Strategic Management Accounting

Sean Stein Smith

• Publisher: Business Expert Press
• Year: 2017
• ISBN:
  9781631576850
• Topic: Business
• Subtopic: Managerial Accounting
• Index: Business

This book critically analyzes the concept of strategic management accounting, the implications this emerging paradigm will have on the accounting profession, and the ramifications for businesses at large. This research examines current literature, and illustrates these concepts with current market examples. This manuscript approaches the topic in a way that is unique by linking the concept of SMA to the integrated reporting framework. In essence, strategic management accounting is a theory with broad-based support, but the IR framework and reporting structure provides a vehicle through which progress, costs, and benefits of a more strategic accounting function can be evaluated. Focusing on principles, primarily for internal management utilization, the following provides an outline and summary of concepts and techniques that can be used to elevate the role of the management accounting function. Whether you are a management expert, an accounting professional, or simply someone looking to keep up to date with emerging business trends, this text provides the content, and action-oriented steps to meet those expectations.

CHAPTER 1

What Is Strategic Management Accounting?

Introduction—The Importance of Strategic Management Accounting

Globalization, digitization, and increased competition continue to increase the competitiveness of the business landscape as well as the pace of changes. Organizations in virtually every industry, and specifically the management teams at said organizations, are under scrutiny from an increasingly broad set of interested parties. Shareholders, activist investors, environmental groups, and other interested external stakeholders require information and quantitative data in order to evaluate organizational performance. In order to satisfy these requirements, it is important that management professionals assess and review the appropriate information. Several trends, partially in response to these extrinsic forces, and also partially in response to transitions occurring organically, are converging to address these evolving requirements and demands. Integrated financial reporting, representing an iteration and evolution of several types of nontraditional reporting, blends elements of financial and nonfinancial information including aspects of corporate governance, sustainability, and risk management at an organizational level. Such a formalized template provides a platform and vehicle for management accountants to play a more proactive role in the decision-making process. Designed to be more forward-looking and comprehensive in nature than traditional reporting, integrated financial reporting provides a more comprehensive and holistic view of financial performance and the health of the organization.

Additionally, and more pertinent to the finance and accounting fields, is the reinvigoration of strategic management accounting (SMA). SMA, and the recent increase of research and conversation about this concept, appears to be linked to the rise of nontraditional reporting, including integrated financial reporting. As organizations require large amounts of data to disseminate to a broad range of stakeholders, several nontraditional factors must be factored into the business of decision-making process. In order for this to occur successfully and consistently over time, however, there are several steps that must happen at an organizational level. This realization and the reality that organizations rely, in large part, on the data that is controlled, managed, and analyzed by management accountants should not be lost on management accountants. The challenges that confound management teams across industries and that have made reporting and compliance more complicated have simultaneously created numerous opportunities for management accountants who are proactive and forward thinking.

First, information must be quantified and collected using a consistent and standardized process. This step, and the underlying decisions and judgment calls that drive it, can be a difficult, but necessary, part of the process. Second, the said information must be made comparable to, and integrated with existing operational and financial data. Third, and arguably most important, is that senior-level decision makers must have the ability to analyze, discuss, and explain the information presented and communicated to end users. Stated another way, the information generated and analyzed from operations, which includes financial information, must be presented in a format that is understandable even to nonfinancial experts. Accounting professionals, already embedded in virtually every area of the organization, and increasingly tasked with assisting with technology and operational upgrades, are uniquely situated to leverage changes in the market to accelerate this transition. This transition, from financial reporting expert, to business decision maker, is not a straightforward or simple concept, but the opportunities available to those professionals willing to seize them are substantial.

