Effective management accounting practices can improve decision-making in organizations, which need sound fundamentals but also speed when trying to decide which strategic paths to follow. In short, organizations need principles that can be applied to help produce favorable outcomes.
The Global Management Accounting Principles, released Wednesday, represent the first set of universal principles to guide the practice of management accounting.
The principles, prepared in a comprehensive report released by the AICPA and Chartered Institute of Management Accountants (CIMA), are based on insights from a global sampling of CEOs, CFOs, academics, and other professionals.
The four principles, focused on four outcomes, are intended to provide senior executives with strategic and financial oversight a way to benchmark their management accounting processes and identify where the processes can be improved. The goal of the principles is to establish values, qualities, and norms that represent the profession’s best practices.
The purpose of the principles, in four key points, is to:
- Outline the fundamental values and qualities that represent management accounting.
- Improve understanding of the management accounting profession.
- Increase recognition of the crucial role of management accounting in organizations and ensure that is it used at the highest levels.
- Enable management accounting potential to be realized.
Need for decision-making change
A global survey commissioned by CIMA and the AICPA and conducted in August by Longitude Research shows that organizations are rethinking their decision-making processes and hoping to make better use of available information. But few (36%) said they can easily ensure consistent, quality decisions at all organizational levels, and 89% said a stronger partnership with finance in decision-making would help them better manage their organizations in the future.
“We work with a range of organizations across the world and can see that decision-making is becoming more and more difficult as complex information flows so much faster,” CIMA Chief Executive Charles Tilley, CGMA, said in a news release. “Too often, impulse substitutes for insight, and we need a dramatic improvement in the way decisions are made at all levels.”
The principles are intended to be applied to all levels and types of organisations: large or small, public or private. Barry Melancon, CPA, CGMA, the president and CEO of the AICPA, said the principles “will help bring structure to chaotic complexity and empower evidence-based decision-making that prioritizes long-term success over short-term gains.”
The four principles:
Communication provides insight that is influential. Good management accounting begins and ends with conversations, allowing management to cut across silos and create a path to integrated thinking.
Information is relevant. One of management accounting’s central roles is providing decision-makers the right information on a timely basis. If the needs of the decision-maker are understood, then identification, collection, validation, preparation, and storage of timely information can be carried out.
Impact on value is analyzed. This principle requires a thorough understanding of the business model and the macroeconomic environment. Strong management accounting functions are able to turn information into insight by assessing the impact of scenarios being considered.
Stewardship builds trust. The principles require active management of relationships and resources “so that the financial and non-financial assets, reputation and value of the organisation are protected.”
The principles provide guidance about the core competencies required of management accountants, which are detailed in the CGMA Competency Framework. The principles are meant to be applied across 14 practice areas of the management accounting function (see below).
“The management accounting principles are bringing about a new dimension of value—understanding, identifying, and capturing the accounting of value,” said Anant Nadkarni, a member of the Global Management Accounting Principles Advisory Panel and a former group vice president of corporate social responsibility and sustainability at the Tata Group in India.
Three factors play a role in the effective application of the principles, according to the report:
- Understanding the need. First, management must be aware of and appreciate management accounting’s ability to help the organization achieve sustainable success. The test for each principle is its ability to contribute to organizational success.
- Tools and techniques. In practical application of the principles, individuals need to use appropriate tools and techniques that are refined as objectives change.
- Diagnostic. People skills, principles, practice areas, and performance management systems can help an organization assess the effectiveness of its management accounting function and identify areas for improvement.
“It’s an education for CEOs, COOs, people that make most of the decisions related to strategy and putting together a business plan—they have to understand the skill set that finance brings to the table,” said Jim Blake, CPA, CGMA, another member of the global advisory panel. “If they don’t, and they only allow them access to a certain piece of the decision-making process, they’re really shortsighted. There’s an education process that has to occur.”
— Neil Amato ( email@example.com ) is a JofA senior editor.
14 practice areas
The Global Management Accounting Principles are intended to guide best practices. According to the report, a combination of competent people, clear principles, well-managed performance, and robust practices make for an effective management accounting function. Here are the 14 practice areas:
- Cost transformation and management
- External reporting
- Financial strategy
- Internal control
- Investment appraisal
- Management and budgetary control
- Price, discount, and product decisions
- Project management
- Regulatory adherence and compliance
- Resource management
- Risk management
- Strategic tax management
- Treasury and cash management
- Internal audit
Regarding internal audit, the report says: “It is not a practice area that sits within the management accounting function, but management accounting makes a significant contribution to the system of internal controls as tested and appraised by the internal audit function.”