What Is Strategic Management Accounting?
Introduction—The Importance of Strategic Management Accounting
Globalization, digitization, and increased competition continue to increase the competitiveness of the business landscape as well as the pace of changes. Organizations in virtually every industry, and specifically the management teams at said organizations, are under scrutiny from an increasingly broad set of interested parties. Shareholders, activist investors, environmental groups, and other interested external stakeholders require information and quantitative data in order to evaluate organizational performance. In order to satisfy these requirements, it is important that management professionals assess and review the appropriate information. Several trends, partially in response to these extrinsic forces, and also partially in response to transitions occurring organically, are converging to address these evolving requirements and demands. Integrated financial reporting, representing an iteration and evolution of several types of nontraditional reporting, blends elements of financial and nonfinancial information including aspects of corporate governance, sustainability, and risk management at an organizational level. Such a formalized template provides a platform and vehicle for management accountants to play a more proactive role in the decision-making process. Designed to be more forward-looking and comprehensive in nature than traditional reporting, integrated financial reporting provides a more comprehensive and holistic view of financial performance and the health of the organization.
Additionally, and more pertinent to the finance and accounting fields, is the reinvigoration of strategic management accounting (SMA). SMA, and the recent increase of research and conversation about this concept, appears to be linked to the rise of nontraditional reporting, including integrated financial reporting. As organizations require large amounts of data to disseminate to a broad range of stakeholders, several nontraditional factors must be factored into the business of decision-making process. In order for this to occur successfully and consistently over time, however, there are several steps that must happen at an organizational level. This realization and the reality that organizations rely, in large part, on the data that is controlled, managed, and analyzed by management accountants should not be lost on management accountants. The challenges that confound management teams across industries and that have made reporting and compliance more complicated have simultaneously created numerous opportunities for management accountants who are proactive and forward thinking.
First, information must be quantified and collected using a consistent and standardized process. This step, and the underlying decisions and judgment calls that drive it, can be a difficult, but necessary, part of the process. Second, the said information must be made comparable to, and integrated with existing operational and financial data. Third, and arguably most important, is that senior-level decision makers must have the ability to analyze, discuss, and explain the information presented and communicated to end users. Stated another way, the information generated and analyzed from operations, which includes financial information, must be presented in a format that is understandable even to nonfinancial experts. Accounting professionals, already embedded in virtually every area of the organization, and increasingly tasked with assisting with technology and operational upgrades, are uniquely situated to leverage changes in the market to accelerate this transition. This transition, from financial reporting expert, to business decision maker, is not a straightforward or simple concept, but the opportunities available to those professionals willing to seize them are substantial.
SMA in a Stakeholder Landscape
Enron, WorldCom, the London Interbank Offered Rate (LIBOR) rate-fixing scandal, and the financial crisis that consumed the entire globe are just a few examples of how poor management, poor data quality, and a lack of comprehensive follow through can negatively affect organizations. In the increasingly complicated business environment following these multiple crises, business management and reporting must evolve. The underlying business issue appears to be that managerial professionals are uncertain as to how best to address various stakeholder reporting demands. Stated in a different way, there is uncertainty surrounding the investments in training and implementation of new systems, that is, will the financial benefits exceed the costs? The specific problem is that organizations are investing in integrated reporting research and implementation without knowing if it improves financial performance (Roth 2014). One area of guidance is from nontraditional stakeholders, as these organizations have the potential to more fully integrate the value creation process for organizations, to the benefit of all stakeholders (Garriga 2014). This new paradigm, one of activist stakeholders, requires a new mindset and framework as to how organizations deploy internal resources and personnel. Reframing the role of accounting within the organization allows the finance/accounting function to assist firms in dealing with this increasingly complicated environment (Skærbæk and Tryggestad 2010). Additionally, there is increasing regulatory and stakeholder interest in developing standards, and metrics to assist in addressing concerns that continue to dominate the discussion of the sluggish worldwide recovery (LeBlanc 2012).
Incidents such as the emissions testing violations at Volkswagen, which occurred during 2015, demonstrate the continuing need for improved information, communication, and reporting tools. This applies to both financial information such as profitability and return on investments (ROIs), and the operational data that drive the financial results. Management accountants, already embedded within the broader decision-making process, are uniquely well positioned to assume a more proactive role. It is important to remember that compliance and other operational information virtually always have a financial bottom-line effect on organizational performance. Linking together operational information, however plentiful and comprehensive, to reporting systems and methodologies is not a simple task, and doing so requires the integration of accounting and accounting systems with other information systems within the organization. Acknowledging the proliferation of stakeholders, the necessity of increasing stakeholder-oriented reporting, and the increased importance of nontraditional information of business decision making provides an opportunity for accounting professionals. Chief financial officers (CFOs) are increasingly responsible for not only the financial reporting and results of the organization, but also for how the organization reports operational results to various stakeholders. Summarized by Hasan (2015), the five major categories and areas that CFOs are now held accountable for include providing accurate and actionable data, bringing speed and efficiency to the analytic process, leveraging technology (specifically the cloud), improving the forecasting process, and managing the data security and risk management of the organization.
Clearly, the role of the CFO, as well as the direct reports of the CFO, continues to evolve and shift in response to marketplace demands and realities. Accounting professionals must obtain and refine the skills necessary to not only remain up-to-date on accounting regulations, but also to take advantage of the opportunities present in emerging areas. Elevating both professionals working in individual organizations, as well as the accounting profession itself, to a role more akin to strategic business partner, is a transition that is currently underway. The transition of the accounting role, however, is merely a symptom of a larger shift in the way businesses operate, and how organizations engage with each other as well as with end users.
It can be argued that the only true value that the accounting and finance functions can deliver to the enterprise is the value of good information, that is, the information that can be leveraged and utilized to make better business decisions. Transforming operational data into financial information for decision making is a key aspect of business and strategic planning, and accounting and finance professionals must be able to generate and disseminate the appropriate information to a wide variety of stakeholder groups. Organizations, regardless of the specific industry or whether or not they operate on a for-profit basis or as a not-for-profit, have two primary functions that must be accomplished in order to continue operating on an ongoing basis. First, organizations must create more resources through operations than those consumed via operations, and second, organizations must effectively allocate existing resources that are available to the management team.
