Impact of business environment on management accounting practice

by Dr. Anbalagan Krishnan

There are two broad categories of accounting information – Management Accounting (MA) and Financial Accounting (FA). MA is used by the internal management of an organisation (primary users) while FA is used by parties external to the organisation (secondary users).

MA information is generally presented in the form of management accounts, budgets, forecasts or financial statements and is normally used by the management and employees. MA assists the management in making informed decisions, planning, directing operational activities and controlling finances.

It also enables the management to analyse the organisation’s performance and position, and subsequently take appropriate measures to improve the organisation’s results. In addition, employees use MA to assess the organisation’s profitability to ensure long term job security and remuneration.

On the other hand, FA is used to present the financial health of an organisation to its external stakeholders. Creditors such as suppliers, financial lenders or banks use FA to determine the creditworthiness of an organisation and set the term of credit based on the assessment of the organisation’s financial health. Investors such as shareholders and bondholders also use FA to analyse the feasibility of a company to ensure reasonable returns on their investments.

Moreover, FA enables the tax authorities to determine the credibility of the tax returns of the organisation, as well as enable regulatory authorities to ensure the proper disclosure of accounting information to protect the interests of the stakeholders who rely on such information to form decisions. Customers also use FA to assess the financial position of their suppliers to secure stable and long-term sources of supply.

The table below summarises the differences between MA and FA.

  Management Accounting Financial Accounting
Use of Information Managers within the organisation Interested parties outside the organisation
Regulation Not required and unregulated since it is intended only for management Required and must conform to generally accepted accounting principles
Source of Data Basic accounting system and various other sources such as physical quantities of material and labour used in production, occupancy rates in hotels and hospitals, and average take-off delays in airlines Almost exclusively drawn from the organisation’s basic accounting system which accumulates financial information
Nature of Reports and Procedures Reports often focus on subunits within the organisation such as departments, divisions, geographical regions, or product lines Reports focus on the enterprise based on historical transaction data

In a nutshell, MA and FA are both crucial for an organisation despite serving different purposes for different users. According to Belinda (2008), while FA provides information on business profit, it is not sufficient for the organisation to develop or successfully manage its business. Thus, MA is presented internally to complement information provided by FA.

The business environment has changed rapidly through the decades. Customers’ demands and requirements have changed and new technologies have encouraged new firms to enter the market with better and affordable products, and subsequently, created threats to existing firms.

Growing markets and increased competition have resulted in the need for management accountants to be flexible and fast in responding to opportunities and threats. They need to be equipped with knowledge of international markets and different cultural environments as be aware of inherent risks involved in operating in multiple economies.

According to Kassim, Md-Mansur and Idris (2003), globalisation brings new development to a specific country and this affects the choice of management accounting practice in an organisation. It also results in the organisation needing to reconsider its existing organisational setup and strategies in order to meet the changing environment.

As the cost of raw materials and cost of doing business increase yearly, cost management is pivotal in order to provide globally competitive products. Management accountants can enhance the organisation’s competitiveness by increasing the level of efficiency and productivity, as well as implementing cost-leadership.

Additionally, management accountants must be able to delegate responsibilities and influence and improve decision making at top levels. Increased visibility and control over internal operations is essential and management accountants should communicate regularly with managers across every function.

While rapid growth markets present a unique opportunity to earn significant revenues, some companies are exposing themselves to risks of fraud, bribery and corruption by overlooking the importance of proactive measures and communicating top-down commitments. Thus, management accountants play a role in guiding the matters of ethics and accountability, and understanding the commercial rationale of things rather than just crunching numbers.

In general, MA plays an important role in managing internal and external influence to ensure the organisation achieves its vision and mission. The evaluation of MA practice has changed from focusing on profit to business relationships with various stakeholders such as customers, employees and society.

In conclusion, management accountants must develop and sustain a culture of innovation in facing the ever-changing business environment.

Dr. Anbalagan Krishnan is the Associate Dean of Research and Development at Curtin Sarawak’s School of Business. His professional and teaching experience include conducting industrial training programmes and teaching accounting and managerial accounting units for university degree programmes. Dr. Anbalagan can be contacted by e-mail at anbalagan.k@curtin.edu.my.

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