THE MANAGEMENT ACCOUNTING PROFESSION
Eric Kohler's widely used Dictionary for Accountants defines management accounting as: accounting designed for or adapted to the needs of information and control at the various administrative levels of an organization. The term has no precise coverage but is used generally to refer to the extensions of internal reporting for the design and submission of which a corporation controller is responsible. Repetitive reports on performance involving both product quantities and dollars, special reports covering operational areas undergoing change, or proposed for reorganization, and reports of investigations of malfunctioning or suspected inefficiencies are illustrative of the manifold activities in which the present-day controller, frequently with the assistance of the public accountant, is expected to engage. Emphasis is often given to prompt, authoritative, and complete reports that can lead to and even induce management decision making. An illustration of management accounting is activity accounting.
A CPA employed as a management accountant is responsible for developing, producing, and analyzing data useful for decision-making. These data also include information that will be reported to interested parties outside the company. Today, the number of management accountants who are CPAs is rising rapidly. Over 50 percent of the CPAs who are members of the AICPA and state CPA societies are employed in business and industry. Within a few years, the majority of members in these professional organizations will be from industry. The CPA credential is important because of the great value placed on the financial management function.
Management plans are directed toward achieving certain financial results. The company's resources must be wisely allocated and its human resources most efficiently directed. In addition, management must stand ready for and be capable of prompt access to credit and capital markets so it can finance needed expansions and research and development and so it can cover short-term financial needs. Financial reporting to investors, banks and other lending institutions, and governmental agencies must be acceptable and ready should management need to seek outside funds.
The accounting field, then, comprises more similarities than differences if we are talking about accounting standards. In some respects, ac-counting principles are of primary concern to management accountants since it is their financial statements that are submitted to independent auditors for examination. The outside auditors determine if management has, in their opinion, complied with the established accounting principles. Both groups of professional accountants are responsible for a thorough knowledge of accounting. Both have responsibilities regarding reporting of information and judgments to third parties who will rely on this information to make investment and other decisions.
There are literally thousands of large and small businesses in manufacturing, selling, importing, exporting, and service fields that might be prospective employers for management accountants, also known as private accountants. Then, too, there are different types of nonprofit institutions-colleges, hospitals, research foundations, and charitable organizations such as the American Red Cross and the USO. The variety of opportunities seems endless.
Although the private accounting field is made up of organizations of all kinds and sizes, the accounting used in every business is basically the same. On the surface, this does not always seem to be the case, because accounting records, methods, and procedures of organizations in differ-ent lines of business, or of different sizes, are dissimilar. For example, the accounting records of banks are unlike those of other organizations and, of course, the accounting methods and procedures for large companies are more complex than for small ones. But these things do not change the basic fact that accounting fundamentals and principles are the same in all organizations. This is significant because it means that an education in accounting provides the background necessary for accounting in any organization.
THE TYPE OF WORK
The nature of the work of private, or management, accountants differs somewhat from that of public accountants. Private accountants are concerned primarily with management and administrative problems. Their duties tend more to the constructive and practical aspects of accounting while those of public accountants generally relate more to the analytical and technical side.
Not many years ago, accountants in the business field were looked upon as recorders of financial history, having as their major responsibility the submission of financial data to management concerning past operations. But this has changed. Now, accountants are not only responsible for reporting on past operations but also for interpreting them for management and for forecasting future financial results and capital requirements. They have become an integral part of the management team. The top positions in private accounting require broad-gauge individuals because little can happen in any organization that does not involve money and financial planning.
There are many important positions for management accountants. The top ones in the accounting area generally carry the title of vice-president finance, controller, treasurer, or a combination of these titles. Others include assistant controller, budget director, chief accountant, general auditor, and tax manager. Management accountants also find that their training and experience provide an excellent background to advance to positions that are not strictly accounting in character.
