“The harmonisation and standardisation of financial accounting benefits shareholders and other stakeholders. In contrast, these groups benefit from the variability associated with management accounting.”
Introduction
The main purpose of accounting is to give information that is needed in the process of economic decision-making that will help to create sound and feasible decision. It focuses on the process of preparing different financial reports that will show the information regarding the performance of the company or organization to the external parties or stakeholders that are involved with the company or organization such as investors, creditors, tax authorities etc. On the other hand, the management accounting focuses on the different issues that are related and important to the overall internal process of decision making ( 2007). Furthermore, the two is also different in terms of the influence of the impact of the standard setting bodies in the decision-making process or regarding their creation of laws and regulations. The financial accounting is being affected greatly by the different organizations and authorities in different countries, while the management accounting varies from different perspective of different organizations and companies.
Accounting is considered as the mirror of a society, thus it is a naturally occurring contingent ( 2001). The accounting process of different companies and organization in the world is considered as one of the most important factors, due to the fact that it enables them to see as well as control the financial flow inside and outside of their business or organization. Furthermore, it is also important to the different stakeholders of that organization, in order for them to know the current financial situation of the entire establishments. Because of the different factors such as technology and globalization, the process of accounting is facing different dilemmas and changes. Due to the said factors, internationalization of accounting standards is considered as a significant and essential part of the rapidly globalization economy ( 1992,). On the other hand, the management accounting is not affected or influenced by any general laws due to the differences in different small but important aspects of different companies.
Harmonization and Standardization of Financial Accounting
Accounting systems are all embedded in the economic as well as legal framework of a given country that is shaped by different political processes. Organizations have sets of implicit or explicit contracts among different individuals or group of individuals or stakeholders such as managers, investors, creditors, employees, auditors as well as the governments. All of the said stakeholders have their different preferences and endowments of capital, skills as well as information that will cause conflict of interests, as well as the contracting and monitoring problems ( 2004).
Each country has its own accounting regulation, thus the financial statements as well as reports are being prepared for their shareholders and other uses are based on the different principles as well as rules that can vary widely from country to country. That is the reason why multinational entities have to prepare reports about their activities and performance based on the different principles that makes it difficult for the investors and analysts to interpret financial information. The said lack of compatibility in the financial reporting can affect the credibility of the reporting of the entity and the report of the analysts that can have a great impact on the financial investments ( 2007).
Furthermore, the harmonization of the world economy can help the economy of the world by facilitating the international transactions, thus helping to minimize the exchange cost by the process of providing the increasingly perfect information. Above all, it can help to make the financial-based management decisions with less risk (1992, ).
By harmonizing the accounting policy, it will help to provide and give a level playing field in global manner. Thus, the regulators and auditors will receive the same information that will help to facilitate the overall evaluation process (1992).
Another important driving force for the global accounting system is the need to underwriter the securities in different capital markets by using a single set of financial statement. Thus, the capital market has a strong impact over the different accounting processes ( 1999).
Variability of Management Accounting
Management accounting is considered as one of the areas in the field and profession of the accountancy. It focuses on the different consideration regarding the ways in which the accounting information can be accumulated, synthesized, analyzed, as well as presented with the relation to the specific problems, decision, as well as day-to-day tasks of business management ( 1992). The managerial accounting focuses on the process of planning that has a great impact to the total financial performance of a given organization. Furthermore, it must go beyond the cost accounting and then integrate it to the various materials from the different fields and aspects of the organization such as the organization theory, behavioral sciences, information theory etc, in the multidisciplinary approach that aimed at the process of facilitating the production of different information for the internal decision-making ( 1992). Furthermore, it shows that management accounting focuses on the internal affair of the entire organization and include the process of decision-making regarding the inside issues of the company. Furthermore, all of those internal issues have a great impact to the result of the planning and implementation of different actions that can affect the organization or company as a whole, thus will affect all the entities that are directly and indirectly connected with them.
