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Home , Management, Management accounting

REDEFINING

Promoting the four pillars of our profession

By Peter C. Brewer, CPA

Last year I attended a conference where surprise, at least one attendee nodded one of the speakers discussed some of his “yes.” When the speaker asked why this concerns about the management member of the audience agreed with the accounting profession. To highlight one quote, the attendee replied that, after all is of his apprehensions, he shared with the said and done, “A debit is still a debit.” audience a quote from a high-ranking While I can’t refute the truism that a debit in a is still a debit, I believe that the financial professional (not IMA) who accounting-oriented mentality underlying claimed that the foundation of the audience member’s quote needs to be management accounting was Generally refuted. It shows that many people still Accepted Accounting Principles (GAAP). don’t understand the value-added role that As I read this quote on the speaker’s management play (or should PowerPoint slide, I shared his frustration play) within . that a highly visible person within our Financial reporting standards, auditing profession had such a misguided view of standards, , and Sarbanes-Oxley what management accountants do. The (SOX) legislation play a vital role in speaker then asked the audience if they ensuring that organizations remain agreed with the quote, and, to my

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accountable to their stakeholders. Indeed, A NEW FRAMEWORK many management accountants who are Figure 1 summarizes this new management members of the Institute of Management accounting framework that suggests the Accountants (IMA®) have expertise in ultimate responsibility of management these facets of the accounting profession accountants is adding value. that has enabled them to advance their This definition moves us away from narrow careers and add value to their terms like and and toward organizations. Yet we need to overtly a more encompassing vision of recognize that rules-based, compliance- management accountants as key influencers oriented activities aren’t the focal point of in an organization’s efforts to satisfy the management accounting profession. stakeholder expectations. The framework Management accounting is first and also depicts how management accountants foremost about managing internal add stakeholder value—by providing operations to optimize organizational , by supporting a company’s performance. efforts, by creating In doing my part to help advance our operational alignment throughout an profession, I’m introducing a new organization, and by facilitating continuous management accounting framework that learning and improvement. describes the full spectrum of skills that The remainder of the article serves two should be espoused by management purposes. First, it elaborates on the meaning accounting leaders in organizations and of the four management accounting pillars management accounting professors in the depicted in Figure 1. Second, it encourages classroom. The framework moves beyond you to consider the 25 questions in Tables the rules-based languages of accounting 1-4. These four sets of questions (each to properly emphasize the management based on a pillar of the management orientation of management accounting. It accounting framework) enable management also expands traditional definitions of accounting practitioners and professors to management accounting by introducing help assess the extent to which they are more inclusive terminology than the embracing the full spectrum of widely accepted adjectives of planning, management accounting competencies. If control, and decision making. While these you find yourself repeatedly providing concepts are vitally important to unsatisfactory answers to these questions, it management accounting, they don’t suggests two possible concerns. First, adequately capture the breadth of skills perhaps you’re spending too much time needed to build a successful career within performing or teaching financial our profession. For example, traditional accounting. Second, perhaps you need to definitions of management accounting expand your definition of management largely overlook leadership skills and accounting beyond traditional planning, partnering skills—two critically control, and decision making to include important aspects of building a successful leadership, business partnering skills, and management accounting career. We need other competencies. a new definition of management accounting that better captures the LEADERSHIP richness of what management accountants While effective leadership undoubtedly stand for and what they do. emanates from the C-suite, large and small

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the company’s mission solely to maximize decentralized organizations need additional wealth, or are there other leadership voices to reinforce key messages. stakeholders who need to be taken into As shown in Figure 1, management consideration? What are the ethical values accountants provide leadership voices that espoused by the organization? Is the help create shared beliefs, shared boundaries, commitment to these values made with effective decision-making processes, and sincere words backed by deeds, or does it effective processes. consist only of superficial sound bites? Are (The concept of belief and boundary employees viewed as intellectual to be systems was created by Robert Simons in his cultivated or as to be minimized? 1994 book Levers of Control: How Management accounting leaders need to Managers Use Innovative Control Systems help shape and communicate answers to to Drive Strategic Renewal.) Infusing an these types of questions. They also need to organization with shared beliefs includes communicate and rigorously abide by shared reinforcing the company’s mission, ethical boundary systems such as corporate codes of tone, and attitude toward its employees. Is