Obviously, beginning accountants do not begin in these top positions immediately after graduation from college. A beginner might gain experience by starting as a member of the general accounting department of a company, working as an assistant to the chief accountant, or as the head of a section of the department such as the accounts receivable or accounts payable division. Beginning accountants might also start as members of cost departments, tax departments, audit departments, or with methods and procedures groups. In some organizations, new accountants are known as trainees and are rotated through several departments for periods varying from a few months to a year or more before receiving permanent assignments. Where beginners start and the nature of their work will depend on openings available, personal interests, and the indoctrination procedure of their employers.
KINDS OF POSITIONS
A detailed description of the numerous positions in private accounting would be impossible within this book. However, a good idea of the kinds of positions open to accountants in this field can be gained by a brief description of the more important accounting functions.
The responsibility for controlling accounting functions and the titles given to those having that responsibility vary in different organizations according to the size of the business, the method of operation, and the philosophy of management. In some of the larger companies, the vice-president-finance is the chief financial officer, and the treasurer and controller report to him or her. In companies not having a vice-president-finance, the treasurer is usually the top accounting and financial officer. In others having both a treasurer and controller, the controller is the major accounting executive, and the treasurer's responsibilities are limited to finance matters. Similarly, some organizations use the title assistant controller or plant accountant to designate the person in charge of ac-counting at a production unit while other companies use the title chief accountant for that purpose. Titles are not important to this discussion. The functions, rather than the tides given to those responsible for the functions, are considered here.
This position is usually, but not always, filled by an individual trained in accounting. The vice-president-finance is the chief financial officer, reporting directly to the president and assuming overall responsibility for the accounting and finance functions for which the controller and treasurer are directly responsible. The vice-president-finance would probably be the financial advisor for the company in connection with any acquisitions or merger negotiations. Other responsibilities of this position would include capital acquisition, credit policies, and cash management.
The controller (same as comptroller) is the chief accounting executive and is responsible for all phases of general accounting, cost accounting, budgets, methods and procedures, taxes, and often for internal auditing. The controller is expected to keep informed concerning all external developments having a bearing on the financial operations of the company. A person in this position must be alert to favorable and unfavorable trends in costs and sales and must work intimately with the heads of production and sales departments in order to correlate the activities of these departments and to ensure the most effective use of capital and an adequate profit margin. The job, as indicated, is extremely varied, requiring a firm grasp of business, a sound knowledge of accounting, and the ability to deal effectively with people.
The Financial Executive Institute outlines the functions of the controller as follows:
o Planning for control. To establish, coordinate, and administer, as an integral part of management, an adequate plan for the control of operations. Such a plan would provide to the extent required in the business, profit planning, programs for capital investing and financing, sales forecasts, expense budgets and cost standards, together with the necessary procedures to effectuate the plan.
- Reporting and interpreting. To compare performance with operating plans and standards and to report and interpret the results of operations to all levels of management and to the owners of the business. This function includes the formulation of accounting policy, the coordination of systems and procedures, plus the preparation of operating data and special reports as required.
- Evaluating and consulting. To consult with all segments of management responsible for policy or action concerning any phase of the operation of the business as it relates to the attainment of objectives and the effectiveness of policies, organization structure, and procedures.
- Tax administration. To establish and administer tax policies and procedures.
- Government reporting. To supervise or coordinate the preparation of reports of government agencies.
- Protection of assets. To assure protection for the assets of the business through internal control and internal auditing; to assure proper insurance coverage.
- Economic appraisal. To appraise economic and social forces and government influences and to interpret their effect on the business.
In organizations not having a vice-president-finance or a controller, the treasurer is the chief financial officer assuming the responsibilities mentioned above. The basic functions of a treasurer in organizations also having a controller are arranging for meeting capital needs; handling corporate investments; managing relations with creditors, stock-holders, and bankers; and administering insurance coverage and credit policies and collections. This position may also represent a crucial step for those aspiring to chief financial officer. It functions within the inner circle of top management.
