Accounting for Sustainability: Practical Insights - Literature review Example

Word Count: 2222 Management Accounting Your name Course Tutor Institution Department Introduction The core management accounting task is to assist managers in the day to day decision making processes on aspects such as cost implications and performance levels, notes Rowe et al, (2008). The management accounting function within an organization has become an integral component in enhancing the competitiveness and sustainability of a business. This is because it provides management with much needed accounting and non-accounting information and advice, which directly or indirectly affects management decision making quality forenhanced performance. The contributions of management accounting in decision making activities, more so those that are concerned with the social aspects of a business undertaking, cannot be ignored. Management accounting information, which is most often presented in form of management reports influences decision making, which in turn affects a business’ social relationships. Duh et al (2009) narrates that the survivals of a company depend on its ability to improve the quality of decisions made.Management accounting has been regarded as the most complicated business function within an organization due to the vast nature of decisions it aims to assist managers arrive at. Most decision making in organizations is done in uncertain circumstances and these decisions usually have different impacts which are perceived differently by different stakeholders who most often have varied interests on the company. Researchers have identified an important interface between management accounting and decision making activities within companies.According to Rowe et al, (2008), businesses organizations use management accounting as a tool that aids decision making.Management accounting is thus becoming an integral decision making tool as companies strive to remain competitive and sustainable in the face of cut throat completion brought about by globalization and recent advancements in technology. The social facets of a company include its employees, customers, suppliers, shareholders as well as the society in which it undertakes its operations. Management accounting provides information that touches on each of the above social facets of a business. This information is then used for decision making purposes. For instance, management accounting reports such as cost volume profit (CVP) analysis regarding particular customers comes in hand in making decisions whether to continue serving a particular client or not. Management reports also provide information on the productivity of individual employees and cost implications of remuneration packages and other benefits that the company provides to its employees. When it comes to society, management accounting functions within organizations may provide information such as possible impact of the company’s activities on the environment, such as pollution. All these social implications are analyzed below. Management accounting decision making impacts on Employees Management accountants present information such as reports on the number of employees and the cost implications on their budgeted salaries. They also prepare and present reports on both performance and non-performance based benefit schemes, which have various implications on the company’s employees. All these combined together are termed as a company’s compensation scheme. Bernadin (2007) defines compensation as all sorts of financial as well as non-financial benefits that companies offer to their employees as compensation for the services they offer and time dedicated to the company. According to Cascio (2003), employee compensation is an important factor as it directly touches on their lifestyles and eudemonia. Employees expect to be fairly compensated for their services and time commitments while organizations are concerned with the cost implications and sustainability of their employee compensation packages. Compensation acts as a motivation to employees as it influences their productivity, notes Judge, Bono & Patton (2001). Management accountant’s decision making on issues that involve employee compensation should, thus, take into consideration, what impacts each decision will have on the overall performance of the organization. The management accounting function within a company also provides information that is used to determine whether or not to fund employee training and development programs, Kouhy et al (2009). This is usually in form of employee productivity and performance reports that are aimed at determining opportunities for improvement. They make decisions regarding the cost-benefit implications of staff development and training programs. This directly affects the level of motivation and productivity of the employees. This usually has the potential effect of influencing the level of employee motivation and overall performance. Management accounting decision making impacts on Customers Management accountants also make decisions that have a negative or positive impact on their existing and potential customers. For instance, management accounting decisions on marketing programs targeted at enhancing product or service differentiation among its customers may result in greater customer satisfaction and brand loyalty.They may also make decisions on investments in research and development activities that are aimed at new product development or enhancing the quality of the existing products, (IFAC 2012). Customers may react to real or perceived satisfaction which makes them to take action, such as product boycotts of a company that they perceive as not providing desired customer satisfaction. This may potentially result in the reduced sales levels and lower