Category: Financial and Management Accounting

The Changing Nature of Management Accounting and the Emergence of "Hybrid" Accountants

November 2000

Brief Synopsis

The paper presents evidence from a study of management accounting change in UK companies. Motivated by claims that management accounting had lost its relevance in informing managers' decisions, our research investigated whether management accounting has been too slow to change despite the rapidly changing technological and organisational environment in recent years. We conclude that management accounting is changing. However, rather than change being necessarily in the type of management accounting techniques adopted, it seems to be more about the manner through which management accounting, including many traditional accounting techniques, is being used. Furthermore, our research also highlights the emergence of new, more "proactive" management accountants who increasingly become part of the management team within a business process. The paper highlights the roles and expectations of these so-called "hybrid" accountants and projects implications for the professional accounting bodies and its members.


Biographical Details

John Burns, Lecturer in Accounting since 1996, at the University of Manchester, UK. Main research interests in: all areas of management accounting; organisational change; institutional theories of organisational change; industrial policy.

Robert Scapens, Professor of Accounting since 1983, at the University of Manchester, UK. Editor-in-Chief of CIMA's academic publication, Management Accounting Research. Main research interests in: all areas of management accounting; enterprise resource planning (ERP) systems; case study research methods; institutional theories of organisational change.


Introduction

In recent years there has been considerable debate over the extent to which management accounting is changing. Johnson and Kaplan (1987) argued that management accounting had not changed since the early part of the twentieth century and, as such, had lost its relevance for the purpose of informing managers' decisions. Although, it has also been argued that the environment in which management accounting is practiced has changed considerably - with advances in information technology, more competitive markets, different organisational structures and new management practices (see, for example, Ezzamel et al., 1993).

Since the publication of Johnson and Kaplan's work, various new accounting techniques have been developed such as activity-based costing (ABC) and strategic management accounting. However, such so-called "modern" techniques are not being used as widely as their advocates might have expected. For example, various surveys indicate that ABC is only used by between 20% and 30% of companies (eg., Innes and Mitchell, 1995). Whereas traditional management accounting techniques continue to be used widely (see Drury et al., 1993). These surveys, therefore, appear to support the relevance lost thesis.

This leads us to question whether management accounting has been too slow to change despite the rapidly changing technological and organisational environment in recent years - the focus of a research project based at Manchester University (UK) . The project was generously funded by the Chartered Institute of Management Accountants and the Economic and Social Research Council; it comprised a questionnaire survey, a field study of 12 companies, and 8 "longitudinal" case studies (all UK-based and lasting between 3 and 5 years).

Broadly speaking, our research findings suggest that management accounting is changing. However, rather than change being necessarily in the type of management accounting techniques adopted, it seems to be more about the manner through which management accounting, including many traditional techniques, is being used. Whilst it is difficult to disagree with the findings of surveys that, at a superficial level, traditional management accounting techniques continue to be used, these surveys fail to identify changes in the way that traditional accounting techniques are now used in practice.

Furthermore, our research also highlighted the emergence of new, more "proactive" management accountants. As will be developed in the paper, rather than there being a "crisis" in management accounting (eg., Bromwich and Bhimani, 1989), the profession faces exciting challenges ahead. Although, as we shall explain, individuals must be prepared to accept, and have organisational backing to, change traditional "ways of doing" accounting.


Factors Shaping Management Accounting Change

However, before describing our observations on the changing nature of management accounting and the changing roles of an accountant, we should briefly outline some of the external factors which seem to be shaping such change. No attempt was made to assess the extent of the impact of each of these external factors ñ they are simply the factors which managers and accountants claim to be having an impact on their management accounting.

Various factors were mentioned by different people, but probably the most frequently cited was the competitive economic situation of the 1990s, and especially global competition. The extent to which the claims of increased competition are rhetorical, rather than actual economic effects, does not really matter. It is the perception of managers and accountants which is important, and how they perceive the economic climate in which they operate. If there is a perception of greater competition, then an increased focus is likely to be given to markets and the customer. And, though much of this customer focus may simply be rhetoric, in the companies we studied there did appear to be a greater emphasis on the service given to customers, and to providing that service in a market-orientated way.

