Describe the ‘Challenge of Management Accounting Change’ in light of recent research findings and discuss, how can this change help an organisation, in getting its strategic, tactical and operating objectives? Management accounting change and the continuously changing roles of management accountants have dominated accounting literature for the past few decades and the theme of management accounting change procedures has been a topical issue of many studies such as Baines and Langfield-Smith, 2003; Kapla, 1985 and Granlund and Lukka, 1998, just to name a few.
In order to understand the relationship between a firm’s strategy and objectives with its management accounting systems, it is necessary to first define the latter. The Chartered Institute of Management Accountants (CIMA) define Management Accounting as “the process of identification, measurement, accumulation, analysis, preparation, 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.
Management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities.
” It is important to explore the extent to which management and strategic concerns are driven by accounting practices, and also how accounting practices are mediated by the views that managers have of the role of accounting (Burns et. al, 1999). Changes in Management Accounting can be viewed as an inevitable process, and they are also intrinsically interlinked to not only changes in a firms strategy, but also with environmental changes.
Both internal and external changes in our economic and business environment are the dominating factors in the change of management accounting practices within organisations. This view that change is inevitable has been supported by Kaplan (1985), where he details the change as a “cause-effect relationship. ” In short, management accounting systems have to change whenever there is any sort of change in an organisations business or economic environment. Organizational change is frequently a response to environmental change; such as changes in competition, or changes in laws and legislation.
So if Management Accounting change occurs due to organizational change, it is important to note the indirect link between environmental change and management accounting change (Burns et. al, 1999). Wijewardena and De Zoysa (1999) support this idea by detailing that the success of an organisations strategy can be determined by how quickly and effectively management accountants can adapt to their systems to ever changing environmental and economic conditions, thereby supporting the link between management accounting practices and the business environment.
It is fair to state that there are a number of factors that can influence change in management accounting and these factors are both internal and external. A research project on management accounting change in the UK, that was funded by CIMA and the Economic and Social Research Council was conducted between 1995 and 1998 by Burns et. al (1999). The study aimed to investigate changes in management accounting systems, the changing role of management accountants and the adoption of modern accounting techniques.
The study initially sought to settle the claim that management accounting had not changed in more than 60 years (Johnson and Kaplan, 1987). The initial stages of the research found that management accounting practices use traditional accounting systems and modern techniques such as Activity-Based Costing and Strategic Management Accounting were not being used as much as expected. One reason for management accounting changes is the general economic factors such as the globalisation of markets. Changes in technology are another key factor, especially changes in information systems and methods of production.
It is in this context that changes in management accounting have taken place. Changes in information technology have allowed for accounts and information to be dispersed around the organisation and managers have a more profound and hands on role within a firm. This in turn indefinitely has an impact on how objectives are met and how strategies and tactics are implemented to achieve, said objectives. This has led to a decentring of accounting knowledge, meaning that it is not only specified accountants who have knowledge of a company’s accounts, but also managers and their subordinates.
This gives managers a greater ownership of information and it also means that they have to have an increased knowledge of accounting systems. Ezzamel (1997) states that a “lack of change in accounting practices is presented as being not only detrimental to business interests but also threatening to corporate survival. ” However we must also look at external environmental factors and how they affect management accounting systems. A definition stated by Macy and Arunachalam (1995) define an external environment as “a phenomenon that is external and have either potential or actual influence on organisations”.
However we must reiterate the fact that organisations of no control whatsoever over external factors. It is in an organisations best interest to take any external factors that could affect their operations, into consideration and to recognise them for their long term survival. External factors create a lot of uncertainty for firms. This uncertainty means that companies have to learn to adapt to sudden changes in external environmental business factors. Research by Mia and Patiar (2001) show that organisations must have more refined management accounting practices in order to operates successfully in uncertain business environments.
There are also a number of views that contradict the idea that management accounting systems are directly influenced by external environmental factors. The idea of uncertainty, according to Chapman (1997), can be linked to internal factors as well as external factors. More research shows that external factors affecting management accounting can be dealt with in the way internal managers and accountants actually perceive the external variables. Despite the vast amount of advantages to management accounting and organizational change, there are also downsides to such changes.
Burns, Scapens and Ezzamel (1999), show that accounting change can challenge existing routines and institutions within an organisation. This can then lead to conflict and resistance within employees, managers and perhaps even board members. Goal congruence may disappear, and an organisations strategy to achieve objectives may be hindered with the lack of an aligning view from all the members who have succumbed to the initial accounting change. Burns et al. (1999) also state that it can be a difficult process for previous systems to be unlearned.
A major role for management accounting systems is to motivate behaviours of employees and managers in line with the desires of the organisation as a whole. A great problem is that many managers try to implement new accounting systems without taking into consideration the behavioural implications and consequences of employees with regards to these systems. The lack of goal congruence and effective communication can lead to low motivation and dysfunctional behaviour of employees. A change in an existing system will reduce employees’ knowledge and skill thereby affecting the effectiveness to achieve company objectives.
Implementation of new techniques has to be orchestrated with great care and communicated thoroughly throughout the organisation. Accounting practices and emerging routines can be said to be institutionalised when they become widely accepted in the organisation such that they become the unquestionable form of management control. In which case, they are an inherent feature of the management control process, and represent expected forms of behaviour and define the relations between the various organisational groups (Burns and Scapens, 2000).
Burns et. al study of “CHEM”, a small chemicals manufacturer showed that a change in the accounting and organisational systems had little impact on the company as a whole and it did not change their previous ways of thinking. This led to conflict between individual members of the chemical manufacturing company. Later, the new accounting systems were scrapped as they offered little benefits to the company; there had been very little change in the routines, institutions and systems of the firm.
There are also claims that management accounting does not always change or respond to environmental or business changes. For example Kaplan (1984) suggests that despite significant changes to the business environment, such as increased competition and continuous changes in technologies and production processes, there has been no signicant changes in management accounting to match since 1925. Research conducted by Horngren (1995) and Burns et. al (1999) show that firms still tend to use traditional management accounting methods instead of adopting new techniques such as ABC.
It is also important to note that their has also been a lack of implementation of non-financial measures such as Total Quality Management, Strategic Management Advice or Internal Financial Presentation and Communication. The absences of “modern” accounting methods support the claim that there is indeed in some cases little change within organisations from traditional accounting systems to new techniques. It is a difficult process to draw a set conclusion on the effectiveness of management accounting change.
It is evident that there are vast pools of research both supporting the idea that management accounting hange is beneficial in aiding an organisations strategy but there is an equal amount of research to support the idea that change in accounting systems is derogatory to the success and progress of a business. It is fair to say that further external factors can determine how successful accounting change can be for a firm. For example we must take into account cultural and political factors of the country a particular organisation resides in to fully understand the implications of strategic, and management accounting change.
It is impossible to apply findings from research to every company, because in short, every company is different; be it it’s strategy, its structure, its ethics or its objectives. We must be liberal in what we determine is successful implementation of management accounting change. The change that has taken place in organisations cannot be pinpointed to solely a change in management accounting systems and techniques but it is in fact the change in how these new systems are used and implemented (Burns et. al 2000) and these changes are more often than not part of wider changes of the organisation as a whole.