CHAPTER
6
The relevance
of management
Considering the key words in the above definition shows the following:
• Decisions – accounting is about informing judgements and decisions made by users.
• Information – it suggests that accounting is about providing information to others. Accounting information is economic information – it relates to the financial or economic activities of the organisation.
• Identification and measurement – a ccounting information needs to be identified and measured. This is done by way of a “ set of accounts”, based on a system of accounting known as double- entry bookkeeping.
The accounting system identifies and records “ accounting transac- tions”. The “ measurement” of accounting information is not always a straightforward process. It involves making judgements about the value of assets owned by the organisation or liabilities owed. It is also about accurately measuring the financial performance of the organisation over a particular period. As will be seen, the measurement of account- ing information often requires subjective judgements to come to a conclusion.
• Communication – the definition identifies the need for accounting infor- mation to be communicated. The way in which this communication is achieved may vary. There are several forms of accounting communication ( e.g. annual report and accounts, management accounting reports), each of which serves a slightly different purpose. The communication need is about understanding who needs the accounting information, and what they need to know!
Thus, accounting is basically about the provision of information to users ( or potential users) in order to discharge accountability and enable the decisions to be made about the use of resources in the organisation. If one considers who are the people who examine and make use of accounting information it is possible to divide these users into two groups:
• External users – people external to the organisation such as suppliers, clients and lenders
• Internal users – people or groups internal to the organisation such as di- rectors, senior managers and operational managers.
Consequently, in relation to public and private sector organisations, accounting practice is also usually considered as being of two types – financial accounting and management accounting. This is illustrated in Figure 6.1.
Both types of accounting utilise the same raw financial data but the distinc- tion between management accounting and financial accounting is exemplified in Table 6.1.
If we turn now to management accounting, many definitions exist. One older and fairly simple definition states that management accounting is:
The process of preparing management reports and accounts that provide accu- rate and timely financial and statistical information required by managers to make day-to-day and short-term decisions.
CHAPTER 6 Relevance of management accounting 79
These days, such a definition as the above might be seen outmoded, in that it portrays the role of management accountant as being somewhat limited and confined to a passive mode of being the collector and giver of information to managers in order for them to make decisions. Other definitions of management accounting now exist, which are more broadly based and which, perhaps, give a better picture of management accounting in the modern world. These include the following:
Management accounting is the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of financial information that is used by management to plan, evaluate, and control within an organisation. It is the information used for the planning, control, and decision- making activities of an organisation.
(AllBusiness) Accounting
Information Outside the Organisation
Inside the Organisation
Financial Accounting
Management Accounting FIGURE 6.1
Financial and management accounting.
TABLE 6.1
Distinction between financial and management accounting
Theme Financial Accounting Management Accounting Focus External to organisation Internal to organisation
Period covered Annual Any period but typically much
more frequently than annually ( e.g. monthly, weekly)
Framework for
production Legislative/ professional User determined framework
Orientation Mainly historically oriented Historical and future orientation Disclosure of
information Limited disclosure of Wide and detailed range of information and external comparators
information but enhancements being made
Management accounting is a profession that involves partnering in management decision making, devising planning and performance management systems, and providing expertise in financial reporting and control to assist management in the formulation and implementation of an organisation’s strategy.
( Institute of Management Accountants in the USA) the process of identification, measurement, accumulation, analysis, prepara- tion, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources….
( CIMA Official Terminology)
These definitions suggest a management accountant who is much more of an ac- tive player in the organisation and who acts as a partner, with others, in making decisions concerning the organisation and its use of resources. This concept of a
“ business partner” is something returned to later.
When we turn from broad definitions and consider the specific roles played by management accounting in an organisation there are a number of ways of looking at this. One approach is to define the roles of management accounting as being concerned with contributing to decision making in the organisation in relation to:
• Planning
• Control
• Evaluation
A different approach to defining the roles of management accounting concerns what might be seen as the three questions any organisation will be concerned with, namely:
• Scorekeeping: Are we doing well or badly? – this involves the accumu- lation and classification of data which enables the assessment of organ- isational performance. However, the management accountant’s role as a business partner means that this role shifts more into assisting line managers in interpreting a mass of complex information in order to assess performance rather than the somewhat mechanical tasks of accumulation and classification of data which, these days, are undertaken by technology.
• Attention directing: Which problems should we look into? – attention directing means reporting and interpreting information that helps man- agers to focus on operational problems, imperfections, inefficiencies and opportunities. This aspect of management accounting helps managers to concentrate on important areas of operations promptly enough for effec- tive action to be taken.
• Problem-solving – the problem- solving aspect of management accounting brings the modern management accountant to the forefront of decision making in the organisation rather than being a passive observer. It in- volves assisting with the development of alternative courses of action and then undertaking a robust evaluation of the likely results of those possible courses of action – and often to recommend the best course to follow.
CHAPTER 6 Relevance of management accounting 81 Problem-solving is commonly associated with non-recurring, non-routine decisions and situations that require special reports rather than the routine provision of information.
Finally, in relation to public services, CIPFA’s Financial Management ( FM) Model is structured around the three themes:
• Securing stewardship
• Supporting performance
• Enabling transformation
The examples quoted above look at management accounting in slightly different ways but the thrust of this book is to consider how management accounting in public services can, and should, contribute towards decision making in public service organisations at the strategic, tactical and operational level in relation to public service delivery. This will be continued in the next section.