The Political Implications of the Decision-Making Function of Management Accounting - Literature review Example

The political implications of the decision making function of management accounting. Student name: Student number: Tutor: Date: Introduction The success of any particular business is mainly influenced by the decisions of the management. Consequently, it is significant for the management to have sound knowledge of management accounting. Management accounting can be described as a process that entails the identification, accumulation, measurement, analysis, interpretation and communication of facts and information that assists the management to attain the objectives of the organization. A significant function of management accounting is decision making. The decisions made by the management can bring about various implications to the business. These include; political, social and cultural implications. This paper seeks to examine the political implications of the decision making function of management accounting. One of the political implications of the decision making function of management accounting is ascertaining conformity to the set accounting standards. It is mandatory that the information disseminated by the management to the users meets the set accounting standards both internationally and within the national accounting standards. Thus, a manager has to base the decisions made on the set accounting standards. For instance according to the FASB’s and IASB frameworks, financial information that is useful for decision making consist of two quality characteristics; faithful representation and relevance. According to the standards, relevant financial information has the ability to make a difference in the decisions of the users. On the other hand, faithful representation according to FASB and IASB is that information that is represented faithfully is free from error, neutral and complete. When the decision making process integrates the requirements of relevant and faithful representation, then the manager will ensure that information given to users will conform to the set accounting standards (Eierle, 2013). Good corporate governance is another political implication of the decision making function of management accounting. Corporate governance focuses on mechanisms and structures that ensure proper rules of disclosure of information to creditors and shareholders, transparency in the activities of the organization, proper internal rules and structures of the board of directors and sound decision making (Fernando, 2009). In the recent years, corporate governance has been an area of great concern essentially when it comes to accountability of financial statements. This is due to recent collapse of giant companies such as Enron and also scandals such as the Madoff scandal which were associated to the provision of wrong financial information leading to misleading decisions by the management. An additional case was the 2001 collapse of Harris Scarfe, Australia’s leading retailer on home wares. Adam Trescowthick the Chairman of the board and the CEO was charged with a series of financial miscommunication which were provided to the Board. The CEO was charged with deliberately providing false financial information that consisted of infiltrated gross profit and incorrect profits (McGuire, 2003). From the cases cited above it can be stated that the decision making function of the management influences the corporate government of an organization. If the management decisions are fraudulent or unlawful then there will be lack of accountability in corporate governance practices. The decision making function of management accounting also enables the management to maintain control over the business (Mintzberg, 1994). When the management is able to make decisions concerning financial statements, marketing and production, the top management then develops the feeling that they are more contented and in control of what is going on in the business. For instance, when a manager has a good understanding of the financial statements of the business, they are bound to come up with quality decisions. Although financial statements are usually prepared by accountants, their implementation is usually done by the decisions of the management. The historical data that is prepared by accountants therefore results to financial decisions (Mintzberg, 1994). If a manger is able to make effective financial decisions from the information provided by the accountants then the manager will definitely gain control over the business. The decision making function of management accounting assists in achieving the interests of the various users of financial information. There are various users interested in the financial information which acts as their basis of decision making. Managers require financial information in order to make decisions and also control the activities of the business. Shareholders on the other hand require financial information in order to evaluate the worth of their investment and therefore to make a decision whether they should continue investing on the business or not. Employees on the other hand require financial information in order to evaluate whether the business is able to provide for them their various requirements. If not employees may choose to work in other organizations. Banks and creditors on the other hand require financial information in order it examine the capability of the company in sustaining its financial liabilities and obligations. The information therefore assists the banks and creditors to make a decision on whether they should continue lending the company or not. Government entities require financial information for making decisions on the type of microeconomic development policies to adopt (Holloway, 2006). It can therefore be stated that the decision making function of managerial accounting is useful in attain the interest of various users. The decision making function of management accounting can also affect the going concern of the organization which is definitely a political implication. This is because in the event that a business does not operate at minimal costs and only makes losses then the business is bound to collapse. This may therefore lead to loss of shareholders. Thus, the continued existence of a business is mainly grounded on the decisions that the management will make. The increase in market competition and also the rapid changes in the business environment, imply that the management should adopt decisions that can actually keep the organization within the market for a long time instead of leading to failure. Decision making in the context of management accounting can simply be described as selecting a course of action from various alternatives. If an alternative does not exist