In: Accounting
It is argued that the role of management accounting in the global age has increased more than ever. Do you agree with this argument ? What are the implications of globalization from the viewpoint of management accounting and management accountants ?
A) It is argued that the role of management accounting in the global age has increased more than ever. Do you agree with this argument?.:-YES
New trends and the recent development of proposed global principles have pushed management accounting into the spotlight. George W. Russell looks at the evolution in the field and its practice in Hong Kong and China.
Gary Biddle, Professor and Chair of Accounting at the University of Hong Kong and a co-opted Council member of the Hong Kong Institute of CPAs, likens the relationship of management accounting and financial accounting to the solar system. “Management accounting is like the sun,” says Biddle. “It is the thing generating the energy, the results of companies. Financial accounting is more like the moon – it simply reflects them.”
While much meaningful data can be read by moonlight, it is vital to capture the heat of the sun, says Biddle, a fellow of the Institute. He believes that management accounting is on the ascendancy, and for good reasons. “Management accounting has grown a whole lot more important,” he says. “Companies have to concentrate more on value creation than valuation.”
The rising importance of management accounting has been an evolving process for some years, but some CPAs say the field has been handicapped by its lack of a coherent structure, compared with the rigorous standards applied more or less globally to auditing and financial reporting.
That might change with the release in February of proposed Global Management Accounting Principles designed to create a comprehensive framework to bring consistency to management accounting practices around the world.
The principles jointly issued by the American Institute of CPAs and the London-based Chartered Institute of Management Accountants and subjected to a 90-day consultation period that ended last month, have helped thrust management accounting into the international spotlight.
“From this global consultation, we will deliver a blueprint for rigorous forecasting that meets the needs of businesses,” Barry Melancon, President and Chief Executive Officer of the AICPA, said at the launch of the consultation. “Our goal is to help management accounting professionals build higher-performing organizations.”
In Hong Kong, the growing popularity of management accounting has led the Institute to include it as a module in its Financial Controllership Programme now under development, says Jonathan Ng, the Institute’s Executive Director, Qualification and Education.
“We are aware that management accounting is a growing trend,” says Ng. “More management accountants are out there and they need to have that level of knowledge. We are trying to do this Financial Controllership Programme as a way to address the need for more education on the management accounting side,” he says.
Ng adds that he hopes the proposed management accounting principles become “a golden benchmark for accountants to adopt and also be used for training purposes.”
Management accounting experts are keen to emphasize that shoring up CPA skills in the field should not be at the expense of financial accounting, the bread-and-butter accounting of auditors and financial controllers. “The answer is not to do less financial accounting but more management accounting,” says Biddle at HKU.
B) The implications of globalization from the viewpoint of management accounting and management accountants are as follows:
With a movement towards globalization approaching, the change brought on by it can change how companies in the U.S. view their accountants. First, there are two types of accountants, financial accountants and managerial accountants. A definition of financial accounting, taken from Merriam-Webster, is the systematic analysis of information about the economic affairs of an organization for the use of persons outside the organization. Merriam-Webster goes on to explain management accounting as "the creation of reports for planning and decision-making"... "It's aim is to provide managers reliable information on the costs of operations and on standards with which those costs can be compared, to assist them in budgeting". The key difference to take away from these two definitions is that financial accounting provides information to people outside of the organization, and management accounting is aimed at helping managers within an organization make decisions.
The U.S. becoming more globalized will increase competition for firms within the country, therefore making management accountants more valuable to firms. To understand what an increase in competition will do to U.S. companies and their accountants, one must first take a look at how companies in the U.S. see management accountants in comparison to another country. In a research article titled "Management Accounting Practices in the U.S. and Japan: Comparative Survey Findings and Research Implications (1991)" by M. Shields and C. Chow, notes the difference in goals set by U.S. and Japanese accountants. The survey suggests that U.S. accountants "emphasize the use of standards to control manufacturing costs after the fact", while contrasting Japanese accountants use practices that look towards the future. This difference here lies within the goals set by the companies. While firms in the U.S. are looking at what they can do now to lower costs, Japanese firms are looking into the future to lower costs for products that might not exist yet. This type of thinking for U.S. firms is not acceptable, and the state that companies are in now is less than satisfactory because the current state of management accounting is in the wrong direction.
Management accountants look toward the future, they set up budgets, forecast, and steer companies in the right progressive direction. In increased competition, especially for U.S. firms, companies will need managers that make the right decisions for the good of the company. In an article by B. Pounder, "How Globalization is Affecting U.S. Accounting (2006)", Pounder states that one of the main reasons management accounting is obscure in this country is because American managers are more likely to make "gut feeling" choices (usually for personal gain) rather than making the choices that will be good for the company in the long run. This can be tied back to the research survey from Shields & Chow, looking at firms and their respective goals. It is more common for businesses in the U.S. to demonstrate action for personal gain than it is in Japan, and in an age of globalization and increased competition companies cannot survive with that type of mindset and framework.
The current state of management accounting in the U.S. rewards managers and puts the company as a whole in jeopardy, and with a rise in competition approaching is it in firms' best interests to employ management accountants that make decisions for the best interest of the company.