisation’s management only to make strategic decisions. The information is usually forward-looking, confidential, and computed by reference to suit managerial needs - normally through application of management information systems. The American Institute of Certified Public Accountants states that as a practice, management accounting extends to the following areas: Strategic management - Advancing the management accountant’s role as the organisation’s strategic partner. Performance management - Managing the organisation’s performance and developing its decision making practice. Risk management - Contributing to the practices and structures for identifying, gauging, managing, and reporting risk factors that might strain or hamper an organisation’s achievements in terms of its objectives (Robertson & Foster, 2006). Accounting educators and practitioners were heavily criticised in the late 1980’s due to the fact that management accounting practices, especially the curriculum offered to accounting students, had barely incorporated any changes. Appropriate changes on management accounting practices, according to critics, have been lacking in spite of drastic changes in the business environment. Institutes of professional accounting, for fear that management accountants were becoming irrelevant to business organisations within the context of business practice innovations devoted significant resources to address this issue (Drury, 2005). The aim of this paper is to ascertain if management accountants are indeed innovative within the business context. And if they are innovative, the paper investigates the significance of their innovations on the business organisations within which they practice Management accounting innovations Among the most outstanding accounting innovations are the Balance Scorecard (BSC) and Activity Based Costing (ABC). Those who vouch for these innovations are of the opinion that their application is beneficial to virtually every organisation. Those opposed to the idea of these innovations being beneficial to organisations argue that the evidence supporting how beneficial these innovations are to organisations is subjective and non-systematic. In spite of lack of hard evidence in this respect, international survey studies reveal that several organisations have already incorporated one or more of these innovations. Additionally, the same studies have revealed that currently, the number of organisations contemplating adoption and even implementation of these innovations is on the increase (Hopwood & Chapman, 2008; Kale, n.d.). This therefore implies that the impact of these innovations to the modern day organisation is significant. Reasons why management accounting innovation is one of the core themes driving modern organisations To ascertain whether management accounting is one of the key themes driving modern organisations, it is imperative that an evaluation be carried out on innovations within management accounting per se. The topic of many research studies within which management accounting innovation is assessed is Activity Based Costing. One of the main challenges in these studies is determination of the most appropriate dependent variable (Hopwood & Chapman, 2008). From an empirical management accounting perspective, there are four success measures attributed to Activity Based Costing. These are: (a) application of Activity Based Costing to make organisational decisions; (b) decision actions drawn from Activity Based Costing information; (c) increase in profits attributed to Activity Based Costing; and (d) management assessment as to the general success of Activity Based Costing (Smith, 2007).These factors are deemed drivers to organisations in the sense that that they influence the direction to be taken by the organisation with respect to growth and development. It is also worth noting that management accounting innovations are considered key drivers to modern organisations due to the role they play in addressing organisational objectives. They offer a framework within which management accountants can facilitate organisations to attain sustainable value creation. The role and adequacy of a management accountant in driving innovation Management accounting innovations are deemed as practices or strategies recognised as new by the organisation incorporating the innovations. The basic perception as denoted by new is that all innovations entail change, but not all changes entail innovation. Management accounting is described as the practice of analysing and reporting financial information required by the management for decision making oriented towards attainment of the organisation’s predetermined goals and objectives. Financial reports offered by management accountants can be applied to make strategic changes on how the organisation operates hence the necessity to innovate (Seleshi, 2001). From this end, it can be said that the role of a management accountant to a certain degree, drives organisational innovation. However, the management accountant’s role has not been adequate in driving innovation. Evidence reveals that despite the fact that management accounting has developed over the years to espouse appropriate and relevant innovations; this has only been myopically attained with focus on manufacturing. Therefore, the challenge is on management accountants to come up with innovations on other areas such as marketing. The issue of inadequacy with regards to the management accountant’s role is supported by a questionnaire that was developed to ascertain the role and adequacy of management accountants pertaining to innovation. The questionnaire inquired from management accountants whether they had initiated any changes in the management accounting practice over the preceding two years. For the answers drawn from these accountants to be effective, it was important for them to only include innovations that they had personally initiated as they were the only ones that could be linked to the management accountant’s role. Incidentally, requirement that the management accountant only indicate self initiated innovations is because other innovations could have been imposed. Two years was deemed appropriate to ensure that only significant innovations would be recalled. The respondent to this questionnaire was offered a list of practices attributed to management accounting drawn from recent studies, and these espoused contemporary techniques, traditional techniques, and changes to working practices. Lack and inadequacy of management accountants in driving innovations was evident following the revelation that only ten percent of the respondents affirmed to have initiated innovations. This therefore implies that even though management accountants drive innovations, their efforts are not adequate and need to be enhanced to facilitate comprehensiveness in this respect. Role involvement Role involvement within management accounting context can be defined as the fundamental aspect of the management accountant’s task, responsibility, and authority towards the department of comptroller. High (low) fundamentality depicts management accountants with a functional orientation. A study survey supports the revelation that management accountants whose role involvement is inclined towards the functional element will consume more time within the business unit. Additionally, they will have more mutual understanding towards business unit managers’ information requirement. According to Emsley (2005), role involvement influences innovativeness based on: (a) knowledge on