then no decision is needed. In most cases the best decision is usually the one that has the least amount of cost and brings about the most revenue. If manager bases the decisions on minimum cost and the highest revenue then the organization is bound to continue existing and thus the shareholders of the company will be satisfied (Bennett et al, 2002). Holloway, (2006) highlights that the decision making function of management accounting can assist in establishing a healthy board culture. As a matter of principle, decision making in management accounting is not just an activity that is undertaken by management alone, other stakeholders such as the board of directors of the organization should also be actively involved. In most organizations boards are usually dysfunctional due to managerial hegemony or dominance in the decision making process. This occurs essentially in the top- down decision making approach whereby the management usually makes all the decisions. This particular dominance of the management in the decision making process has led to many corporate failures. Therefore, there is need to develop a healthy board culture whereby all members of the management and also the board are involved in decision making. Consequently, effective management accounting decisions can be attained through a culture of teamwork, whereby directors and the management work collaboratively in order to come up sound managerial accounting information that has integrity (Holloway, 2006). According to Bekefi and Epstei (2006) the decision making function in management accounting can influence the identification of political risks that may affect the company. Some companies are usually prone to political risks due to the products they offer, their facilities, industrial characteristics, customers and location. Well known examples include companies such as Wal-Mart, Shell and Nike. In addition varying political risks and also the degree of the risk affect a company when it is located in certain countries. Political risk can largely be understood as the use of political power in order to intimidate the value of a company (Diamonte et al 1996). Some of the political risks include; using political power to increase regulations and creating changes in the legal framework which may affect the operations of the company, using political power to encourage consumer boycotts which may affect the sales of the company and developing government policies that may affect the company’s current and future operations. The decision making function of management accounting is therefore a useful tool in the management of political risks. Bekefi and Epstei (2006) highlight that in order to effectively manage political risks; decision makers should develop a framework that can assist in lowering unwanted surprises that may affect the business. The framework should entail two major aspects which include identifying the existing political risks. Identification assists in refining the list of issues that can bring about effects on the operations of the company. The second aspect involves developing response strategies that assist the managers to deal with the risks. In developing response strategies for dealing with political risks, decision making tools of management accounting can be useful. This include; strategies such as cost reduction in the event that the government has mobilized consumers to boycott products. Also, a company can use environmental friendly resources in the production process in case it is required to comply with environmental regulations. A company can even change its production and marketing approaches in order to comply with regulations. For instance, food and beverage firms have been linked with the obesity endemic. A case in point is McDonalds which has often been accused of encouraging the health challenge of obesity through the manner in which it markets its products. A law suit was therefore placed against the company in 2005 January. In order to comply with the law suit, Macdonald’s begun to provide its customers with fruits and salads on top of its traditional French fries and hamburgers. The company also started to reduce the amount of fat in the potato chips. It can therefore be argued that the decision making function of management accounting can actually work towards reducing the existing political risks. Also it can be argued that the decision making function of management accounting has assisted in the realization of public sector reforms. Hughes, (2003) highlights that in the previous decades reforms have taken place in the public sector, essentially due to changes in the manner which the management makes financial decisions. Before the reforms managers used to make decisions that were mainly geared towards attaining the objectives of the government and being accountable to the minister in charge (Weller and Lewis, 1989). Nevertheless, with the emergence of new decision making models great reforms have been attained. Managers in the public sector make decisions on the basis of maximizing the value of money where resources are scarce. Decisions are also made with the objective of being more accountable when using public resources. Managers also ensure that the outcomes attained by the organization are worth the investment of funds by the government and also the tax payers. Schwartz (2003) discloses that the decision making reforms have greatly been implemented in public sector organizations such as Universities, whereby the institutions have now been taken nearer to the market, or students who are the customer. The students are then charged full prices. The universities also have made the decision to operate without regulation. Implementation of such decisions has greatly transformed public sector management of finances. Conclusion The above discussion has provided various views concerning the political implications of the decision making function of management accounting. Some of the political implications of the decision making function of management accounting highlighted include; conformity to the set accounting standards both the international and the national standards, good corporate governance essentially through the adoption of integrity in financial reporting, enables the management to maintain control over the business, attaining the interests of the various users of financial information, decision making also affect the going concern of a business , it also enables the establishment of a healthy , decision making function of management accounting has also assisted in the realization of public sector reforms and the identification of political risk. In conclusion, it can be stated that the decision making function is very significant in management accounting. 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