Managerial Accountant’s Compass

Research Genesis and Development

Gary Oliver

• Publisher: Routledge
• Year: 2018
• ISBN:
  9781351602846
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Betriebliches Rechnungswesen

This is the first detailed view of the managerial accountant's role and responsibilities in organization setting. Its aim is to foster role development: the opportunity to work at an advanced level of practice. Accounting studies develop technical skills associated with topics, and, responding to defined scenarios but provide very little guidance on what to recognizing and approaching the broad problems or challenges under conditions of uncertainty.

It is a double first because it provides the managerial accountant's compass as a general purpose analytical framework for managerial accounting independent of any selected theory and method. The metaphor of a compass creates a mental schema for its four points named (1) goals and principles, (2) boundaries and constraints, (3) methods and models, and, (4) collegial relationships. Dynastic Chinese and some other Central Asian cultures, view the center as a fifth principal direction, giving a total of five points. The center represents a high standard ethical conduct and self-care, or moral compass.

Managerial Accountant's Compass offers an integrated and systematic guide to approaching situations that are constantly changing. It gives a protective starting pattern which produces new meanings and awareness of the ambiguity and uncertainty for each situation. Ultimately the managerial accountant's compass can help you make more effective sense of yourself, your expertise and your practice in the organization where you work, which should open career opportunities.

Part I
Genesis of the Managerial Accountant’s Compass

1
Establishing the Need for the Managerial Accountant’s Compass

This chapter establishes the need for a systematic analytical framework to be available for managerial accountants. It is motivated by five imperatives. Although organizations in society are heterogeneous, a systematic approach is possible. Students of accounting and junior managerial accountants lack a single integrated framework to help them marshal and use the plethora of managerial accounting concepts, methods¹ and processes.² The importance of an integrated framework becomes apparent when the career of management accountants is considered. It is a progressive trajectory with at least three broad levels (entry, intermediate and senior) most probably across many organizations in different industries. There are also opportunities for the managerial accountant to move into non-accounting managerial positions that utilize their accounting knowledge. The expression non-accounting manager is used to emphasize that most of the relationships that the managerial accountant has are with employees outside their organizational unit, and this requires a thoughtful approach. In the rapidly changing socioeconomic environment with changes in work–life balance, the potential benefit of an integrated and systematic framework for planning and decision making has both short-term and long-term payback through becoming a more effective individual and team member. The remainder of this chapter explores these imperatives and outlines the structure of the book.

1.1 Organizations and Societies Are Heterogeneous

In any given year, there are approximately 200,000 newly qualified accountants worldwide. Despite advances in transaction processing technology, the employment trend is upwards with “heightened demand for newly qualified accountants” (Robert Walters, 2015: 13). International and country statistics suggest accountants form a very large occupation group who have wide employment opportunities not only in capital cities, but also suburbs and regional towns. Accountants have retained full-time job hours at a time of growing part-time, casualization and job-sharing. So far, outsourcing and off-shoring trends have had little impact on accountants. The most common level of educational attainment for accountants is bachelor’s degree. It is possible for accountants to seek employment with just their degree, or complete membership studies to join one of the professional accounting bodies.

However, during their studies accountants have very little guidance on what to expect.³ The managerial accountant’s compass is designed as a guide to help uncover and make sense of the myriad of unfamiliar and complex managerial accounting issues that new accountants face. Students and new employees already have to cope with unfamiliar operational, organizational and people practices, and foibles. Concerted effort is required to master concepts, processes and skills, but also in overcoming unfamiliarity in putting knowledge and skills into practice. The managerial accountant’s compass is a knowledge organizer and guides effort.

When managerial accountants encounter difficulties, it is difficult to learn from them. Newspapers and journals frequently describe organizational difficulties and career changes, but the failure is either unclear or undisclosed. Students also lack familiarity with failure in their ordinary degree studies with attention to very few cases where the existence of the organization as a going concern is jeopardized. The vignettes below illustrate the potential for failure that managerial accountant may navigate. Where the reader is likely to be unfamiliar with an organization, some additional commentary is provided. Each vignette consists of a short, impressionistic scene designed to give insight into ideas in a setting (Alexander & Becker, 1978).