There are different activities that are involved in the management accounting which focuses on the process of planning in strategic and operational levels. It focuses on the establishments of different policies as well as the formulation or creation of plans that are related with the budget that are expressed in the financial terms. Furthermore, it is also considered as the initiation of the as well a provision of the guidance for the decision of management that involves the process of generation, analysis, presentation as well as interpretation of appropriate information. Because of the said process, management accounting can help in the process of monitoring as well as controlling the performance of the company by the help of the provision reports regarding the organizational performance, such as the comparisons of the actual situation with the planned or budgeted performance, together with the analysis and interpretation of the report.
Above all, management accounting has a great influence of impact over the financial accounting o the periodic reporting of the accounting that required by the statue in order to show the performance of the company to the stakeholders such as the shareholders, government agencies as well as other external parties that are related with the operations of the company
Financial Accounting vs. Management Accounting
It had been showed and explained in the first part of the paper that financial accounting and management accounting has a great difference in terms of its application and use as well as the use and implementers (Riahi-Belkaoui 1992, p. 2).
Financial accounting focuses on the reporting information that focuses on the financial position, performance as well as conduct of a company for a given period of time in order to the set of users as well as the market in general. On the other hand, the management accounting is considered as more oriented towards the different internal managers. However, both are considered as production processes of different accounting data for the different aspects of the problem-solving situations ( 1992).
The financial accounting is considered as the result of the process of applying the accepted standards and principles of accounting in the aspects of recording of the different transactions between the different entities. Therefore, the financial accounting statements conform obey the rules that had been established and implemented by the professionals. While, the management accounting reflects the use of different techniques that varies from the different disciplines such as accounting and internal problem solving (1992).
This shows that the techniques that are used differs from one company or organization to another and does not follow any set of rules and regulations, and the decision is left to the hands of the philosophies of the decision-makers ( 1992,).
In summary, it shows that the frame of the reference that is being used in the management accounting is much broader compare than that used in the financial accounting ( 1992). In addition, the information that are being used in the financial accounting is from the management accounting, that is why it is important to focus regarding the different details regarding the internal financial aspects of any company.
Stakeholder
Business is all about how the customers, suppliers, employees as well as financiers (stockholders, bondholders, and banks), communities, the media, managers and the government interact in order to create value (2007,). They are the one that can help the business to perform at its best or least.
Stakeholders are the different internal and external entities that are being affected by any decisions or changes that will happened in any aspects of the company. That is why many companies are analyzing the needs, demands and wants of their stakeholders regarding their decision-making process. Furthermore, they are also the primary concern of the company regarding the different rules, regulations and standards that are being used in order to come up with the expectations that will maintain good relationship and smooth flow of information and money inside and outside the company or organization.
Stakeholders and Financial Accounting
The harmonization as well as standardization of the financial accounting has a great positive impact towards the shareholders and other stakeholders. This is somewhat connected to the needs of the corporate governance. It focuses on the absence of the irreducible differences of the different interests between the investors and other stakeholders. The main objective of the corporate governance is to prevent the conflicts that will rise between the stakeholders because it can harm the growth and development of the company. Furthermore, it also focuses on the process of respecting the general interests as a whole by letting a fair and balance distribution of income that will help to persuade a corporate behaviour of all the stakeholders despite of the differences in their interests
The financial accounting focuses on keeping transparency in a given company or organization. This shows the financial performance and condition of a company in a given period of time that will help them to communicate with their stakeholders. However, different stakeholders have their different interests towards the company, and that interests must be meet in order to maintain good stakeholder’s relationship. Furthermore, the process of harmonizing and standardization of the financial accounting can help the company to know the standard or the set rules regarding the process of reporting their entire performance from their employees up to the customers. Financial accounting enables the company to give information regarding their accountability in explaining the financial aspects of the company that will determine, reflects as well as strengthens and solidifies the powerful relationship between the company and the stakeholders. However, different stakeholders have different knowledge and skills regarding the process of understanding and analyzing the financial data and information that are being released by the company. That is why it is important and great help for the stakeholder to have a standard or general way or pattern in the financial accounting. By doing that, it will give them a guideline in knowing what to expect and what to look in the financial accounting aspects of the company.
