College aantekeningen
Samenvatting Advanced Management Accounting
- Instelling
- Vrije Universiteit Amsterdam (VU)
Samenvatting en college aantekeningen Advanced Management Accounting
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Advanced Management Accounting – Lecture summaries and notesLecture 01: Introduction & Management Accounting Evolution
Management accounting is concerned with the generation, communication, and use of
financial and non-financial information for managerial decision making and decision control.
Decision making: how to use information to make better decisions.
• In order to make (better) decisions, uncertainty has to be reduced.
Decision control: evaluate on decisions made, after some time.
• Assess the profitability of units/products.
• Stimulate and reward employees.
Information has value when it has the ability to change the outcome of a decision.
The value of information is to decrease uncertainty.
Management accounting is covering a lot of information. The question is how to report this
information to allow managers for making decisions.
Tension between decision making and decision control because it uses the same
information:
1. Management might anticipate in the decision making process the target and create
slack so the target can be achieved (creating circumstances that allow the target to
be achieved)
2. Misrepresent outcomes in order to make themselves look good when in the decision
control process.
Balancing the dual responsibilities of business unit controllers (Maas and Matjeka 2008
Accounting review)
Role of the controller/business unit controller:
• Local responsibility: help the business unit controller make the right decisions.
• Functional responsibility: report to headquarters(HQ) how the business unit is
performing.
Tension for business unit controller: report a favorable outcome to HQ or be honest and
report the actual outcomes. In other words, there is an incentive to create a better picture
than actual is the case for the business unit.
The tensions that holds for the business unit controller also holds for the CFO.
The CFO might show a better picture of the firm’s situation to shareholders and the board
than actually is the case.
Changing roles of the controller over time:
• Historic: bean counter and prepare documents.
• Improve ‘business orientation’: participate more in operational and strategic decision
making.
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,Advanced Management Accounting – Lecture summaries and notes
• Scandals, resulting in new corporate governance regulation: Controllers becoming
more independent (e.g. performance dependent rewards of CFO < CEO) (e.g.
Sarbanes-Oxley act).
Theoretical model (Modigliani and Miller) Hypothesis 1: Dual responsibility of the business
unit controller.
• Local responsibility: add value to the business unit and identify opportunities.
• Functional responsibility: providing higher levels with information about the business
unit (e.g. concern controller), acts as a watchdog.
Watchdog: ‘When the business unit manager wants to show other figures, paint a nicer
picture of the company, and the business unit controller does not agree with that, he has to
first of all discuss it with his business unit manager and when they do not come to a
conclusion, the business unit controller will always come to CFO/controller and tell me that
he does not agree with the figures he is forced to report and then the business group
executives go to the business unit manager’.
Theoretical model (Modigliani and Miller) Hypothesis 2: When functional responsibility is
more important (and therefore local responsibility less important), data manipulation will be
less.
• Direct effect of functional responsibility on data manipulation.
Manipulation: slack building into budgets, shifting funds to meet performance goals, etc.
Theoretical model (Modigliani and Miller) Hypothesis 3: A dual role increases role conflicts
and role ambiguity.
• ‘You have to allow some range for the game. You must not want to know everything.
What you do have to know is whether they themselves know. For me, a business unit
controller and a business unit manager are one party. I treat them as one. I do not
want to sit in between them because they have to work together’.
• There is an indirect effect.
Theoretical model (Modigliani and Miller) Hypothesis 4: Role conflict and role ambiguity
might lead to data manipulation (e.g. slack generating, shift funds, etc.)
• ‘The business unit controller was very close to the business unit manager, he stood
together with the business unit manager to defend the budget against the business
group. The same was true for investments, both tried to sell them. For example, you
could decide towards the end of the year to expense less and to capitalize more
investments to meet your target’.
• Of a business unit controller: ‘Of course, there are a number of rules that you follow,
yet there is always some room, some gray areas and those often really matter’.
• Design failure of business unit controller in the company resulting in misreporting of
data.
Hypothesis 3: a dual role increases role conflicts and role ambiguity, is the most important
hypothesis.
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,Advanced Management Accounting – Lecture summaries and notes
Afbeelding 1: Full model (Maas & Matejka).
From the Maas and Matejka model you can derive that when the functional role is more
important, the local role of the business unit controller is neglected.
Results, study Maas and Matejka:
• Hypothesis 2: direct negative effect, impact of functional responsibility results in data
manipulation.
• Hypothesis 3 & 4: indirect positive impact of functional responsibility on data
manipulation.
• All hypothesis accepted, except for hypothesis 2. There is only a negative impact of
high emphasis on functional responsibility.
• Controller value local role > controller value functional role.
The dual role of controllers leads to goal ambiguity which increases the likelihood of
manipulation of data.
Controllers and their fiduciary duties (Eskenazi, Hartmann and Rietdijk 2016, AOS)
Social pressure from business unit managers and others to optimize business unit
performance.
The ability to withstand pressure is a key professional competence of a business unit
controller.
Human mirror neuron system (hMNS): a region in the brain that understands other peoples’
emotions. Automatic mimicking of emotional facial expressions, stable personal trait,
explains why some people are more receptive and responsive to other feelings.
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, Advanced Management Accounting – Lecture summaries and notes
hMNS Hypothesis: hMNS predicts controller’ vulnerability to social pressure.
Experiment: answer whether controllers would cooperate with suggestions of business unit
managers. Measure of nMNS in which a low value was associated with more mirroring and
more sensitives to emotions of others, a high value was associated with less mirroring and
less sensitives to emotions of others. Expectation was that when the measure of nMNS
decreased, cooperation with the business unit managers increased. Results: A low nMNS
measure associated with higher cooperation with business unit managers.
Some people are better able to withstand pressure than others. This information and the
way of measurement could be used in hiring decisions.
Evaluation of management accounting (Groot and Selto, 2013 Chapter 1)
Management accounting information became more complex over time due to:
• Market-internal transactions: the level of integration of value chains.
• Organizational structure: Centralization and decentralization.
• Increased complexity of the production processes.
Recent innovations are developed by consultants that try to sell innovations, instead of
innovations developed by employees working in firms.
MAScomplexity over time (18-20 Century)
Complexity
MAS-system
ROI
Du Pont chart
Budgeting
Variance analysis Reward systems
Indirect costs allocation Transfer pricing
CVP analysis
-Unit costing Scientific management movement
-productivity info
-gross margins
-efficiency/ coordination
-Only financial
transaction information
Begin 19th Cent. Beginning 20th Cent.
-Multi phased production -Large diversified org. (Du Pont, GM) Time
-Textile/ Armories End 19th Cent. -multidivisional structure
18th Cent. -
-Family business -Large scale production
-integrated production -Communica tion 31
-Railroads/ Metal
Introduction BU controller History of management accounting 3 from 11
Afbeelding 2: Time of management accounting system complexity.
Management accounting knowledge comes from practice, where models, methods are
developed.
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