• Automation enables manufacturing efficiencies by standardizing routine operation, but Mercedes Benz will abandon automation of its production line for its S-class flagship passenger vehicle at their largest plant in Sindelfingen, Germany. It wants to increase the scope for customers to personalize their order. “The Mercedes-Benz S-Class is too complex for robots to assemble. Robots can’t deal with the degree of individualization and the many variants that we have today”, said Markus Schaefer, the head of production at Mercedes-Benz (Behrmann & Rauwald, 2016).
• Growth is always sought but can be problematic. Deutsche Bank expanded beyond its core business of financing the foreign expansion of German organizations. In the United States, it sold toxic mortgage securities before the 2008 global financial crisis and subsequently was accused of failure of oversight and internal control of its FX traders who buy/sell currencies for its own accounts and for customers. The demand from US Department of Justice and Commodity Futures Trading Commission exceeded USD 7 billion. Deutsche publicly apologized and reviewed its operations and strategy.
• Performance incentive schemes may be dysfunctional or gamed. Austrade, the Australian federal government business development agency, allowed staff to earn bonuses of AUD12M between 2007 and 2014. It promoted a controversial company that later collapsed. It allowed bonuses to be paid without checking the bona fides of the organization used to earn those bonuses. One organization was the collapsed Indian pyramid scheme associated with Pearls Group India. (Klan & Bearup, 2016)
• The behavior of cartels in charge of procurement or sales is unpredictable. The Organization of the Petroleum Exporting Countries (OPEC) acts as a volume seller for its oil-producing nations who reduce supply-side production based on estimated non-OPEC output and OPEC stockpile, and expected world oil demand. In mid-2016, OPEC decided to maintain high production levels, and thus low prices to eliminate higher-cost producers and regain market share. It uses short-term quotas to regulate supply to manipulate prices and avoid fluctuations that might affect the economy of OPEC members.
• Rent-seeking behavior is opportunistic. Australia Post is the Australian government solely owned postal service. In 2017, its profit after tax increased 162.1% despite an 11.8% decline in addressed letter volume and 5.6% growth in domestic parcels. In the previous year, its then CEO Ahmed Fahour claimed its letter service will “never ever make money again” and sought a government subsidy (Durkin & Lynch, 2016). Letters are a steadily declining product as a result of digital communications, but Australia Post is obligated to provide a frequent, reliable service at a fair price.
• Often employees are retrenched using the justification of cost reduction. Optus is a major telco in Australia. It reframed the retrenchments of employees from the company’s customer service and network roles as a strategic initiative to win customers. Optus intends to use savings from shedding 10%of its workforce to support its ambitions to buy rights to broadcast sport and pay for the cost of hiring sports stars to promote it in the media. (Burke, 2016)

In the background of these vignettes is the managerial accountant providing cost, performance, control, and strategic information and recommendations to non-accounting managers. Without a criterion framework like the managerial accounting compass, the managerial accountant cannot be expected to go beyond their knowledge of how to apply methods and processes to assist organization and anticipate consequences during and after implementation. Given their limited knowledge of the organization, and time constraints, it is unlikely that she or he should do so without further guidance and insights into possible pitfalls. There is a need for a systematic framework, which allows the managerial accountant to take into account goals, principles boundaries, and relationships and organizational context.

1.2 No Single Integrated Framework Exists

Despite the discussion in textbooks of methods and processes in different organizations, no single integrated framework is provided. This occurs against a background where the target entity is given different names. In the discussion that follows, the term ‘organization’ is preferred to ‘business’, ‘company’, ‘corporation’ ‘entity’ or ‘enterprise’. It is an umbrella term because it refers to for profit and not-for-profit, listed corporations and privately held organizations. An organization is a social unit with a purpose, a structure of management and rules of conduct. Some are discipline-specific. For example, strategic management prefers the term ‘firm’. Another expression, ‘enterprise’, is used to emphasize the commercial aspects of organization. The managerial accountant is employed by or contracted to any of these organizations. All these forms of organization require the managerial accountant to contribute to decision making, and all make a range of decisions and require the managerial accountant to apply the knowledge and skills he or she acquired in formal education. However, managerial accountants have become prisoner to simple definitions of accounting for their role and responsibilities.

The standard definition of accounting emphasizes reckon. A common textbook definition is process of identifying, measuring, analyzing, interpreting and communicating information for the pursuit of an organization’s goals. This definition is responsible for managerial accounting being identified with cost accounting⁴ and the financial reporting of production (manufacturing, construction, mining and agriculture), or sales (merchandising). Early definitions recognized the financial and managerial sides of an organization and its concern with economic and social phenomena (Duncan, 1909). A broader view of managerial accounting is that it is concerned with information outputs. It provides managers and employees with information used for organizational decisions as well as monitoring progress against goals. Like financial accounting, it has processes for identifying, measuring, accumulating, analyzing, interpreting and communicating information in a timely and reliable manner. However, the primary role of the managerial accountant is to provide the non-accounting managers and employees of an organization with the accounting viewpoint in planning, control, and making decisions and judgments. The information, advice and assistance given by the managerial accountant concerns the costs⁵ in the organization (Boyns & Edwards, 2013), its use of tangible and intangible resources (Barney, Wright & Ketchen, 2001), improving its profitability⁶ (Drury & Tayles, 1995), the effectiveness of its processes and productivity (Banker, Datar & Kaplan, 1987), and the impact of potential threats and opportunities from either competitors or changes in the external environment of the organization (Bromwich, 1990). Any of these may involve organization change (Burns & Scapens, 2000). The managerial accountant therefore has a wide remit and should revisit their earlier analysis if significant new information becomes available or the passage of time affects their assumptions and estimates.

