Name : Des McAuley

Date : 1^st of December, 2000.

I.D. Number: 96328142

Class: ACC 531

Lecturer: Ms. Margaret Healy

In the past, traditional management accounting systems flourished in companies where the key constraints were mainly cost and capital and where the management structure operated in an authoritarian manner, giving top-down orders from the top of the leadership pyramid.

These industries were commonplace in the pre-1990’s where market conditions made managent accountancy relatively predictable (when compared to present day market conditions) with consistent and usually constant stock levels, orders, costs and products. Competitiveness, strategy, balanced scorecard and squeezing the market share were most definitely not buzzwords used by accountants when planning their yearly budgets.

One of the main reasons that that traditional budgeting systems were so effective in this so-called manufacturing era was because it made planning and control of estimates a lot easier. Accountants were able to accurately estimate stock and product levels by looking at the previous years figures and making a reasonably accurate estimate. Workers were easy to motivate as they had a set of procedures to complete in a certain time and by completing these would provide an economic reward for performance. This has been based on Douglas McGregor, Motivation Theory, ‘Theory X’, which assumes that all individuals are naturally lazy and will only get motivated to work if there is an economic carrot dangling in their face.

No longer can manufacturers assume that it may be easier to make a product instead of buying it. No longer can they assume that the wholesalers/retailers will buy the product on the premise that they have been supplying them for the last twenty years. Economic and export borders have been lifted, international agreements have been made and retailers are finding that in some cases, far away hills are indeed greener. How many times have we seen cases of factories closing down in the West of Ireland because raw materials and labour are much cheaper in the Far East? E.g. The Fruit of the Loom.

How do accountants budget and plan for something which they have absolutely no control over and how can they increase the quality of their knowledge for decision making purposes? For starters, the whole terminology around the word ‘budget’ according to Hope and Fraser is that it:

"Re-enforces the command culture, constraining freedom and autonomy, and stifling the very challenges that excites prospective managers".

New schools of thought are emerging with regard to the measurement and budgeting of accounting and information systems. One school of thought was written about in the KPMG White Paper "Beyond The Numbers" by saying that more and more companies are being judged not only on their value, but also on their values or as the leaders of the Royal Dutch/Shell Group of Companies say:

"Linking profits and principles".

What this means in a nutshell is that companies are becoming increasingly aware of the need to be accountable for all aspects of their performance, not just their financial performance. With the introduction and increasing prominence of Business to Business E-Commerce , corporate managers are beginning to realsise that to stay alive in these dynamic new business environments, they must become proactive instead of reactive, to lessen their chance of being vulnerable to attack from new competitors. Budgets and planning can go out the window at a moments notice in an environment nowadays which is characterised by discontinuous change and unpredictable competition and where you can gain or lose customer loyalties at the click of a mouse.

To survive, organizations must do a root and branch study of its organizational value and re-define their existing strategies so that they can gain competitive advantages from core competencies by spotting niches at the expense of their inefficient competitor. In short they will be able to spot what their core values are and compare them to present process objectives and budgeting systems.

Armed with their list of new perspectives, managers can review their current strategy and identify where non-financial performance can affect current and future values. By adding these strategic values to their business they can earn the tag of early adopters or ‘first mover advantage’, thus getting their foot in the door of a brand new market first. A recent example of this can be seen how Allied Irish Banks have exploited a niche in the market with their online Internet banking which enables 24 hour banking for those who cannot visit the bank during normal business opening hours. By adding this technological ‘added-value’ the A.I.B.(at that time) drove customers away from non-internet banks like the Trustee Savings Bank.

One of the most successful models in recent times was highlighted in ‘Beyond Budgeting’ where the Svenska Handelsbanken from Sweden has proven to be a big hit with introducing a culture of "Responsibility, Enterprise and Learning".

Its’ banks have no annual budget and do not set targets. Their only target is to beat their competitors rather than some negotiated budget. Branch autonomy is high, with each branch manager deciding on business plans for his/her bank depending on what the individual customers want and which services to provide. The main motivation for staff is peer pressure created by inter-branch performance league tables, which is geared to improve return on capital, cost-to-income ratios and profit per employee. In short, this is a happy place to work with exceptional performance results. Other major companies to use this system have been Volvo, Ikea and Boots.

What this means in the future for the role of the management accountant is that his/her department will not be controlling the activities of the other departments like HR, Marketing and Advertising but will be integrating itself, not only with these departments, but also with the firms strategy. As Hope and Fraser said:

"Budgeting is however, much more than a financial process. It is the glue tat connects the entire management system together from strategy and planning through resource and cost management to measurements and rewards".

Traditional accountants will fear that management will end up having less control and less profits but in essence, the opposite will be true as in this era of enterprise and team responsibility where flexible budgeting and control systems are ideal for uncertain environments. Others like Alistair M. Preston believe that budgets are vital to organizations trying to raise funds from financial institutions or governments, but in this new era institutions are only too pleased to hand out money to internet startup /dot.com companies where it is unique ecommerce ideas and not budgets which can secure a loan. At the moment the Internet service Provider IOL are pumping 1Million Punts into the creation of a website for journalist/broadcaster Eamon Dunphy. Surely no one could budget with any degree of certainty what sort of revenues could be made from this site.

In summary, with the present trends of high uncertainty in the business environment, flexible and responsive budgets must be used for companies to accurately benefit from market movements. In general, traditional budgets are not responsive enough, involve too much bureaucratic time wasting and impede foresightedness.

There is no black and white budgeting system for every company so each company must have an in depth knowledge of their strategic demands in order for them to understand which particular accounting system will drive their company to success.

• Banham, Russ "Better Budgets" in The Journal of Accountancy, February 2000. pp37-40.
• Buckley, A. and McKenna, E. "Budgetary control and business behaviour"- Class notes.
• Fraser & Hope "Beyond Budgeting". (Lecture Handout).
• Lukka Karl "Budgetary Biasing in Organisations: Theoretical Framework and Empirical Evidence".
• McGregor, Douglas "Motivation Theory".
• Pierce, Bernard "Budgets Under Attack – Where Stands the Accountant" in The Journal of Accountancy, March 2000. pp7-10.
• Preston, Alistair M. "Budgeting, creativity and culture" – Issues in Management Accounting, Chapter 8, pp145-168.

• KPMG White Paper: "Beyond the Numbers: How leading organizations are linking values with value to gain competitive advantage". (In PDF Format)

• "Budgeting as a competitive advantage" by Kathryn Jehle, CPA

http://www.mamag.com/strategicfinance/1999/10k.htm