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conduct and whistle-blowing that To effectively support a company’s strategic clearly define unacceptable behavior. management efforts, management accountants need to be able to create Two other key elements of the leadership strategies that provide sustainable sources of pillar are understanding how to establish competitive advantage and to manage the effective decision-making processes and enterprise risks that threaten the attainment how to enable organizational change and of strategic objectives. Too often we . Rather than focusing exclusively incorrectly assume that enterprise risk on crunching numbers, management management and financial reporting risk accounting leaders need to effectively management are synonymous. This manage the behavioral interactions of assumption is one of many examples of how culturally diverse human beings who we artificially bind ourselves with the ties of ultimately shape decision outcomes. . We management Similarly, they need to be able to effectively accountants need to understand the manage the organizational resistance that dynamics of our and our company’s often emerges in response to organization- operations so that we can intelligently assess wide change initiatives such as enterprise the strategic, operational, internal reporting, implementations, activity-based and compliance risks associated with costing (ABC) systems, balanced scorecards, particular courses of action. or Lean accounting systems. In short, quantitative analysis is less than half the Management accountants also need to use battle when it comes to influencing strategic systems to aid coworkers’ attitudes toward change and organizations in assessing performance on effectively implementing new initiatives that three levels: enterprise performance, serve the greater good of the company. interorganizational performance, and Table 1 summarizes six questions that will benchmark performance. Our profession help practitioners and professors assess the has relied too heavily on short-run financial extent to which they are embracing the metrics to assess performance. We need to leadership aspects of management complement these types of admittedly accounting careers. Management accounting important measures with nonfinancial, is a leadership-oriented career path, and we process-oriented performance measures as need to start recognizing this fact when well as stakeholder-based measures of defining and promoting our profession. environmental and social performance, interorganizational performance measures STRATEGIC MANAGEMENT that motivate supply chain partners to The second pillar of the framework relates to in harmony with one another, and how management accountants aid an benchmark measures that evaluate organization’s strategic management efforts. performance relative to key competitors or As shown in Figure 1, there are four aspects world-class standards. to this portion of the framework: formulating Finally, as Figure 1 shows, management and com-municating strategy, identifying accountants use strategic measurement and managing enterprise risks, developing systems to analyze decision alternatives. measurement systems that assess These alternatives come in three forms: organizational performance, and analyzing customer-related decisions, product- decision alternatives. /service-related decisions, and process- related decisions. is

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facilitate external reporting is meaningless another area where management for internal decision-making purposes. accountants too often rely on data Too often we lose sight of the produced by the financial reporting fundamental management accounting system. For example, it’s indefensible to concept of “different for different measure product profitability using job purposes.” Furthermore, we spend too costs produced by a standard system. much time focusing on cost reduction and Not only is the volume-based not enough time on growth. If allocation likely to be distorted, but the management accountants want to be the product vs. period cost distinction voice of clarity that transforms data into embedded in the job cost computation to the valuable insights that drive decision

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making, then we need to recognize that budgeting process in general rather than strategic decision analysis is broader in accepting the inevitable “budgeting time scope than cost analysis. sink” as a given. For example, some Table 2 summarizes eight questions that companies have replaced with help practitioners and professors assess rolling forecasts of financial and the extent to which they are fully nonfinancial data. embracing the strategic management Operational alignment systems also are aspects of management accounting used to formalize vertical careers. These questions highlight the fact channels from business units to that there are numerous ways that we can headquarters and to coordinate operations expand our efforts to add value as horizontally across an organization. strategic managers. Management accountants tend to overrely on functionally organized responsibility OPERATIONAL ALIGNMENT accounting systems that report financial The third pillar of the framework is measures (such as return on investment operational alignment systems, which (ROI) and cost variances) decentralized organizations use to create as by-products of the monthly closing and execute short-run (e.g., annual, process. This financial accounting quarterly, monthly, weekly, or daily) orientation causes us to lose sight of two that support strategic objectives. As ways we management accountants can Figure 1 shows, management accountants help enable organizational alignment. use operational alignment systems for First, we need to focus on cascading a four main purposes: planning for the balanced set of financial and nonfinancial future, communicating vertically, process-oriented measures down through coordinating horizontally, and evaluating an organization. It’s important for these and rewarding employees. measures to span functional boundaries. Second, we need to redefine our role as With respect to planning, management enabling rather than monitoring. Our accountants tend to focus too much should be to empower of attention on “rolling up the employees throughout an organization to numbers” rather than on using knowledge assume of their results by of business strategy coupled with rigorous providing them with transparent (e.g., data analysis to accurately forecast future understandable, timely, concise, and sales and expenses and to allocate easily analyzed) feedback. across business units in a manner that drives optimal performance. Finally, operational alignment systems are We also pay minimal attention to used to evaluate and reward employees. management tactics, such as finished Our natural inclination in this area is to goods postponement, that organizations view individual employees as requiring a use to respond to the inevitability of “kick in the pants” to do the right thing errors. We need to understand for the greater good. Given this mind-set, these types of concepts so that we can we preoccupy ourselves with attempting work with nonaccountants to minimize to extrinsically motivate employees using the financial impact of stockouts, financial rewards and with attempting markdowns, carrying costs, and towin the ubiquitous “budgeting inventory obsolescence/spoilage costs. gamesmanship” battles. But we need to We also need to cast a critical eye on the counterbalance these inclinations with an