SMA in a Stakeholder Landscape

Enron, WorldCom, the London Interbank Offered Rate (LIBOR) rate-fixing scandal, and the financial crisis that consumed the entire globe are just a few examples of how poor management, poor data quality, and a lack of comprehensive follow through can negatively affect organizations. In the increasingly complicated business environment following these multiple crises, business management and reporting must evolve. The underlying business issue appears to be that managerial professionals are uncertain as to how best to address various stakeholder reporting demands. Stated in a different way, there is uncertainty surrounding the investments in training and implementation of new systems, that is, will the financial benefits exceed the costs? The specific problem is that organizations are investing in integrated reporting research and implementation without knowing if it improves financial performance (Roth 2014). One area of guidance is from nontraditional stakeholders, as these organizations have the potential to more fully integrate the value creation process for organizations, to the benefit of all stakeholders (Garriga 2014). This new paradigm, one of activist stakeholders, requires a new mindset and framework as to how organizations deploy internal resources and personnel. Reframing the role of accounting within the organization allows the finance/accounting function to assist firms in dealing with this increasingly complicated environment (Skærbæk and Tryggestad 2010). Additionally, there is increasing regulatory and stakeholder interest in developing standards, and metrics to assist in addressing concerns that continue to dominate the discussion of the sluggish worldwide recovery (LeBlanc 2012).

Incidents such as the emissions testing violations at Volkswagen, which occurred during 2015, demonstrate the continuing need for improved information, communication, and reporting tools. This applies to both financial information such as profitability and return on investments (ROIs), and the operational data that drive the financial results. Management accountants, already embedded within the broader decision-making process, are uniquely well positioned to assume a more proactive role. It is important to remember that compliance and other operational information virtually always have a financial bottom-line effect on organizational performance. Linking together operational information, however plentiful and comprehensive, to reporting systems and methodologies is not a simple task, and doing so requires the integration of accounting and accounting systems with other information systems within the organization. Acknowledging the proliferation of stakeholders, the necessity of increasing stakeholder-oriented reporting, and the increased importance of nontraditional information of business decision making provides an opportunity for accounting professionals. Chief financial officers (CFOs) are increasingly responsible for not only the financial reporting and results of the organization, but also for how the organization reports operational results to various stakeholders. Summarized by Hasan (2015), the five major categories and areas that CFOs are now held accountable for include providing accurate and actionable data, bringing speed and efficiency to the analytic process, leveraging technology (specifically the cloud), improving the forecasting process, and managing the data security and risk management of the organization.

Clearly, the role of the CFO, as well as the direct reports of the CFO, continues to evolve and shift in response to marketplace demands and realities. Accounting professionals must obtain and refine the skills necessary to not only remain up-to-date on accounting regulations, but also to take advantage of the opportunities present in emerging areas. Elevating both professionals working in individual organizations, as well as the accounting profession itself, to a role more akin to strategic business partner, is a transition that is currently underway. The transition of the accounting role, however, is merely a symptom of a larger shift in the way businesses operate, and how organizations engage with each other as well as with end users.

It can be argued that the only true value that the accounting and finance functions can deliver to the enterprise is the value of good information, that is, the information that can be leveraged and utilized to make better business decisions. Transforming operational data into financial information for decision making is a key aspect of business and strategic planning, and accounting and finance professionals must be able to generate and disseminate the appropriate information to a wide variety of stakeholder groups. Organizations, regardless of the specific industry or whether or not they operate on a for-profit basis or as a not-for-profit, have two primary functions that must be accomplished in order to continue operating on an ongoing basis. First, organizations must create more resources through operations than those consumed via operations, and second, organizations must effectively allocate existing resources that are available to the management team.

Business is much more than simply selling goods and/or services. Businesses have powerful impacts on both internal and external stakeholders, and this concept permeates the economic theory and concept of externalities. Linking the somewhat abstract concept of externalities to a more concrete example, Hiller (2013) argues that there is demand growing for innovative forms of business and management to help satisfy the need for comprehensive performance information, adding to pressures already placed on organizations. In essence, this represents a signal from the marketplace stating that business as usual will not suffice in the 21st-century business environment. As demands grow for more accountability, real-time data and managerial tools, and more flexibility from businesses, business professionals face an ongoing challenge. How can the business community satisfy traditional financial stakeholders, provide nontraditional stakeholders with the information they need, and communicate all of this to the marketplace? Findings and analysis of existing literature, pertaining to integrated financial reporting, appear to lend support to such a model as a method to address a complicated environment. Linking corporate governance to business decision making and financial reporting is an integral aspect of the reporting framework, and provides a pathway and framework to a higher level of strategic decision making (Starbuck 2014).

