Management Accounting Assignment

Student Details And Assignment Question

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Declaration of Originality

We, Ang Cheow Yong and Seow Su Hui declare that:

•this essay is our own work

•all information derived from the published or unpublished work of others has been acknowledged in the text of the essay and a list of references, which is given in the References in Section [insert number]

•all information derived from the Web has been acknowledged by an appropriate hyperlink

•we have read and understood the School of Accountancy and Business's Policy on Academic Dishonesty at http://nbs1.ntu.edu.sg/ab212/essay/academic_dishonesty.htm

•we are aware of the content of the University's Statutes as they relate to cheating.

Signed:

Ang Cheow Yong 15/3/1999 

Seow Su Hui 15/3/1999

Abstract

This essay identifies some of the changes expected in the business environment and operation in the next millenium. It further discusses the implications of such changes to the role of management accountants and new skills or knowledge needed to be acquired by the management accountants.

Rapid advancement in information processing and technology will continue to shape the business environment. Businesses will operate in a competitive global market. Responding to these changes, new organisation structures and business strategies catering to various organisational stakeholders will be adopted.

These may lead to management accountants taking up new roles as:

• Information Managers
• Agents Of Change
• Managers Of Business Value
• Internal Consultants/Business Partners

I. Introduction

As we approach the next millennium, changes in the business world will occur at a much faster pace. At this particular point in time, many of such changes are already taking place in a subtler manner; they will be more widespread in the near future. As maintainers of management planning and control systems, management accountants will be directly affected by such developments through the change in their roles and responsibilities. To retain their organisational importance, management accountants will have to adapt to a new business environment.

In this essay, we hope to:

• identify such changes in the business environment; and
• analyse the implications to Management Accountants and address the new knowledge and skills required by management accountants as the profession changes

Our objective is to provide evidence as to why we feel these changes in business operations will be more widespread in the future and how such changes impact the Management Accounting profession. The phenomena mentioned are neither exhaustive nor are they new to us. Instead, they are selected because they were consistently brought up in different acclaimed accounting journals. Based on our literature reviews, we hope to present what we believe to be the most influential trends in shaping the Management Accounting profession in the next millennium.

II. Changes In Business Operations

We have identified four major phenomena that will shape the business environment in the next millennium, namely:

1. Rapid advancement in information processing and technology
2. Globalisation and intense competition
3. Changes in organisational structure and
4. Focus on stakeholders

Rapid Advancement In Information Processing And Technology

The world's most famous technocrat, Mr Bill Gates, has said that as far as the information technology revolution is concerned, we are merely in the Paleolithic Age. More technological inventions can be expected and they will emerge at an increasingly faster pace. At this present moment, we can already witness the acceleration in advancement in the field of computer and information technology.

This advancement is an important driver for the rest of the phenomena mentioned. Globalisation will be assisted by telecommunication and transportation technology will overcome geographical barriers. Information technology in the field of computer network will facilitate sharing of information in a flatter organisation structure. Specific information technology applications can help the organisation create value for its various stakeholders, just as what "Just-In-Time" and "Computer Aided Design" technologies have contributed to retailer- and customer-relationships in the past. Conversely, it is also due to these phenomena, that many organisations have invested heavily in research and development for new technologies.

While information technology can come in various forms, two types deserve special attention: those contributing to the company's infrastructure and those assisting the company to compete more effectively in the business world. The first type includes the computer network residing in the organisation, facilitating information sharing and communication within the company. In addition, the accounting system of the company also falls into this category. Companies have increasingly implemented advanced internal information systems and automated accounting systems to achieve higher efficiency. These implementations will directly change the way management accountants work in these organisations.

The second type of technology is used for long term planning, collecting information on competitors and creating value for the stake holders. As the role of management accountants change in the new organisational model, they will come into more contact with such technology.

The mention of these two types of information technology provides a preview to new technologies that will be closely related to management accountants in the future. More elaboration on the implications of such technology to Management Accounting will be covered in the relevant section.

Globalisation And Intense Competition

With the new wave of globalisation coming from second and third world countries, we can expect globalisation to become a constant theme, not just among large organisations but also to every domestic firm.

The recent Asian economic crisis has intensified instead of cooled the global competitive environment. For Asian developing countries, their consumption power is greatly impaired and their involvement in the global market became more of exporting without much importing. Even developed countries such as Japan and the European countries are reporting lower import figures because of poor consumer sentiments. Everyone is looking towards the United States as the only healthy consumer in the global market.

