The first part of the CIMA dialogues had Noel (Executive Director – CIMA), Kevin (Senior Lecturer, Finance & Investments – University of Johannesburg) and Musa (Corporate Executive, Stakeholder Management – Tongaat Hulett) as panelists on CNBC.
Much was discussed and I took the liberty to jot down some notes:
The dialogue opened with an acknowledgement on the work is being done in the field of management accounting being quite a lot and launched with a definition of management accounting as follows; Management Accounting supports decision making, people’s actions and manages behaviours within the business. It is essentially focused on the present and is forward looking, as opposed to Financial Accounting. Financial accounting communicates financial health and state of the organisation, it is historical – meant for external stakeholders. Management accounting speaks to internal stakeholders and influences the results that would be reported by financial accounting. The two must complement each other.
The global problem was defined in two parts; firstly, the economic crash is primarily a failure of governance, performance and risk management within organisations and organisations need to be protected from these failures, this is where management accounting assists. Secondly, the global economic environment changes fast and the pace is getting faster and is no longer predictable – i.e. disruptive innovation/technology. Management accounting assists in helping run the organisation within this context. One of the root causes of the global financial crisis, which happened under the watch of industry leaders, professionals and multiple skills, is the risk associated with not talking the same language (Financial Accounting versus Management Accounting). The two functions need to be aligned, the proposed global management principles are for management accountants to assist in making decisions and aiding financial accounting.
In addition, management accounting focuses on the management of risk, specifically external factor such as social and political risk. Management accounting is seen as a tool to mitigate these and further create value. These are the kinds of factors in which management accounting includes in scope when contrasted against financial accounting. It considers stakeholders, both internal and external, environmental impact and can be related to both state entities such as municipalities and the non-profit sector. Management accounting brings about utility.
Principles serve as a solution to global problems for organisations. They form a basis for behaviour and assist in the identification of the drivers of change through providing relevant information. The need for the principles is also highlighted with the fact that management accountants, by virtue, are short-term experts and the need arises when an organisation has to look in the long-term. This is the direction the profession is going, connecting the short-term with the long-term and the external factors with the internal factors.
The principles are look beyond the basic input/process/output of an organisation by considering outcomes and impact. The information obtained enables building relationships with stakeholders and integrating some modelling to create value for them.
Value creating is normally between two streams; external reporting (through the balance sheet) and securities (if the company is listed)/ the balance sheet is the accounting value, which is normally only 20%. If you only manage that aspect of value, you leave 80% of your value to chance. Relationships should count for something, for instance those with suppliers just as the Japanese had used in supply chain management and it was through established relationships that they managed to drive value. Same goes for a community that an organisation operates in. It ensures that the right stakeholder receives the relevant kind of information for appropriate use. Management accounting strives to track the movement of both financial and non-financial factors by linking the two.
There are different disciplines within an organisation (Marketing, HR, etc.) and they use both quantitative and qualitative methods in their respective functions. The principles look at how their management contribute to the value created. It enables that kind of conversation. This highlights the direction in which management accounting is to take; moving from a functional/departmental analysis to an analysis based on value creating mechanisms. Allocating costs and revenue in accordance to the organisation’s value chain to better focus on the strengths and weaknesses. From assets/resources to value creation. This is where innovation comes in.
Furthermore, there’s a need for effective communication, strategic influencing and this should come from the very top of the organisation otherwise it shall be challenged. The management accounting science is conscious of the importance of leadership and encourage the creation of value through its activities. The CEO should be a part of the conversation and effectively entrenching them in the middle of it all through a flat organisational structure ensures that value is derived and consistent for an organisation to be successful.
Moreover, there is also the danger of assuming that everyone in an organisation understands the jargon within the accounting scope and this contributed to the problem as accounting numbers (or spreadsheets) could never be related to the strategic intent of the organisation. There is a need to diversify mediums of communication and the kind of language used. Another factor to consider is the timeliness of information, such that someone can act upon it. The kind of information that would be generated would affect behaviour and build the credibility of management accountants in the organisation.
A management accountant can become a dominant player in an organisation, as you might find that they only comprise of 5% of staff but can contribute to 95% of the decision making. Through these principles, they are seen as co-navigators of organisations.
Out of the 12 core practice areas, a few are really based on accounting. The management accounting profession covers further on elements such as; investment appraisal, project management (which was never really in a finance function) and budgeting. It more practical and business related. A management accountant should be able to get involved in all projects, initiatives and other areas within the business.
Professionalism, integrity and ethics driven in the organisation through management accounting. Competence and confidence is encourage, especially in the curricula for knowledge, business acumen, people skills and leadership (strategy/finance/implications). From this stand point, it should be able to drive innovation and enhance value.
Charted accountants emphasise on the International Financial Reporting Standards and are essentially rule based. Management Accountants should understand that the principles serve as a benchmarking and best practise tool that has not been used before. Global reporting restricts innovation, driving business and creating value in contrast to the current system of box ticking (compliance). It is also noted that these principles would assist in industrial development, to appropriately address the value chain and decision making in various state or regional initiatives.
An important factor for the proposed principles is the creation of awareness for chief executives to determine if the demand is there for management accounting and whether it is used. The main question one should ask if the finance function is working for the organisation and the credibility of the finance function should be subject to the daily impact and influence that people have on the impact.
There is no dictating the information that should be used and the principles emphasise on only looking at what is relevant, in the environment and the organisation’s strategy. The different business models and industries all use the principles and is important for the management accountant to partner with internal stakeholders for better strategic influence.
“Skills talk about what to do, the how part creates accountability.” Management accountants should be able to come up with solutions for innovation and wealth creation. A slightly variant version of principles for the state and non-profit sectors is being created and conferences are to be held in June for this purpose.
Create, preserve and distribute value. That is the main essence of the management accountant and this is enabled by the conversation with peer institutions that focus on soft skills, such as HR. Every organisation needs management accountants and diagnostic tools shall be developed to help them.
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