Management Accounting: Future Perspectives

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Aubrey Carson
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1 Management Accounting: Future Perspectives Michael Bromwich CIMA Professor of Accounting and Financial Management Emeritus 38 TH MARG Conference, LSE 30/03/2017 1

2 Doom and Gloom Examples: Some US business schools do not teach MA Many challenges from many other professions and other training, lawyers, MBAs, Big Data analysts Many countries do not have a MA profession-work done by business and engineering graduates- and MA activities dominated by financial accounting Management accountants mainly involved in transactional accounting become outsourced, robotised and redundant. Management accountants do not control (own) IT, the Web, Big Data nor much non-financial including green information Shadow decision departments 2

3 INTRODUCTION I first list briefly a number of current opportunities and challenges to management accounting(ma).i then give examples of senior management views on these and my own forecast. And as an example I discuss globalisation. Finally if there is enough time one neglected area that in my view needs much more discussion: accounting for web based products and services. First Look challenges and opportunities for MA 3

4 Challenges and Opportunities for MA Arise from upheavals in the environment. These changes in the environment include financial crises, Brexit, globalization versus populism, global supply chains, robotisation, increasing technologically fluid organizations, sustainability both short run and long run including environmental, more supplier and consumer partnerships including consumer involvement in product design, changes in the digital economy and increasingly fluid organization structures (organizations without boundaries). 4

5 In my view for many of these changes are too big for smaller organisations to do other than ride the waves created except for the areas in which they specialise and have special knowledge and to survive have to respond. 5

6 What are CFOs Thinking? - Views of some CFOs of large companies Based on my experience, my research into companies, discussions with CFOs, CIMA s experience and the literature including surveys, some thoughts are: 6

7 Excluding Brexit, current change not different to recently but much more rapid now but accounting change slow and acceptance difficult Needed quick responses gives much importance to ad hoc decisions but lack of people who can master vast amount of data and extract the hidden stories. AI may help. Too many number crunchers Increases the debate whether to split MA between transactional and analysis Need to strongly advocate the essential USP of MA: includes independence from other functions, neutrality, ensuring integrity of information from whatever source and providing holistic view; valid figures seen as essential for sound decision making Robotisation-major force, more nuanced than often suggested; dangers include lack of safeguards and validation and possibility of gaming and losing the big picture 7

8 Divisionalization DCF Budgetary control Standard costing Improved costing Cost book keeping *Date of general acceptance by large companies * early 1960s Evolution of Management Accounting in UK and USA 8

9 Business models incorporating a variety of stakeholders High Value added management revivified As an objective: value maximisation: near universal Basic EVA: high Complex EVA low. Suffers from not considering other stake holders Beyond budgeting Re-engineering the Finance Department Very high Low except enthusiastic users Balanced scorecard Very high Activity based costing Divisionalization & transfer prices 20 percent usage by large firms; an accepted tool Flatter organisational structures; economic TPs dominated by legal TPs Agency, contingency theory, performance management management control systems Low; mainly very general principles and language incorporated into practice Early1990s Mid 1990s 2000s Penetration of New Methods in the UK 9

10 Dates somewhat subjective. You could add your favourite techniques. Performance measurement, MCSs and contingency theory have a very large, especially research, literature but at least in detail seems not to have impacted on practice. What seems to have impacted on practice is some of the language and some of the common sense findings. Strategic management accounting not shown as the research literature regards its acceptance as unsettled However, I believe accountants need to be outward looking to the market both in decision making and control. This where the customers and competitors are located

11 Dangers of robotisation include: a loss of understanding of business, MA becoming as narrow as in the US and analysis and decision making being taken over by competitors possibly allowing wild heads to reign. In my experience robotisation is not the highest priority of CFOs. There is great concern for those affected by these forces offset by a belief that many more jobs will be created but in time. There is a strong belief there will always to be a need for good analysis. 11

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13 Forecasting may be impossible in a rapidly changing and disruptive environment. Reliance needs to be placed on scenario planning, early identification of disruptive activities and discontinuities. Against all this, surveys of CFOs suggest their concerns with the role of MA are much more mundane. For example, Deloitte CFOs survey for the last quarter of 2016 emphases the uncertainty with Brexit and its effect on businesses risk attitudes but the corporate priorities for the next year are led by the traditional ones of cost reduction and increasing cash flow little sign of major changes in MA. 13

14 Forecasting is impossible? Now my forecast 14

15 FORECAST Of course it is impossible to forecast the future of MA in a challenging and rapidly changing environment. Nevertheless, l shall try to suggest some possible future changes to encourage debate. This selective forecast draws on my experience, other suggestions and the literature. A major problem with seeking to innovate to help deal with a dynamic environment is that few suggested innovations in MA succeed in having a wide take-up and those that do take around 10 years to succeed. Similarly MA innovations within organisations often fail, are expensive and even successful innovations take a long while to be generally embraced in the organisation. (See appendices) 15

