At first blush, a statement of principles for management accounting from two big accountants’ associations appears to tell us what we already knew. Upon closer examination, it could serve as a handy guide for corporate finance departments.
The document, prepared jointly by the American Institute of Certified Public Accountants (AICPA) and the Chartered Institute of Management Accountants (CIMA), sets forth four overriding principles for a management accounting function that effectively improves decision-making in organizations. AICPA and CIMA hardly needed to do what they did — conduct qualitative research across 20 countries in five continents and provide a 90-day comment period in which more than 400 people participated — to come up with these basic principles:
Any management accountant might be aware that those elements will define how effective he or she will be after a couple of months on the job. “This document is a way to pull together at a high level some core principles of management accounting,” says Paul Parks, AICPA’s associate director of management accounting. “Certainly they’ve existed before. For example, communication that provides influence is something we all strive to do.”
The real value of what the two accountants’ organizations created becomes evident in the second half of the 53-page document. It contains fairly comprehensive checklists of best practices for applying each of the four major principles to 14 finance and accounting disciplines:
Take, for example, cost transformation and management. Listed under “Communication provides insight that is influential” are the following best practices:
1. Cost targets are discussed and developed in conjunction with colleagues and business partnerships to gain buy-in.
2. Plans for execution of approaches are agreed with relevant employees and business partnerships.
3. Cost plans are broken down into components appropriate to the various stakeholders.
4. Reports are produced on how well cost management approaches are rolled out across the organization.
5. The drivers of costs are analyzed and discussed with relevant employees and business partnerships so that those drivers can be effectively managed in the future.
Under “Information is relevant” are:
1. Cost drivers are known and recorded.
2. Cost driver measurement results for every component of the end-to-end business model are compared over time.
3. Costs are compared with equivalent costs from relevant organizations.
4. Asset utilization is compared over time and with best-in-class benchmarks.
5. Costs from previous years at aggregate, departmental/functional and product levels are known and compared.
Under “Impact on value is analyzed” are:
1. Relevant data models are used and value-generation processes refined to estimate the impact of processes on outcomes.
2. The business model is challenged and assessed for cost effectiveness.
3. Performance measures for drivers of costs are developed or refined across the components of the business model. The impact of cost drivers on key results is calculated to understand value generation and preservation.
4. Through interpretation of the value drivers across the business model and value chain, approaches are designed to improve cost outcomes.
5. Rational but stretching cost targets are developed.
6. Value-chain efficiency is compared over time.
7. Cost transformation processes are regularly reviewed so that activities continue to be relevant to stakeholder needs.
Under “Stewardship builds trust” are:
1. Employee incentives are designed that drive alignment of behaviors with organizational objectives and projected future needs.
2. Compliance is always maintained with internal policies and procedures and, as required, other relevant legal and regulatory obligations.
3. Opportunity costs are calculated and recommended on the basis of net value to the organization.
The other 13 finance and accounting disciplines are similarly broken down into their component parts that are relevant to management accounting. “This document is designed to help CFOs and their teams look at how their accounting function is operating and spot ways to improve it,” says Parks. “A lot of companies may be doing some of these best practices, but it offers an opportunity to be self-critical and reassess whether you’re doing them to the level you want to.”
That said, many items in the checklists are too often just plain missing from companies’ finance and accounting playbooks. One example, from the “Information is relevant” checklist in the “Cost transformation and management” section, is “Costs are compared with equivalent costs from relevant organization.” Says Park, “I’ve spent most of my career managing finance organizations, and it’s surprising how often companies don’t do a good job of benchmarking themselves against the competition. Or they’ve done it, but it was six years ago.”
Another such example is in the “Stewardship builds trust” checklist of the “Investment appraisal” section. One item there is, “Post-investment audits are carried out and assessments made of the actual benefits realized compared with projected values.” Lots of management accounting teams do a great job of analyzing investments for approval, Parks says, but many simply ignore the important post-investment assessment.
Taken together, the checklists reflect the diversity of the finance function. “I’m a person who left public accounting and went into industry, and the range of duties you have is very broad,” Parks says. “This is a very practical document that enables a type of benchmarking of the finance function. We know our members are looking for this. Benchmarking always rises close to the top of the list of resources they want. You can look at a bullet point in a checklist and say, ‘We probably ought to be doing a better job there.’ That’s when you roll up your sleeves and figure out how.”