revenues. The decision making aspect of a business has a direct implication on the corporate image of a company among its customers, which in turn affects its corporate sustainability. Hopwood et al. (2010) defines corporate sustainability as a company’s activities that are aimed at encompassing the management of itseconomic, social as well as environmental facets. Corporate sustainability attempts to enable a company to achieve sustainable business operations and enhance its relationships and value creation for the larger society. A company’s performance in social aspects affects its overall business performance and competitiveness, Parker (2005). Management accountants have to make decisions such as make or buy decisions as well as outsourcing services and products. This may affect product quality hence customer satisfaction. Where some customers perceive outsourcing of a particular product or service as undermining the quality of the product or service, their level of trust on the company is impaired and impacts negatively on the sales volumes and consequent revenues and profitability of the company. Decisions such as product or service discontinuation also affect customers. As Bekefi & Epstein (2006) note, whenever a company discontinues a product or entire operations where they have been found to be unviable and unprofitable, the society is normally economically ravaged and desolated which may result in a possible backlash against the company and its other products or services. For instance, management accountants may carry out a profitability analysis that may indicate that a given product line is unprofitable; hence propose to discontinue it as it is uneconomical to continue producing it. Where such product or service is highly beneficial to the customers, this may create a negative perception and diminish its corporate image. Management accounting decision making impacts on Society Management accounting provides both accounting and non-accounting information that is utilized in decision-making processes such as product pricing and capital budgeting decisions. This affects how society perceives the company and its overall effectiveness. For instance, management cost reports that result from different cost accounting options such as JIT, ABC and marginal costing may result in different product prices. Where this results in higher product prices, the society may regard this as exploitation even when in actual terms it is justified that higher product prices should be judged. According to Greenwood et al., (2008), company decisions are influenced by the expectations of the society in which they operate. They have to conform and meet these expectations if they aim to survive and ensure sustainability of their operations. For a business undertaking to be competitive and sustainable, it has to establish and maintain positive relationships with the society in which it is operating. It has got to brace itself for challenges presented by the dynamic social challenges. An organization’s performance success does not only depend on technical efficiency, but rather on established mutual relationships with society at large, that enhance its competitiveness. Good relationships ensure that organizational undertakings do not have to be questioned by the society hence developing legitimacy for its operations and decisions. The social aspect of a company has always been measured through considerations on how socially responsible a business is. Management accountants are usually faced with a dilemma on choosing between recommending for allocation of resources to corporate social responsibility projects that do not result in profits for the shareholders, with some people arguing that involvement in non-profitable social responsible activities is in contravention of the fundamental business principle of profitability. According to Bennnet, Schaltegger & Zvezdov (2013), social responsibility projects should result in desirable benefits for both the company and the society. However, in instances where the benefits reaped from such projects are only in favor of a company at the expense of the society, this may result in increased societal backlash and cynicism. Many a times, the society may regard social responsibility as a mere public relations fete in camouflage. The members of society have questioned the true motive behind social responsibility campaigns, terming them as not grounded on the best interests of the community and society at large. As Bennnet, Schaltegger & Zvezdov (2013) suggest, even where some companies have an unfeigned motive in their social responsibility projects, they may find it difficult to attract customers, some of whom regard the projects as mere marketing stratagems. Some management accountants may view socially responsible activities as depleting profit margins. This is because these projects usually provide immensurable gains to the company, even where the society reaps benefits from them. Bennnet, Schaltegger & Zvezdov (2013) adds that the benefits that social responsibility programs provide are incapable of being instantaneously tangible, hence making it difficult for management accountants to quantify them in monetary terms. Bennnet, Schaltegger & Zvezdov (2013) (2004) explains that companies should not only be concerned with their financial performance but also their environmental and social performance, as these aspects impact directly and indirectly on its sustainability and performance. Management accountants should focus on nurturing a company’s intangible assets such as product brands and corporate images which promise long term value creation for the company, its customers and society at large. The established norm for carrying out business undertakings is to achieve economic effectiveness and profitability. Management