Therefore management accounting, as a role player in the business environment and a subfield of accounting, has by no means been unaffected by the drivers of change. Siegel and Sorensen (1999:3) contend that management accounting should undergo perpetual change to remain relevant. They describe change In the world of management accountants as follows: The characterization of management accountants In leading-edge companies has gone from 'bean counter' and 'corporate cop' on the periphery of business decision making, to 'business partner' and valued team member' at the very centre of strategic activity.
Smart Pros (2004:1) support Siegel and Sorensen in stating that management accountants need to shift their focus away from historical information and an inward perspective (see paragraph 2. 2) which largely Ignores the supply chain, because It Is no longer valid. Wyatt (2002:10) speaks of an overriding phenomenon In terms of the true of management accounting, namely that business customs and practices are changing. This chapter investigates the effect of the changing business environment on the role of management accountants in postmodern times.
MORPHOLOGIC CHANGE IN MANAGEMENT ACCOUNTING Two authoritative studies on what is required of management accountants were identified in a review of the literature, namely Competency profiles for management accounting practice and practitioners by the International Federation of Accountants (AFC) in 2002, and a study by the Institute of Management Accounting (AMA) in 1996, updated in 1999, called Counting more, counting less. These studies are briefly summarized in order to provide a comprehensive overview of the new skills required of management accountants.
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Current changes in the business environment were described as morphologic in paragraph 3. 2. Two key questions are typically associated with morphologic change: 69 What is the current situation regarding morphologic change? Answering this question requires a broad overview of the impact of change on the management accounting profession. This question will be researched in paragraph 4. 3. If the values of management accountants to organizations are influenced by the drivers of change, where are we going? The second question associated with morphologic change, namely Where are we going? Will be investigated in chapter 6.
A balanced scorecard methodology is used to determine the strategic direction of management accounting in South Africa. An analysis of the current position of management accounting is necessary to determine the extent to which morphologic change has affected management accounting. Toffee's waves of change (see diagram 3. 2) are applied to assess the role f the drivers of change. 4. 2. 1 Toffee's waves of change applied to management accounting Toffee (1980:27) saw change as a continuous process occurring in different waves. Each of these waves has an impact on society and consequently on the business on management accounting? 0 4. 2. 1. 1 Management accounting and Toffee's First Wave (8000 SC-mid 18th century) During the First Wave, which was characterized by the Agricultural Revolution, business activities were localized and technology was minimal. Even business activities that involved "world trade" were structured to create few problems (Wyatt 2002:4). During Toffee's First Wave, accountants were required to keep a record of cash transactions. However, Wyatt (2002:4) states that even in those early days it became evident that more information would become necessary.
According to Lloyd (2002:4), researchers such as Chattiest and Vanquishers (1996:13) who examined source documents dating back to 1 530, have been able to prove the existence of cost or management accounting at the time. An analysis of one such document describes arithmetic techniques to deal with particular problems of the merchant bookkeeper related to decision making (Lloyd 2002:7). During this First Wave Bacilli developed concern for cash budgeting and variance accounting (accountant & Stannic 20021). The Agricultural Revolution soon gave rise to Toffee's Second Wave, known as the Industrial Revolution. . 2. 1. 2 Management accounting and Toffee's Second Wave (18th century - late 20th century) Wyatt (2002:5) traced changes that took place during the Second Wave and states that enterprises embarked on production activities during this period. The history (see paragraph 2. 4. 2) indicated that the change in production activities created new accounting challenges. 1 Business operations became more complex during the Industrial Revolution. Manufacturing expanded and the need for cost control on the one hand and product pricing on the other made new demands on management accountants.
Management accounting became firmly established during this period of capitalistically single- product enterprises such as the railroad, steel and coal industries. Cost accounting had to expand to deal effectively with changes during the Second Wave (see paragraph 2. 4. 2), and in the process management accounting developed measures (Beriberi 2000:714). The Industrial Revolution was characterized by the introduction of machines for production purposes, and accountants grappled with problems such as overheads.
However, Accusing and Stannic (2002:1) mention that although the Second Wave of change brought about new developments in cost accounting, no fully-fledged systems were devised until near the end of the 19th century. Cooper (2000:6), who focuses on economic expansion towards the end of the 19th century, states that the factories had to produce multiple products and that this increase in complexity created a cost assignment problem. At the beginning of the 20th century cost accountants began to study overheads and to speak of absorption costing. During this time Church developed the machine-hour method of applying fixed costs (Loft 1990:2).
