Management Accounting as a Knowledge Based Organization Value Driver for the 21 st Century Business

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Abstract
The 21 st century information and information technology revolution has made its mark on classical business functions like business support services. Management accounting, a still young business activity has transformed from reactive cost determination focus to proactive value creating and considerate resource business driver. Management accounting is on the way to asserting itself as a proactive business value driver for the modern 21 st century business organizations. The present paper is presenting the arguments that support the transformation of management accounting from the " bean counter " score keeping role to value driver supported by knowledge, the prime commodity of the 21 st century business environment. Management accounting is the business partner that delivers reliable and accurate data and information for the business decision process that is more and more influenced globalization, internationalization and accelerating and dynamic markets. Can modern companies afford to disregard the dormant value drivers from within their own business organization?
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Management Accounting as a Knowledge Based Organization Value
Driver for the 21st Century Business
Daraban Marius Costin
“Lucian Blaga” University of Sibiu
marius.daraban@ulbsibiu.ro
Abstract
The 21st century information and information technology revolution has made its mark on
classical business functions like business support services. Management accounting, a still young
business activity has transformed from reactive cost determination focus to proactive value
creating and considerate resource business driver. Management accounting is on the way to
asserting itself as a proactive business value driver for the modern 21st century business
organizations. The present paper is presenting the arguments that support the transformation of
management accounting from the “bean counter” score keeping role to value driver supported by
knowledge, the prime commodity of the 21st century business environment. Management
accounting is the business partner that delivers reliable and accurate data and information for the
business decision process that is more and more influenced globalization, internationalization and
accelerating and dynamic markets. Can modern companies afford to disregard the dormant value
drivers from within their own business organization?
Key words: management accounting, value, knowledge, support services
J.E.L. Classification: M4, M21, M20
1. Introduction
Accounting is one of the main business support activities that is present in any company. The
two major accounting fields that can be found distinct in the business accounting activity are
financial accounting and management accounting.
The main activity of financial accounting is the recording, reporting and analysis of financial
business transactions. The preparation of financial statements requested and imposed by authorities
are the main output of the financial accounting activity. The main stakeholders of the financial
statements are shareholders, suppliers, financing organizations, fiscal and tax authorities and other
3rd parties are just some of the interested stakeholders.
Financial accounting is regulated and governed by local and international accounting standards
and principles. The local regulations are issued by governments and local tax and fiscal authorities
whereas international organizations like IASB (International Accounting Standards Board) have
issued, the todays one of the most used accounting framework, the IFRS (International Financial
Reporting Standards).
While financial accounting is mainly for non-operational stakeholders that are not involved in
the day-to-day activity of the company, management accounting is used for the daily business
operations in the management decision process. Management accounting is the operational
“business language” that is used mainly by the involved managers and business responsible.
Similar to financial accounting, management accounting is regulated by various organizations
worldwide, like the UK based CIMA (Chartered Institute of Management Accountants), Australia
based ICMA (Institute of Certified Management Accountants) or the US based IMA CMA
(Institute of Management Accounting Certified Management Accountant).
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The Institute of Certified Management Accountants defines the management accountant as
follows: A management accountant applies his or her professional knowledge and skill in the
preparation and presentation of financial and other decision oriented information in such a way as
to assist management in the formulation of policies and in the planning and control of the operation
of the undertaking.
Management Accountants therefore are seen as the “value-creators” amongst the accountants.
They are much more interested in forward looking and taking decisions that will affect the future of
the organization, than in the historical recording and compliance (scorekeeping) aspects of the
profession. Management accounting knowledge and experience can therefore be obtained from
varied fields and functions within an organization, such as information management, treasury,
efficiency auditing, marketing, valuation, pricing, logistics, etc. (Institute of Certified Management
Accountants, 2017)
2. Genesis of management accounting
IFAC (The International Federation of Accountants), founded 1977 in Munich, Germany, is one
of the major worldwide professional organizations that has a major contribution to the development
of the accounting profession and standards.
IFAC is the global organization for the accountancy profession dedicated to serving the public
interest by strengthening the profession and contributing to the development of strong international
economies. IFAC is comprised of over 175 members and associates in more than 130 countries and
jurisdictions, representing almost 3 million accountants in public practice, education, government
service, industry, and commerce. (International Federation of Accountants, 2017)
1989 the International Federation of Accountants (IFAC) issued a statement summarizing its
understanding of the scope and purposes of management accounting and the concepts which
underpin it. The statement was revised and released in 1998 as Management Accounting Concepts
- Number 1 in the series of International Management Accounting Practice Statements. (Abdel-
Kader & Luther, 2006)
IFAC recognizes in their updated statement from 1998, 4 stages of evolution of the management
accounting concepts and focus. The 4 development stages, illustrated further in Figure 1, are not
exclusive developments stages, they are inclusive stages, one stage includes and does not exclude
the previous stage of development.