Business is much more than simply selling goods and/or services. Businesses have powerful impacts on both internal and external stakeholders, and this concept permeates the economic theory and concept of externalities. Linking the somewhat abstract concept of externalities to a more concrete example, Hiller (2013) argues that there is demand growing for innovative forms of business and management to help satisfy the need for comprehensive performance information, adding to pressures already placed on organizations. In essence, this represents a signal from the marketplace stating that business as usual will not suffice in the 21st-century business environment. As demands grow for more accountability, real-time data and managerial tools, and more flexibility from businesses, business professionals face an ongoing challenge. How can the business community satisfy traditional financial stakeholders, provide nontraditional stakeholders with the information they need, and communicate all of this to the marketplace? Findings and analysis of existing literature, pertaining to integrated financial reporting, appear to lend support to such a model as a method to address a complicated environment. Linking corporate governance to business decision making and financial reporting is an integral aspect of the reporting framework, and provides a pathway and framework to a higher level of strategic decision making (Starbuck 2014).
Integrated Financial Reporting
Developed and implemented by the International Integrated Reporting Council (IIRC), integrated financial reporting, developed, promoted, and now implemented worldwide, can offer a comprehensive solution to this business dilemma. Establishing communicative processes for both the costs and benefits of utilizing integrated financial reporting is an integral next step in the development, adoption, and evolution of integrated reporting in the financial reporting process (Monterio 2014). Through the International Federation of Accountants, global regulators, industry associations, investor groups, and practitioners, this one report integrates all aspects of business performance. The IIRC, through reports, research studies, and implementation, has sought to establish an industry definition of integrated reporting. Additional research and data that was analyzed builds on this analysis, and proposes that integrated reporting emphasizes the synthesis and analysis of both financial and nonfinancial data that is material to stakeholders (Abeysekera 2013). Through quantifying and reporting on the impact that nontraditional measures can have on financial performance, which includes environmental impact, societal impact, corporate governance, and developing five types of capital in addition to financial capital, an integrated reporting structure quantifies what has traditionally appeared only in footnote disclosures. Accountants might frame the argument in this manner: in order for organizations to realize the full benefits of utilizing an integrated reporting structure, the organization must utilize certified public accountants and the internal accounting/finance function overall in a strategic manner (Hughen, Lulseged, and Upton 2014).
Establishing such a quantitative relationship between organizational information, including aspects of corporate governance, and the effect that such items have on financial performance, is a critical connection toward the development of integrated financial reporting. Drilling down, an integrated financial report represents a more comprehensive and holistic view of organizational performance, but in order to fully reap the benefits of such a framework, qualitative information must be presented in a logical and consistent manner. Bringing together elements of both financial and nonfinancial data represents an opportunity and a challenge, however, for both preparers and users of these reports. Virtually by definition, quantifying and reporting on nonstandardized information such as items related to corporate governance is a multifaceted endeavor.
As it relates to emerging areas of importance for management accountants and organizations in general, the linkage between concepts such as integrated reporting and the information required of organizations is readily apparent. Moving beyond the reporting requirements themselves and understanding the integrated reporting framework are critical for both the proponents of integrated financial reporting and organizations wishing to examine the concept in more detail. In essence, moving beyond integrated reporting and realizing the implications of this concept necessitate an understanding of the six types of capital that underpin the theory: financial; manufactured; natural; intellectual; human; and social and relationship capital (Jhunjhunwala 2014). Analyzed in more detail throughout this text, a multiple capital model is a critical concept for management teams to understand, utilize in business decision making, and apply to the strategic planning process.
The ability to leverage and build on the inclusion of multiple types of capital into existing reporting frameworks is an essential aspect of what SMA actually means. Reporting and analyzing information from multiple perspectives, and understanding just how these different types of information drive organizational performance, are imperative in a business environment that is increasingly driven by factors outside of traditional business areas. Incorporating nontraditional types of information, qualitative data, and embedding this information in the decision-making process is no simple task. It is, however, one that increasingly appears to be necessary in order to successfully navigate and succeed in a fast-moving business environment. It is critical, however, that any discussion or analysis of integrated financial reporting and the feasibility of adoption of integrated financial reporting include an analysis of the multiple capital aspect of integrated reporting.
Accounting professionals already have the existing skills and abilities necessary to quantify and report on disparate types of information, and integrated reporting is simply an extension of existing skills and aptitudes to address new market requirements. In place of developing entirely new skills and competencies, the much simpler task facing the profession is to simply refine and further develop existing skill sets to meet the needs of the marketplace. Simultaneously, as the utilization of nontraditional and integrated reporting has increased, the accounting profession continues to evolve and change into a role more akin to strategic partner. This convergence and simultaneous rise in the consciousness of both researchers and practitioners do not appear to be a coincidence. As increased scrutiny is brought to bear on organizations from an increased number of angles, it is relatively straightforward to conclude that better and more consistent information is necessary. Accounting professionals, tasked with roles linked directly into the production and dissemination of organizational information, are well positioned to elevate their contributions accordingly. After appearing to have receded from discussion and research, the concept of SMA has resurfaced.
Stakeholder Reporting
Stakeholder reporting, mentioned previously as an introduction before being expanded upon later, is the theoretical underpinning of both integrated reporting and SMA. Stakeholder-oriented reporting is, almost by default, a broad-based approach to dealing with the necessities of the post-financial crisis business environment. In an environment increasingly driven by both financial and nonfinancial information, a more integrated accounting team is necessary to satisfy decision making criteria. In order to accurately evaluate and judge both the management of the organization and organizational performance, it is imperative that end users have access to financial data as well as to information that has financial ramifications. Put simply, stakeholder reporting, as a theory, supports the concepts and tactical applications of reporting linked to sustainability, corporate governance metrics, and how risk management plays a role in strategic decision making. Coupled with the increasing digitization of information and the connectivity that now exists between organizations and customers/ stakeholders, the implications are profound. In order to succeed and thrive in a business environment that demands larger amounts of information focusing on a broader range of areas, organizations must be able to produce and communicate information on a timely basis.