While it is now still possible for the United States alone to be a major consumer for all exporting countries, the situation has nevertheless resulted in that of a very small consumer market with a lot of producers. The whole global market will undergo further shrinking as optimism among American consumers diminishes and their consumption decreases. Though a global recession may be difficult to ascertain, the trend towards more competitive business environment will be obvious.

Under such adverse conditions, organisations will have to come up with great competitive advantages and business strategies in order to survive. This will lead to emergence of new 1) business strategies 2) organisational structure and 3) organisational focus. While the latter two will be covered in the next two sections, we will discuss the shift in focus of the business strategy here.

Responding to the competitive business environment, more organisations will engage in proper, formal strategic planning. The focus will be on a broader and longer term perspective. On a broader perspective, performance will be viewed in terms of the competitors, the market and the business environment as a whole. Efficiency and effectiveness measures will be benchmarked against the best practices in the industry. Organisations will be more external looking instead of focusing only on internal affairs. On a longer term perspective, planning will extend beyond yearly goals, while still maintaining flexibility. This flexibility will allow firms to respond to changes in the environment at the same time organisations move towards their objectives. Due to the volatility of the business and economic environment, yearly deviations from targets will be accepted so long as the organisation is moving forward.

Changes In Organisational Structure

From a CIMA survey of Europe's top multinational corporations in December 1998, we discovered that virtually every company contacted had either been reorganised, was in the middle of a organisation or was about to reorganize. This finding actually supports our proposed phenomenon of intense competition and organisations' need for change. Among such changes are 1) flattening of the organisational structure, 2) empowerment of organisational members 3) decentralisation in decision making

As part of the cost cutting drive, many organisations will resort to downsizing, which is further facilitated by new technology and automation of manual procedures. Working with fewer staff, organisations will demand for higher quality workers. Employees must be able to manage different portfolios, and are strongly self-initiated and self-motivated. Companies no longer can afford to hire many levels of managers to supervise lower level workers. Instead, the whole organisational hierarchy will be much flatter with each member answerable for his or her own work.

With a flatter structure and fewer members, organisations will need to empower the members, giving them authority to make decisions. Each employee is to decide for himself what steps to take to enhance the welfare of the company. This will increase the competitive edge of the organisation because lower level workers, being the ones directly involved in the producing of goods and the serving of customers, are better able to suggest relevant solutions to existing problems. As a whole, the organisation can react faster to the ever-changing business environment, instead of requiring lower level members to go through long channels of communication for any suggestions to be approved. In the past, either the junior members will not be motivated to suggest any improvements or the solutions will be approved too late to solve the accumulated problems.

On the organisational subsidiary level, empowerment will also be given to different subsidiaries. Such a decentralized approach will lead to the formation of strategic business units (SBUs) among subsidiaries in related fields of business. Likewise, ability to make independent decisions among SBUs will lead to faster reactions to the changing market conditions.

Focus On Stakeholders

Many organisations will seek continuous improvement in all aspects of the business. The stakeholders framework will be a frequently used tool when organisations recognize the need to improve relationships with all stakeholders. Shareholders, customers and employees will be mentioned below, with special emphasis on the employees.

Many organisations have adopted "to enhance shareholders' wealth" as the primary organisational objective. Nevertheless, the majority of the managers presume that shareholders will be satisfied so long as the organisation is well managed well and earns money. They do not openly seek to satisfy the shareholders by providing dividends or incentives. However, organisations will start to recognise this need once they realize that existing shareholders are less willing to contribute funds in a slowing world economy.

For customers, organisations still place great emphasis on customer satisfaction, as in the past. Now, in addition to creating a customer-demanded product, organisations will focus on the quality and service when delivering the goods to the customers. This is very important because when all competitors are able to imitate each other's technology and produce similar products, the only difference between each organisation will be the peripherals such as the type of service provided to the customers.

On the employees' side, with the employment of fewer but more capable workers, many organisations will start to focus their attention on intellectual capital. Intellectual capital is defined as the intellectual material that has been formalised, capitalised and leveraged to produce a higher value product. It represents knowledge that is transformed to something of value to the organisation. To date, only the outputs of intellectual capital (patents, copyrights, goodwill) are recorded in the financial statements. The accounting system fails to recognise the equity (capital) which was invested in all these intellectual assets.

From the explosion of the knowledge economy and the emphasis on high quality workers, intellectual capital will play an increasingly important role in organisations in the next millennium. Much evidence has already indicated the impact of intellectual capital:

1. Market values of many companies have exceeded their book values (net assets) by many times.
2. In a November 1998 study, Coca Cola Corporation had net assets worth of US$6 billion, yet possessed a market value of US$148 billion. Likewise, Microsoft Corporation had net assets of US$7 billion but ,with more than 15 times, a market value of US$119 billion. The excess value represents intellectual capital residing in the organisations
3. Studies by Mc.Kinsey in 1992 and 1993 had shown that in the service industry, the organisation of labor rather the capital invested determined the productivity levels.

