MASTERS OF BUSINESS ADMINISTRATION

Accounting

BY ID/NO

SUBMITTED TO: -

June, 2023

Addis Ababa/ Ethiopia

Introduction

Management accounting as a distinct profession emerged after WWI and developed a technology
of practice distinct from financial accounting. In part, its emergence reflected the importance of
operational efficiency in the war effort and the development of specialists in budgeting and
costing (Loft, 1989; c.f. Boyns and Edwards, 1997, 2006). However, it also arose as a distinct
profession because of the exclusionary practices of existing accounting associations who wished
to maintain the purity of public accounting in the face of increasing numbers of salaried
accountants. Recently there have been calls to unify these branches of accounting thought and
professional organization but important questions are raised by these trends. Management
accounting information is needed to support financial reporting and, as financial reporting
became more future-oriented and investor focused, the assumptions underlying budgeting and
operational planning became input to financial accounting policies and estimates (Taipaleenmäki
& Ikäheimo, 2013; Ahmed & Duellman, 2013). This has led to calls for the unification of
financial accounting and management accounting as technologies of practice. But management
accounting has expanded its areas of practice to support strategy implementation, competition on
the basis of quality and social impact, and stakeholder management. If merging these
technologies of practice occurred would it represent the continued dominance of the shareholder
view of accounting underlying financial reporting or would a new synthesis be needed that
reflected a broader set of stakeholders and issues in organizations? Membership in management
accounting associations is growing faster than membership in financial accounting associations
creating potential usurpatory challenges to the hegemony of financial accounting in the market
for professional credentials. Management accountants have developed a distinct identity and
regard their careers as independent of financial accounting (Richardson and Jones, 2007; Weaver
and Whitney, 2015).

Financial and Management Accounting

The creation of associations of public accountants began in the UK in the late 1800s, spreading
throughout the Commonwealth and internationally. The early associations were largely signaling
devices to distinguish higher status public accountants from others. In time, the distinction
between designated accountants versus those not affiliated with an association was argued to
reflect the difference between “qualified” and “unqualified” accountants leading to the
development of tests of competence and, ultimately, programs of training to justify this
distinction (Hoskins and McVie, 1986; Anderson et al., 2005). These associations used both
ascriptive and cognitive criteria to restrict access to credentials and, in general, succeeded in
raising the economic and social status of their members.

The problem with this form of “exclusionary” closure is that it does not prevent others from
forming their own associations and implementing a strategy of “usurpatory” closure, i.e.
attempting to take privilege from those who had structured the profession (Parkin, 1982;
Coronella et al., 2015). We thus see competing accounting associations in many countries and
attempts by entrenched associations to limit the creation of new associations (or at least their
intended domain of practice) through lawsuits, registration systems and unification proposals
(Richardson, 1997;

Walker and Shackelton, 1998). Following WWI, accountants were increasingly employed in
industry in part to provide information to produce financial statements for equity markets but
also to manage control systems in organizations that covered vast geographic distances (e.g.
transportation companies), had extensive hierarchies (e.g. public sector organizations and large
scale enterprises), or operated as conglomerates with many unrelated businesses where
management accounting information replaced prices to guide the allocation of capital (Johnson,
1983; Chandler and Daems, 1979). Accountants in industry also were concerned about
professional development and recognition.

Financial and Management Accounting as Technologies

The relationship between financial and managerial accounting as technologies is complex. On

the one hand, management accounting systems provide the cost data and inventory valuations
that are used to support financial reporting and, in this sense, are subordinate to financial
reporting (Richardson, 2002). There is no question that management accountants and financial
accountants share a common knowledge base at a basic level (Richardson, 1992). On the other
hand, management accountants have been urged to act as internal consultants within
organizations focusing on strategic initiatives and performance measurement/management rather
than routine costing processes (Russell et al., 1999). There is also a well-recognized tension
between the information needed for stewardship versus investment decision-making (Beyer et
al., 2010). Management accounting focuses on the stewardship or implementation aspects of
management actions while financial accounting focuses on the investment uses of information.
Management accounting is thus simultaneously a profession that supports financial reporting
while attempting to develop beyond this narrow scope.

Complicating this relationship is the idea that financial reporting should provide stakeholders
with insight into the metrics that managers use to run the business. This can be taken to imply
that managers should and do manage by the numbers (Geneen, 1984; Papadakis et al., 1998) but
some have suggested that financial statements are “too late, too aggregated and too distorted”
(Johnson and Kaplan, 1991) to be used to run organizations. Even so, there is pressure for
management accounting systems to become isomorphic with the needs of financial reporting
(Johnson, 1991; Weißenberger and Angelkort, 2011). The key question is thus whether or not
management accounting and financial accounting represent two distinct technologies of practice
or are they converging on a single information set that can support managerial decision-making
and investor decision-making. I identify two historical junctures at which management
accounting has diverged from the information needs of financial reporting and then return to
consider the current state of this relationship.

A related development

Standard costing substitutes a “norm” for what a cost “should” be in place of actual costs. The
choice of a standard-cost might be informed by knowledge of planned changes in technology and
learning curves. The use of standard costs simplifies accounting in long-chain production
processes and highlights variations from expectations that facilitates management-by-exception
(Brownell,1983). After WWII, standard costing and variance analysis were common components
of cost accounting courses. These techniques establish a baseline for performance evaluation and
managerial decision-making that is distinct from the transaction-based records underlying
financial reporting. The second break in the relationship between financial accounting and
management accounting as technologies was the strategic revolution (Bromwich, 1990;
Langfield-Smith, 1997). Johnson and

Kaplan (1991) goaded management accountants into renewing the relevance of their technique to
management decision-making. This work focused attention on the role of management
accounting in implementing strategy and providing the incentive systems that guide strategic
behavior (MacDonald and Richardson, 2002). A key technical development was the balanced
scorecard and strategy maps (Kaplan and Norton, 1996, 2001, 2004).

