The Neo Accountant - Essay Example

This paper describes and discusses the changing face of accounting practices given the rapid pace of change in the global business world. The accountant of today must not only know how to deal with organizational change, but should also possess skills other than those that were traditionally considered a part and parcel of the accounting profession. The Neo Accountant There is mounting evidence that any form of organizational or management change, e.g. the deployment of digital technologies, affects the economics of operational and managerial processes and also activates wide-ranging social and organizational effects (Bhimani). A. Hopwood has correctly stated: "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." The Contingency Theory can best explain how management should respond to proposed change. The theory is summed up in two words: It depends! Accountants and other members of the management team will have to respond to each situation by looking at it whole. According to Fiedler's Contingency Theory of Situational Leadership, situations of proposed change that appear low in control must be managed in a directive and task-oriented manner. On the other hand, situations that are high in control must simply be dealt with in a supportive fashion; in this case, managers can stay out of their subordinates' way to a large extent (Boje). All changes in accounting practices are sure to have extensive effects on the organization as a whole and the community of people it is involved with. Accounting practices with the aid of latest technology that make an organization more efficient may improve the state of an entire economy. Given that finance is the basis of organizational operation, accountants cannot isolate themselves and be looking for an improvement in accounting practices without consulting other branches of management as a team. Consultation, then, has got to be the first step in the introduction of accounting or managerial change. This essential step to change involves many departments of management, including planning. Forecasters and planners along with those that propose change have to work in agreement before any lasting change can be implemented, let alone expected to have results that lead to increased efficiency, productivity, and profitability. According to Brewer, Brownlee, and Juras, who have written on the implementation of activity based costing and the change management process: "Implementing change in an organization is about ninety percent cultural and ten percent technical." To put it another way, applying accounting change is easy when it comes to the technical side of things. But organizational change is never about technicalities alone. Before applying new accounting principles expected to lead to greater organizational success, it takes a long time for any firm to convince the people that it must convince, and plan with the workforce it must plan change with. Vroom And Yetton's Contingency Model of Normative Leader Decisions is clear on this point. The model asks for consultation or the group decision process if the commitment of group is essential. But if the managers have got all the necessary information, they are advised to be autocrats, making decisions for all and going with the flow (Boje). Take the example of digitization alone for the simple fact that the technological age has brought tremendous change in all areas of human life. Bhimani writes about digitization only in an organizational context: Digitization impacts the form, substance, and provenance of internal accounting information with attendant consequences on the behavior and actions of organizational participants and on the functioning of enterprises more widely. Knowledge about the influence of the deployment of digital technologies on management accounting thinking, processes, and practices is starting to take shape. It is for reasons of far-reaching effects of accounting change that accounting information networks are emerging today to replace the loner psychology of accountants of old (Bhimani). Accountants in our day realize that they cannot be number crunching behind balance sheets by themselves. If they are seeking improvement in accounting practices in a fast changing world, they must begin planning with a team of managerial personnel. Andrew Moss, Corporate Finance Partner at Duncan Sheard Glass, has been a chartered accountant for many years. He explains the new face of the accounting profession thus: My favorite part of the job is the face-to-face contact I have with clients, and working with them to help them achieve their business goals. Working at DSG has been an exciting learning curve, as I hadn't fully appreciated the reliance that owner managers place upon their accountants as advisors. At my previous firm, I dealt with larger organizations which generally had more independent management teams, but small to medium-sized owner-managed businesses really rely on our advice and expertise. This is what makes the job more enjoyable, because it means each day is packed with variety and we get to build really strong relationships with our clients, which leads to an in-depth understanding of their businesses ("Appointments: My First Step to Success"). As the world embraces its debatable meaning of "New Economy," it is clear that the significance of geographical location has been reduced. The importance of speedy action is stressed, although it