Another fundamental change, and far more than rhetoric, is the advance in information technology which has taken place in recent years. The speed of technological change over the last 30 years or so, and especially the advent of the PC, has had a profound affect on organisational life. Particularly significant over the last 5-10 years has been the extent of the dispersion of computers and computing capacity around the organisation. The increased use of the computer has had major effects on the nature of work, especially clerical work, and on information flows around the organisation.

In addition, there have been other substantial changes in organisational structure ñ although again whether they are generated by rhetorical or real economic factors is not clear. For example, whereas in the UK in the 1970s, there was a wave of acquisitions and mergers, with the creation of conglomerates, by the 1990s organisations were moving in the opposite direction. The trend was then for de-mergers, with companies focusing on core competencies, and outsourcing non-core activities.

These various changes - in competition, technology and organisational structure - all have important implications for the nature of management accounting - particularly the manner in which traditional accounting techniques are now being used. In the next section we discuss such implications.


The Changing Nature of Management Accounting

As described above, there have been considerable advances in information technology in recent years. One of the most important, apart from the speed and capacity of modern systems, has been the development of data-base technologies which provide the ability to store vast amounts of information in easily accessible ways. These technologies permit various users simultaneously to access the information stored on the database and to use it in different ways.

When Johnson and Kaplan were proclaiming their relevance lost thesis, one of the reasons they advanced was that management accounting is dominated by financial reporting. They argued that as financial reporting is a legal requirement, it has to be done. So if a company has only one information system, it is the needs of financial reporting which will take precedence. Thus, information for other purposes has to be accommodated within that system, so far as it is practical. In this sense, management accounting is second place to financial reporting.


Database systems

But with modern databases, information can be analysed in a number of different ways. This makes it possible to design an information system that meets the needs of the various users, and in effect to have different information for different purposes. There need only be one database, but which is used to produce the information needed for different accounting systems, and these systems are then integrated through the information systems as a whole.

Another significant effect of IT development is the way in which information is more widely dispersed around the organisation. All managers and many other people at all levels within the organisational hierarchy have PCs on their desks, which can be used to access the information they need. Traditionally, managers would ask accountants for the information, especially the financial information, they needed. Although some managers would maintain their own, often informal, records, the formal information was maintained in the accounting system. If managers wanted to access that information or they need particular analyses, they would ask the accountants.

But now, as information systems become more integrated and access to them is dispersed around the organisation, the information flow has, to some extent, been reversed. Individual managers have greater responsibility for information concerning their areas of activity, and instead of asking accountants for information, they can obtain the information directly from their PC. Thus, rather than managers seeking information from the accountants, the accountants use the information stored in the information system to produce both financial and management accounting reports. So, as it were, the accounting reports are extracted from the information system, rather than being the basis on which information is provided to the rest of the organisation. This implies a change in the role of accountants, from one of information provider to, at least to some extent, the "customer" of the broader integrated information system. Accountants, however, are often directly involved in the design and maintenance of the information system.


Decentring accounting knowledge

A particular management accounting consequence of these technological developments is what we have called elsewhere, the decentring of accounting knowledge (see Scapens et al., 1996). Information such as budgets, variances, and actuals are all now available at various levels in many organisations. Even in companies that have not implemented one of the new integrated information systems, we have found that such accounting information is often available, for instance, in the production information system, and is designed and maintained by production personnel, rather than by accountants. Furthermore, it is the managers who now have the responsibility for cost management, whereas previously it was the accountants' responsibility to monitor costs. Cost management is now more generally accepted to be a managerial function, and managers increasingly think and talk about their activities in cost terms.

This means that, within the various areas of a business, there is a need for individuals who understand costs, variances, accounting reports and so on. Such individuals may be accountants (part or fully-qualified), or more likely people from other functions who are financially literate. In some of the organisations we studied, such people were described as "pseudo-accountants" or something equivalent. These are the increasing number of people who have accounting knowledge, and although not trained as accountants, can access, analyse and use accounting information without the intervention of an accountant.

