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Closing GAAP and managerial accounting gaps creating insightful knowledge

By Charles Barnsley Holland*

Management accounting is the measuring tool to serve management with the necessary insights and knowledge to manage enterprises. The Institute of Mangement Accountants (IMA) recently released the conceptual framework for managerial costing, defining the principles, concepts and constrains for costing done to support internal decisions. IMA members are encouraged to study the new release.

One rewarding step, not always carried out by interested parties, is to understand thoroughly the internal managerial, cost and performance accounting reports, and the related reconciliations to GAAP reports. This also enables independent auditors to understand the company and its business and to have insightful discussions with management relating the differences with GAAP reports.

When I was an active independent auditor, in some instances I agreed with the reconciling differences, and in other instances I did not. Some companies reported misleading results in the managerial reports before being challenged by independent auditing teams. Management was always grateful for our insights and discussions about their in house managerial reports.

They liked being challenged safely. This was and will always be time well spent adding value activity to companies and related management teams. Understandably, management does not use GAAP accounting to manage their business. They correctly rely on their internal managerial accounting reports. Independent auditors add value to their work when they truly understand the managerial reports and feel mutually comfortable together with company management with the differences in relation to GAAP reports.

The sky is the limit in terms of providing meaningful managerial accounting, costing and performance reports. Examples: benchmarking processes with peers and others, efficiency and idleness reports about sales, production, administration and finance, etc. can provide the necessary information and back-ups for the executive management team to make the necessary hard decisions to enhance competitiveness and returns.

Management accounting, costing and performance measurements provide the necessary business knowledge and business decision insights. But the differences with GAAP accounting always needs to be measured, reconciled, understood and explained, as executive management always have together with the Board of Directors of companies to make the ultimate decisions. Shareholders and the latter will be always influenced by GAAP accounting. Therefore, closing the gaps and working closely together is beneficial to all interested parties.

 

* Member of IMA/ANEFAC chapter in Sao Paulo, member of audit committees of public companies and business advisor to several CEO/owners in Brazil. Before retirement he was an audit partner at EY Brazil.

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