As the name implies, persons having this title may act as general assistants to the controller or may relieve the controller of direct responsibilities in certain management and administrative areas. An assistant controller may work at the same location as the controller or may be the accounting head at a subsidiary company, plant, or product division. Some large companies having far-flung operations have several assistant controllers. The assistant controller has the same responsibility in areas coming under the jurisdiction of the office as the controller has for the entire company. The personal requirements for holding such a position are similar to those needed for controllership.
This title is often used to designate the accountant in charge of ac-counting at a particular production unit. The plant accountant would usually report directly either to the controller or an assistant controller. In some instances, the duties and responsibilities of plant accountants are the same as those of assistant controllers. The fact that "plant" is part of the title generally indicates that the person in this position is responsible for accounting at a production unit, and this usually requires a thorough knowledge of manufacturing processes and cost accounting as well as general accounting.
The person in charge of a large accounting department or several departments making up an accounting unit is often given the title chief accountant. The chief accountant generally supervises and coordinates such accounting sections as the cashier's department and payroll department and is responsible for the preparation of financial and operating statements.
The chief accountant works under the general direction of an assistant controller or plant accountant in large organizations or the controller in smaller ones. A good technical knowledge of accounting and practical experience are requisites for this job. Also, since the chief accountant is at the hub of accounting where data are collected, recorded, :
The head of a cost accounting department or large cost unit is usually known as the chief cost accountant.
Cost accounting is an extremely important segment of accounting. It deals with the allocation of the basic elements of costs-labor, material, and overhead-to products and to units of operations. It also deals with the recording and summarization of such data and its interpretation for use by management. Business in a competitive economy requires de-tailed cost information to operate profitably. Good cost accounting is the best defense against excessive costs.
Cost accountants must have a comprehensive knowledge of cost accounting, a good understanding of general accounting, and a detailed knowledge of the production and manufacturing processes relative to the products on which they are collecting cost data. Furthermore, cost accountants must be constantly on the alert to investigate variations from standards, to revise procedures in order to establish more accurate costs, and to obtain cost information in the most economical way. The good cost accountant should possess imagination, be meticulous concerning detail, and have a good sense of proportion.
The designation cost accountant is often used erroneously to describe any person working on cost records in a cost department. Most cost departments have many cost clerks but few cost accountants.
The general auditor is responsible for all auditing functions of a company and reports directly to the president, the chairman of the finance committee, the vice-president-finance, or the controller, depending on the size of the business and the line of authority established.
Auditing functions are generally carried out by a group of well-qualified auditors, known as internal auditors, whose work is similar in some respects to that of public accountants. However, auditing departments in some organizations are composed mainly of audit clerks whose duties are largely routine, requiring little if any accounting knowledge. This discussion does not include the work of audit clerks, although they do come under the direction of the general auditor.
What is internal auditing? The Institute of Internal Auditors states that "basically, internal auditing is a control that is concerned with the examination and appraisal of other controls-in seeing that the assets of a business are properly protected and accounted for, that current transactions are promptly and completely recorded, that faulty, inefficient, or fraudulent operations are revealed, and that the business is adequately protected against waste, fraud, and loss."
Some internal auditors do considerable traveling. They examine branches, division offices, and subsidiaries that may be located nearby, in other parts of the country, or even abroad. The financial audits they conduct are generally of a more detailed nature than those made by public accountants for large companies. The internal auditor's work includes a careful review of procedures to determine that company policy is being followed and to ascertain that financial data are being supplied to the head office on a uniform basis throughout the company. This uniformity is essential for accurate comparisons and evaluations of the operations of one unit with another, and it also facilitates the preparation of combined or consolidated balance sheets and operating statements for the company as a whole. The most desirable background for this work is accounting study at the college level supplemented by public accounting experience or special training in the employer's methods, procedures, and policies.
Internal auditors are frequently required to prepare comprehensive written reports covering their examinations. These reports are used by management and are usually reviewed by the firm of certified public accountants retained by the company. Public accountants can generally limit the scope of their examinations as a result of the work of internal auditors.
