Is the authority to advise but not command others it is exercised laterally or upward?

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Course: Strategic Cost Management (CAE 123) Unit Title: Introduction to Strategic Cost Management Lesson Title: The Professional Environment of Cost Management Objectives: After studying, you should be able to: 1. Describe the position of the management accountant in the organization structure of the business firm. 2. Explain the role and the relationship between the Chief Financial and the Controller. 3. Describe the functions and responsibilities of the Controller as the top management accountant. 4. Explain the role and the relationship between the Chief Financial Officer and the Treasurer. 5. Describe the functions and responsibilities of the Treasurer. 6. Understand the ethical standards for management accountants. 7. Realize the need for a company code of conduct. 8. Be familiar with typical ethical challenges that management accountants encounter. 9. Describe the international certifications that are available to management accountants. Introduction: Many of the activities constituting the field of management accounting are interrelated and thus must be coordinated, ranked and implemented by the management accountant in such a fashion as to meet the objectives of the organization as perceived by him or her. A major function of the management accountant is that of tailoring the application of the process to the organization so that the organization’s objectives, short-term and long-term are achieved effectively. The accounting function is usually the “staff”, with responsibility for providing line managers and also other staff managers, with specialized services. This includes advice and help in the areas of budgeting, controlling, pricing and special decisions. Line authority is the authority to command action or give orders to subordinates. Line managers are directly responsible for attaining the objectives of the business firm as efficiently as possible. Sales and production managers typically have line authority. Staff authority is the authority to advise but not command others; it is exercised laterally upward. Staff managers gives support, advice and service to line departments.

Except for exercising line authority over his department, the chief accounting officer usually the controller generally fills the staff role in his company as contrasted with the line roles of sales and production executives. Theoretically, the controller transmits the best accounting procedures to be followed by the line people to the President who will communicate such through a manual of instructions. In practice however, the controller holds delegated authority from top line management to direct the line people on how to apply these procedures. This is known as functional authority which is the right to command action laterally or downward with regard to a specific function or specialty. Content: THE CHIEF FINANCIAL OFFICER AND THE CONTROLLER The chief financial officer (CFO) – also called the finance director in many countries – is the executive responsible for overseeing the financial operations of an organization. The responsibilities of the CFO vary among organizations, but they usually include the following areas:  Controllership – includes providing financial information for reports to managers and reports to shareholders and overseeing the overall operations of the accounting system.  Treasury – includes banking and short and long-term financing, investments, and management of cash.  Risk management – includes managing the financial risk of interest-rate and exchange-rate changes and derivatives management.  Taxation – includes income taxes, sales taxes, and international tax planning.  Internal audit – includes reviewing and analyzing financial and other records to attest to the integrity of the organization’s financial reports and to adherence to its policies and procedures. In some organizations, the CFO is also responsible for information systems. In other organizations, an officer of equivalent rank to the CFO – called the chief information officer – is responsible for information systems. The controller (also called the chief accounting officer) is the financial executive primarily responsible for management accounting and financial accounting. Modern controllers do not do any controlling in terms of line authority except over their own departments. Yet, the modern concept of controllership maintains the controller does control in a special sense. That is, by reporting and interpreting relevant data (problem-solving and attention-directing roles), the controller exerts a force of influence that impels management toward making better-informed decisions. Figure 2-1 is an illustrative organization chart of the CFO and the corporate controller of an apparel company Figure 2-1: Reporting Relationships for the CFO and the Corporate Controller

Chairman Chief Executive Officer (CEO)

Board of Directors

President Chief Operating Officer (COO) Chief Financial Officer (CFO) Controller

Treasurer

The Controller as the Top Management Accountant Controllership is the practice of the established science of control which is the process by which management assures itself that the resources are procured and utilized according to plans in order to achieve the company’s objectives. In most organizations, the top managerial accounting position is held by the controller. The controller provides reports for planning and evaluating company activities (e.g., budgets and performance reports) and provides the information needed to make management decisions (e.g., decisions related to construction of a new factory or decisions related to adding or dropping a product). The controller also has a responsibility for all financial accounting reports and tax filings with the Bureau of Internal Revenue and other taxing agencies, as well as coordinating the activities of the firm’s external auditors. A simplified illustration of the organization chart for the controller’s office is shown in Figure2-2. Note that one of the areas reporting to the controller is cost accounting. Most medium-sized and large manufacturing companies have such a department. Cost accountants estimate costs to facilitate management decisions and develop cost information for purposes of valuing inventory. The controller is an integral part of the management team. If one wants a high-level career in management accounting, he/she will need not only strong accounting skills but also skills required of all high-level executives. These skills include excellent written and oral communication skills, solid interpersonal skills and a deep knowledge of the industry in which the firm competes. The controller’s authority is basically staff authority in that the controller’s office gives

advice and service to other departments. However, in his own department, he has line authority. In the modern concept of controllership, it is maintained that the controller does not control in a special sense. That is, by reporting and interpreting relevant data, the controller exerts a force or influence that impels management toward logical decisions consistent with objectives. Figure 2-2: A Typical Organization Chart Showing the Functions of the Controller

Controller

Financial Reporting

Budgeting and Performance Reporting

Systems Development

Financial Analysis and Special Studies

Cost Management

Taxation Reporting

Basic Functions of Controllership The basic principal functional responsibilities and activities of controllership may be categorized as follows: 1. 2. 3. 4. 5.