Most frameworks are specific to a given analysis task and there are very few generic frameworks apart from decision making. Most textbooks have a preferred decision-making framework. Generally, it consists of three stages: define the problem, assemble relevant information and evaluate the consequences of options. The limitations of these frameworks are twofold. First, they assume there is a clear decision awaiting determination. A desirable framework should also require reflection. Second, it ignores the pitfalls of decision making, particularly insufficient attention, and the impact of heuristics and biases. Most decision frameworks place undue emphasis on its finalization rather than its consequences or difficulties of implementation. The framework also overlooks the pernicious effect of particular cognitive biases that overplay the need for the decision or the obviousness of what is perceived as the preferred option. Explicit frameworks are thus specific to a task and provide little substantive substructure to avoid overlooking what may later be considered relevant factors by the managerial accountant, their manager or other non-accounting managers. They also assume the framework covers matters valued by society such as ethics and health. A systematic framework therefore needs to be generally applicable as well as directly articulate wider values often described as ‘doing the right thing’. Therefore, the framework should be broadly useful across the function of management accounting.

1.3 Career Trajectories Within Management Accounting

The managerial accountant in an organization is appointed at different levels (entry, intermediate and senior). These are discussed in Chapter 5, which details differences for each of these three levels. While the focus is on the role and responsibilities of the managerial accountant, these are incomplete without considering what makes a managerial accountant successful. This is a matter of performance and is viewed through the literature on critical success factors. Those for a managerial accountant are specified in Chapter 6. Of course, they are subject to any specific performance objectives that are defined in an organization-wide evaluation scheme, or form part of an employment contract.

The career of some managerial accountants has been foreshortened by insufficient effort to practice ethical behavior. Public attention to ethics in accounting occurs frequently. The failures of Enron and WorldCom focused attention on the unacceptable ethical behavior of the accounting profession (Salter, 2008). The managerial accountant should be aware of Enron since it is likely that early actions by its accountants were legal but unethical and then illegal. This is often an event history (Baucus & Near, 1991). Enron also suggests the difficulty in coping with ethical challenges from peers, supervisors and external parties. The code of the Institute of Management Accountants (2017, originally issued 2005) which is found in many textbooks (e.g., Horngren,⁷ Datar, Foster, Rajan & Ittner, 2015; Hilton & Platt, 2014) and discussed in Chapter 10 is unique among professional codes for its two-level hierarchy. Textbooks include ethical dimensions to many problems, but these are artificial. Students can either deduce the appropriate answer from the scenario or use a template to give the correct answer. They lack any direct and indirect financial and peer pressure. Textbooks also suffer from hindsight when discussing examples of unethical behavior that has become public. An integrated framework should anticipate the subtle pressures on a managerial accountant and the reality of loss of income. Textbooks also overlook the attendant career consequences (e.g., loss of current accounting job, and/or potential for continued future unemployability in many other jobs) of becoming a whistleblower. Since ethics disrupts career ambitions, the managerial accountant’s compass places ethics at its center.

Another career disruption can occur with unfamiliar work. A hallmark of the managerial accountant is skill in applying the managerial accounting methods and processes competently to new situations. The managerial accountant should aim at building a portfolio of skills covering:

• Creating models using existing guidelines and processes in various topics of managerial accounting
• Identifying and applying accounting guidelines that have general business acceptance (e.g., the managerial accounting principle that benefits exceed costs)
• Developing criteria that go beyond measuring accounting return or payback and extends to improvements in value generation before recommending a preferred option or beginning evaluation
• Using a decision-making framework that recognizes cognitive biases, human or behavioral factors, and demand effects to please supervisors in considering information and making decisions
• Recognizing that a decision is preceded by developing a range of acceptable and reasonable options
• Balancing operational or short-term targets with long-term strategic goals
• Successfully communicating difficult or unpleasant accounting information to non-accountants

However, the managerial accountant does not have a framework for integrating these separate accomplishments. The managerial accountant’s compass brings these together. The other side of the career trajectory is obtaining a position outside accounting w...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Dedication
• Contents
• List of Figures
• List of Tables
• Acknowledgments
• Preface
• Extended Abstract
• PART I Genesis of the Managerial Accountant’s Compass
• PART II Resources Contributing to the Managerial Accountant’s Compass
• PART III Insights From the Managerial Accountant’s Role, Performance, Decisions and Judgments
• PART IV Development of the Managerial Accountant’s Compass
• PART V Perspective on the Managerial Accountant’s Compass
• Appendix: Research Positioning
• References
• Index of Industries, Organizations and Products
• Index of Topics