is only wise to give considerable thought to the effects of management change in any respect. As mentioned previously, technical change can be swift. It is the thinking process that retards the process of organizational change, and rightly so. The human aspect of organizational change is indeed recognized as a crucial one. Managerial and financial controls must be renewed to take all of the changing factors into consideration, and still bearing in mind the transformation that is bound to follow in many areas because of the new forms of control (Bhimani). The Path Goal Theory of Situation Contingency is a good way to understand some of the factors to be considered in the process of change. This theory builds on Expectancy Theory and shows two pathways to leaders: (1) the subordinates have the requisite know-how, talents, and confidence to complete the task successfully; and (2) there is a valued (instrumental) reward awaiting those subordinates that complete the task at hand. The Path Goal requires managers to analyze the situation and change their behavior to match it. They may notice, for example, that subordinates need more guidance in the process of change. Or, they may observe that each individual subordinate is different, and therefore their relationships with their subordinates must suit each individual situation. After the Enron debacle in Houston, Texas, the accounting profession in both the United States and United Kingdom saw itself dealing with reform. Ernst & Young in the UK used to perform a dual internal and external audit role for its clients including the oil giant BP Amoco. Internal auditors develop in-house financial risk controls for management. External auditors, on the other hand, verify and test out those financial systems on behalf of shareholders. The Securities and Exchange Commission in the United States declared that this could be compromising independent scrutiny. Alan McGuinness, the head of internal audit services at Ernst & Young, said: "As a result of the Enron situation, boards and non-executive directors are putting a lot of scrutiny on what their internal and external auditors are doing." Eventually the firm announced that it would no longer work on internal financial controls for clients for whom it already acts as an external auditor. This was in line with a policy about to be made mandatory in the United States (Armitage). Enron was, in fact, using accountants at Arthur Anderson to make assets out of liabilities. It is only now that we realize that this practice is not entirely rational, whereas the Contingency Theory of the Situation is an "entirely rational process" (Sartre). Leaders have to designate tasks in fully comprehended human situations. In this case, it became obvious that Enron's charismatic leaders did not have the good of the organization and its employees in mind. There are five main steps to organizational order or disorder with regards to the Contingency Theory: (1) Every leader understands the act or plot; (2) He comprehends the situation in terms of all means and resources; (2) The leader is able to unveil the existential structures; (4) He constructs behavior or acts to achieve goals; and (5) The leader sees the process through (Boje). Back to the case of Enron - the application of the Contingency Theory further clarifies that the management of Enron had deliberately misconstrued managerial practices. Accountants and other members of the management team today do not only have to work with technological transformations in accounting practice, but they must also keep abreast of the latest theories and developments in accounting and managerial practices around the world. The alteration of accounting policy at Ernst & Young led to other accounting firms in the United Kingdom to begin reviewing their policies, just as the accounting firms in the United States had to accept the fixed change in policy. Similarly, as new international accounting standards are being considered, there is growing pressure especially on multinational businesses worldwide to adopt these new international accounting standards. Such changes leave accountants all around the globe to wonder whether their businesses too will be called upon to alter their current accounting practices (Houston and Reinstein). Even the thought of change should lead accountants to begin using our proposed theoretical framework to deal with management change, that is, at least consultation should commence at the time of consideration of change. According to R. D. Fitzgerald, accounting principles and reporting practices are forms of communication which, in theory, ought to move across national boundaries as freely as the business practices they are supposed to reflect. In reality, however, these procedures mirror the disparate economic and social environments of their respective nations and regions. Add Houston and Reinstein: "Ideally, establishing international accounting standards should reduce the costs of doing business and raising capital across borders, streamline internal accounting and auditing functions for multinationals, increase the efficiency of market regulations, and decrease the costs of international financial statement analysis and investment." But if all businesses worldwide were to adopt standard international accounting practices, change would have to be achieved at such a massive scale that the state of the world would also be revolutionized. Accounting procedures