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Role of management accounting in globalised economy

 

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Introduction

Management accounting is a process of creating and using cost, quality, and time-based information in an organization to make effective decisions (O’ Mahon & Doran, 2008). Various entities in an organization are required to play a part for management accounting to be a success among them; internal audit department, financial accounting, system professionals, tax department experts, costs accounting department, and the controller functions as the overall with the key role of bringing together all the information from the various units and direct it to planning, controlling, evaluation, and decision-making activities throughout the organization. This essay will seek to establish the various roles of management accounting in an organization operating in a globalized environment.

According to Garg et al (2003), management accounting involves three main practices; strategic management, performance management, and risk management. Strategic management involves advancing the roles of the management accounting personnel as strategic entity in the organization. Performance management involves the development of decision-making as a practice and management of the performance of the organization and risk management is the contribution to practices and frameworks used for measuring, managing, identification, and reporting risks with the purpose of realizing the goals of an organization.

Globalization  as defined by the International Monetary Fund is “growing economic interdependence of countries worldwide through increasing volume and variety of cross-border transactions in goods and services, free international capital flows and also more rapid and widespread diffusion of technology” (Ahid & Augustine, 2012). In the era of globalization, internalization of businesses has mainly affected the policy framework in which they operate in. with the complications of globalization and the need to thrive in the globalized marketplace; management accounting has to integrate the various units of a business to ensure realization of the set goals.

Role of management accounting in globalized era

Traditionally, accounting has been perceived as ‘bean-counting’ but in the wake of the 2008 global economic crisis, accounting has been under sharp focus with rigorous changes and regulations to the professional standards (Kidane, 2012). According to Ahid & Augustine (2012), the change of roles in the accounting profession began from 1980 when practice of globalization was fully entrenched in economies and the flow of information across boundaries became more thorough. With this change, globalization became more affective in both the local and the global economies hence influencing change in the accounting craft with accounting playing more and bigger roles in management hence management accounting.

Firstly, management accounting plays an active role in the acquisition and provision of information to the business (Ahid & Augustine, 2012). For business to thrive in the global market place and maximize on profits, information is critical. Globalization has lead to increased competition and with advanced technology, business are required to get information sooner to stay on a competitive edge. In addition to being information providers in a business, management accounting plays a role in the decision making to help managers make better and informed decisions (Garg et al, 2003). For modern business operating in a globalized  marketplace, management accounting has moved towards resource management through the application of process analysis tools for example activity based costing, life cycle costing, and costs management techniques among them opportunity cost analysis (Hansen et al, 2006).

In the role of providing information, management accounting in modern business operating in a globalized economy have to break away from the traditional scale of providing only internal information to the external market and inform the top management team and decision making team on external parameters concerning as well as affecting the business among them; competition, changing market environment, and threats (O’ Mahon & Doran, 2008). This information is then put into the formulation of the business’ policies and strategic plans in which the management accounting team is a core partner.

Management accounting according to Garrison et al (2006) play a critical role in strategic decision making in a business. A survey by the Institute of Management Accountant and Ernst and Young (Garg et al, 2003) established that management accounting provides input required by strategic decision makers in a business. For business operating in a globalized economy whether locally or abroad, completion is an inevitable challenge. To circumvent this challenge, strategic decision making is an inevitable process for businesses (Kidane, 2012). In strategic decision making, management accounting helps managers determine the most important customers, substitute products in the market, critical capabilities, and adequacy of funds to fund a strategy.

It is the role of management accounting to create and add value to a business. According to Bamber et al (2008), management accounting plays this role by managing resources, people, and activities in a business for the realization of the business’ objectives. One of the ways through which management accounting does this is by focusing on reduction of waste and creation of value through effective and maximized utilization of the available resources. The responsibilities to achieve this role are vested on the manager and are practiced through four main practices; planning, directing, controlling, and decision making (Shah, 2009).

Hansen et al (2006) argue that it is the role of the management accounting department to track performance on the chosen key success factors among them quality, costing and efficiency, time and innovation and reference these to the performance of competitors. The argument in based on the reasoning that: it is the role of the management accounting team to track the performance of other companies with the objective of benchmarking as well as alert the managers on the possible changes customers are observing and evaluating (Seal et al, 2006). While this may be regarded as part of the role of information provision, tracking performance to that of competitors on key success factors is regarded as a distinct role because of the processes involved, even though the final deliverable of the process is information.

Ahid & Augustine (2012) argues management accounting plays a vital role in the development and implementation of fraud prevention and internal control systems within their businesses. According to the authors, management accounting department reports to the vice president of the various operations and in their reports, they cover various aspects concerning fraud; extent of fraud, causes and patterns of fraud, risk management, fraud prevention, identification of fraud, and measures to be taken in response to fraud. However, due to the sometime complicated nature of fraud, O’ Mahon & Doran (2008) recommend that management accounting personnel should be trained appropriately on how to prevent fraud as well as detect fraud.

According to Hansen et al (2006), the roles of management accounting vary from one business or organization to another depending on the size of the business, type of the business, industry or operational niche, culture, and other factors. Moreover, the factors determining the role of management accounting are constantly changing based on time, technology available especially in the globalized economy. Nevertheless and as indicated by Kidane (2012), the roles of management accounting have not changed significantly overtime or through the technology available, but rather influenced how the roles are executed. Therefore, the change in the roles of management accounting can only be viewed as being parallel with the business circumstances which in case of modern business operating in a globalized economy; globalization is the circumstances of the market.

Conclusion

Globalization has led to the transformation of management accounting and it is evident that the metamorphosis is still on. The roles of management accounting have changed from the traditional ‘bean-counting’ to become core partners in almost every managerial task. The roles of management Accounting discussed here include; acquisition and provision of information to the business for better performance of the business and establishment of a competitive edge, plays a critical role in strategic decision making in a business, to create and add value to a business, track performance on the chosen key success factors among them quality, costing and efficiency, time and innovation and reference these to the performance of competitors, and development and implementation of fraud prevention and internal control systems within their businesses. These roles will vary from one business to another depending on the size of the business, the target market, the type of the business, and the culture of the business among others.

References

Ahid M. & Augustine A. (2012). The Roles and Responsibilities of Management Accountants in the Era of Globalization. Global Journal of Management and Business Research, Vol. 12 Is. 15.

Bamber L., Broun K. & Harrison T.W. (2008). Managerial accounting, First edition. Prentice Hall.

Garg A., Ghosh D., Hudick J. & Nowacki C. (2003). Roles and practices in management accounting today. Strategic Finance. 85 (1), 30-65.

Garrison R., Noreen E. & Brewer P. (2006). Managerial Accounting. Eleventh edition.

Hansen, Don R. & Mowen M.M. (2006). Cost Management: Accounting and Control, Cincinnati, Ohio: South-Western/Thomson Learning.

Kidane F. (2012). “Decision Making and the Role of Management Accounting Function – a Review of Empirical Literature”, Radix International Journal of Banking, Finance and Accounting, vol. 1, issue 4, 77-97

O’ Mahon A. & Doran J. (2008). The changing role of management accountants; evidence from the implementation of ERP systems in large organizations. International Journal of Business and Management, 3(8), 109-115.

Seal W., Garrison R.H. & Noreen E.W. (2006). Management Accounting. 2nd edition. Singapore: McGraw Hill.

Shah P. (2009). Management Accounting. New Delhi: Oxford University Press.

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