The Chartered Institute of Management Accountants (CIMA) head of policy research Naomi Smith tells Carlos Martin Tornero about the reasons to launch a global consultation on management accounting principles
The Chartered Institute of Management Accountants (CIMA) and the American Institute of Certified Public Accountants (AICPA) have jointly launched a draft framework for consultation, which aims at bringing consistency to management accounting practices around the world.
The deadline to participate in the consultation is 10 May. So far, different organisations have already reacted to CIMA and AICPA’s joint initiative, such as the UK Financial Reporting (FRC).
The FRC said it endorses all efforts to raise the quality of accounting, both in the UK and globally, and announced that it will respond to the consultation in due course.
The International Integrated Reporting Council (IIRC) chief executive Paul Druckman said there is "synergy" between the draft framework and the principles of integrated reporting and expressed support for the joint initiative.
At CIMA, head of policy research Naomi Smith, who has prepared the draft framework, says that establishing a set of universal principles for management accounting is not only possible but necessary.
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By GlobalDataSmith tells The Accountant this is the first time CIMA is initiating a public consultation and is looking to engage in a "conversation with the rest of the world", and encourages all stakeholders to actively participate in the consultation.
The Accountant: CIMA and AICPA are launching an "authoritative" set of management accounting principles. But, unlike in financial accounting, there is no standard-setter in the field of management accounting. Where do you think this authority comes from?
Naomi Smith: I think our authority comes from the fact that we have half a million members between us and CIMA is the world’s largest management accounting institute. We have consulted over 300 organisations before bringing the draft to the rest of the world. This is not something that has been drawn up by one person. It has already had a very robust internal consultation amongst our key stakeholders. I also think our authority largely comes from the fact that we are governed by our own royal charter, and the fact that we’ve been doing this for nearly 100 years; we are a 95-year-old institute. And yes, we aren’t standard-setters or regulators but we do have the duty and the moral responsibility to be sure that our members are performing to the highest standards the profession within the organisation they work for.
TA: The IIRC has recently launched its integrated reporting framework. The International Accounting Standards Board closed recently the consultation on its conceptual framework. Do you fear you can get feedback perceiving your initiative as yet another framework to cope with?
Smith: If we do get that feedback, then that would be our own fault for failing to effectively communicate what we are trying to achieve with this. Although we are calling it a framework, this is principles-led, not standards, and it will be something very practical.
After the consultation, we are hoping to launch an online diagnostic tool as well, which would help organisations to get a benchmark of how good their management accounting function is and whether it needs to be improved. Therefore, adding red tape or bureaucratic burdens it’s the antithesis of what we are trying to do.
TA: What’s your main motivation to launch this consultation then?
Smith: Our motivation is to improve the performance of businesses. If you are able to elevate the role of management accounting within your own organisation you will be able to make better decisions because you will have information based, not on conjecture, but on evidence. That’s why we have spent long time defining what management accounting is. From that definition we’ve derived some principles which capture the fundamental values of what management accounting really is. Then, we have applied those principles to the core practice areas of the performance management circle. There are 12 core practice areas but this can change after the consultation.
TA: The IIRC framework is designed to engage with stakeholders and investors. Would be your draft framework more focused on reporting internally to the management of organisations?
Smith: Not solely that at all. It’s a framework for the entire system. One of the headline principles in the draft framework is about communicating with impact; about making sure that communication, whatever the format it takes, it’s tailored to the audience. Although reporting is incredibly important, it’s only one part of what we see as the management accounting system. But I think we have a real opportunity here for those in the SMEs that are struggling to get funding from banks. We hope this framework, if adopted by an organisation, will give investors more assurance over the long-term viability of their investment in an SME.
TA: The IIRC put in place a pilot programme to test its framework during the consultation. Do you plan to do something similar to trial your draft framework?
Smith: We have several strong endorsements from various organisations. A trial or a pilot programme for implementing these principles over the next six months is something we would welcome. We are also engaging with regulators and governments. We also think that these principles might be useful for standard-setters when they come to reviewing certain standards, ethical guidelines, etc. And actually this framework is broad enough to appeal to the audit profession.
TA: In what sense your draft framework would attract the attention of the audit profession?
Smith: There is currently an interesting debate about the whole concept of going concern and whether it’s a sufficient measure for those who have got a long-term interest in organisations. If auditors are making a judgement on the going concern of an entity, perhaps these principles can provide them with a bit more assurance of the long-term viability of an organisation, meaning that decisions are being made with long-term value creation rather than short-termism financial gain.
TA: CIMA and AICPA’s chief executives say in the consultation draft that the practice of management accounting remains varied. Is this variety anything to worry about?
Smith: I wouldn’t necessarily call it worrying, but it could be better. What really interested me was that some of the best and biggest organisations in the world were the first to say ‘we do some things well and some other things badly’ when it comes to management accounting. The draft framework is not based on what the big guys do and therefore what the SMEs should copy from them to improve. It’s a two-way conversation because small organisations can do things very well too. In that sense, we did notice how varied it was, but in some instances organisations need to be able to be flexible. That’s the beauty of the tailored approach of management accounting. It isn’t bounded to very strict standards and rules but at the same time some overarching good business principles are needed.
TA: Financial accounting, reads the introduction of the consultation draft, is no longer sufficient due to its focus on past activity. Is becoming more difficult to fill the gap between these two accountancy disciplines?
Smith: I think financial accounting and management accounting are siblings but not twins. Of course, organisations need them both. On the one hand, there is the compliance aspect of the financial accounting because you have no option but to make sure your organisation is compliant with the letter of the law. On the other hand, there is the management accounting angle. If you only did financial accounting and you only look at how you have previously performed, your chances of having sustainable success are so limited. Planning, performance management, looking at trends and forecast, how to manage risks and spot opportunities, all that has got to do with the job of management accountants.