Business continues to increase in terms of both complexity and speed, and these trends have a direct effect on the accounting profession. Information and management decision making occur on a continuous basis, and have ripple effects that span the globe. One prime example of a stakeholder-oriented mindset applied to the marketplace is that of Boeing, a multinational aerospace organization that engages with corporations, governments, and NGOs on an ongoing basis. Analyzed by Carlon and Downs (2014), Boeing integrated the concepts of stakeholder reporting and valuation into the financial reporting process in a material way, with significant financial benefits. In addition to the changes necessary to create and support stakeholder-oriented data, the organization realized increased transparency and insights into just how costs and revenues associated with R&D, customer retention, and environmental compliance affect the organization. These items, which are just a few of the many factors that drive organizational performance, clearly require analysis and understanding in order to best manage the organization and create value.
Stakeholder reporting is not a new concept or idea, but the proliferation of reporting demands and requirements placed on organizations has led to a reinvigoration of the stakeholder concept. As businesses and organizations are held to higher standards across a broad swath of financial and nonfinancial aspects, it is readily apparent that organizations must be able to quantify, report on, and analyze information that comes from a number of sources and is distributed to a large audience. Information, specifically quantitative data, forms the foundation of business decision-making and planning, but the data must be organized and presented within a qualitative framework. Especially as nonfinancial stakeholders received more information on a recurring basis, the importance of linking together qualitative and quantitative information is difficult to overstate.
The very essence of stakeholder orientation and reporting recognizes the following reality—the business landscape has changed and become increasingly oriented toward a multiuser model of financial and operational data. Embracing this fluid and dynamic landscape necessitates that accounting, finance functions, and the individuals who work within these functions embrace a more comprehensive and holistic view of the role accounting plays. Instead of merely reporting historical financial information to a narrow group of creditors and equity holders, accountants should truly become masters of data and data analysis. In order to successfully manage this transition, however, accounting professionals must be willing and able to approach work, workflow, and processes in a more flexible and forward-looking manner. Framed in a slightly different way, if accountants want to play a more proactive and decisive role in the strategic decision-making process the management accounting function must become more strategically oriented.
Strategic Management Accounting & Integrated Reporting
SMA represents the transition of accounting services and accounting professionals from the role of historically oriented record-keepers to that of action-oriented professionals who assist in senior-level decision making. Increasing digitization of the global economy has influenced virtually every type of organization, and business leaders are now expected to be well versed in the various types of information produced and collected by their organizations. Increasingly, it is becoming clear that organizations best able to make use of information will be the organizations best positioned to succeed, such as Amazon, Google, and retailers such as Kohl’s. Strategy, drilling down to the core issue and ignoring labels or characterizations such as disruptive innovation or blue ocean strategy, is based on quantitative data. Specifically, strategy is a qualitative activity or idea that is heavily dependent on data, that is, quantitative information. Data, and the insights that can and should be generated from the data collected by an organization, are what enable senior-level decision makers to make appropriate choices and selections for the organization moving forward.
That said, simply being able to generate and analyze organizational data is insufficient from a strategic planning perspective—the information must be able to then be used to develop action-oriented business activities. In order to develop and execute a cohesive organizational strategy, business decision makers must be able to integrate the following three areas. First, data must be generated consistently and reported in a format that is understandable and useful to the end users. Second, the financial implications of nonfinancial data, such as information related to environmental compliance, governance metrics, and broader changes in the business landscape, must be clear and communicated throughout the organization. Third, and arguably most important, is that such information must be incorporated into any discussions or plans related to strategic initiatives, plans, or expenditures. Better information, and information that is understood by all parties, is a key driver of effective decision making.
In spite of the apparent widespread acceptance and agreement regarding the importance of the transition of accounting professionals to thinking and behaving in a more comprehensive and strategic manner, the market realities of the situation are far from consistent or altogether positive. Several ways in which management accounting appears to be playing a less relevant role in both the academic and practitioner communities include less representation in MBA programs, fewer scholarly outlets and publications, and a perception that management is less a broad-based competency than a specialized niche (Krishnan 2015). Such perceptions, limitations on the profession, and management accounting specifically, must be combated with vigor by proponents and supporters of a more strategic management function. Linking together management accounting and organizational decision making is a critical next step that must take priority as business continues to evolve and move forward.
SMA, in essence, represents an evolution and transition of accounting and financial professionals from financial reporting and analysis to the role of predictive analytics and forecasting information for business decision makers. Being able to make best use of the increasingly digitized information, and the real-time demands of stakeholders with regard to information and data-driven decision making, require that organizations become proactive in how they address and integrate informational requirements into business decision makers. It is up to the individuals working within the profession to embrace the changes occurring within the industry, and integrate existing skills into the developing needs of the broader business community. Whether the strategic initiative is related to information technology, nontraditional financial reporting, or getting better analytics out of existing data, the underlying message is the same; accountants must think more strategically about the role they play within the organization. In order to execute this transition smoothly, the accounting professionals attempting to evolve into strategic decision makers must be able to integrate a wider variety of information and decision requirements on a continuous basis.
Integrated reporting, and the different aspects included within this framework, can be linked directly to a more strategic accounting function. Regardless of specific industry, it is increasingly clear that financial and accounting professionals are tasked with operational and strategic decision making. Involvement in strategic planning, capital budgeting, operational efficiencies, and developing reporting templates for dissemination to both financial and nonfinancial stakeholders, result in management accountants being embedded within critical areas of the organization. In addition to the quantitative data and metrics that form the foundation of decision making, it is important to be able to understand the qualitative foundation underpinning the information. Since management accountants are currently involved in the gathering and analysis of data, it is logical to conclude that these professionals will have the ability to explain this information to both internal and external users. The ability to articulate, explain, and connect to the broader business issues at hand are key characteristics of strategic thinking. Accounting professionals must embrace such a mindset to evolve and elevate the work product currently produced. Two specific areas of importance to integrated reporting and SMA are corporate governance and sustainability.