Taxes assessed by federal, state, and local governments are one of the major costs of operating a business. Many corporations, therefore, have tax departments composed of specialists in tax matters. These specialists establish procedures to control tax aspects of day-to-day transactions and are called on to determine the tax consequences of new projects under consideration by management. They prepare tax returns or supervise their preparation and represent their companies in contacts with taxing authorities.
Tax specialists need a good background in accounting and taxation. They must have an understanding of tax laws and regulations applicable to the various kinds of corporate taxes, such as social security, unemployment insurance, sales and use, federal and state income, franchise, and property taxes. Some employers believe that these specialists should have a law degree in addition to a degree in accounting.
Methods and Procedures
This function has taken on added significance in recent years, and larger companies have separate departments composed of accountants and industrial engineers who devote all their time to studying methods and procedures in an endeavor to reduce operating and administrative costs, improve communications relating to financial information, establish effective management controls, and improve financial reporting. In other companies, this function is not departmentalized, and internal auditors are often given the responsibility for this work. In small organizations, this function would be the direct responsibility of the controller.
Methods-and-procedures work in the business field corresponds to the work of management specialists in public accounting. Those working in this area should have training in management science and knowledge of electronic computers as well as an accounting or general business background.
Budgets are forecasts that provide a basis for management planning, operating controls, and performance appraisal. Managements of most large concerns and many medium-sized and small ones want to know well in advance how their companies will make out financially, assuming that certain sales volumes can be attained. Income and expense budgets are the source of this information since they are usually prepared for a fiscal year in advance and represent estimated standards or goals of performance by which efficiency of operations can be measured. However, if budgets are to be meaningful, the estimates used therein must be realistic and reasonably accurate-not a matter of mere guesswork. Therefore, the preparation of budgets is placed in the hands of persons trained in this work.
The budget director heads a staff that prepares an income and expense budget and obtains data relating to anticipated sales, revenue, and other income and to the estimated costs of producing that volume of sales and the amount of selling and administrative expenses involved. The staff obtains this information in sufficient detail to enable it to prepare an estimated income account for the company's whole and estimated operating statements for each department and production unit separately. Before these estimates are summarized, they are considered and appraised critically, both in relation to past performance and to anticipated future occurrences such as variations in economic trends. It is not unusual to have all estimates reviewed and approved by a budget committee composed of the controller, sales manager, and production manager before final budgets are prepared.
In addition to income and expense budgets, budgets are often pre-pared with reference to capital expenditures, cash, and inventories. Budgets of all kinds provide bases for comparing actual performance with predetermined standards. The budget director and staff make these comparisons and investigate variations.
This brief explanation of the duties and responsibilities of the budget department's staff may tend to oversimplify by omitting specific reference to the many involved problems that arise in this work. The work is not routine. The budget director and staff assistants should be well versed in accounting, have a good grasp of all phases of their employer's business, and have the ability to work effectively with others.
Credit and Collection
The extension of credit to customers and the collection of amounts due from them are not accounting functions in a strict sense. Yet some knowledge of accounting is very desirable, if not essential, because any-one responsible for granting credit must know how to analyze financial statements and related data in order to form sound judgments. People trained in accounting have the background to do this, and therefore they are often selected for credit work.
A company's credit and collection practices can have great effect on the availability of working capital as well as on customer relations. An accountant who understands the need for maintaining a fine balance and is tuned to the individual company's particular financial condition, can help establish policies that will maximize cash flow without jeopardizing future sales.
The broad objective of training programs is to accelerate the development of personnel for supervisory and executive positions. The more specific objectives are to train employees in the methods, procedures, organizational structure, and management policies of their employers. Methods followed to attain these objectives differ. Some companies do not have formal training procedures while others have programs for employees at various experience levels.
In general, only larger companies provide formal training programs for accountants, and these usually consist of planned on-the-job experience coupled with rotational work assignments. Extensive orientation and formal training programs of the classroom variety, conducted during regular working hours, are the exception; but there are a few industrial companies and financial institutions that conduct such programs. It is noteworthy, although not surprising, that most companies having well-defined training practices also follow a promotion-from-within policy.