There is a need to manage intellectual capital in order for the organisation to retain its value. In managing intellectual capital, proper measurement units and methods must be defined.

These shifts in focus will bring about changes in how organisations operate. The Management Accounting system will also have to change as measurements have to be created to record performance in these new areas of focus. Specific changes will be covered in the following section.

III. Implications To Management Accountants

As a prelude to our discussion, we would like to present the findings of one survey that addressed future developments in the accounting profession. Conducted by two prestigious lecturers ate Massey University in 1997, respondents, who consisted of members of Chartered Accountants, were asked to identify likely roles (Note: not new roles) of accountants in the new millennium, and the skills required to perform these roles. The following tables show the results:

Table 1: Future Roles Of Chartered Accountants

Note: The percentages add to more than 100 as each person could identify more than one role. There were 358 replies.

Table 2: Skills Accountants Need In The Future

Note: The percentages add to more than 100 as each person could identify more than one role. There were 358 replies.

[Extracted from When is an Accountant not an Accountant, Chartered Accountants Journal, December 1998]

Hence, we can see from Table 1 that accountants, including management accountants, will be required to take on increasingly non-accounting roles in the future. The strictly accounting roles are only taking a moderate placing at the fourth position and these roles consist more than basic accounting skills. This finding is in accordance with the changes in business operations we have identified. Rapid advancement in information technology, which is the basis and advocate for all the other business operations developments, have resulted in automation of the more routine job of generating financial statements, leaving no role for the generic accountant. Accountants will be called to provide additional value to the companies, over and above that of generating year-end accounts.

Due to constraints, we will only address some of the roles that management accountants will be required to adopt due to changes in business operations. We would like to re-emphasize that these roles are not new, but that they will be increasing in importance and might be taking priority over the normal accounting roles. Subsequently, we will identify the knowledge and skills which management accountants will have to acquire in order to perform these roles competently. Some of these identified knowledge and skills are drawn from Table 2 while others are extracted from other research findings and journals. Nevertheless, the skills mentioned are not exclusive to the roles under which they are classified; they apply to all the other roles mentioned in Table 1 as well.

Information Manager

At the most basic level, rapid advancement in technology has brought about automation for the various business functions. One can easily conclude, from observing the firms around one, that the accounting function is often among the first to be automated, the reason being that it is one of the most tedious functions in the operations of a business. In addition, the fact that the very essence of the accounting function is mostly number crunching has encouraged leaving the work to be done by computers. Of course, there is the analytical aspect of accounting but this still requires the numbers to be generated, and automation decreases the likelihood of errors occurring when generating these figures. Hence, management accountants will be one of the primary consumers of information technology in most organisations. Consequently, management accountants should be better prepared than others to seek and evaluate new software. Firstly, nobody knows better than the management accountants themselves what is required of a software to fulfil the informational needs of the organisation. Secondly, the reports produced by management accountants are most critical for decision-making in the company. It will be the management accountants who get blamed for any deficiencies or errors in the data. Therefore, it is most logical that the job of evaluating the suitability and strengths of software be assigned to a management accountant. 

The challenges of improved technology to management accountants do not stop at the above. As mentioned earlier, increased automation will bring about decrease in the number of employees required, resulting in a flatter organisational structure. Management accountants now have to produce the same amount and quality of information, if not more, with fewer workers. As such, the positions of management accountants in organisations will be more senior. They will have more say in the decision-making process, and with increased importance comes increased responsibilities. They hold the information needed by top management to measure the performance of past strategies and to plan new ones. Management accountants are now called upon to develop and manage the business information warehouse within the organisation. In addition, the growing affluence of the Internet also increased the demand for real-time, accurate, detailed data, not only for top management but also for other stakeholders of the company. 

We mentioned that management accountants might have to produce more and better quality information with increased technology. What type of information are we referring to and how does it differ from existing reports generated by management accountants? 

Now that financial statements can be prepared by computers, the emphasis for management accountants will be shifting from cost determination and financial control focus to the provision of advice that will result in an addition or creation of value. In other words, management accountants now should concentrate more on financial analyses than just mass data production. They are supposed to interpret data in terms of implications for the future, so that the leaders can build strategies and make decision on more precise information. The more traditional historical perspective was to evaluate the performance of the firms and come up with suggestions on why deviations from targets occurred and how they could have been prevented. In the future, management accounts will have to relate these data to a company's future that business can utilize the data from the financial statements in a more effective manner which will maximize shareholders' value. The argument also works the other way. For management accountants to perform financial analyses that will be more useful, the routine work of deriving the figures will have to be removed from them. Computers now do the work and management accountants are freed to see to the more important task of analysing the data. 