Integrated Financial Reporting

Developed and implemented by the International Integrated Reporting Council (IIRC), integrated financial reporting, developed, promoted, and now implemented worldwide, can offer a comprehensive solution to this business dilemma. Establishing communicative processes for both the costs and benefits of utilizing integrated financial reporting is an integral next step in the development, adoption, and evolution of integrated reporting in the financial reporting process (Monterio 2014). Through the International Federation of Accountants, global regulators, industry associations, investor groups, and practitioners, this one report integrates all aspects of business performance. The IIRC, through reports, research studies, and implementation, has sought to establish an industry definition of integrated reporting. Additional research and data that was analyzed builds on this analysis, and proposes that integrated reporting emphasizes the synthesis and analysis of both financial and nonfinancial data that is material to stakeholders (Abeysekera 2013). Through quantifying and reporting on the impact that nontraditional measures can have on financial performance, which includes environmental impact, societal impact, corporate governance, and developing five types of capital in addition to financial capital, an integrated reporting structure quantifies what has traditionally appeared only in footnote disclosures. Accountants might frame the argument in this manner: in order for organizations to realize the full benefits of utilizing an integrated reporting structure, the organization must utilize certified public accountants and the internal accounting/finance function overall in a strategic manner (Hughen, Lulseged, and Upton 2014).

Establishing such a quantitative relationship between organizational information, including aspects of corporate governance, and the effect that such items have on financial performance, is a critical connection toward the development of integrated financial reporting. Drilling down, an integrated financial report represents a more comprehensive and holistic view of organizational performance, but in order to fully reap the benefits of such a framework, qualitative information must be presented in a logical and consistent manner. Bringing together elements of both financial and nonfinancial data represents an opportunity and a challenge, however, for both preparers and users of these reports. Virtually by definition, quantifying and reporting on nonstandardized information such as items related to corporate governance is a multifaceted endeavor.

As it relates to emerging areas of importance for management accountants and organizations in general, the linkage between concepts such as integrated reporting and the information required of organizations is readily apparent. Moving beyond the reporting requirements themselves and understanding the integrated reporting framework are critical for both the proponents of integrated financial reporting and organizations wishing to examine the concept in more detail. In essence, moving beyond integrated reporting and realizing the implications of this concept necessitate an understanding of the six types of capital that underpin the theory: financial; manufactured; natural; intellectual; human; and social and relationship capital (Jhunjhunwala 2014). Analyzed in more detail throughout this text, a multiple capital model is a critical concept for management teams to understand, utilize in business decision making, and apply to the strategic planning process.

The ability to leverage and build on the inclusion of multiple types of capital into existing reporting frameworks is an essential aspect of what SMA actually means. Reporting and analyzing information from multiple perspectives, and understanding just how these different types of information drive organizational performance, are imperative in a business environment that is increasingly driven by factors outside of traditional business areas. Incorporating nontraditional types of information, qualitative data, and embedding this information in the decision-making process is no simple task. It is, however, one that increasingly appears to be necessary in order to successfully navigate and succeed in a fast-moving business environment. It is critical, however, that any discussion or analysis of integrated financial reporting and the feasibility of adoption of integrated financial reporting include an analysis of the multiple capital aspect of integrated reporting.

Accounting professionals already have the existing skills and abilities necessary to quantify and report on disparate types of information, and integrated reporting is simply an extension of existing skills and aptitudes to address new market requirements. In place of developing entirely new skills and competencies, the much simpler task facing the profession is to simply refine and further develop existing skill sets to meet the needs of the marketplace. Simultaneously, as the utilization of nontraditional and integrated reporting has increased, the accounting profession continues to evolve and change into a role more akin to strategic partner. This convergence and simultaneous rise in the consciousness of both researchers and practitioners do not appear to be a coincidence. As increased scrutiny is brought to bear on organizations from an increased number of angles, it is relatively straightforward to conclude that better and more consistent information is necessary. Accounting professionals, tasked with roles linked directly into the production and dissemination of organizational information, are well positioned to elevate their contributions accordingly. After appearing to have receded from discussion and research, the concept of SMA has resurfaced.