Planning. Control. Reporting. Accounting. Other Primary Responsibilities.

Qualification of the Controller The qualifications of an effective controller would include: 1. An excellent technical foundation in accounting and finance with an understanding and thorough knowledge of accounting principles. 2. An understanding of the principles of planning, organizing, and control. 3. A general understanding of the industry in which the company competes and the social, economic, and political forces involved. 4. A thorough understanding of the company, including its technologies, products, policies, objectives, history, organization, and environment.

5. The ability to communicate with all levels of management and a basic understanding of the other functional problems related to engineering, production, procurement, industrial relations, and marketing. 6. The ability to express ideas clearly in writing or in making informative presentations. 7. The ability to motivate others to achieve positive action and results. The controller may have the technical capability and be able to lay put the assigned tasks as well as supervise and direct his personnel, but he must also have integrity and the ability to communicate if he is to succeed. He must be fair, reasonable, and sincere with all concerned if he is to be recognized for the importance of the controllership function. As in any executive position, the controller must be able to work with people at all levels, have respect for the ideas and opinions of others, and have the resourcefulness, to meet all challenges. THE CHIEF FINANCIAL OFFICER AND THE TREASURER Although organizational structures may vary from firm of firm, the role of finance is assigned to the Chief of Financial Officer (CFO) or the Vice President-Finance who reports to the President. The financial vice-president’s key subordinates are the Treasurer and the Controller. This book has extensively dealt with the role of the Controller in the previous section. Treasurership Treasurership is concerned with the acquisition, financing and management of assets of a business concern to maximize the wealth of the firms for its owners. In addition to the position of the controller, many companies have a position called a treasurer, The treasurer has the custody of cash and funds invested in various marketable securities. In addition to money management duties, the treasurer is generally responsible for maintaining relationships with investors, banks, and other creditors. Thus, the treasurer plays a major role in managing cash and marketable securities, preparing cash forecasts and obtaining financing from banks and other lenders. Both the controller and the treasurer report to the chief financial officer (CFO) who is the senior executive responsible for both accounting and financial operations. In most firms the treasurer has the following responsibilities: 1. Funds procurement 2. Banking and Custody of Funds 3. Investment of Funds 4. Operating Responsibilities related to a. Credit and Collection

b. c. d. e. f.

Inventory Management Corporate pension and retirement fund Investor Relations Insurance Compliance with legal and regulatory provisions relating to funds procurement, use and distribution as well as coordination of the finance function with accounting function.

ETHICAL STANDARDS FOR MANAGEMENT ACCOUNTANTS In recent year, many concerns have been raised regarding ethical behavior in business and in public life. Allegations and scandals of unethical conduct have been directed toward managers in virtually all segments of society, including government, business, charitable organizations, and even religion. Although these allegations and scandals have received a lot of attention, it is doubtful that they represent a wholesale breakdown of the moral fiber of the nation. After all, hundreds of millions of transactions are conducted every day that remain untainted. Nevertheless, it is important to have an appreciation of what is and is not acceptable behavior in business and why. Fortunately, the Institute of Management Accountants (IMA) of the United States have developed a very useful ethical code called the Standards of Ethical Conduct for Practitioners of Management Accounting and Financial Management. Even though the standards were specifically developed for management accountants, they have much broader application. Code of Conduct for Management Accountants The Institute of Management Accountants (IMA) issued the Standards of Ethical Conduct for Practitioners of Management Accounting and Financial Management. These standards are presented in Figure 2-3. There are two parts of the standards. The first part provides general guidelines for ethical behavior. In a nutshell, the management accountant has ethical responsibilities in four broad areas namely 1. To maintain a high level of professional competence 2. To treat sensitive matters with confidentiality 3. To maintain personal integrity, and 4. To be objective in all disclosing. The second part of the standard gives specific guidance concerning what should be done if an individual finds evidence of ethical misconduct within an organization, The ethical standard provide sound, practical advice for management accountants and managers. They require professional behavior, especially in avoiding conflicts of interest. They require management accountants to bring bad news to the attention of their supervisors, and to work competently. Most of the rules in the ethical standards are motivated by a very practical consideration – if these rules were not generally followed in business, then the economy could come