For instance, it will give the government and tax collector to know the current financial situation of the company that will enable them to collect tax that is appropriate with their revenue or profit gains in a given period of time. At the same time, it will also give the shareholders the idea regarding the overall financial performance of the company by knowing their fair share in the profit gain of the company. In terms of employees, they will be able to know if the company is worth working for, or if their compensation and benefits are equal to the financial situation of the company. In the part of the customers, it is their rights to know the situation of the company in order for them to know if the company is trustworthy or not. If there is no general set of rules and regulations that will cater to the financial accounting needs of each and every company, there are chances that they will not show or present the real data or information that are important for the stakeholders.
Stakeholders and Management Accounting
Management accounting is designed to facilitate the internal decision-making and accountability, thus provide necessary data in order to inform the management (2000). On the other hand the variability of the differences in the techniques that are used in the management accounting can benefit the stakeholders in different ways. First is that it helps the employees, primarily the managers to do their job by focusing and analyzing the internal information. Furthermore, another reason why management accounting is not regulated by any law or regulation is because there are different sensitive data and information that are not available in the external entities in the business. This will help other stakeholders such as the shareholders to maintain confidentialities of important internal data ( 2000).
Furthermore, each and every company have their own techniques that are used in their internal control and monitoring procedures. This can help to ensure that the financial information is reliable and consistent when it is finalized and published to the public ( 2000).
In terms of the customers, because of suitable planning and implementation for the process of controlling and monitoring the financial aspects of the company, it enables the company to look at the future and present of the company, and this can be done by the process of estimating the cost, setting the price. This enables the customers to get what they paid for. Furthermore, it also enables proper budget and performance that will ensure quality control ( 2000).
On the other hand, it can also help the employees by letting them know the overall internal performance of the company that will help them to know what to improve regarding their activities and productivity ( 2000). This will also help them to analyze and figure out their strategies with regards to their individual performances with the overall performance of the company.
Conclusion
Based on all the theories and information that had been gathered from different perspective, ideas and resources, it can be said that accounting is considered as one of the most important aspects of any companies that focuses on the financial relationship of a given company to their stakeholders. Furthermore, the management and financial management are considered as two of the most important fields and areas of accounting. In addition, although the two are considered as inseparable because the other is dependent on the data and information to the other, the two shows huge differences in terms of use and focus. In brief, financial management focuses on the concerns of the external decision making as well as the external performance and issues of the company, while management accounting focuses on the most important aspects of the company which is the internal flow of finance and other monetary issues of the company that can greatly impact the entire operation and performance of the company, thus will reflect on the stakeholders’ relationship of the company.
It shows that while the financial accounting depends on the general standards of rules that are set by authorities in different countries. This is due to the fact that the financial accounting focuses on the needs of the external stakeholders to know the current situations of the company. In addition, the process of standardization as well as harmonization of the financial accounting is considered as beneficial and give advantage to the stakeholders, particularly to the shareholders, governments and interested customers. This is because; there is a set of standards that will give them the ideas regarding how to read or know the contents of the financial reports, and how it concerns them. The said general standards, rules and regulations serve as guidelines to the stakeholders in order to know the current situation of the company in terms of the financial matters. Furthermore, the harmonization and standardization of financial management enables corporate governance, by enabling the companies to become transparent regarding the real and current situation of the company.
On the other hand, the management accounting is considered as more important than the financial accounting because it focuses on the aspects that must be considered in the internal decision-making. This kind of accounting is not affected or influenced by any external authorities or standard giving bodies because it depends and varies according to all of the aspects of the company including their culture, behavior and other important aspects or department of the business. Furthermore, it also based on the principles and decision-making of the managers that will be based on his or her skills and perspective regarding the financial and accounting areas of the company. By using different techniques in the said type of accounting, it will give the company the edge in terms of decision making that will give the stakeholders, primarily the shareholders, more profits and returns.
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