There is no such thing as a typical training program for beginners in business organizations. Each company develops its own program, taking into account the educational background of the trainees, the work they are best equipped to undertake at the time of employment, and the general area for which they are to be trained.
Because of the variety of positions in the business field open to those having some accounting training, companies employ not only graduates who majored in accounting but also those who majored in other subjects-for example, business administration, mathematics, management, and liberal arts. However, graduates who did not specialize in accounting but plan to work in the financial area are expected to study accounting through attendance at evening schools or by taking correspondence courses. A number of companies conduct evening classes in accounting and related subjects for their trainees and even those who specialized in accounting while at college are expected to attend programs that are devoted primarily to the application of company methods and procedures to general accounting practices. Some companies arrange with local schools to provide evening classes for their beginners. In the final analysis, a substantial knowledge of accounting is apparently considered essential for advancement in the financial end of almost all business organizations.
Planned on-the-job training for graduates having different specializations indicates that an accounting major would be a logical choice for initial assignments to the cost or general accounting departments while a mathematics major might be assigned to the statistical research department and a management major to the methods and procedures department.
To attain training objectives through rotational work assignments, beginners are transferred from one department to another, spending a few months in each department, where they gain a basic knowledge of the work carried out in each department and the problems inherent in such work. This initial program may cover a period of two years or more and include periods in the cost, general accounting, budget, credit, methods and procedures, and audit departments. During their experience in these different areas, beginners are counseled and appraised by those responsible for their training, and at the termination of this program they will be given positions, which, based upon their individual performances during the training period, they are best equipped to undertake.
In many organizations, training does not stop there. Other methods are followed for greater development of individuals as they gain experience and move up the ladder. These methods vary from special evening classes, seminars, and group meetings concerning specific areas conducted by the employers to executive training programs offered by colleges, continuing education programs given by the National Association of Accountants, state CPA societies, and self-study programs.
In companies where well-defined training programs are not provided, beginners usually are employed for particular jobs, and training is obtained from their immediate supervisors. There is nothing wrong with this tutorial type of training if the supervisors are good teachers and the beginners are employed with the intention of grooming them for advancement to supervisory responsibilities. Unquestionably, more beginners start careers in business with companies not offering formal training programs than with companies where formal training programs are provided.
Greater opportunities now exist in the private or management ac-counting field than ever before. Several factors contribute to this: the expansion of the economy, the cost-price squeeze requiring ever-increasing efficiency, electronic equipment providing a means of processing vast amounts of data upon which management decisions can be made, the greater dependence of business on management science, and the continuing shortage of capable young people entering the accounting field.
Accountants are at the hub of business. Information concerning sales, marketing, production, and all other aspects of operations flow to the chief financial officer for summarization and interpretation. Having this overall knowledge of the business, the individual in this position is quite often the logical choice to be president, and the number selected to fill the president's seat has been on the increase during recent years. Certainly all accountants do not become presidents or even controllers of their companies, but the fact that the chief executive officer's post is opening up more to accounting-trained people is encouraging and is a further indication of the important role accountants are now playing in management affairs.
Capable beginners will have no difficulty in obtaining desirable positions in private accounting. The number of openings has increased not only as a result of the general expansion of business but also because many new positions have been created through the increased use of budgets and the application of computer technology and management science to business operations. In today's market, beginners can advance to more responsible positions in accordance with their capabilities.
Many beginners stay with their first employers, advancing through the ranks to important positions in the financial area. Some, after gaining experience, leave to accept more responsible or challenging positions with other companies, and others leave to establish their own businesses in management consulting or to join firms of management consultants. However, opportunities for management accountants are not limited to positions in the financial area, and a number of those who started in accounting use their background and experience as a stepping-stone to responsible positions outside that field in such areas as production and sales.