From all of the above, we can conclude that management accountants in the future have to play the role of an information manager. Not only do they have to use information technology to manage large masses of data, they have to manipulate it so that it is presented in a form useful for decision-making. Basic information technology and web skills are the most integral to perform this role. However, there are also other capabilities to be acquired, pertaining to the analyses of financial statements. Examples are analytical and interpretation skills, presentation skills and a basic knowledge of the economy in which the business operates. These will be mentioned again in the following sections.

Agents Of Change

In a highly competitive business world, it is imperative that corporations foresee changes in the economy and take steps to tackle problems or seize opportunities as they arise. Globalisation has enlarged the environment in which a business operates and multiplied many times over the number of threats and opportunities a firm can face. The current Asian economic crisis has also resulted in a situation (one of a small consumer market with a lot of producers) that forced businesses to constantly evaluate and come up with new business strategies to ensure their survival. In light of all this, the management accountant is called to be an agent of change on behalf of the company. The importance of this role cannot be more emphasized. Although a management accountant works with financial statements, which are prepared on a historical basis, businesses still rely heavily on such figures to tell them whether they have made the correct choices in the past. Furthermore, management accountants hold the key to applying these results to future, relevant decisions. Based on their role and involvement with financial information, management accountants will become the natural candidates as agents of change.

To be a successful change agent, the management accountant must always have an awareness of the changing business and the economy. This sums up to general knowledge. Management accountants cannot be workers who sit for hours, hunched over desks to come up with a set of figures. They must be concerned about developments in their clients' business environment, whether in the legal, business, accounting or other general aspects. Only then can they advise their clients on the trends they foresee and relate the firms' numbers to its future. Basic awareness of the business environment is also crucial for the other roles that management accountants must assume, like that of an internal consultant or a business partner. This results in the management accountant being more of a manager than an accountant. Recall that information technology has a big part to play in this. Without information technology to take away the drudge of accounting work, management accountants could never afford the time to keep abreast of world affairs.

Competitors form the most substantial part of a business' environment and have the most influence on a company's policies and its survival. Hence, management accountants must not only analyze the firms' internal performance, but also try to get hold of competitors' information and consider them when providing advice to top management. With today's technology and existing statutory disclosure requirements, it will not be difficult for management accountants to obtain some basic information about a firm's competitors. In analyzing this information, management accountants are expected to be able to understand and interpret details of competitors' cost performance. In reality, it is seldom that all the detailed breakdowns required by the management accountants are provided for all to see. In such circumstances, the management accountant will have to make intelligent estimates either based on their past experiences or their understanding of the recent business developments. Competitor analysis should also enable management accountants to gain insights into competitors' strategies and future plans. However, all these are still considered insufficient. Management accountants must be able to anticipate threats and convey the message to the top management so that appropriate defense or counter-attack strategies can be planned. From all of these, we can see that the domain of cost management has extended far beyond the historical, narrow focus of the manufacturing function.

Lastly, to adequately perform the role of an agent of change, management accountants must master additional, more revealing techniques other than the traditional numerical analysis. Some examples are strategic cost analysis, fishbone analysis and performance driver analysis. [For details on the last two techniques, please refer to Management Accounting for Strategic Performance, Charter, April 1998] These analyses will enable management accountants to provide insightful advice to the top management. Again, we see that the role of a management accountant becomes more managerial than accounting-based. In the future, the challenge would be to train accountants to be total finance specialists. They will be able to understand capital markets and issues such as measuring shareholder value rather than accounting tax and audit. Hence, the techniques we have listed are only the tip of the iceberg. As we step into the next millennium, management accountants must acquire more diverse and high-level skills to preserve relevance. They no longer have to be exact in their reporting - just close enough.

Although traditional accounting techniques have decreased in importance, it is still crucial for management accounts to maintain a certain degree of competence in executing such techniques. Table 3 shows the shift in emphasis in trends of management accounting. We can see that despite a decrease in emphasis on absorption and variable costing, these techniques still command a moderate level of importance in the future. Therefore, management accountants seeking to acquire new techniques, such as activity-based costing and benchmarking, should not neglect the more traditional skills too.