Strategic Management Accounting & Governance
Linking back to the concept of integrated financial reporting and several of the critical components therein, specifically corporate governance and sustainability matters, management accountants are already involved in updating and improving reporting and disclosures to external stakeholders. Yahoo, the U.S.-based e-commerce organization, as well as Alibaba are both examples of how corporate governance concerns can significantly affect financial performance and managerial concerns. Under new leadership, Yahoo, beginning in 2013, embarked on a string of high-profile acquisitions and personnel hiring that led to increased scrutiny as core operations continued to grow sluggishly, and eventually became stagnant in 2014 and 2015. During this time, up until the end of 2015, sluggish operations and lackluster management results were overshadowed by the significant ownership stake held by Yahoo in the Chinese e-commerce giant Alibaba. Complicating the situation further, disclosure of a 2014 data breach was only made public in 2016, jeopardizing the potential sale of Yahoo to Verizon. Following the IPO of Alibaba, however, investors were able to invest in Alibaba directly instead of purchasing Yahoo shares as a tracking tool. The increased scrutiny combined with a lack of management strategy and narrative led to a depressed valuation of the organization’s shares. The fate of a once cutting-edge Internet and technology organization boiled down to whether or not the core assets of the business could be sold off to a larger telecommunications organization or to a private equity organization. Better governance and governance data management might not have been able to prevent this, but it would have at the very least made analysis simpler and less complex through improved communication and data clarity.
Corporate governance represents how organizations interact with both internal and external decision makers and partners, and is an essential area in which accounting professionals can add value to the decision-making process. Interacting with stakeholders, both financial and nonfinancial in nature, requires that the information produced and disseminated to users be consistent, robust, and comprehensive in nature. Developing and implementing policies and procedures to create and authenticate the information produced by accounting systems and organizations align with existing strengths of the accounting function that can be leveraged and extended to governance reporting and analytics. Communicating clearly and consistently with stakeholders represents an area of competitive advantage in a business environment increasingly focused on information and real-time communication. In addition to clearly communicating and disseminating information, the creation of reports, dashboards, and analytics linked to corporate governance is a clear way in which accountants can add tangible value to the organization.
Corporate governance, highlighted by periodic organizational failures and episodes of mismanagement, has clearly evolved and adapted over time to changing marketplace conditions. Implementation of legislation such as the Sarbanes-Oxley Act and Dodd-Frank Act, coupled with increasing pressure from activist investors and other stakeholders, has resulted in a reassessment of what specifically governance means in terms of management research (Tihanyi, Graffin, and George 2015). As a result, besides the additional regulation and informational requirements, the concept and implications of corporate governance for management teams have become increasingly complex. Such complexity, however, provides an opportunity for management accountants willing to think creatively about how to best leverage existing skill sets.
Improved accounting and management of the corporate governance process, while unable to solve the core issues plaguing Yahoo operations, would have enabled the organization to more effectively communicate both the issues being faced, as well as management’s plan to address these concerns. While Yahoo has been the focus of this discussion, the principles and tactics can and should be applied to any organization facing increased competition, organizational change, or a change in organizational strategy. Communicating and disseminating information to interested parties in a clear, consistent, and logical manner is essential for effective business decision making. Market-based support for a more quantitatively based and proactive approach to corporate governance analysis is demonstrated by the growing discussion around corporate governance, as well as the proliferation of analytics related to corporate governance.
Specifically, as it pertains to successfully addressing activist investors and other critics of managerial and board practices, the more quantitative data that can be brought to bear, the stronger the argument becomes. Organizations are in need of professionals willing to improve the consistency and quality of governance information, and accounting professionals appear to be uniquely positioned to accomplish such goals. Recent public debates regarding the growing importance of governance as it relates to doing business overseas, succession planning, executive compensation, and the strategic planning of the organization are clear indicators that the need for such information will only increase.
Strategic Management Accounting & Sustainability
Sustainability is an ongoing issue that is of increasing importance for organizations operating within mining, timber, or other extractive industries, but the scope of sustainability and environmental reporting continues to expand. While carbon dioxide levels, water treatment solutions, and safety controls to prevent leaks and spills are relatively high-profile utilizations of sustainability accounting, there is much more occurring in these areas, which is bringing these areas increasingly into the spotlight. The Sustainability Accounting Standards Board (SASB), a not-for-profit organization located in San Francisco, has been working, since 2011, to develop and communicate sustainability accounting standards for publicly traded organizations. Differentiating itself from optional standards and assurance previously issued and still in existence within the marketplace, the standards developed and communicated by the SASB are specific, quantitatively driven, and comparable between different organizations operating within the same industry. Such development, of assurance and reporting standards that are based in quantitative data as opposed to purely qualitative description, is an area where management accountants can assume a decisive leadership role. Standardization and consistency represent two logical areas for which accounting professionals apply existing skills and competencies in order to improve existing workflows and informational results.
Building on these themes of developing quantitative metrics, it is interesting to note the strong similarities that exist between financial reporting and assurance standards, and emerging areas of strategic importance. Many of the same challenges associated with reporting and assurance standards, namely consistency and comparability, are very similar to the challenges that nontraditional areas face, such as corporate governance, sustainability, and risk management practices. Organizations and users of organizational information require that the information presented to them be consistent, comparable, and relevant, akin to the requirements associated with financial information that is currently disseminated to end users. Management accounting professionals can leverage existing skill sets, knowledge, and placement within the organization to assist with the development and communication of these badly needed standards. Robert Eccles, considered by many researchers to be an authority on this issue, summed up the conversation by stating that whether or not the standards are industry specific or overall standards, establishing that such standards will greatly assist with the adoption of sustainability reporting standards.
