Sustainable Management Accounting

week 1-7

accounting system

is a formal mechanism for gathering, organizing, and communicating information about an organization’s activities.

financial accounting

is a branch of accounting producing for external decision-makers a mandatory, standardized, audited, periodic and synthetic financial representation of an organization’s transactions with, as well as rights and duties towards, external stakeholders.

fianancial accounting characteristics

• the main users (external decision makers);

• the regulation (mandatory, standardized, and audited);

• the timing and nature of the information produced (periodic financial synthesis); and

• the content of the information (transactions with, rights and duties towards, external stakeholders)

liquidity

 indicates whether a company will be able to repay its short-term debts. 

→ low: a supplier may refuse to deal with the company, or refuse to sale on credit.

solvency

 the ability to repay long-term debts.  

→ banks and other creditors are interested in this

→ financial accounting provides them crucial information to assess a company’s financial health and thus its ability to pay them back. 

audited

that external auditors are mandated to check whether companies communicate about actual, not fake, transactions and comply with the standards set to aggregate these transactions.   

→ they are verifiable, because transactions with third parties which already happened must have a corresponding record in another company. 

→ This retrospective approach limits the reliance on estimates and makes financial accounting more accurate, objective and reliable because it is more difficult to manipulate.

why is financial accounting both important and sensitive

1 external constituencies use financial accounting information to determine whether they should invest some of their wealth in or time with the company 

2 At an economic level, financial accounting information is therefore crucial to help these external decision-makers allocate more efficiently their resources to maximize value creation.

3 From the perspective of the companies producing financial accounting information, the stakes are also massive.

limitations of financial accounting

• Financial accounting ignores what is specific to each company and does not provide details about its business model or how it operates concretely.  

• financial accounting is produced at regular and relatively distant intervals 

management accounting

a set of methods, techniques, and tools used for the production of relevant and timely information helping managers make decisions and making managers accountable for the decisions they make to ensure the best possible use of resources within the organization.

management accounting characteristics

• is serves internal decisionmakers instead of external ones 

• it is flexible and adaptable instead of mandatory and standardized 

• it is produced on demand rather than periodically and includes non- financial information 

• it focuses on internal flows of resources (internal transactions instead of transactions with external stakeholder) 

decision making process management accounting

1. directing attention 

→ signalling opportunities and threats managers should address 

2. formulating problems 

→ identifying stakes and formalizing both goals and constraints 

3. designing solutions 

→ showing managers levers on which they can act to achieve their goals 

4. evaluating and selecting solutions 

→ anticipating and assessing potential financial and non- financial consequences of alternative courses of action 

5. organizational learning 

→ liking decisions made to their actual and sometimes unexpected financial and non- financial consequences 

6. evaluating and rewarding performance

→ making managers accountable for the financial and non- financial consequences of the decision they make

single- loop learning?

?

double- loop learning?

?

relevance

that all necessary information, and only the necessary information, should be communicated to managers. Any information helping to make a decision should be taken into account, even if it is highly subjective, approximate, unverifiable, or unreliable.

→ does not aim for comprehensiveness

timeliness

that information should be produced when managers need it. Information should be available anytime on demand as soon as a decision needs to be made (not periodic).

→  Non-financial information is often used as leading indicators as they provide early signals about a lagging future financial performance. 

→ managers need to anticipate what will happen and the consequences of their decisions, thus management accounting must be oriented towards the future, prospective

role

a core set of behavioral expectations tied to a social group or category that defines appropriate and permitted forms of behavior for group members.

scorekeeper

 takes care of routine tasks which are mainly focused on internal financial reporting and traditional cost accounting. It collects and records financial information, prepares standardized reports, and sends them out periodically to internal recipients. 

watchdog/ corporate policeman

 controls whether managers achieve financial targets and adhere to internal control mechanisms and analyzes budget variances as well as deviations from internal management accounting policies. It directs attention of managers to these variances and deviations.

business partner

brings the support and enhances managerial decision- making processes. Especially, to facilitate strategic or operational decision- making purposes, the business partner pro-actively collects (from other functions and beyond the organization) and presents financial and non- financial information for managers.The business partner works alongside management and partially even participates as an equal member in decision-making teams.

chapter 2