Management Accounting - Articles Flashcards
How do Financial accounting and Management Control differ?
Management control and financial accounting differ significantly in their purpose, scope, audience, regulations, and time orientation, as highlighted in both the general context of these disciplines and the specific discussions within articles like Mikes (2011) and Scapens (2016). Here’s a comparison:
- Purpose
Financial Accounting:
Provides standardized, historical financial information primarily for external stakeholders (e.g., investors, regulators, creditors).
Focuses on ensuring accountability and compliance with legal and regulatory frameworks.
Management Control:
Aims to influence internal decision-making and align operations with strategic goals.
Focuses on planning, performance evaluation, and ensuring that employees’ actions are consistent with organizational objectives. - Scope
Financial Accounting:
Limited to quantifiable, monetary transactions and events that can be measured and recorded in financial terms.
Adheres to strict boundaries defined by accounting standards (e.g., GAAP, IFRS).
Management Control:
Broader scope, incorporating both financial and non-financial measures (e.g., customer satisfaction, operational efficiency).
Can address strategic and operational uncertainties that may not be directly quantifiable. - Audience
Financial Accounting:
Primarily for external users, including shareholders, regulatory agencies, and financial analysts.
Focused on building trust and credibility with external stakeholders.
Management Control:
Designed for internal users, such as managers and employees at various organizational levels.
Tailored to specific organizational needs and contexts to improve decision-making. - Regulations
Financial Accounting:
Heavily regulated with strict compliance requirements (e.g., standards, audits).
Reports must meet specific formats and guidelines for comparability and reliability.
Management Control:
Not bound by external regulations; instead, it is flexible and designed to suit internal processes.
Evolves based on the organization’s goals and strategies, with no requirement for uniformity. - Time Orientation
Financial Accounting:
Primarily backward-looking, providing historical financial results over specific periods.
Concerned with reporting past performance.
Management Control:
Both forward- and backward-looking, focusing on planning, forecasting, and real-time adjustments.
Helps anticipate future challenges and align operations proactively. - Tools and Techniques
Financial Accounting:
Involves preparing balance sheets, income statements, cash flow statements, and disclosures.
Relies on double-entry accounting and strict documentation of transactions.
Management Control:
Uses budgets, variance analyses, performance scorecards, and dashboards.
Includes softer instruments like scenario planning, stress testing, and envisionment (as per Mikes, 2011).
How can we understand management control systems?
David Otley (1999) introduces a framework for understanding and analyzing management control systems. This framework focuses on five core areas:
Objectives: Identifying the organization’s key goals and evaluating their achievement.
Strategies and Plans: Understanding the activities and processes necessary for achieving objectives and measuring their performance.
Targets: Establishing performance benchmarks to guide the organization toward its goals.
Incentives and Rewards: Aligning employee and managerial motivations with organizational objectives through rewards and penalties.
Information Flows: Utilizing feedback and feedforward loops to enable learning and adaptation.
Management control systems provide information that is intended to be useful to managers in performing their jobs and to assist organizations in developing and maintaining viable patterns of behaviour. Any assessment of the role of such information therefore requires consideration of how managers make use of the information being provided to them. Can be compared to financial accounting where managers must take into account how external stakeholders make use of the information in their resource-allocation decisions.
Contingency Theory and Management Control
Contingency Theory: The contingency theory of management accounting suggests that there is no universally applicable system of management control but that the choice of appropriate control techniques will depend upon the circumstances surrounding a specific organization. A central contingent variable is the strategy and objectives that an organization decides to pursue. (Otley, 1999)
Management control systems should be designed and used in line with the unique situation of the company
Focusing on how variations in contextual factors affect management control systems
Turbulent environment may call for decentralized decision making and informal hierarchy. While a stable environment may call for centralized decision making and formal hierarchy.
Comparison Financial Accounting and Management Control by Scrapens.
Similarities:
Routines and Rules:
Both financial accounting and management control systems develop through routines and rules, which are influenced by institutions over time (Burns and Scapens framework).
Interdependence:
Both practices shape and are shaped by broader organizational and institutional contexts.
Differences:
Purpose and Focus:
Financial accounting is concerned with external reporting and follows strict institutionalized rules driven by regulatory frameworks.
Management control focuses on internal decision-making and is less constrained by external institutions, adapting to organizational needs.
Flexibility and Change:
Financial accounting routines tend to resist change due to their regulatory and institutionalized nature.
Management control practices are more dynamic and evolve with internal organizational pressures.
Role of Trust:
Financial accounting emphasizes compliance and external legitimacy, often requiring less trust within the organization.
Trust is critical in management control, as highlighted in the study of trust’s role in enabling or hindering accounting system adoption.
From counting risk to making risk count: Boundary-work in risk management (Mikes, 2011). On Management Control.
Definition and Purpose:
Management control is portrayed as a dynamic, evolving system aiming to influence decision-making and align operations with strategic objectives.
It extends beyond strict quantitative measures, emphasizing adaptability to manage uncertainties.
Contrasting Approaches:
The study identifies two distinct calculative cultures influencing management control practices relative to risk:
Quantitative Enthusiasm: Focuses on rigorous measurement and quantification, often using advanced models to control risks systematically.
Quantitative Skepticism: Relies on envisionment and judgment, prioritizing non-measurable uncertainties and strategic foresight.
Boundary-Work:
Managers actively engage in boundary-work to define their domain, often balancing expansion into new areas and protecting professional autonomy.
This reflects a negotiation of authority and responsibility within organizational contexts.
1. Crisis as a Catalyst for Innovation in Risk Measurement
Crises often expose the limitations of existing risk measurement methodologies, prompting organizations to develop or refine new tools.
For example, the financial crisis of 2007-2009 revealed gaps in traditional models’ ability to predict and manage systemic risks. These gaps highlighted the need for more comprehensive and adaptive measurement techniques.
Crisis, works as a catalyst hence both for financial accounting and management accounting.
“Introduction to the cases: theories, concepts and models” (Nilsson, 2014)
Relationship between strategy and control affects an organisations competitive advantage.
Strategic congruence and integrated control.
Firms which have succeeded in establishing consistency between strategies at different levels (strategic congruence), and corporate wide planning and follow-up (integrated control) are more highly competitive and create more value (better performance) than firms which have not succeeded in this regard. Strategic congruence and integrated control is a two-way relationsship: Control systems also affect the choice of strategies.
Environment
The environment is envisaged as the competitive domain in which the firm operates. Porters five forces, Steep analysis etc.
Strategic Congruence
There is strategic congruence when the corporate, business and functional strategies of the firm are mutually consistent, with strategy at each organizational level appropriate to the firms competitive arena and overall strategic aims.