Figure no. 1 Evolution of Management Accounting
Source: IFAC 1998
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The defined development stages of management accounting reflected the economic
environment of the time that was synchronized with the shift in management accounting focus.
Stage 1 - cost determination and financial control (pre-1950) has been described as mainly
focused on the determination of product cost. The production processes have been simplistic and
labor intensive. This allowed an easy direct cost allocation to the production. Its focus was mainly
oriented towards the determination of product cost.
Stage 2 - information for management planning and control (by 1965) In the 1950s and 1960s
the focus of management accounting has shifted towards the delivery of business information for
the business planning and control processes. Management accounting was more reactive than
proactive with main interest in operational topics and no involvement in strategic and management
issues.
Stage 3 reduction of waste of resources in business process (by 1985) came as a result to the
1970 world recession and the oil price shock from the 1980. The focus of management accounting
shifted towards the reduction of waste of business resources.
Stage 4 creation of value through effective resources use (by 1995) is a normal and logical
continuation of stage 3, the focus of management accounting has shifted to value creation by
effective usage of existing business resources.
A critical difference between Stage 2 and Stages 3 and 4 is the change in focus away from
information provision and towards resource management, in the form of waste reduction (Stage 3)
and value creation (Stage 4). However, the focus on information provision in Stage 2 is not lost, but
is re-figured in Stages 3 and 4. Information becomes a resource, along with other organizational
resources; there is a clearer focus on reducing waste (in both real and financial terms) and on
leveraging resources for value creation. Accordingly, management accounting is seen in Stages 3
and 4 as "an integral part of the management process, as real time information becomes available to
management directly and as the distinction between staff and line management becomes blurred."
(IFAC, 1998, para 19) The use of resources (including information) to create value is seen to be an
integral part of the management process in contemporary organizations (Abdel-Kader & Luther,
2006, p. 5)
3. Management accounting as a knowledge based organization
Even though there is no universally accepted definition of a knowledge based organization it is
commonly understood as being the organization whose products and services are knowledge
intensive. A knowledge based organization is an organization where workers use processes and
infrastructure to produce, change, manage, use and share knowledge based products and services to
achieve the organizational goal. (Daraban, 2016, p. 4)
The characteristics of a knowledge based organization, go beyond product to include process,
purpose and perspective. Process refers to an organization’s knowledge based activities and
processes. Purpose refers to its mission and strategy. Perspective refers to the worldview and
culture that influences and constrains an organization’s decisions and actions. knowledge based
organization exhibit knowledge-intensive processes, purpose, and perspective, regardless of their
product (Zack, 2003, p. 1)
IFAC has issued 07.2009 an International Good Practice Guide (IGPG) on Evaluating and
Improving Costing in Organizations where a clear distinction between financial and management
accounting is made and recognized.
Also in the IGPG the recommendation is made to distinguish between cost accounting for
external reporting, where historical performance is reported within certain prescriptive guidelines,
and costing for decisions to drive improved organizational performance. (IFAC PAIB Committee,
2009)
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The positioning and participation of management accounting within the context of cost
measurement, as one of the main pillars of management accounting activity, is illustrated in Figure
2. Per IFAC IGPG management accounting is a part of the enterprise financial management,
involved in cost measurement, with contributions to the performance evaluation and analysis and a
driver role in the business planning and decision support by adding value by providing useful and
relevant business information and knowledge. In this view management accounting is defined as
being inclined towards higher value added information for the business management decision
process.
A knowledge based organization could be shortly defined as an entity, where knowledge
workers are making use of business resources, like systems and processes, to generate, alter, use
and transfer knowledge intensive products and services to achieve the organizational goals. The
key defining characteristics of a knowledge based organization are at the core of the role definition
and meaning of management accounting. Business and financial data are used as input, data are
analyzed, put into specific business context and disseminated through the organization as business
support data and information. Management accounting is a data-driven business information
provider for the business decision process.
Management accounting is using the historical data analysis as a foundation for the predictive
higher value business data generation and dissemination that is needed for the business planning
and decision support. The management accounting system is leveraged and driven forward by the
knowledge worker, the management accountant that is the enabling factor for the learning ability of
the knowledge based organization. The learning ability adds to the management accounting
activity the knowledge aggregation ability that results in wisdom, the highest and most valuable
form of knowledge. The business and financial data transformation into valuable business
knowledge is driven by the management accountant that is the knowledge worker as a 21st century
“new” type of worker. The knowledge worker raises and deepens the challenges of the 21st century
modern data and information driven business where knowledge is the prime commodity. The
learning aspect of the knowledge based organization, the management accounting activity, is the
key element in the generation of business support data driven conclusions and recommendations
that enable a more clear and efficient, risk minimizing planning and decision support. Management
accounting encompasses elements of a knowledge based organization, it operates and develops
business systems and processes to use, generate, transform and disseminate business information
with increased economic value added through its knowledge workers, the management accountant.