and principals reflect the economic and social environments of specific regions and nations, and so standard accounting principles would have to be mirrors of the economic and social state of the world. And, as Hopwood said, accountants would have to look at the human side of change instead of merely treating it as a technical phenomenon. It is through this one-world microscope that we unmistakably and plainly gather the wisdom behind Hopwood's words. The management of contemporary organizations also entails increasing expertise on the part of accountants. There is a new breed of accountants to deal with the greater than ever problem of corporate fraud around the globe, for example. Traditionally, the corporate fraud problem was addressed as an accounting exercise. Nowadays, the fraud auditor, sometimes referred to as a forensic accountant, with an education in auditing and accounting, is hired to look into this problem. The fraud auditor has knowledge of both accounting and investigations and can be employed by a public agency engaged in investigations. We can confidently add that the Contingency Theory has helped to process this change in the accounting profession, given the increased need for fraud check. In any case, whenever there is a problem of fraud, company management is asked to cooperate fully with the forensic accountant looking at the problem with the eyes of both investigator and auditor (Luizzo and Nostrand). As discussed before, cooperation remains a necessity in accounting practice. No more may accountants behave as mad mathematicians without much to exchange with other levels of management in a firm. Tom Lewis and Scott Luecal from the United States write on the "unbundled" accounting system, which explains this latest trend of merging accounting practices with other managerial functions: Rural electric cooperatives have historically used the Federal Energy Regulatory Commission (FERC) accounting system, as modified by the RUS. This system has been used because it is a utility accounting system that is an effective means of reporting to the regulator. It has also been very helpful for preparing annual financial statements that present fairly, in all material respects, the financial condition of the cooperative. Cooperatives can then receive from their auditors the unqualified audit opinion that is essential for business success. It is important, however, to remember that the historical FERC/RUS system is a financial accounting system; that is, it is intended for external reporting purposes. The concern has always been with satisfying regulators' requirements. The FERC/RUS system was not intended to be a managerial (internal), decision-making system. With greater deregulation and greater competition, however, it is the market place that has to be satisfied. It is important, therefore, that utilities incorporate a management decision-making system within their utility accounting systems. This is why so many cooperatives are moving in the direction of "unbundling," an activity-based costing (ABC) or activity-based management (ABM) accounting system. This movement is not intended to usurp the FERC/RUS system. Its intent is to modify that system so that a cooperative has a decision-making system as well as a financial reporting system. It is this decision-making system that will permit the cooperative to satisfy the market place on a daily basis, as it must. As the finance director of one cooperative explained, "We are unbundling to create a competitive advantage and to be prepared to satisfy regulatory requirements if utility restructuring occurs in our state." The introduction of the "unbundled" accounting system again brings Hopwood's statement to attention. To manage contemporary organizations, we have got to replace the earlier robotic image of the accountant with a human face. In other words, accountants of today must be prepared to deal with customers and educated in the sciences of management beyond numerical figures. They must be thoroughly acquainted with the Contingency Theory, for example. Whereas the human side of the accountant was previously ignored in organizations all around the world, nowadays it is close to impossible for accountants to succeed in their professions without giving due regard to work outside numbers. Even if they work for organizations that have not yet merged accounting practices with other management functions, they must be consistently seeking to improve their practices, and for that, yet again, the human face must appear in their minds, given that change concerns all. Looking at universal change in accounting practices has indeed made it obvious that even the smallest change in accounting principles leads to greater organizational change, which in turn affects all those that the organization connects with. Accounting decisions must certainly have an all-embracing effect on the state of the world. As another universal illustration, consider the fact that until recently, German companies did not seek capital in the U.S. markets because they were unwilling to conform to accounting standards in the United States, which they believed to be too costly and burdensome to follow (Freund). It was Daimler Benz that sought entry into U.S. markets in 1994 and for this it had to agree to reconcile its financial statements and schedules prepared in accordance with German accounting principles into U.S. standards (Gould). Both consultation and planning were used by accountants in these examples. Today's accountants have a greater need to use these steps in management because the rates of change facing the world are quite high in almost all aspects of human living. 