Table 3: Trends In Management Accounting

# Indicates techniques that will continue to be emphasized.

[Extracted from Management Accounting, where to next; Australia CPA, December 1998]

Managers Of Business Value

With an increasing emphasis on stakeholders such as customers and employees, new organisational objectives are set. Management accountants who traditionally measure the performance of the organisations with costs, revenues and profits will encounter new challenges when existing measurements are no longer in line with new objectives. With such changes in organisational focus, management accountants need to develop new sets of performance measures to determine how well the businesses are doing in managing business value (in terms of maintaining relationship with customers and valuing employees).

Competitor analysis reveals the difference in value between a firm and its competitors, which is an indirect measure of a business' value to its customers. Earnings of a company also provide a form of measure of creation of wealth to shareholders. There are also other measures such as the actual amount of dividends paid and other profit-sharing schemes. For employees, however, their value to the business is their intellectual capital.

Intellectual capital is an intangible asset, like goodwill, patents and research and development expenditures. Something that differentiates intellectual capital from the other intangible assets is that whereas accounting standards have been developed to govern the accounting for the latter intangibles, the treatment for intellectual capital is still only in its infant stage of discussion. The debates regarding the measurement of intellectual capital and its inclusion in the financial statements have only started recently. While there are many suggestions proposed, one common viewpoint is that intellectual capital is too important and valuable to ignore. The difference between a firm's market value and its book value partially represents the value of its intellectual capital, but there is no known method to measure how much of it is intellectual capital. Some propose that a balanced scorecard be used while others suggest using a single index or capitalizing salary or wage expense and amortizing them instead of writing them off to the profit and loss statement.

The duty of the management accountant at this stage, as a knowledge worker and manager of business value, is to be aware of the developments in this discussion about intellectual capital. Management accountants could also begin their own research for methods of measuring intellectual capital and hence, contribute to the discussion.

Internal Consultants/Business Partners

This last role that management accountants have to play is an integration of all the other roles mentioned in this essay. As can be seen from the preceding discussions, management accountants no longer just generate reports and interpret past performance. They must analyze the figures with respect to the future and advise businesses on threats and opportunities that they foresee. Since the demand that management accountants perform such functions will increase in the next millennium, it can be followed that management accountants will be increasingly relied upon by businesses to be consultants, advisers or even partners in the decision- making process. In the future, management accountants will not just be scorekeepers; they will be people who can influence the scores.

As the organisational structure of the firm flattens, the positions of management accountants in the company also increase in seniority. They not only have to manage their own staff but they also come into more contact with other functions. Hence, some crucial skills that management accountants must acquire are interpersonal and communication skills. For example, they may have to collaborate with the information technology department to come up with the design of a sophisticated information system for the organisation. Management accountants will need to maintain cordial relationships with this department they try to convey what they want to the information technology specialists. They also must possess good communication skills so that understanding is enhanced between them and the information technology experts.

Secondly, management accountants will need presentation and facilitation skills. They need to create and deliver formal presentations that will use information as a tool to convince others that change is not only good but also necessary. For example, whether stretch budgets will achieve the desired effects in an organisation will depend on how management accountants present the workings of such budgets not only to the top management but also to the lower-level managers. Management accountants, in a way, act as the link between the top management and the lower-level managers.

As a business adviser, management accountants must also have foresight and be willing to undertake risks. Foresight is already mentioned under the role of management accountants as agent s of change. However, if management accountants do predict future opportunities but are unwilling to take the risk of investing, then such foresight is useless. Accounting training stresses risk reduction or at least risk identification of what is known. On the other hand, change requires willingness to examine the unknown, which is equivalent to risk-taking. Therefore, we can see that management accountants in the future will have to put down some of the things they have learnt and experiment with change.

Lastly, as the role of management accountants becomes more of a business partner in the organisation, the management accountant must know when to relegate some of his duties and outsource these to others. Some control will be lost, but without outsourcing, the management accountant might not be able to perform the more critical task to ensure the survival and profitability of the company.

IV. Conclusion

Ever since the evolution of Management Accounting, changes to roles of accounting have been continual, as the business and organisational environment change. It is indeed not surprising to expect vast changes of roles as mentioned in the essay.

We will present Table 4 as a summary of how the business environment and operations of the next millenium contribute to the new roles of management accountants.

Table 4: New Management Accountants' Roles Brought About By Changes In Business And Organisational Environment

 While their organisations undergo changes, management accountants are the first and one of the most involved in such transformation. This can be attributed to their strategic positions as designers and maintainers of management control and planning systems. As expectations of management accountants increase, more skills and knowledge will be needed by the accountants. Whether management accountants can cope with these changes will be dependent on their ability to identify these changes and capitalize on the opportunities while addressing emerging threats. As management accountants, they will have to remain adaptable to the tests of time.

References

Anastas, Mike. The Changing World Of Management Accounting & Financial Management. Management Accounting (New York), Oct 1997