Summary by Summary by Zuwena De Freitas
Master of Accountancy Program
University of South Florida, Summer 2002
In this article Flamholtz examines the past, present and future of managerial accounting with two main objectives. One objective is to identify certain aspects of the progress made in managerial accounting in the last 20 years, while simultaneously pointing out the direction in which the field must grow if it is to continue to be relevant and useful. The second objective is to examine progress in two areas of managerial accounting that emerged during the last 20 years: behavioral accounting and human resource accounting.
There are two basic notions that underlie this article. The first one is that managerial accounting is and must always be inextricably tied to the actual organizational environment that it is intended to serve. If managerial accounting fails at this, it risks being irrelevant. The second notion is that managerial accounting has lost touch with reality and therefore has in fact lost its relevance. Flamholtz blames primarily the academic accountants for this lost relevance. According to him maintaining legitimacy inside of the universities has been the dominant force driving academic research as opposed to being relevant to the environment that academic research is ultimately intended to serve. The research methods that have been used have not necessarily been relevant to the types of problems faced by real managers and actual organizations.
The need for cost accounting came about as a result of the industrial production in the nineteenth century and throughout the middle of the twentieth century as corporations made great investments in factories, natural resources and equipment. Throughout this period, managerial accounting was essentially cost accounting. The growth of the service industry and the rapid growth of financial institutions further changed the environment in which accounting existed in the beginning of the 1960s and managerial accounting began to mean more than just cost accounting. Along with this change came the development of the field of behavioral accounting as more scholars began to see that accounting had a significant behavioral impact. During this same time human resource accounting also began to emerge. Managerial accounting also experienced change in the area of research. During the 1960s and the 1970s there was an increasing attempt to become more quantitative through the use of mathematical models. This was carried to such a degree that the journals seemed to have lost any sense of reality and research got further and further away from reality.
Behavioral accounting was concerned with looking at the impact of accounting measurement systems on the behavior of the people in organizations while simultaneously looking at the impact of human behavior on the effectiveness of accounting measurements and systems. Most of the systematic studies in this field were done in the 1970s and during this period behavioral accounting research studied issues such as budgeting and human behavior, human information processing and problem solving, and the impact of organizational structure on managerial accounting. According to Flamholtz, the very notion of behavioral accounting (accounting measurements can simultaneously affect and be affected by human behavior) has affected the way people view the world. This notion of behavioral accounting has become part of managers’ mindset.
Human Resource Accounting
The development of human resource accounting came about as a result of an increasing recognition of the importance of human assets in economics, psychology, and personnel management. Human resource accounting involves accounting for people as organizational resources and its development has progressed through several stages. The first stage involved the recognition by academicians that a method to account for human resources was needed. The second stage involved development of concepts and models for measuring the cost and value of people as organizational resources. The third stage involved experiments to apply the measurement in actual companies. The difficulties involved in finding organizations that are willing to serve as research sites has limited the number of these types of studies. The fourth stage involved empirical testing of human resource accounting information in a behavioral context. The fifth stage like the third one involved additional experiments to apply human resource accounting technologies to a variety of managerial problems.
Flamholtz uses definitions of the objective and purpose of managerial accounting given in 1966 by a committee of the American Accounting Association to show how little progress managerial accounting has made in achieving its intended goals. The objective of the accounting function is the "measurement and communication of data revealing past, present and perspective socioeconomic activities. The purpose is "to improve control methods and decision making at all levels of socioeconomic activities." Flamholtz notes that some people would even challenge the ability of managerial accounting to achieve this objective and purpose. He also notes that the accounting function has rarely played a decisive role in the management of organizations and is not central to the operations of many businesses. According to Flamholtz, people in practice rarely see accounting as a useful managerial tool. As mentioned before he blames this lost relevance in part on academic accountants. He also believes that practicing accountants and managers themselves bear significant responsibility. Managers should demand the information they need from the accounting function. The bottom line for accounting, according to Flamholtz, is that managers of smaller entrepreneurial organizations are not as sophisticated as professional mangers of the larger enterprises and they do not consider managerial accounting as having significant value.
Flamholtz presents alternative scenarios of what the future of managerial accounting might be like: the dark view, the utopian view and a most likely view.
Under the dark view scenario, the managerial accountant would have no real influence or authority in a business as he or she and the managerial accounting function would gradually be reduced to the role of a mere operational clerk. Academic accountants would also continue to publish irrelevant mathematical articles.
Under the utopian scenario, accountants would have a broader understanding of the nature of organizational functioning and become more sophisticated. They will produce timely and relevant information and managerial accounting would evolve and adapt to the changes in organizations. For example, the notion of individual accountability and responsibility accounting would be replaced with systems of team management.
The most realistic scenario involves an extrapolation of the present to the future. Accounting would just exist and would not be any more or any less relevant.
For managerial accounting to regain its relevance and usefulness a whole new culture must be developed to allow the field to grow in the right direction. The future agenda according to Flamholtz would require accounting to examine fundamental managerial processes and accountants to learn about actual organizations in order to gain insight for future research. It also requires research to be both basic and applied in order to develop practical and useful tools and concepts. Academic and practicing accountants will be required to view accounting in a broader spectrum rather than focusing on the accounting technology. With regard to the future of behavioral accounting, statistical manipulation and mathematical modeling must be replaced with relevant studies, which would result from gaining knowledge of actual organizations. Research must be done in actual organizations and should be conducted more like a cultural anthropologist. This is exactly what Flamholtz also suggest for the field of human resource accounting. Researchers in this field must also get involved in organizations to gain the kind of information that will be relevant to managerial accounting. As Flamholtz puts it: "managerial accounting must adopt a paradigm that emphasizes relevance over spurious rigor, utility over mathematical glitz, significance over imagined objectivity, and intellectual risk and daring over statistically correct but marginally imaginative studies."
Anthony, R. N. 1989. Reminiscences about management accounting. Journal of Management
Accounting Research (1): 1- 20. (Summary).
Birnberg, J. G. 1992. Managerial accounting: Yet another retrospective. Advances in Management Accounting (1): 1-19. (Summary).
Church, A. H. 1995. Overhead: The cost of production preparedness. Journal of Cost Management (Summer): 66-71. (Summary).
Cooper, R. 2000. Cost management: From Frederick Taylor to the present. Journal of Cost Management (September/October): 4-9. (Summary).
Frank, W. G. 1990. Back to the future: A retrospective view of J. Maurice Clark's Studies In The Economics of Overhead Costs. Journal of Management Accounting Research (2): 155-166. (Summary).
Gantt, H. L. 1994. The relation between production and costs. Journal of Cost Management (Spring): 4-11. (This is a presentation Gantt made in 1915). (Summary).
Horngren, C. T. 1989. Cost and management accounting: Yesterday, and today. Journal of Management Accounting Research (1): 21-32. (Summary).
Johnson, H. T. 1983. The search for gain in markets and firms: A review of the historical emergence of management accounting systems. Accounting, Organizations and Society 8(2-3): 139-146. (Summary).
Johnson, H. T. 1987. The decline of cost management: A reinterpretation of 20th-century cost accounting. Journal of Cost Management (Spring): 5-12. (Summary).
Johnson, H. T. and R. S. Kaplan. 1987. Relevance Lost: The Rise and Fall of Management Accounting. Boston: Harvard Business School Press. (Summaries and additional information).
Martin, J. R. Not dated. 200 years of accounting history dates and events. Management And Accounting Web. http://maaw.info/AccountingHistoryDatesAndEvents.htm
Shillinglaw, G. 1989. Managerial cost accounting: Present and future. Journal of Management Accounting Research (1): 33-46. (Summary).