Figure no. 2 Enterprise Financial Management IFAC PAIB
Source: IFAC 2009
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4. Management accounting as a business value driver
Business value creation is the ultimate goal of any business organization and can also be defined
as being the sum of the value created by all business activities and processes from the specific
organization. The todays business organizations must compete in the globalized, dynamic and
information driven markets. The competitive advantage that assures the future of the business
organization can be gained by coping with the 21st century market requirements, understanding
and managing the available data and information that are business relevant.
Competitive advantage cannot be understood by looking at a firm as a whole. It stems from the
many discrete activities a firm performs in designing, producing, marketing, delivering and
supporting its product. (Porter, 1985, p. 33)
Porter, in his book “Competitive Advantage” has identified that support activities have a
contribution to the business margin at the beginning of the information age, that has made its mark
on the existing economic and business processes.
In the quest for more reliable, quicker and actual business information business organizations
have invested and made maximum use of the new information technology features and possibilities
in data processing, storage and distribution. Management accounting has become a driver for the
usage and adoption of modern IT systems that allowed and eased the data acquisition,
transformation and dissemination process.
The business data used as inputs and outputs by management accounting are matching the
knowledge value chain. Raw data are acquired, aggregated into information that is transformed into
business knowledge to gain more and more and reliable business wisdom that is used for the
business management and decision process to assure the much-needed competitive advantage and
to create sustainable business value for its shareholder. The more aggregated data is the more value
it creates for its users.
The knowledge value chain represents the conceptual basis for the development of a more
prescriptive model for the definition and the implementation of knowledge management projects
oriented to improve the value-generating capability of a company. (Carluci, et al., 2004, p. 13)
Knowledge value chain has been defined by Powell as being a process model of how data
becomes intelligence, and eventually becomes part of a business result or benefit. The knowledge
value chain (KVC) comprises two major sets of activities, knowledge acquisition and knowledge
application. This reflects the division of labor in knowledge work that has evolved in large,
complex organizations. Here, knowledge workers are primarily tasked with knowledge acquisition
and development, and decision-makers apply the resulting knowledge to make better business
decisions, plan and execute actions, and thereby achieve business results. (Powell, 2001, p. 3)
Powell has defined the knowledge value chain (KVC) as a shared process between knowledge
worker and decision maker. The KVC starts with a joint shared understanding and ends with
results. Powell’s KVC is illustrated in Figure 3. The KVC includes 7 steps, each being considered
and opportunity and a potential point of failure where quality control is required and needed.
5. Conclusions
In the context of an information and data driven economy and business environment, business
support activities, like management accounting, have been transformed by the influence and
requirements of the information revolution. The classical approach of business support activities as
non-productive, resources consuming and unproductive needs to be reconsidered.
Management accounting, as a science, still in its early ages, has morphed from the more
simplistic cost calculation and financial control focus to business value creating activity by the
most efficient use of existing resources.
The modern 21st century business organizations must adopt and accept that management
accounting is a data-driven business partner that is providing the needed information and data by
the business planning and decision activities.
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Strategic management accounting will become part of the new business model and business
organizations that is supporting the strategic plans and management of the future businesses.
The present paper has shown that management accounting is a knowledge organization that is
generating value for the business organizations that are looking for the sustainable competitive
advantage, advantage that allows them to compete, adapt and survive in a dynamic and demanding
21st century business environment.
Figure no. 3 Knowledge Value Chain
Source: Powell 2001
6. References
Abdel-Kader, M. & Luther, R., 2006. IFAC’s Conception of the Evolution of Management
Accounting. Advances in Management Accounting, Volume 15, pp. 229-247.
Carluci, D., Marr, B. & Schiuma, G., 2004. The knowledge value chain: how intellectual capital. Int.
J. Technology Management, 27(6/7), pp. 575-590.
Daraban, M., 2016. EMPIRICAL APPROACH TO KNOWLEDGE, KNOWLEDGE ECONOMY AND
KNOWLEDGE BASED ORGANIZATIONS. Paltinis, Editura Tehnica, pp. 209-215.
IFAC PAIB Committee, 2009. International Good Practice Guide - Evaluating and Improving
Costing in Organizations, New York: International Federation of Accountants.
Institute of Certified Management Accountants, 2017. Institute of Certified Management Accountants,
Australia. [Online]
Available at: http://www.cmawebline.org/about-icma.html
[Accessed 23 03 2017].
International Federation of Accountants, 2017. About IFAC. [Online]
Available at: https://www.ifac.org/about-ifac
[Accessed 04 04 2017].
Porter, M. E., 1985. Competitive Advantage. New York : The Free Press.
Powell, T., 2001. The Knowledge Value Chain (KVC): How to Fix It When It Breaks. New York, M.E.
Williams.
Zack, M. H., 2003. What is a Knowledge Based Organization ?. [Online]
Available at: http://www2.warwick.ac.uk/fac/soc/wbs/conf/olkc/archive/olk5/papers/paper62.pdf
[Accessed 06 04 2016].
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