Linking together research from thought leaders such as Eccles with market realities, it is clear that a definitive need exists for standardized financial reporting, metrics, and frameworks as they relate to sustainability and organizational performance. Framed in the context of a case study instructional tool, the primary challenges associated with sustainability reporting and information consist of a nonexistent reporting framework, minimal assurance standards, and a dearth of industry-wide practices (Bouten and Hooze 2015). Stated in such a way, framed as almost a case study problem to solve, it presents benefits to organizations seeking to improve current reporting on such measures. Namely, by outlining the current situation, outstanding issues, and ideal ending place, it provides structure, clarity, and a familiar way to approach the issue. This is essential when dealing with an issue, such as improving reporting, that can, at first glance, appear to be overwhelming. It is interesting to note that many of the same issues raised by Eccles, namely the lack of standards and reporting tools, are also raised as critical areas of concern for educators and future members of the accounting profession. Building bridges among academics, practitioners currently in the field, and upcoming members of the profession is an essential step in developing and maintaining the concept of SMA and fully realizing the implications of such a methodology.
The connection, among research, academia, and practitioners working in industry, is an important partnership to develop and maintain. Stepping back from the discussion at hand, the accounting profession faces a somewhat frightening set of circumstances. First, the profession as a whole, both in the United States and abroad, is facing a significant graying risk, that is, the average age of accountants is increasing faster than before. Compounding this situation are both the growing competition for analytic and financial information, and a growing prevalence among accounting and finance students to not actively pursue certifications. In order to effectively combat such trends, this partnership must be able to present a viable career path with a multiplicity of options. SMA, and the options therein, provide options that are appealing in both the current and future marketplaces.
Even organizations that do not, at first glance, have a large environmental footprint such as service or technology organizations, can benefit from integrating sustainability into the accounting and finance practices used by the organization. In addition to the informational benefit of improved insights regarding sustainability initiatives, virtually every organization can receive a financial benefit from integrating sustainability into operations and management practices. Understanding the cost/ benefit ramifications of renewable energy or sustainability-oriented projects should be of top priority for senior management teams across industries. This increasing importance provides yet another opportunity for strategically oriented and strategically minded accounting professionals to align themselves with higher level analytics and decision making.
Taking a Deep Dive—Integrated Reporting & Strategic Management Accounting
Business operations, such as an automobile or any professional sports team, are an amalgamation of pieces, people, and processes. The organization or entity will not be able to function at optimal capacity if certain pieces are not working in harmony with the other aspects of the organization. The same can be said of organizational reporting and performance. Business operations, from a holistic point of view, and regardless of whether the entity is managed as a for-profit or not-for-profit, have a common objective—to produce more resources than are consumed via ongoing operations. Without achieving this goal consistently over time, the organization will cease to exist. It is with this overarching theme in mind that an analysis of how different concepts and theories interact should be examined. Theory and theoretical constructs are, of course, an important part of management and should be integrated into the business decision-making process, but the ideas and concepts discussed should also be adding value to the organization.
As the business landscape continues to evolve and change on an ongoing basis, it is imperative that management professionals, and specifically accounting professionals, understand the differences between short-term interests of the market and more substantive paradigm shifts in how organizations conduct and report operations. Due to the changing nature of information, and pace of business, accounting professionals must integrate strategy into the analysis process. Particularly since the financial crisis of 2008, market analysts and commentators have speculated and discussed about how best to manage organizations that simultaneously publish quarterly earnings while also providing proper stewardship of assets for long-term growth. Assuming a stewardship role and mindset is something that should be reinforced at both the director and senior management levels of the organization. That said, developing and maintaining such a mindset is inevitably easier to articulate than to put into place—management accounting data and reporting can produce reports and templates that assist with this process.
Throughout the discussion and analysis surrounding a more strategic accounting function and the implications that such a change will have on organizations as well as the profession, the end users must remain of paramount focus. If the data and information produced to address the needs of the organization are not user friendly, or meaningful to end users, the impact of said reports and information will be diluted. The end users, and the end use of the data, must remain of primary importance as the accounting function continues to evolve and develop. Integrated reporting, combined with the emerging trends toward a more strategic role for the accounting profession, lays the broad groundwork and foundation for such data distribution.
Several areas stand out as particularly applicable to the changing nature of the accounting profession, including integrated financial reporting, corporate governance, sustainability, stakeholder-oriented reporting at large, and the increased prominence of SMA. SMA, at the core, is caused by the transition and evolution of financial reporting from backward and historically focused information to a forward-looking analysis of ongoing performance. Prior to forecasting the current implications and future developments linked to these themes, however, it is critical that a deeper dive be conducted on integrated reporting and the implications therein. Understanding both the concepts themselves, and more importantly, the linkages between them, creates a superior level of understanding and ability to critically analyze both the concepts and the implications for accounting professionals. Put simply, in order to truly understand the implications of SMA and IR, it is practical to revisit them and examine how, specifically, these topics fit together.
Integrated Reporting—Implications
Integrated financial reporting, often abbreviated with the acronym IR, represents both a new framework for financial reporting and an evolution related to how organizational information is communicated to financial and nonfinancial shareholders. Traditional financial reporting, characterized in U.S. markets by the reference markers 10-Q, or 10-K, is designed and prepared for a limited group of end users, specifically shareholders or creditors. Presented in a standardized format, consisting of standardized components, the information contained within these reports is dense, quantitative, and technical in nature, focused on events that occurred during the previous quarter or annual period. Such consistency, related to both the information contained within the reports as well as the framework of the reporting, provides several benefits to end users. First, the information contained within the financial statements is consistent and comparable with prior periods. Second, regardless of industry or management preference, the same information is compiled and presented, that is, the disclosure involved in preparing traditional financial reporting assists the end users objectively evaluate organizational financial performance. Lastly, the regularity of communication means that end users have information delivered to them on a periodic basis. Such timeliness assists in the business decision-making process.
