From the Editor

PUTTING IT ALL TOGETHER:

MANAGEMENT ACCOUNTING IN THE YEAR 2000

Paul Sharman

The "From the Editor" column this issue continues a series of articles commissioned last year about the future of management accounting. In this issue, we welcome another member of our board of advisors, Paul Sharman, President of Focused Management Information in Oakville, Ontario, Canada.

In the information age that looms beyond the year 2000, possession of information will represent power. Intellectual capital will become more valuable than real property. At the same time, rapidly developing technology will continue to speed the pace of change. Growth in market and economic value will be premier measurements for commercial organizations. People will also monitor cost­effective service quality in noncommercial organizations.

Emerging markets

Emerging markets of the 1990's in China, India, and South America will drive the world economy to new levels of affluence. The efficiency with which processes transform inputs and resources into sellable outputs will determine how profitable organizations will be in these highly competitive global markets. In tomorrow's world of rapid changes and ready dissemination of ideas, success will go to those who identify opportunities early and respond to them rapidly.

By the end of the 1990's, knowledge and understanding in all areas of life and science will be twice what they are today. In particular, managers will gain substantial experience and skills in using new tools to ensure continued productivity and competitiveness in the midst of rapid change. Changing businesses will require different administrative methods. The administrative capabilities of people will place them in one of two camps:

1. Specialists in information systems and software applications; and

2. Experts in compiling, analyzing and interpreting information.

In most organizations, it is the latter specialists who will plan, measure, and monitor all aspects of performance. These "knowledge integrators" will define the purpose of the systems and software applications that the organization employs to pursue its goals.

By the year 2000, management accountants will have become those integrators of knowledge. Their operational financial skills will be tightly integrated with management of nonfinancial information. In most organizations, management accountants will focus on developing strategy, planning, measuring and working with management to define the organization's direction. They will offer real­time decision support, working with operating personnel to provide effective projections and recommendations. Thus, management accounting will still be considered a profession rather than a general business skill.

Taking the organization's measure

Management accounting is emerging as the premier accounting qualification for accountants in industry. In the United States, accountants in industry should become certified in management accounting after they become qualified through education and training equivalent to a master's degree (as is already the case in Canada and Britain). These skilled and experienced practitioners will be highly valued by all organizations as the practice of historical reporting becomes redundant. Consulting specialists rooted in management accounting will predominate over those trained as certified public accountants. The auditing function will increasingly lose its relevance. Measurement and analysts will continue to be integral parts of the management accountant's job. In a structure best described as performance management, management accountants will measure the performance of the individual , process, and organization in the attributes of time, quality , finances, and flexibility. The Deming/quality engineering axiom of "PDCA" (i.e. plan, do, check, act) will be adopted as the management model. An integrated management model will incorporate focusing and measurement tools to enable the organization to continuously adapt to rapidly changing market needs. These tools include:

* Strategic planning;

* Activity­based costing (ABC);

* Process management (ongoing, with reengineering only when needed); and

* Benchmark performance measurement.

Organizations will be externally focused but internally driven.

The management accountant's toolkit

Management accountants will be responsible for many areas including the following:

* Providing fiduciary management, protecting assets, and reporting to regulatory bodies;

* Integrating financial and nonfinancial information for planning and monitoring performance;

* Simulation modelling of nonfinancial and financial information for decision­support purposes;

* Providing information to active, integral members of cross­functional process teams throughout the organization; and

* Providing advice to management.

Management accountants will also demonstrate high skills in using, influencing, or participating in many tools and methods, as explained below:

* After 2000, many of today's accounting methods (including double­entry bookkeeping) will still be used. One exception is full­absorption costing which will be abandoned. Generally accepted accounting principles ­ which are in fact not "generally accepted" among practitioners ­ ought to be simplified.

* Organizations will see the use of integrated computing, including real­time updating of enterprise support systems (ESS), which were formerly known as executive information systems. Drawing on their understanding of people's roles and responsibilities and on an understanding of how behavior is affected by information and measurement, management accountants will be largely responsible for designing the measurement systems in these ESS systems.

* Management accountants will use stakeholder analysis to understand the perceived needs of owners, customers, regulators, suppliers, and others whose decisions affect the organization. Those needs will be addressed during strategic planning, strategy deployment and organizational goal­setting.

* With their solid understanding of strategic planning techniques, management accountants will be responsible for aligning performance measurement systems with strategic and organizational goals. The notion of the balanced scorecard or the control panel is central to aligning measurement systems and strategy.

* For all organizations, ABC will become the accepted costing mechanism. Yesterday's fully absorbed profit and loss (P & L) statements will be replaced by direct­cost P & L structures. Indirect cost analysis will be accomplished by ABC. Current actual costing will be used for material valuation. Standard costing will be abandoned for labor, overhead, and indirect cost calculation. Inventory valuation will use simplified methods to capitalize indirect costs. Cross­functional, process­based, activity­based budgeting will rapidly replace the functional budgeting of the past.

* Process analysis and management techniques will be basic training for management accountants. Membership on process improvement teams and steering committees (and provision of financial information and counsel to these teams) will become routine elements of the management accountant's job. Old­style control mechanisms (e.g. auditing and approval of documents) will give way to real­time controls built into management processes.

* Integrated performance measurement, including benchmarking based on multiattribute analysis of processes, will become standard practice.

* Alignment of human performance and compensation plans with the performance measurement system will be a key responsibility for management accountants. However, they will not be responsible for designing human performance systems and work structures that define skill requirements in terms of process performance goals.

* The familiarity of management accountants with modern computing techniques and quantitative and qualitative simulation methods will allow them to conduct simulation performance modeling (e.g. evaluating the probable impacts of alternative strategic decisions on organization and process design).

A new view of control mechanisms

By the year 2000, control mechanisms and the management accountant's control function will have changed substantially. On the general premise that it is more effective, efficient and economical to "build quality in" than to "inspect it in," management accountants will develop control mechanisms as members of process management and design teams. No longer will the accounting function serve as the organizational "police department" or be responsible for losses incurred because other people failed to do their jobs.

Process management, computing capabilities, and improved communications will allow organizations to establish systemic quality control and fiscal control processes. Built­in security mechanisms in computer systems will ensure that transactions are completed accurately and that access controls operate in real time. Processes will be designed with built­in asset safeguards, such as electronic tags and sensing devices. Employees will be assigned ownership and clear accountability for all aspects of a process, including fiscal controls. In many organizations, the information systems (IS) function is flexing its muscle. This function can free up large budgets for sometimes indecipherable purposes, occasionally without any solid business rationale. But leaving performance management in the hands of the IS function is akin to putting the monkeys in charge of the peanuts. It is the management accountants who should be responsible for the design of the information structures that managers use for making business decisions. More than any other professional group, management accountants are the legitimate integrators of financial and nonfinancial information. It is up to the leaders of the management accounting profession to ensure that its members assume that role ­ before someone else does.