Other notable changes were introduced to management accounting, for example by Charles Babbage who emphasized the analysis of variances from manufacturing standards, and by Stanley Henries who is generally described as the father of standard costing. Hendricks work complemented that of Babbage, enabling managers to isolate problem areas (Czarinas 2002:5110). 72 As standard costing evolved, the focus shifted from determining product costs to managing efficiency (Simi & Croon 2003:38) and another important function of a cost system, namely cost control, emerged (Cooper 2000:6). 4. 2. 1. Management accounting and Toffee's Third Wave (asses and ongoing) The current wave in the business environment started in the sixties of the 20th century. Toffee's Third Wave saw the introduction of information technology and knowledge workers (see paragraph 3. 3. 2 & 3. 3. 3). The Third Wave is dominated by service organizations and the line between manufacturing and services has become lured (Toffee 1980:6). The Third Wave revolves around knowledge - who owns it, and how is it extracted, assimilated and implemented for quick decision making. This knowledge is deemed the primary source of wealth generation.
Two distinct periods emerged during this Third Wave (see paragraphs 2. 4. 3 & 2. 4. 4). The two periods reflected different views of management accounting and was identified by Beriberi (2000:714) as the modern management accounting and the postmodern management accounting periods. ; The modern management accounting period (1950-1980) Critical change occurred in management accounting during the first part of the Third Wave. Textbooks that emphasized decision making began to appear during this period (Hansen & Owen 2005:9). Direct or marginal costing was introduced.
During this period, management accounting became a field of study at universities and no longer had to be studied through apprenticeships only (Wyatt 2002:5). The Ford empirical, analytical and experimental studies (Maier 2000:337). 73 The postmodern management accounting period (198()- ) The postmodern management accounting period began in 1980 and signaled a new RA for management accounting. As Maier (2000:337) said: It became obvious that cost accounting and management control procedures developed to support mass production of products with a high labor content were no longer appropriate for contemporary companies.
Management accounting extended into nonofficial areas and field research to gain a better understanding of contemporary business problems and the information needs of managers. According to Wyatt (2002:7), dissatisfaction with the perceived lack of relevance of historical information grew. It was widely recognized that unidentified information tells only part of the story. Kaplan (in Maier 2000:338) states that changes in the management accounting field were primarily based on business needs, and there is evidence that management accounting practice is presently ahead of academic theory (Hilton in Maier 2000:338).
Boer (2000:320) indicates that most of the changes in the business environment require a changed role from management accountants. Modern management accountants have to make future cash-flow projections rather than produce historical analyses and aggregates of past activities. Binders (1996:32) expresses concern bout the ability of management accountants to respond to the changed business environment (see diagram 4. 1). 74 Diagram 4. 1 : The changing characteristics of performance measures Source: Binders 1996:32 Diagram 4. Illustrates that in the period before 1980 performance measures were dominated by demands from shareholders who focused on output and static information. In the post-1980 business environment, stakeholders dominate the need for performance measures, the focus is now on information technology (IT) and other soft issues, and the emphasis is on strategic rather than static information. 4. 3 ENVIRONMENT Management accounting evolved through the Agricultural Revolution to the information age, largely through the impact of three drivers of change, namely globalization, information technology and knowledge management.
Ukulele and Siegel (1997:56) say of this velveteen: much of our metamorphosis has been evolutionary rather than revolutionary, until the last five to ten years, that is. And, 75 say Siegel and Ukulele (1996:21) the change is accelerating as we go. The change in the last five years is much more dramatic than say in the previous five or ten. The current status of management accounting, and therefore the effect of the drivers f change on management accounting, warrant a more detailed analysis. 4. 3. The effect of globalization on management accounting The impact of globalization on the business environment was discussed in paragraph 3. 3. 1 . The question is: What are the implications for the management accountant? Globalization creates bigger opportunities but also bigger threats as it opens the market to a much bigger customer and supplier base. Growing markets and increased competition mean that management accounting systems need to be flexible and quick to respond to opportunities and threats. ;
Managers can no longer afford to wait for strategic information: Senior management wants to know yesterday (Siegel & Sorensen 1999:15). Globalization also implies that information must be accessible from anywhere in the world Institute of Chartered Accountants of Australia (ACACIA 1998:20). Organizations no longer have to be in close proximity to the management accountant to access useful information. Managements can seize the opportunities created by globalization to offer services in multiple economies (Hill 2003:6). Globalization also means that knowledge of international markets and different ultra environments is important.
Providing services in multiple economies means that the management accountant has to be aware of the inherent risks involved in operating in multiple economies as well as of the legal, health and environmental issues that apply to these economies. 76 organizations develop globally competitive products and services. They have to accurately measure the costs of business operations and identify ways to reduce these costs. This in turn implies that management accountants must develop and sustain a culture of innovation (ACACIA 1998:21). ;
Globalization implies that qualifications will become portable and internationally recognized. This aspect creates both opportunities and threats, as professionals have to compete in their country of origin against international competitors. The competition may be able to provide management accounting services at a much lower cost as business opportunities in underdeveloped countries such as Hungary, Russia, and Poland increase (Hayward 2003:10). A study by Lacily and Wilcox (1998:369) indicate that cost saving was by far the most favorable reason / expectation for outsourcing encore activities.