In essence, and a method that can be used to best utilize the concepts of integrated financial reporting, is the development and usage of integrated thinking in the workplace. Integrated reporting, by default, encompasses a broad and interconnected view of how information connects to business performance in the current period and toward future opportunities. The benefits of such an outlook are relatively straightforward to see from a managerial point of view; the nimbler and forward-oriented an organization is, the easier it will be for that organization to be proactive toward new opportunities and challenges. Several steps, outlined by Hagel (2014), that accountants can take to develop an integrated thinking mindset include the following. First, develop clear explanations for positive and negative impacts broader trends will have on the organization. Second, be sure to link financial and operational data points to the broader strategic concepts and realities facing the organization, and third, be holistic in reporting and analysis, so that decision makers understand the ramifications of your analysis.
That said, there are significant deficiencies with the current financial reporting structure that may prevent management professionals from making the best possible decision. First, and perhaps most important, is the historical nature of the information contained in these reports. While compiling and reporting on financial information, which is often affected by estimates, judgment, as well as auditor opinion and advisement, is a time-consuming initiative, the lag between when the data is generated and communicated to shareholders can be quite large. For example, it might be a full three months before financial information is released, in its final form, to shareholders. In a business environment where decisions are made on a rapid basis, this is unsustainable. Second, the presentation and information contained within traditional financial reporting, while appropriate and applicable for financial shareholders, requires a certain degree of financial knowledge and sophistication to understand and interpret the data correctly. These requirements limit the usefulness of the data, and limit the positive benefit of communicating such data. Third, and of increasing importance, is that traditional financial reporting does not contain information related to emerging areas of importance. While depending on the industry or organization in question, the specific areas of investor focus may vary, the realms of corporate governance, sustainability, and integrating risk management into strategic planning are of growing importance for business decision makers across the board.
What integrated reporting attempts to do is twofold, and these two parts are interdependent on each to succeed. First, integrated reporting, at the core of the concept, represents an evolution of financial reporting and communication to include elements of nonfinancial information and provides this information on a more real-time basis. Management accounting professionals are obligated to both fulfill these needs and to assist in the business decision-making process. Organizations are increasingly interconnected to, and held accountable by, the environments in which they operate, and stable and productive relationships are dependent on open lines of communication. Akin to how poor or inconsistent communication can hamper an individual department or organization, poor communication between an organization and its stakeholder base can have a detrimental effect on the organization. These ramifications, focused on the external benefits and attributes of integrated financial reporting, are merely what is presented externally to the marketplace. In order to produce and sustain such a reporting framework, however, substantive changes must be undertaken and embraced within the accounting function to account for the increased demands placed on the organizations’ information systems.
In order to best leverage the implications and possibilities embedded within the integrated reporting framework, however, accounting professionals cannot approach the situation as business as usual, from a strictly financial reporting orientation. Accounting and other financial professionals seeking to make the best use of integrated reporting and the variety of points of view included within the report must approach the idea of financial reporting from a much broader and comprehensive point of view. The linkage and connection between integrated reporting and SMA are clear and readily apparent to those seeking to connect the concepts. While SMA is akin to a conceptual framework and base from which to further develop ideas and plans of action, the structure of integrated financial reporting provides a vehicle within which SMA can grow and develop. Put simply, SMA is a theory that was in need of a more quantitative framework to assist with communicating the concept itself, as well as in implementing the ideas of SMA within organizations.
Guidelines
To best sustainably produce and disseminate such information it is logical to utilize internal resources currently tasked with the creation, dissemination, and maintenance of information to external users. Management accountants are already involved in the production of the raw information contained in traditional financial reports as well as the finalization of the presentation that is communicated to end users. Familiar with quantifying information, creating templates that are clear for external users to understand and developing metrics to benchmark against and compare results, management accountants are well equipped to address the challenges inherent when implementing an integrated reporting structure. Additionally, and while most clearly evidenced at the CFO level, management accounting professionals are increasingly tasked with information technology roles, that is, assisting in system upgrades. This experience and hands-on practice with the development, testing, and refinement of technology systems provide additional insights into how the organization operates.
What integrated reporting attempts to accomplish, in short, is to transform into reality the concept that the management accounting function is, in fact, comprised of multiple layers and responsible for multiple directives from management. Finance holds multiple roles within organizations, and influencing decision making in a wide variety of ways—only some of which are readily apparent to external users of organizational data. Two specific areas influencing and impacting the role of the finance function and organizational effectiveness have to do with the general operating environment and the increasing integration of information technology and accounting (Hsihui, Ittner, and Paz 2014). Emerging linkages and connections such as these, particularly the greater connection between IT and accounting, hold profound implications for the profession. Integrated reporting and SMA at large require that accounting professionals have access to greater quantities of organizational data as well as the ability to make sense of such information. Expanding on these themes is a core directive of proponents seeking to promote and expand SMA within the profession. Reporting, to both financial and nonfinancial reporting stakeholders, requires that information is collected and presented in a consistent format that makes sense to the end users. Leveraging existing strengths of the profession to meet the varied needs of stakeholders, in conjunction with an integrated reporting framework, provides a clear and market-oriented path that management accountants can take to amplify professional strengths while also moving into a more strategic role. While every organization is different, the following guidelines and principles should be factored into the implementation of a more SMA function.
Link strategy, operations, and reports—disseminated to end users by producing the breadth of information, and distributing it in the appropriate venue for each stakeholder group, that modern marketplace conditions dictate.
Connect information with the front and back end—organizations have vast quantities of data, but must be able to interpret and efficiently glean business insights from this information.
Understand what integrated reporting represents—if stakeholders request additional information and analytics on sustainability or governance, an IR initiative provides an opportunity to proactively develop such areas.
Focus on what the information illustrates—reporting, regardless of form, is a business necessity, but that does not mean it should be treated only as an expense item if management can leverage the information into insights and business actions.
Look forward—insights into risk management, supply chain operations, and the needs of stakeholders, including customers, provide a roadmap for decision making moving forward: management should use the map.