In part, this decentring of accounting knowledge is the result of accountants educating other people in the organisation, but it has been made possible by the availability of financial information at all levels in the organisation. Furthermore, it has implications for the role of a management accountant, as was illustrated in several of our case studies. Many managers, although not trained as accountants, displayed a very high level of understanding of accounting systems and accounting information. Nevertheless, most still claimed the need for an accountant. In several companies we visited, the management accountant would be notionally a member of the centralised accounting function, but assigned "out in the field" where he/she works most of the time. In general, these accountants were regarded as important because of their links to the centralised accounting function which means that he/she has knowledge of the interactions with other parts of the business. So, the accountant is able to provide a much broader understanding of the business, and able to advise on the impacts and implications which actions within the particular function would have on the other parts of the business. In essence, management accountants were seen as people who could look outwards from a particular area of activity, to the business more generally.


Forecasts

A further issue that emerged in most of the companies we have studied relates to the role of the budgets. Increasingly, budgets are being seen as backward looking and out of date before the start of the year. There now appears to be much greater emphasis given to forecasts - either rolling forecasts for, say the next 3, 6 or 12 months (depending on the nature of the business); or, forecasts to the year end. This is particularly important because, whereas budgets are usually associated with the accountants, forecasts are more closely identified with individual managers.

Budgets are usually produced as part of a business-wide exercise, co-ordinated by the accounting function. Frequently, budgets are perceived as imposed from outside, even where there is some input from individual departments and functions. Forecasts, however, whether they are rolling forecast, or forecasts to the year end, require considerable inputs from these individual departments and functions themselves, as they are the only people with the necessary detailed knowledge, and this greater personal involvement can create a feeling of ownership of the forecast. Consequently, there is a shift of emphasis from budgeting, which has essentially been backward looking and is to a great extent imposed, to forecasts which are forward-looking and locally-owned.


Commercial orientation

A further general finding from our project is the change from what might be termed a "financial accounting mentality", to a more "commercial orientation". More emphasis on commercial orientation does not mean that profit is unimportant ñ profit remains crucial. The vast majority of businesses need to earn profits to survive - but profit can be conceptualised rather differently. A commercial orientation recognises that it is the business' ability to continue to earn profits in future periods which is important, rather than just seeking to earn a profit in the current period. This implies a more strategic view, and an emphasis on managing the capacity to generate profits. This does not necessarily imply less quantification ñ indeed, it may involve more quantification and a wider range of performance indicators. Furthermore there is likely to continue to be an ongoing comparison of actual performance against targets, as expressed in terms of these indicators. But this may be over a longer time period than traditional short-term accounting cycles.

However, a word of caution needs adding about what might happen in an economic downturn. It may have been relatively easy in the early part of the 1990s, with stock market growth and buoyant economies, to focus on a broader conception of profitability. But with declining stock markets and, say, a global recession, there could well be a return to more "bottom-line" focus.


Strategic Focus

This commercial orientation appears in many of the companies we visited to have a more strategic focus, leading to the use of a range of performance indicators - including a significant increase in the use of non-financial measures of performance (eg., customer satisfaction and quality indicators). Key performance indicators, which may be financial or non-financial, attempt to assess the factors which impinge on a company's ability to earn profits, both in the short and long term.

Given that broader based performance indicators are increasingly becoming more important, what is the role of the management accounts which are produced month by month? In one of our case studies, management accounts are prepared for the monthly Management Board meetings, which generally last one whole day and offer the opportunity to discuss current issues and problems in the company. Referring to the management accounts, the Managing Director explained that they are presented by the management accountant, and "it takes 20 minutes - including the jokes!". As such, the management accounts are the starting point for the day's discussions, but the Managing Director did not expect to find anything contained within them which he did not already know.

However, the month-by-month figures in the management accounts have to be understood in the context of broader performance indicators ñ linking the financial outcomes with the strategic consequences of the activities which have been undertaken. One of the roles of the management accountant is to bring together the broad view of the business expressed in the key performance indicators, with the narrower financial view shown in the management accounts. For this purpose the management accountant needs a broad understanding of the business and it operations. Such ideas will be developed in the section below.