'How do we change or improve our existing accounting practices' marks the first step, that is, consultation. 'If we are sure about a certain proposed change or improvement, how are we to deal with it' - the second question for our accountants turned planners in our framework of neo accounting practices in contemporary organizations. After this, leaders must be considering the premises of the Contingency Theory to proceed with change. Robert S. Kaplan and David P. Norton introduced the Balanced Scorecard in 1992 as a complement to the famous balance sheet. Widely adopted since then by manufacturing and service companies, nonprofit organizations, and government entities around the world, the Balanced Scorecard was created on the assumption that financial measures are insufficient and must be linked to strategy to meet the requirements of the increasingly competitive business world in the twentieth century. As a matter of fact, by the end of the twentieth century, "intangible assets became the major source for competitive advantage. (Kaplan and Norton 2001)" Tangible book values represented sixty two percent of industrial organizations' market values in 1982. Only ten years later, the ratio had plummeted to thirty eight percent (Blair)! By the end of the twentieth century, the book value of tangible assets accounted for less than twenty percent of companies' market values (Webber). Kaplan and Norton (2001) describe the change in organizational values thus: Clearly, strategies for creating value shifted from managing tangible assets to knowledge-based strategies that create and deploy an organization's intangible assets. These include customer relationships, innovative products and services, high-quality and responsive operating processes, skills and knowledge of the workforce, the information technology that supports the work force and links the firm to its customers and suppliers, and the organizational climate that encourages innovation, problem- solving, and improvement. Accountants are highly intelligent people. Vital to all organizations, accountants must keep their position as some of the most important people in the workforce by supplementing their existing job descriptions with managerial responsibilities that they did not need to perform in the bygone days. This is the twenty first century, and nowadays a balance sheet means nothing if the public is aware of poor management practices in an organization. According to Kaplan and Norton (2001), "Some call for accountants to make an organization's intangible assets more visible to managers and investors by placing them on a company's balance sheet. But several factors prevent valid valuation of intangible assets on balance sheets." It definitely seems that there is a different kind of job responsibility in the offing for accountants in general. This responsibility demands that organizations must work collectively with accountants in strategic management. This novel feature of accounting practice would involve accountants in qualitative work to complement their quantitative tasks that nowadays might only have less than twenty percent of overall importance in the structure of an organization. Once again, the Contingency Theory has dictated that new business trends must be followed up by new practices. Today's accountant is required to be more knowledgeable than before in areas of management that were not his responsibility to begin with. Called to add more value, he must also have the skills to work with change in accounting practices keeping the whole organizational structure in view. No more can he act as a lone hand. The accountant in our day must have what it takes to become an absolute organizational manager - applying the Contingency Theory, and winning all the way. Works Cited 1. "Appointments: My First Step to Success - Andrew Moss, Corporate Finance Partner, Duncan Sheard Glass - Accounting for a Satisfying Position." Daily Post (Liverpool, England), 16 June 2005. 2. Armitage, Jim. "Ernst & Young to Ditch Dual-Audit Role in UK." The Evening Standard (London, England), 22 February 2002. 3. Bhimani, Alnoor (editor). Management Accounting in the Digital Economy. 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Houston, Melvin, and Reinstein, Alan. "International Accounting Standards And Their Implications For Accountants And U.S. Financial Statement Users." Review of Business, Vol. 22, 2001. 12. Kaplan, R. S., and Norton, D. P. "The Balanced Scorecard: Measures that Drive Performance." Harvard Business Review, January-February 1992. 13. --------------------. "Transforming the Balanced Scorecard from Performance Management to Strategic Management: Part I." Accounting Horizons, Vol. 15, 2001. 14. Lewis, Tom, and Leucal, Scott. "What All Employees Need to Know about an 'Unbundled' Accounting System." Management Quarterly, Vol. 39, Issue 1, 1998. 15. Luizzo, Anthony J., and Nostrand, George Van. "Delving Deeper to Decipher Fraud." Security Management, Vol. 38, September 1994. 16. Sartre, Jean-Paul. Search For A Method. Translated from French with an Introduction by Hazel E. Barnes. New York: Vintage Books, 1963. 17. Webber, A. M. "New Math For A New Economy." 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