Stakeholder Reporting

Stakeholder reporting, mentioned previously as an introduction before being expanded upon later, is the theoretical underpinning of both integrated reporting and SMA. Stakeholder-oriented reporting is, almost by default, a broad-based approach to dealing with the necessities of the post-financial crisis business environment. In an environment increasingly driven by both financial and nonfinancial information, a more integrated accounting team is necessary to satisfy decision making criteria. In order to accurately evaluate and judge both the management of the organization and organizational performance, it is imperative that end users have access to financial data as well as to information that has financial ramifications. Put simply, stakeholder reporting, as a theory, supports the concepts and tactical applications of reporting linked to sustainability, corporate governance metrics, and how risk management plays a role in strategic decision making. Coupled with the increasing digitization of information and the connectivity that now exists between organizations and customers/ stakeholders, the implications are profound. In order to succeed and thrive in a business environment that demands larger amounts of information focusing on a broader range of areas, organizations must be able to produce and communicate information on a timely basis.

Business continues to increase in terms of both complexity and speed, and these trends have a direct effect on the accounting profession. Information and management decision making occur on a continuous basis, and have ripple effects that span the globe. One prime example of a stakeholder-oriented mindset applied to the marketplace is that of Boeing, a multinational aerospace organization that engages with corporations, governments, and NGOs on an ongoing basis. Analyzed by Carlon and Downs (2014), Boeing integrated the concepts of stakeholder reporting and valuation into the financial reporting process in a material way, with significant financial benefits. In addition to the changes necessary to create and support stakeholder-oriented data, the organization realized increased transparency and insights into just how costs and revenues associated with R&D, customer retention, and environmental compliance affect the organization. These items, which are just a few of the many factors that drive organizational performance, clearly require analysis and understanding in order to best manage the organization and create value.

Stakeholder reporting is not a new concept or idea, but the proliferation of reporting demands and requirements placed on organizations has led to a reinvigoration of the stakeholder concept. As businesses and organizations are held to higher standards across a broad swath of financial and nonfinancial aspects, it is readily apparent that organizations must be able to quantify, report on, and analyze information that comes from a number of sources and is distributed to a large audience. Information, specifically quantitative data, forms the foundation of business decision-making and planning, but the data must be organized and presented within a qualitative framework. Especially as nonfinancial stakeholders received more information on a recurring basis, the importance of linking together qualitative and quantitative information is difficult to overstate.

The very essence of stakeholder orientation and reporting recognizes the following reality—the business landscape has changed and become increasingly oriented toward a multiuser model of financial and operational data. Embracing this fluid and dynamic landscape necessitates that accounting, finance functions, and the individuals who work within these functions embrace a more comprehensive and holistic view of the role accounting plays. Instead of merely reporting historical financial information to a narrow group of creditors and equity holders, accountants should truly become masters of data and data analysis. In order to successfully manage this transition, however, accounting professionals must be willing and able to approach work, workflow, and processes in a more flexible and forward-looking manner. Framed in a slightly different way, if accountants want to play a more proactive and decisive role in the strategic decision-making process the management accounting function must become more strategically oriented.

Strategic Management Accounting & Integrated Reporting

SMA represents the transition of accounting services and accounting professionals from the role of historically oriented record-keepers to that of action-oriented professionals who assist in senior-level decision making. Increasing digitization of the global economy has influenced virtually every type of organization, and business leaders are now expected to be well versed in the various types of information produced and collected by their organizations. Increasingly, it is becoming clear that organizations best able to make use of information will be the organizations best positioned to succeed, such as Amazon, Google, and retailers such as Kohl’s. Strategy, drilling down to the core issue and ignoring labels or characterizations such as disruptive innovation or blue ocean strategy, is based on quantitative data. Specifically, strategy is a qualitative activity or idea that is heavily dependent on data, that is, quantitative information. Data, and the insights that can and should be generated from the data collected by an organization, are what enable senior-level decision makers to make appropriate choices and selections for the organization moving forward.

That sai...

Table of contents

• Cover
• Title
• Copyright
• Preface
• Acknowledgment
• Key Concepts and Themes
• Chapter 1. What Is Strategic Management Accounting?
• Chapter 2. Corporate Governance & Sustainability
• Chapter 3. Accounting and Analytics
• Chapter 4. Strategic Management Accounting & the Path Forward
• Chapter 5. Finance 2.0
• Chapter 6. From Concept to Reality
• Chapter 7. Market Examples and Implications
• Chapter 8. Integrated Reporting & the Future of Accounting
• Chapter 9. Strategic Management Accounting: A Path Forward
• References
• Index
• Adpage