The Changing Role of Management Accountants

Having briefly outlined the changing nature of the use of management accounting, we will now explore possible implications for accountants and the professional accounting bodies. As a starting point, it can be said that there are both opportunities and threats. In one case study, a UK-based manufacturer of healthcare products, the number of people in the accounting function declined in the period 1990-97 from 120 to 60. Similar high-percentage reductions were observed elsewhere. Such reductions are largely a result of advances in information technology, particularly the computerisation of recording and processing transactions.

But during the same period in this company, there was also an emergence of "hybrid" accountants - as they were called by some managers. The company had changed from a functionally organised business (with separate business units and service functions to support them) to a process-based form of organisation. Whereby, each unit, and if possible each site, was responsible for all its activities from the receipt of an order to delivery of the final product. Under this new structure there is now a process leader who is responsible for all these activities, together with the associated support functions which are an integral part of the process. In this particular case, the only functions which are now separate are finance, IT and quality. But even the finance function, although notionally separate, became increasingly integrated into the individual processes.

Supporting each individual process is a small group of accountants - the hybrids. A hybrid accountant is someone who has both accounting knowledge and an in depth understanding of the operating functions or commercial processes of the business. Throughout most of the company, hybrids are physically located in the process steams, where they work alongside the process managers. They have offices next to the process leaders, where they work at least three days a week. They then spend the other day or two in the accounting function, where they have an additional desk and are able liaise with their accounting colleagues. But, in most instances, it appeared that the hybrids regarded the process as being their "home", and that they regard themselves as part of the process management team.

There is clearly an opportunity to extend the role of management accountants within such process teams. Although, if accountants are to be involved in the management process in this way, they need to understand the complexities of the business and to have the capability of interacting with people in all parts of the organisation.

We have seen various examples in our case studies. At one extreme there was an accountant who was excellent at producing and analysing the "numbers," but he could not relate them to the business, and consequently he was not retained in the organisation. At the other extreme, someone complimented an accountant saying: "He's not like normal accountants. He can see the real business through the numbers". While intended as a compliment to this particular individual, the comment was a criticism of accountants more generally. There does appear to be a need for more management accountants to understand their business, but this requires broader forms of training and experience, not simply training in accounting numbers. In particular, management accountants need to relate the accounting and financial information to the wider information flows within the organisation, including strategic information, and to recognise the limitations as well as the potential of management accounting.

As was mentioned at the start of this paper, our research project was motivated by concerns over claims that management accounting had lost its relevance for managerial decision making. Our findings, however, indicate that professional bodies should not be unduly concerned about the relevance lost thesis. Management accounting is still very much alive, though in many companies its use is undergoing change. Nevertheless, there is an important issue which the professional accounting bodies do have to address. They must ensure that their members are capable of taking a broader role within the management team. Some accountants clearly are ñ as we have seen in our case studies. But the issue for the professional bodies is whether both their student training programmes and their continuing education activities are preparing their future and current members for this broader role and, in general, helping them to cope with the changing nature of management accounting.

References

Bromwich, M. and Bhimani, A. (1989) Management Accounting: Evolution not Revolution, The Chartered Institute of Management Accountants: London.
Drury, C., Braund, S., Osbourne, P. and Tayles, M. (1993) A Survey of Management Accounting Practices in UK Manufacturing Companies, Chartered Association of Certified Accountants: London.
Ezzamel, M., Lilley, S. and Willmott, H. (1993) Changes in Management Practices in UK Companies, The Chartered Institute of Management Accountants: London.
Innes, J. and Mitchell, F. (1995) "A survey of activity-based costing in the UK's largest companies", Management Accounting Research, June, pp. 137-54.
Johnson, H. T. and Kaplan, R. S. (1987) Relevance Lost: The Rise and Fall of Management Accounting, Harvard Business School Press: Boston, Mass.
Scapens, R., Turley, S., Burns, J., Joseph, N., Lewis, L. and Southworth, A. (1996) External Reporting and Management Decisions: A Study of their Interrelationship in UK Firms, The Chartered Institute of Management Accountants: London.