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These questions highlight the limitations appreciation for intrinsic , of attempting to use a financial reporting nonfinancial rewards, -based reward system and a functional organizational systems, and the concept of decoupling chart to align organizational resources budgets from employee reward systems. around the business processes that deliver Table 3 summarizes six questions that customer value. help practitioners and professors assess the extent to which they are truly CONTINUOUS LEARNING AND embracing the role management IMPROVEMENT accountants can play in creating The final pillar of the management customer-focused operational alignment. accounting framework suggests that

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management accountants should facilitate The fourth step in this process is partnering continuous learning and improvement via to improve operations. Management a four-step process. First, we need to accountants need to appreciate the value of pursue and advocate continuous leaving the safe physical confines of the individual and organizational learning. department and the safe linguistic Second, we need to acquire process confines of debits, credits, variances, and the improvement skills such as those like to understand the operational process espoused by the methodology. flows and terminology that drive the Third, we need to cast a critical eye on the business. Obtaining process knowledge finance function in search of opportunities enables us to collaborate with our to reduce waste and to better serve nonaccounting business partners in a internal customer needs. The goal should continuous effort to improve operations. be to automate or (if possible) eliminate Embracing this four-step continuous transactions and to streamline compliance learning and improvement process helps duties, such as SOX Section 404 management accountants view an compliance. Eliminating waste in the organization from a dynamic, process- finance function creates more free time oriented standpoint rather than from a for management accountants to help grow stagnant, functionally oriented point of view. the business and add stakeholder value.

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Table 4 summarizes five questions that being’s life dramatically influence his or help practitioners and professors assess her future. Indeed, we have all probably the extent to which they recognize the seen or heard about how young children role of management accountants in aiding can learn a second language so easily, yet an organization’s continuous learning and most adults struggle with acquiring a improvement efforts. These questions second language. Similarly, the first three highlight the fact that management years of an ’s life take place on accountants need to be problem solvers a campus. The way we educate who understand and our undergraduate students and the who can dialogue and work productively languages that we teach them with nonaccountants. dramatically influence how they will see CHAMPION THE CAUSE the accounting profession as their careers evolve. If we confine our curriculum to I hope I’ve motivated you to become a the rules-based language of compliance champion for management accounting. To while largely overlooking the language of become a champion, you need to buy in to management accounting, the challenges two principles. First, management inherent in second-language acquisition accounting isn’t primarily a compliance- suggest that, as our students leave campus oriented profession. It’s a profession that and begin to mature professionally, most focuses first and foremost on internal of them won’t become management management and enterprise optimization. accounting champions. Therefore, let’s Second, traditional definitions of make sure our accounting graduates begin management accounting are too narrow. their careers conversant not only in the The management accounting “brand” undeniably important compliance- needs to explicitly include the concepts of oriented languages, but also in the leadership, business partnering, and languages of leadership, strategic continuous learning and improvement. management, operational alignment, and I ask my colleagues in academia to continuous learning and improvement that consider this: Medical research has shown will also be essential to their long-term that the first three years of a human career success.

Peter C. Brewer, Ph.D., CPA, is a professor in the Department of Accountancy at Miami University in Oxford, Ohio. You can reach him at [email protected].

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