What is Management Accounting?

When choosing an accountant to support you and your family business, what are you seeking?  What is their role?  What is their purpose? Do you require a tax accountant, a financial accountant, or a management accountant?

Up front, we should agree that the role of a tax accountant is to prepare financial information to assist in the preparation of a business’ prior year annual tax return.  The set of accounting rules employed should be consistent with the Income Tax Assessment Act 1997, which have a single purpose, to determine a business’ taxable income and how much tax is payable.  Tax laws will allow for accelerated depreciation, the deduction for prepayments, may require cash accounting only and record many agricultural transactions in a manner different to accounting standards.

The purpose of a financial statements is to report the business’ historical profit, cash flow and financial position (assets less liabilities), generally to the business owners, and usually determined in accordance with Australian Accounting Standards.

According to the Institute of Management Accountants (IMA), “Management accounting is a profession that involves partnering in management decision making, devising planning and performance management systems, and providing expertise in financial reporting and control to assist management in the formulation and implementation of an organisation’s strategy”.

The Chartered Institute of Management Accountants (CIMA), being the largest management accounting institute with over 100,000 members, describes “Management accounting as analysing information to advise business strategy and drive sustainable business success.”

The Association of International Certified Professional Accountants (AICPA) states management accounting as a practice that extends to the following three areas:

• Strategic management – Advancing the role of the management accountant as a strategic partner in the organisation.

• Performance management – Developing the practice of business decision-making and managing the performance of the organisation.

• Risk management – Contributing to frameworks and practices for identifying, measuring, managing and reporting risks to the achievement of the objectives of the organisation.

Whereas financial accounting is a historical viewpoint, management accounting information is primarily forward-looking. Again, from Wikipedia: “Management accountants are seen as the “value-creators” amongst the accountants. They are more concerned with forward-looking and taking decisions that will affect the future of the organization; than in the historical recording and compliance (score keeping) aspects of the profession.”

At PrincipleFocus, we are driven by a focus on opportunities and possibilities, a focus on the future.  We can’t change the results achieved last year, last month or even yesterday.  We can only learn from them, and we can only learn from them where the historical results report profit, not taxable income. 

We consider that the label “management accountants” can be applied to much of what we do, the role we enjoy the most, and the role that delivers the highest value for our clients.  By the way, we also do the historical tax and financial accounting, but those functions alone just don’t make businesses better, do they?

Peter Debus is a director at PrincipleFocus, a Chartered Accountant, Chartered Tax Adviser and a Graduate of the Institute of Company Directors.