A challenge that many organizations face is that, while the information exists within the organization, the procedures for extracting that information and making it usable for business decision making is not ideal. Developing procedures, reports, and templates to collect information from business operations should be an optimal focus for management teams. Without quality information, it is next to impossible to successfully execute plans at either the tactical or strategic level. Management accounting professionals are often already embedded within functional silos of the organization, and have experience interpreting operational data into financial information, and this is the core of what SMA represents. In essence, and specifically as it pertains to integrated reporting, the underlying focus of SMA is the ability of accounting professionals to take operational results, data, and metrics that are generated by the organization, and translate those into financial or other quantitative information that can be used to make informed decisions. The true value, and role of SMA, however, is not simply in creating information to be used by others—it is the interpretation and utilization of the information itself.
Integrated Reporting—The Multiple Capital Model
Embedded within an integrated financial report, and critical to the differentiation of this reporting model from traditional financial reporting, is the fact that the reporting framework introduces multiple types of capital. The six capitals, and the ramifications of the inclusion of this information is reporting, is a subject of analysis and debate in both academic and practitioner fields. In addition to existing scholarly literature, there is a growing amount of practitioner- and market-based research on the six capitals, the implications therein, and methods by which accounting professionals can utilize such a multiple capital model. Virtually by default, the materials proposed by such a model include quantitative data as well as qualitative information.
Implications associated with the multiple capital models, as they are linked to the concept of SMA, are difficult to overstate. The reality of the situation is that organizations are judged increasingly by not just how they perform on a financial basis, but how sustainable and comprehensive that performance truly is. A multiple capital model provides a way in which organizations can communicate this much broader set of information to stakeholders doing so in a format that is logical, consistent, and meaningful to the individuals and organizations receiving this information. That said, the responsibility for implementation and maintenance of such a multiple capital model lies with the management accounting professionals seeking to benefit from it. Arguably, the most important step in developing and sustaining integrated reporting and a multiple capital model to support it is for the management accounting professionals in charge of implementation to ask the correct questions.
Focusing on which questions to ask which people is perhaps not the most accurate way to characterize this important step. Rather, it is the idea that accounting professionals must think creatively and in a nontraditional manner in order to effectively address the challenges and opportunities that are embedded within the implementation phases of a multiple capital model and a broader integrated financial report. In order to achieve a more strategic role in the organization and organizational decision-making process, it is logical to suppose that management accountants must embrace a more strategic mindset. That said, it is also important to take into account the difficulty of the reality of attempting to think strategically in a manner that also makes business sense during the day-to-day bustle of the organization. The multiple capital model embedded within an integrated financial report provides a way for management accountants to think strategically in a way that makes logical sense.
The Evolution of Strategic Management Accounting & Integrated Reporting
At the end of the day, the true value brought to bear by the accounting function to an organization lies with the information that the function can produce and disseminate throughout the organization and to appropriate stakeholders. Framed against this market challenge, the real question and the critical link between integrated reporting and SMA begin to take shape. On one hand lies the traditional source of competency and professional expertise of management accountants—quantifying and reporting financial information to management and external users. Simultaneously, and without impairing the quality of the financial information produced and reported by the accounting function, management accountants must also be able to think, speak, and act in a broader context. Accomplishing this task without losing focus, direction, or sacrificing quality is no simple task, and requires a deep understanding of what attributes of integrated reporting can be used to amplify the effect and potential of SMA.
Using the Multiple Capital Model
Discussed previously, the six types of capital included within an integrated financial report include financial, manufactured, social and relational, intellectual, natural, and human capital. The underlying question of SMA is how should management accountants go about using this multiple capital model to create and sustain a more proactive and strategic accounting function? The answer lies with the concept of the capitals themselves, that is, how can management accountants quantify the potential risks and opportunities that these capitals represent to the business? Organizations face increasing scrutiny from financial and nonfinancial stakeholders, and it is imperative that management teams have the information at hand to address and deal with the many situations that continuously arise in a multi-stakeholder world. Using internal accounting personnel to help verify, clean, analyze, and report on organizational data is a cost-effective measure that can generate true ROI for the organization.
At this stage, it seems appropriate to visit the definition of capital, and how this term is used in managerial conversations. Traditionally, capital is perceived and viewed as simply the financial resources that the organization has produced and retained as a result of continuing operations. While sufficient, this is an incomplete view of capital in a stakeholder environment. Capital, viewed in a more comprehensive light, reflective of the evolving business environment, represents the resources available to an organization that enable the organization to accomplish objectives. The importance of ranking, quantifying, and reporting on different types of information crystallizes in light of this refined interpretation of what capital means to an entity.
Beginning with the concepts of human, social, and relational capital might seem like an unusual place to start an analysis, that is, these capitals would appear to be among the most qualitative of the six present in an integrated report. When viewed through the lens of broader corporate governance issues, however, the importance and relevance of these capital classes to business decision making become increasingly clear. Brought to the forefront of many firms via activist campaigns and other shareholder-driven calls for change, corporate governance focuses on how the organization interacts with internal and external stakeholders. Often, an argument underpinning an activist campaign focuses on the fact that initiative, or entire business segments, are operated in a way not in the best interest of shareholders. While the stakeholder-oriented model of reporting and management is increasingly acknowledged in both academic and practitioner press as reality, it remains a challenge to convince many management decision makers. Developing metrics and benchmarks would help make this case and proposed model much stronger and easier for organizations to adopt. Fortunately, there are trends, organizations, and items occurring in the marketplace that can assist management accountants seeking to develop a strategic accounting model.
Quantitative versus Qualitative
While it is a reasonable statement to say that business decision making is, for the most part, driven by quantitative data, statistical information, and statistics that can be tested and verified, it is also important to remember the importance of qualitative data. Qualitative information, and more broadly, the ability of management professionals to understand, discuss, and explain the data produced by the organization are essential. Simply distributing reports of financial information is not enough. Explanations and a narrative must accompany that data to make it useful for business decision making. This concept, the necessity of explanation and a supporting narrative structure, is even more critical for emerging areas such as governance, sustainability, and the integration of risk management into the planning process. Developing metrics and deciding what to measure, of course, is a significant area in which management accountants can add value to their organizations. In order to develop metrics to quantify such information, however, management accountants as well as other decision makers must understand the purpose of gathering such information. In essence, in order to produce key performance indicators, the first step is to develop and test key performance questions, which in turn drive the data collection, analysis, and reporting undertaken by the organization.