16 CLASSIC TOOLS Forecast 1: The classic roles of cost accounting, budgeting and performance measurement will continue using the traditional tools of cost bookkeeping, cost systems, budgetary control and capital investment models. Need refreshing to reflect a better understanding of technology and modern cost functions including nonlinear cost structures and asymmetric cost behaviour where some costs vary differently with expected usage. These characteristics reflect the increasing importance in production of resources with high initial sunk cost and low or zero usage costs (for example: research, automated processes/robotisation, search engines and the development and maintenance of interactive web facilities offered by airlines, banks and utilities and media investments and web based platforms).these costs are often treated as overheads. They are often shared by organisational activities and their correct charging to products and services represents a major problem. 16

17 Forecast 2: Regulation of all types is increasing and the treatment of regulatory costs as overheads is inappropriate. For most large firms regulatory costs easily represent, say, 20% of costs and substantially more for visible organisations and utilities. These costs are beyond the direct control of organisations and therefore should be considered as a separate cost category. Depending on the types of regulation, organisations can respond to them to different degrees. The objective should be to minimise the costs of regulation whilst still adhering to their spirit. 17

18 Forecast 3: The rise of supplier partnerships, organisations without boundaries (virtual enterprises) and to a degree consumer partnerships means that management accountants will be heavily involved in information provision outside the organisation s traditional boundaries and in generating the trust between partners which is essential for these activities. These relatively new requirements on management accountants require them to function without the traditional legal structure and the organisation structure of the home entity and fulfil the demands of nonorganisational members- for example, in open book accounting and block chains. 18

19 Forecast 4: Although many CFOs are deeply involved in strategy this is not necessarily the case for the MA function as a whole. Except for some leading organisations much of MA reporting is still strongly internal and intensively cost orientated. Often customer and competitors data is very limited and is owned and reported in detail by other functions which do not recognise finance s leadership. Frequently cost and revenue variances are unadjusted for environmental changes uncontrollable by management. Often variances are not seen as learning opportunities; rather the focus is purely on accountability. Budgets could be at least benchmarked with the perceived technologies of leading competitors. Many KPIs are chosen to reflect operational concerns rather than corporate objectives for which they may be poor proxies. 19

20 INFORMATION FOR DECISION MAKING This is already a highly contested area by MBAs etc., most dangerous are do-it-yourself spread sheets prepared by nonfinancial managers which tend to be used unquestioningly. 20

21 Forecast 5: There could be strong role for MA to better structure information not just financial and confirm its validity strengthened by MA s unique holistic view of the organisation and the demonstration of the provision of superior analysis. Organisations currently have vast amounts of data, often real time, with a large number of different jealous owners. These problems will become more severe as data gets even bigger. This of course threatens the legitimacy and validity of organisational information and increases the possibility of conflicting information. One question won t machines be better at scanning big data for abnormalities and deviations than humans? Many finance departments cooperate with others in generating balanced score cards and business models and distribute the results and associated analysis. It can be expected that finance will similarly distribute nonfinancial information especially nonfinancial measures of cost, risk and value drivers. 21

22 Forecast 6: Business partnerships will increase but will only bloom properly if MAs are not seen as finance spies and the problem of possible joint loyalties can be resolved. Forecast 7: Much of the MA literature is addressed to routine MA reports but in dynamic environments far more agile ad hoc studies at a senior level will be required. 22

23 Forecast 8: Information based web products and services disrupt the conventional revenue/cost/output model MA for information based web products such as Google and Facebook need to reflect the special nature and characteristics of information (entertainment). Normal goods are for sale at a market price and are used up in use by the purchaser (a chocolate bar). Information (entertainment) is not used up by individual use therefore the marginal cost of extra user very low. The special cost characteristics of these product and services are very high sunk overheads and very small marginal cost. This means that cannot recoup costs from users by at a price willing to pay (marginal cost). Need other sources of revenue: generally advertising-google and Facebook nearer enough 100% of revenue. Advertising revenue not linearly related to volume of users. This revenue needs to be allocated across many products. Similarly, the cost of overhead resources used have to be spread across products in a economical sensible way. MA poor at this. 23

24 AN EXAMPLE: Globalisation: Some important factors impinging on MA (also applies to evaluating both global supply chains and blocking imports) Strong role for MA in: (1) Investment appraisal. (2) Make or buy decisions and outsourcing. (3) Reporting and monitoring multinational locations and outsourcing (improved inter organisational accounting, for example open book accounting). Major method by which organisational strategies, and plans are conveyed to organisational elements and reduces local influences. (4) Performance measurement across multiple locations. (a) corporate-wide performance measurement. (b) or location specific performance tailored to local culture

25 However accountants: 1. Seemingly little role in choice of markets, and approaches to world markets Play little role in determining strategy. Need to take a strategic approach 2. Major calculative role in global supply strategies 3. Cannot continue in traditional way as do many small organisations 25 25

26 Possible major role in accounting for inter organisational relationships reducing the boundaries between firms. But does management accounting play a role in determining global strategy. Rather senior management, operation functions and business development executives. Some commentators believe that advances in telecoms, IT, the Internet and improved organisational networks have enabled globalisation. Generally, MAs do not own any of these within firms

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