By moving operations to countries such as India, companies are also gaining greater productivity and better service from a highly skilled and stable workforce (Barrage 2000:23). Relentless competitive pressure will reduce the functional life of business units. The ACACIA (1998:15) believes that management accountants would be best placed to advise on new strategies and structures to realize opportunities and prevent threats from impacting on the bottom line. Huge opportunities will be available for professional management accountants with the specialist knowledge and skills sought by global organizations (ACACIA 1998:20). . 3. 2 The effect of information technology on management accounting The second driver of change (see paragraph 3. 3. 2), namely increased attention to information technology, has significant implications for organizations and for functional role players in these organizations. Siegel and Sorensen (1999:15) make the following comment: The pace of change in technology is becoming much faster, and accounting and finance people are very heavy users of technology, more so than a lot of other functions. The changing role of the management accountant in response to the IT evolution is illustrated in diagram 4. Diagram 4. 2: A framework of management's role by focusing on the IT evolution Stage of IT evolution Role of IT Impact on management accountant Automation, cost control and efficiency Productivity and end-user empowerment Value creation and end-user business effectiveness Competitive Role differentiation/ expansion Functional redefinition Operational Work improvement Functional enhancement Administrative Source: Garner 1999 78 Diagram 4. 2 indicates that IT, by virtue of the stage of evolution it has reached, has a different impact on management accounting each time.
In an administrative capacity, IT embraces the automation of accounting functions, whereas IT in an operational role enables the entire set of business processes (not merely administrative processes) to be automated. At the present stage of its evolution IT offers the ability to leverage information to obtain differential sources of competitive advantage in the marketplace. IT is forcing management accountants to redefine their role by offering them new challenges (Bogs 1999:14). IT has experienced different waves of change that are identifiable by the characteristics illustrated in diagram 4. . Diagram 4. : Characteristics of identifiable IT applications in the Second and Third Waves of computer technology Characteristic Second Wave of IT (industrial age) Primary tool Machines Third Wave of IT (digital age) Information creation, distribution and application People Division of labor Connectivity of workers through teams, interconnectivity, shared information Productivity Mechanization and automation Partnership Partnership Partnership of people Information technology between man and with people machine Source: Garner 1999 Diagram 4. Indicates that machines (such as mainframes and personal computers) ere present during the second wave of change. However, these machines focused on mechanization and automation (e. G. Capturing and processing financial information). The Third Wave of change in computer technology is driven by the convergence of computer and telecommunication technology. The Chartered Institute of Canadian Accountants (CIA) (1996:8,9) suggests that management accountants should view the changes in IT with some trepidation.
Past experience has shown that automation of the "production" of financial information was accompanied by loss of market share and the entry of other professions and spineless into designated markets. The advent of the virtual organization has caused company boundaries to become porous, with wealth generators becoming increasingly intangible, including such assets as intellectual capital and the organization's ability to learn and innovate. Due to the impact of the drivers of change, the role of management accountants has Technology will enable managers to do for themselves what accountants in the past have done for them.
Companies now go beyond financial statements and offer other types of financial and nonofficial information (Tries 1999:1): The Web is beginning o challenge the very nature of accounting, its boundaries, its frameworks and even its fundamental role in society. The future of management accountants depends on how able they are to adapt and respond to emerging technologies. IT places great emphasis on timely disclosure (Tries 1999:66). In the new reporting environment, the focus will move from the periodicity of reporting management accounting information to real-time reporting.
The ACACIA (1998:39) foresees significant investment in technologies by management accountants. The 21st century user will demand customized financial information reporting, and he concepts of internal reporting (management accounting) and external reporting (financial reporting) will have to be integrated. More data will be stored electronically and management accountants have to understand what data integrity entails (ACACIA 1998:43). According to the ACACIA (1998:45), management accounting education systems need to rapidly accommodate new business needs.
Information and telecommunication technology should become core competencies of the cost management profession (CA 1998:79). 4. 3. 3 The effect of knowledge management on management accounting In this latter part of the Third Wave, information has become a commodity and knowledge is valued. The ACACIA (1998:18) suggests that business success inter alai depends on the management accountant's ability to convert information into knowledge in a cost-effective manner. ; Outsourcing (I. E. Having certain activities performed by another company) is on the increase (Thomson 1998:1).
Barrage (2000:23) conducted a survey in this regard and reported that 83% of the respondents expected to increase their level of outsourcing. The survey revealed that outsourcing is used for several reasons, for example improved efficiency and cost reduction. Management accountants are in an ideal position to take advantage of this growing opportunity. Knowledge demands specialist information. The universities fail to respond to new demands, alternative suppliers of 81 professional qualifications will emerge.
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