Understanding what questions to ask, and how to integrate the needs for information into standardized metrics and tools requires a strategic mindset, or strategic headset. Inherently qualitative in nature, the meaning and purpose of strategic headset is relatively straightforward. In order to best guide the organization forward, the key decision makers must have a strategic plan or orientation for the organization. Formulating and walking the strategic plan through the various necessary iterations is inherently qualitative, that is, this process requires the ability to think holistically about the organization and to articulate positions and views. That said, in addition to being able to think and articulate positions clearly, strategic thinking and planning are supported by quantitative information. How this information is obtained, however, is by asking the correct questions and being aware of how to start formulating those specific questions. Embracing the strategic headset, in and of itself, requires that accounting professions broaden the scope of thinking and consideration, that is, they must be aware of factors outside of traditional accounting and finance thought that influence business decisions.
Linking together the required pieces of qualitative and quantitative information is a key aspect of both organizational decision making and, specifically, the development of an accounting function well situated to compete and provide value in an increasingly globalized and competitive environment. Connecting the dots specifically to the idea and implications of integrated financial reporting, Cohen, Holder-Webb, and Zamora (2015) expand existing research and findings related to the inclusion of nonfinancial information within a broad and more inclusive framework, the essence of integrated financial reporting. While the particular section of nonfinancial information examined is corporate social responsibility- linked data, the ramifications of the research can and should be applied to the broader field of nonfinancial data.
Building the bridge between the quantitative source data, or foundation, and the surrounding narrative or qualitative information forms the foundation of strategic thinking and planning. Utilizing integrated financial reporting, including aspects of sustainability, corporate governance, and risk management in the information disseminated to stakeholders provides accounting professionals with a vehicle to link quantitative and qualitative together. Linking these concepts together is part of what forms the strategic headset, or the lens through which strategically oriented accounting professionals should view the organization and competitive environment. Integrated reporting, it appears, provides a method by which accounting professionals can apply strategic thinking and ideas to different organizational problems that continue to be issues for management teams at large.
Integrated Reporting and the Strategic Headset
Linking together the concepts of integrated reporting and the strategic headset underpinning SMA is a critical aspect of building the bridge among the changing business environment, increased demands on organizations, and the transition of the accounting profession to that of strategic decision maker and business partner. Virtually by default, strategic thinking requires that management integrate a wide scope of information, possibilities, and areas of thought that will influence and help shape organizational strategy moving forward. That is no coincidence, and while nontraditional reporting has been a topic of conversation for decades, the rapid increase in both discussion and adoption of nontraditional reporting methodologies in recent years is a result of market forces.
Formulating an integrated report requires an overhaul of how the organization processes, collects, and analyzes information. Beginning with financial information that forms the basis of external reporting, a differentiating factor of integrated financial reporting is that the information must be analyzed and presented on a continuous basis. In other words, to best serve the needs of stakeholders and internal decision makers, the organization must be able to communicate financial results on a timelier basis than is done currently. Thinking strategically about both the needs of internal management decision makers as well as what external users require to make informed decisions provides an opportunity for management accounting professionals. Working with the information technology and finance functional areas, management accounting professionals should take a leadership role in the development of reports, system functionality, and template development in order to get this information finalized in a shorter amount of time. Developing and testing these systems provide accounting professionals with several benefits. First, gaining hands-on experience with how information is generated and collected throughout the organization provides management accountants with additional insights related to business performance. Second, and arguably more important for the purposes of analyzing SMA, is the position in which taking leadership in these areas places accounting professionals.
Highlighting the connection between integrated reporting and a more strategic approach to accounting at large, Cheng et al. (2014) outline two specific areas for future research that appear to be especially applicable. First, the multiple capital model and concept embedded within the integrated reporting construct presents an opportunity for future practitioner research with far-ranging implications. Creating metrics, reports, and key performance indicators to measure, evaluate, and report on organizational performance will necessitate an accounting function increasingly oriented and focused on organizational performance framed within a comprehensive framework and perspective. Second, and more important to current implementation, is the fact that by using an integrated financial report, organizations, virtually by default, are asking that the accounting and finance function embrace a longer term view of the organization and organizational performance.
Adding value, in a strategic sense to the organization, requires that creativity and innovative thinking be encouraged with the management accounting function. From customers to internal management, there is a need and market demand for new solutions to existing problems. Integrated reporting, in and of itself, is simply the end result of an iterative process that has been ongoing for several decades, and does not represent an ultimate solution. The path to the solution that is of such demand in the current global business market is to see the proverbial big picture, understand which factors will impact the organization moving forward, and be able to drill down specifically and focus on those areas. In essence, in the age of transparency and digitization that business leaders find themselves contending with, organizations must be able to collect, articulate, and quantify information that previously was not, such as matters related to risk management, governance, and sustainability initiatives.
Linking back to the analysis of Cheng et al. (2014), there is one area in particular that appears to present an opportunity for further integration of accounting into the strategic planning and decision-making process, and this is the assurance and attestation of integrated reporting. Nonfinancial information and other information included within an integrated reporting framework are, clearly, a new area of data to be reported and disseminated to stakeholder groups. Developing and standardizing assurance and auditing standards represent a core professional competency of the accounting profession, but extending these current strengths to the new area of nonfinancial information is imperative. In addition to creating value for the organizations in question, and assisting management in decision making, such development also provides material for scholarly research and assists in increasing the validity with which nontraditional information is accepted in the marketplace.
Additionally, information that has been traditionally compiled and disseminated, namely financial data, must be communicated at a more rapid rate to meet the growing demands of stakeholders. Integrated financial reporting, strategic thinking, and the strategic headset are interconnected and reflect the same core reality. Business must be flexible and adaptable to meet the challenges of a globalized world. Now that integrated reporting has been analyzed at a high level, however, it is important to dig deeper into certain areas to understand just how this data could impact an organization, and how a more strategically inclined management accounting function can assist and add value to their organization.