the innovation’s appropriateness, (b) approval by the business unit managers on innovations, and (c) motivation to innovate. (a) Knowledge on the innovation’s appropriateness To innovate successfully, the management accountant ought to have knowledge of an innovation and comprehend how appropriate it is to the needs of the business unit managers. Management accountants with a business unit inclination are more likely to be aware of how appropriate an innovation is since they report to or work alongside business unit managers. This and contact with, and propinquity to business unit managers implies that the management accountants will be more acquainted with the form of decisions to be made by business unit managers. Consequently, management accountants are more likely to ascertain the appropriate types of systems to be applied to design an innovation. As these innovations ought to depict dynamic business needs, management accountants with a functional inclination are less likely to be inhibited by functional constraints and consequently the innovations are more likely to be deemed as radical (Emsley, 2005). Knowledge of the appropriateness of an innovation is essential if management accountants are to come up with relevant innovations that depict the dynamic business needs. To this end, it can be deduced that knowledge of an innovation’s appropriateness affects innovativeness significantly. (b) Approval by the business unit managers on innovations Knowledge of how a management accounting innovation is appropriate is probably an essential but an inadequate step to initiate innovations. Innovations instigated by management accountants with business unit inclination are more likely to be espoused since they trim down business unit managers’ perceived uncertainty regarding benefits derived from innovations. Incidentally, these innovations will reduce their resistance on the same. Perceived uncertainty that revolves around benefits accruing to management accounting innovations is likely to be relatively high since they are administrative innovations whose benefits are intangible (Emsley, 2005). For instance, the benefits accruing to technical innovations that increase a machine’s speed are more tangible compared to an improvement in decision making that cannot be seen by the naked eye. Role involvement in this respect affects innovation on grounds that innovation is more likely to be amplified if the organisation’s management accommodates the ideology. (b) Motivation to innovate Traditionally, incentives have been known to have a positive impact on employee performance, they boost employee performance in several respects as they motivate employees to execute their duties above par. Management accountants are no exception with regard to the impact of incentives in execution of their duties. According to Emsley (2005), incentives not only entail a management accountant’s future prospects and rewards, but also entail an improved job satisfaction that is drawn from better job enrichment. The impact of incentives with regards to management accounting innovation can be viewed from two perspectives. This is in context of management accountants with business inclination and those who are functionally inclined. For management accountants inclined towards business, incentives are likely to be determined by their superiors who in most cases within this context are the business unit managers. This therefore implies that incentives will be offered to a management accountant who will make an effort to provide information oriented towards attaining business unit goals, and as such he will be inhibited by conventions of functional accounting. Management accountants who are functionally inclined on the other hand are more likely to have superiors aligned towards the management accounting function who subsequently will offer them incentives along the same basis. Therefore, a management accountant inclined towards function will aim at amplifying the same based on incentives offered by their superiors (Emsley, 2005). Thus, it can be deduced that incentives can influence innovation from a management accounting perspective but depending on whether it is along a business orientation or functional basis. How management accountants can accelerate innovation within an organisation The first step to be taken by management accountants to amplify innovations within their respective organisations is to change their approach on the management accounting practice. To accelerate innovation within their respective organisations, it is essential that they modify and rectify their approach in conformity with the dynamic business environment. Professional accounting institutions have developed several innovation techniques over the years to facilitate innovation in the accounting profession. To accelerate information within their respective organisations, management accountants ought to convince the organisation’s management to adopt these innovations and implement them. This move will enable a more rapid innovation within the organisation. Another step the management accountants ought to take to accelerate innovations is to espouse a business-oriented approach as opposed to a functional one. In addition, it is important that management accountants possess an all-round knowledge concerning the business both internally and externally and act on this knowledge to modify their approach to fit this purpose. Finally, management accountants should assume a more participative role in the organisation’s operations as opposed to an analytical one. This will enable them to have first-hand experience of the organisation’s operations, identify areas that need changes and rectify their approach to address the same. Conclusion In the past, the role of management accountants was rigid in that the execution of their duties was outlined. Incidentally, the management accounting practice dictated what was expected from them and any deviation from the norm was virtually impractical. However management accountants have been compelled to conform to the dynamic business environment in the recent years. It is worth noting that were it not for their role in analysing the organisation’s performance, the practice would have been irrelevant in the modern business environment. The profession’s survival thus implies that even though it was almost obsolete it played a significant role in an organisation hence its removal might affect the respective organisation. It is therefore important that the management accounting function stays within an organisation but in conformity with the dynamic business environment. References Drury, C. (2005) Management accounting for business, Cengage Learning EMEA, Bedford Row, London. Emsley, D, (2005) "Restructuring the management accounting function: A note on the effect of role involvement on innovativeness" Management Accounting Research, vol.16, iss.2, June 2005, pp.157-177, retrieved 28 October 2009. Hopwood, A. & Chapman, C. (2008) Handbook of Management Accounting Research. Elsevier UK, Oxford. Kale, V. (n.d) A Guide to Implementing Oracle Siebel CRM 8.x, Tata McGraw-Hill, New Delhi. Robertson, J. & Foster, S. (2006) CIMA Exam Practice Kit Management Accounting Risk and Control Strategy, Butterworth-Heinemann, Oxford. Seleshi, S (2001) Organizational change and development in management control systems: process innovation for internal auditing and management accounting, Emerald Group Publishing, Oxford, UK. Smith, J. (2007) Handbook of Management Accounting, Elsevier UK, Oxford. Read More