accountants can ensure their organizations are socially effective as can be reflected in how their organizations haveappreciated the diversity of society’s desires in ensuring its operations and decisions are acceptance and supported by the society within which it operates, and this can encompass a wide range of different factors, Bennnet, Schaltegger&Zvezdov (2013). Management Accounting Investment Appraisal Decisions and how they Affect Society According to IFAC (2012), management accountants are required to make decisions on resource allocation for various investment ventures. To make these decisions, they are required to use analytical tools to arrive at sound judgments as part of the management accounting function. They use such techniques as IRR, ROI and NPV to make appraisals and assess the financial feasibility of a particular venture. Such investment appraisal techniques determine whether or not a company will open a new venture in a particular location. The decision rules on whether or not to invest are usually determined by management accountants and have the impact of affecting the local community positively in terms of employment opportunities and provision of required goods and services or negative effects such as increased environmental degradation as a result of carbon emissions from manufacturing ventures. For instance, managers may decide to apply the NPV technique which may provide favorable results for investment in a particular venture, but on applying another appraisal technique such as IRR, the decision rule may provide that such an investment is not profitable or may not provide desired returns in form of cash flows within the desired time frame. As such, it becomes clear that the management accounting decision making function may affect the social aspect of a company, either directly or indirectly. Conclusion Management accountants have been assigned a crucial responsibility to provide timely and accurate management information. This information enables us to gain an understanding of a company’s overall sustainability. It also enables stakeholders toestimate its environmental impact and revealing the extent of the effectiveness of its governance systems. Management accountants are expected to and should endeavor to always remain firm in carrying out their responsibilities. Managerial accounting plays an important role in the management process, mainly in providing information to internal users (persons inside the organization) in order to make the right decisions. Without a thorough understanding of this concept, managers can’t be certain of the results obtained in the decision-making process. Management accountants should ensure that financial incentives do not affect how they process information in readiness for decision making and evaluation. Management accounting reports on a company’s performance with regards employee turnover and satisfaction, environmental impact assessments, productivity, profitability, quality as well as sustainability are important as they provide an indication of how competitive and profitable a company’s activities are. These are judged and perceived differently by different parties that have a direct or indirect interest in the operations of a given company. Management accountants should approve socially and environmentally ethical activities that guarantee an organizations future sustainability and value creation. This has the benefits of enabling it to protecting its corporate image and reputation, as well as sustains relationships with all stakeholders. Management accountants must actualize the fact that their organizations’ corporate interests ought to be aligned with the society’s demands and interests for them to remain in operation and achieve their performance targets. References Bekefi, T. & Epstein, M. J. (2006). Integrating Social and Political Risk into Management Decision Making.Society of Management Accountants of Canada (CMA-Canada). Bennett, M., Schaltegger, S. & Zvezdov, D. (2013).Exploring Corporate Practices in Management Accounting for Sustainability.ICAEW. Bernadin, H.J. (2007). Human resource management: An exponential approach. 4th ed. New York: McGraw-Hill Irwin. pp. 253-277. Cascio, W.F. (2003). Managing human resources: Productivity, Quality of work, life, profits. 6th ed. New-York: McGraw Hill Higher Education. Duh, R., R., Xiao, J., Z., Chow, C., W., (2009).Chinese firms use of management accounting and control: Facilitators, impediments, and performance effects. Journal of International Accounting Research, 8(1), pp. 1-30. Greenwood R, Oliver C, Sahlin K, Suddaby R (2008).The Sage Handbook of Organizational Institutionalism, Sage Publication, Thousand Oaks, CA, pp. 1-46. Hopwood, A., Unerman, J. and Fries, J. (2010), Accounting for sustainability: practical insights. London: Earthscan. International Federation of Accountants- IFAC (2012).Project and Investment Appraisal for Sustainable Value Creation.Professional Accountants in Business: International Good Practice Guidance, Exposure Draft. Judge, T. A., Thoresen, C.J., Bono, J.E.,& Patton, G. K. (2001). The job satisfaction-job performance relationship: A qualitative and quantitative review.Psychological Bulletin, 127(3), pp. 376-407. Kouhy, R., Vedd, R., Yoshikawa, T. and Innes, J. (2009).Human resource policies, accounting and organizational performance.Research executive summaries series, 5 (4). Parker, L. D. (2005). Accounting, Social and Environmental Accountability Research: a View from the Commentary Box. Auditing & Accountability Journal, 18(6), pp. 842–60. Rowe, C., Birnber, J., G., Shields, M., D. (2008).Effects of organizational process change on responsibility accounting and manager's revelations of private knowledge, Accounting, Organizations and Society, 33, pp. 164-198. Read More