At the same time there was a change in the focus of financial accounting that reinforced the
divergence of perspectives. Initially financial reports were intended as “general purpose”
documents for multiple stakeholders. As formal standard-setting processes were put in place to
guide the development of financial reports however it was found to be impossible to produce
general purpose reports that were internally consistent. The search for a conceptual framework
for financial reporting led standard-setters to focus on equity valuation models, “value
relevance”

(Barth et al., 2001; Holthausen and Watts, 2001) and equity market reactions to new accounting
standards as a test of their relevance (Hines, 1989; Young, 2006). Management, however, must
be mindful of multiple stakeholders and management accountants provide data to support this
broader perspective on the long run success of organizations (Ratnatunga, et al., 2015). The
increasingly distinct sets of stakeholders that are the focus of financial reporting and
management accounting, respectively, encourages a divergence of practice in each area (cf. Ball,
2004).

Integrating Financial Reporting and Management Accounting

The call for a single system of accounting for both managerial decision-making and stakeholder
reporting has deep roots. It is based on three considerations. First, in equity-focused economies,
the claim is made that managers should always act in the best interests of shareholders, i.e. their
decisions should focus on maximizing shareholder value. Financial statements provide a means
by which shareholders monitor management and are often used to build compensations systems
intended to align management interests with those of shareholders. But more than this, it is
argued that shareholders should be able to see the information on which managers make their
decisions in order to differentiate between good/poor outcomes and good/poor decisions, i.e. to
separate skill from luck. This suggests that the information system used by management should
be a more detailed and real time version of the information provided to shareholders and not an
information system based on a different logic of practice (cf. Berliner & Brimson, 1988;
Bhimani, 2009; Hemmer and Labro, 2008). This logic also challenges financial accounting
standard setters to move away from “arbitrary” standards and to adopt those that have proven to
be “value relevant”.

So if financial statements are built on information that drives shareholder value and managerial
compensation and performance evaluation is contingent on financial statement outcomes, why
would managers use a different set of information in decision-making?

A related trend in both management and financial accounting is a focus on risk (Power, 2004;
Hayne and Free, 2014). The concept of risk draws attention to possible future outcomes and
contingencies for the organization and whether or not the organization can withstand shocks
(business resiliency), react constructively to challenges (contingency planning), and innovate to
meet new challenges (innovativeness). The financial statements with their traditional backward
perspective have been inadequate to provide insights into this aspect of corporate performance.
Recent experiments in corporate reporting such as sustainability reporting (and related reports on
corporate social responsibility, environmental and social impact, and intellectual capital) begin to
provide more useful data on these dimensions but, in this case, the assumption is that
management is developing information systems to support business resilience and investors
would find disclosure of this information value relevant.

This argument for integration suggests that the merger of management accounting and financial
accounting as technologies of practice is most likely in publicly listed companies operating
within strong shareholder rights jurisdictions. Second, the development of information
technologies that allow real time data capture and report creation has been suggested to remove
the need for separate systems for managerial decision- making. Johnson and Kaplan (1987: 193)
suggested that financial reports were “too aggregate, too distorted and too late” to be useful for
managerial decision-making. This critique, in part, suggests the conditions under which financial
reporting could be used for management decision-making,

i.e. if it was available in disaggregate form, made theoretically sound distinctions between cost
categories and use theoretically appropriate allocation methods (including not allocating true
joint costs), and was available in real time. Hopper et al. (1992) report a pilot study in which they
examined whether or not financial accounting systems dominated management accounting
systems. They found that among their small sample both financial accounting and management
accounting relied on the same database but processed and formatted the information in distinct
ways. While this suggests a level of integration around “primitive” accounting data, both systems
can maintain their independence. However, if the underlying “primitive” system is based on the
ontology of financial accounting (i.e. limited to transaction-based, auditable information), it
remains unclear if the potential of management accounting information could be realized. The
existence of “vernacular accounting systems” alongside the formal accounting systems of
organizations suggests that this form of integration may not entirely meet the information needs
of managers (Kilfoyle et al., 2013). Finally, the move to market-based information under IFRS
weakens the requirement that financial statements be based on transaction data and opens up the
possibility that the “opportunity cost” information recommended for managerial decision-making
could be consistent with the information reported in financial statements (Taipaleenmäki &
Ikäheimo, 2013; Ahmed & Duellman, 2013). As Ball (2006) notes, however, the “fair value”
provisions of IFRS are among the most controversial aspects of global standards and are an area
where significant domestic variation in application will occur. Weißenberger and Angelkort
(2011) use the transition of management accounting systems in Germany from stand-alone to
integrated management accounting/financial accounting systems to explore the potential benefit
of integration. They do not find a direct technical benefit from the change but do report a positive
relationship between the change and the effectiveness of the controllership function within the
firm based on the creation of single “language” for talking about both investor issues and
management issues. Although not tested, presumably a similar benefit would have been found if
the financial reporting system moved to the management accounting conceptual foundation.
Typically, however, integration is taken to imply the abandonment of a distinct management
accounting system in favour of the compliance based financial accounting system. The
hegemony of financial reporting remains powerful.
Conclusion

Management accounting as a distinct profession and body of knowledge is a relatively recent

addition to and differentiation of the accounting profession as a whole. It is a creation largely of
Anglo-Saxon countries and distinct management accounting associations outside this context are
less common. The existence of distinct associations of management accountants is threatened by
professional drift (associations following the movement of their members into related fields) and
cognitive drift (increasing overlap of the knowledge base of professions in cognate jurisdictions)
which generates competition and conflict between professional associations. The trend is to
resolve these issues through the consolidation of the profession.