Effective management accounting practices can improve decision-making in organizations through, among other things, future-focused insight and analysis. But, according to the American Institute of CPAs (AICPA) and the Chartered Institute of Management Accountants (CIMA), management accounting has lacked the same level of guidance as financial accounting to ensure that these practices are consistently used worldwide.
So, the AICPA and the CIMA last month released four global management accounting principles that they say can be “universally applied in organizations large and small, public and private, anywhere in the world.” By using the new guidance, organizations can make better decisions, respond appropriately to the risks they face, and protect the value they generate, according to the two accounting groups.
The AICPA and the CIMA developed the four principles with input from CEOs, CFOs, academics, regulators, and other professionals in 20 countries on five continents during a public consultation this year.
The management accounting guidelines are aimed at chief executives, finance executives, and other members of boards of directors who oversee their organizations’ performance. Investors and other stakeholders will also find the four principles useful, according to the AICPA and the CIMA.
“The issuing of these principles is significant. They will help bring structure to chaotic complexity and empower evidence-based decision-making that prioritizes long-term success over short-term gains,” AICPA President and CEO Barry Melancon, CPA, CGMA, said in a written statement. “With the principles in place, management, stakeholders, investors, and the public can have more confidence in the actions that organizations take.”
The four global management accounting principles are as follows:
1. Influence:Communication provides insight that is influential. Management accounting begins and ends with conversations. It improves decision-making by communicating insightful information at all stages of decision-making. Good communication of critical information allows management accounting to cut across silos and facilitates integrated thinking. The consequences of actions in one area of the business on another area can be better understood, accepted, or repaired.
By discussing the needs of decision-makers, the most relevant information can be sourced and analyzed. This means recommendations will be useful to the decision-maker and achieve influence.
2. Relevance:Information is relevant. Management accounting scans the best available resources for information that is relevant to the decision that needs to be taken, the persons making the decision, and the decision style or process being used. By understanding the needs of stakeholders, the most relevant information for decision-making is identified, collected, and prepared for analysis.
It requires achieving an appropriate balance between:
- Past, present, and future-related information
- Internal and external information
- Financial and nonfinancial information, including environmental and social issues
3. Value:Impact on value is analyzed. Management accounting connects the organization’s strategy to its business model and requires a thorough understanding of the wider macroeconomic environment. It involves analyzing information along the value-generation path, evaluating opportunities, and focusing on the risks, costs, and value-generation potential of opportunities.
Scenario analysis brings rigor to the evaluation of organizational decisions. By running scenario models to evaluate the impact of particular opportunities and risks, organizations make better decisions about exploiting or mitigating them. The models also enable organizations to quantify the likelihood of an opportunity succeeding or a risk occurring and the value that is to be generated or eroded.
4. Trust:Stewardship builds trust. Accountability and scrutiny make the decision-making process more objective. Balancing short-term commercial interests against long-run value for stakeholders enhances credibility and trust. Management accounting professionals are trusted to be ethical, accountable, and mindful of the organization’s values, governance requirements, and social responsibilities.
Being mindful of conflicting interests improves stakeholder management and is an important consideration when prioritizing stakeholder groups. Proactively seeking feedback and being responsive to questions or complaints facilitates scrutiny by those with an interest in the organization’s performance. This enhances the trust, credibility, and legitimacy of the organization and has a positive impact on improving processes and reputation.
Where to Apply the Principles
According to the AICPA and the CIMA, there are three key factors that play a role in the effective application of the four principles. Those factors are:
1. Understanding the need. The appreciation that management accounting can help organizations achieve sustainable success. The test for each principle is its ability to contribute to organizational success.
2.Tools and techniques. In the practical application of the principles, people need to use appropriate tools and techniques: These must be adapted and continually refined as objectives change.
3. Diagnostic. People skills, principles, practice areas, and performance management systems can help organizations assess the effectiveness of their management accounting functions and identify areas for improvement.
After these factors have been considered, the four principles can then be applied to the following 13 key practice areas of the management accounting function:
1. Cost transformation and management
2. External reporting
3. Financial strategy
4. Internal control
5. Investment appraisal
6. Management and budgetary control
7. Price, discount, and product decisions
8. Project management
9. Regulatory adherence and compliance
10. Resource management
11. Risk management
12. Strategic tax management
13. Treasury and cash management
Although not technically a practice area of the management accounting function, the guidance can also be applied to internal audit. According to the AICPA and the CIMA, “management accounting makes a significant contribution to the system of internal controls as tested and appraised by the internal audit function.”
About Jason Bramwell
Jason Bramwell is a staff writer and editor for AccountingWEB. He has nearly 20 years of experience in print and online media as a journalist and editor.