to a halt. The following are examples of the consequences of not abiding by the standards: 1. Suppose employees could not be trusted with confidential information. Top managers would therefore be reluctant to distribute confidential information within the company. This could result to decision being made based on incomplete information and could lead to deterioration of operations. 2. Suppose employees accept bribes from suppliers. Then contacts would tend to go to suppliers who pay the highest bribe rather than to the most competent suppliers. Would you like to fly in an airplane whose wings were made by the subcontractor who was willing to pay the highest bribe to a purchasing agent? 3. Suppose the CEOs or presidents of companies routinely lied in their annual report to shareholders and grossly distorted financial statements. If the basic integrity of the company’s financial statement could not be relied on, investors and creditors would have little basis for making informed decisions. Rational investors would suspect the worst and would pay less for securities issued by companies. As a result, less funds would be available for productive investments and many firms might be unable to raise any funds at all. This ultimately, would lead to slower economic growth, fewer foods and services, and higher prices. As these examples suggest, if ethical standards were not generally adhered to, there would be undesirable consequences for everyone. Following ethical rules such as those in the Standards of Ethical Conduct for Practitioners of Management Accounting and Financial Management is not just a matter of being “nice”, it is absolutely essential for the smooth functioning an advanced market economy. Figure 2-3: Standards of Ethical Conduct for Practitioners of Management Accounting and Financial Management Practitioners of management accounting and financial management have an obligation to the public, their profession, the organization they serve, and themselves, to maintain the highest standards of ethical conduct. In recognition of this obligation, the Institute of Management Accountants has promulgated the following standards of ethical conduct for practitioners of management accounting and financial management. Adherence to these standards, both domestically and internationally, is integral of achieving the Objectives of Management Accounting. Practitioners of management accounting and financial management shall not commit acts contrary to these standards nor shall they condone the commission of such acts by others within their organizations. Competence. Practitioners of management accounting and financial responsibility have a responsibility to:  Maintain an appropriate level of professional competence by ongoing development of their knowledge and skills.  Perform their professional duties in accordance with relevant laws, regulations, and technical standards.  Prepare complete and clear reports and recommendations after appropriate analysis of relevant and reliable information. Confidentiality. Practitioners of management accounting and financial management have a responsibility to:

  

Refrain from disclosing confidential information acquired in the course of their work except when authorized, unless legally obligated to do so. Inform subordinates as appropriate regarding the confidentiality of information acquired in the course of their work and monitor their activities to assure the maintenance of that confidentiality. Refrain from using or appearing to use confidential information acquired in the course of their work for unethical or illegal advantage either personally or through third parties.

Integrity. Practitioners of management accounting and financial management have a responsibility to:  Avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential conflict.  Refrain from engaging in any activity that would prejudice their ability to carry out their duties ethically.  Refuse any gift, favor, or hospitality that would influence or would appear to influence their actions.  Refrain from either actively or passively subverting the attainment of the organization’s legitimate and ethical objectives.  Recognize and communicate professional limitations or other constraints that would preclude responsibility judgment or successful performance of an activity.  Communicate unfavorable as well as favorable information and professional judgments or opinions.  Refrain from engaging in or supporting any activity that would discredit the profession. Objectivity. Practitioners of management accounting and financial management have a responsibility to:  Communicate information fairly and objectively.  Disclose fully all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, comments, and recommendations presented. Resolution of Ethical Conflict. In applying the standards of ethical conduct, practitioners of management accounting and financial management may encounter problems in identifying unethical behavior or in resolving an ethical conflict. When faced with significant ethical issues, practitioners of management accounting and financial management should follow the established policies of the organization bearing on the resolution of such conflict. If these policies do not resolve the ethical conflict, such practitioner should consider the following courses of action.  Discuss such problems with the immediate superior except when it appears that the superior is involved, in which case the problem should be presented initially to the next higher managerial level. If a satisfactory resolution cannot be achieved when the problem is initially presented, submit the issues to the next higher managerial level.  If the immediate superior is the chief executive officer, or equivalent, the acceptable reviewing authority may be a group such as the audit committee, executive committee, board of directors, board of trustees, or owners. Contact with levels above the immediate superior should be initiated only with the superior’s knowledge, assuming the superior is not involved. Except where legally prescribed, communication of such problems to authorities or individuals not employed or engaged by the organization is not considered appropriate.  Clarify relevant ethical issues by confidential discussion with an objective advisor (e.g., IMA Ethics Counseling Service) to obtain a better understanding of possible courses of action.  Consult your own attorney as to legal obligations and rights concerning the ethical conflict.  If the ethical conflict still exists after exhausting all levels of internal review, there may be no other recourse on significant matters than to resign from the organization and to submit an informative memorandum to an appropriate representative of the organization. After resignation, depending on the nature of the ethical conflict, it may also be appropriate to notify other parties.

COMPANY CODE OF CONDUCT Ethical standards serve a very important practical function in an advanced market

economy. Without widespread adherence to ethical standards, material living standards would fall. A former president of CMA emphasizes the importance of ethics in business: “Employees like to work for a company that they can trust. Customers like to deal with an ethically reliable business. Suppliers like to sell to firms with which they can have a real partnership. Communities are more likely to cooperate with organizations that deal honestly and fairly with them. If the business community is to function effectively, all of the players need to act ethically.” It is unfortunate though, that some companies place so much emphasis on short-term profits that may make it seem like the only way to get ahead is to act unethically. Those who engage in unethical behavior often justify their actions with one or more of the following reasons: 1. The organization expects unethical behavior, 2. Everyone else is unethical, and/or 3. Behaving unethically is the only way to get ahead. To counter the first justification of unethical behavior, many companies have adopted formal ethical codes of conduct. These codes are generally broad-based statements of a company’s responsibilities to its employees, its customers, its suppliers and the community in which the company operates. Codes give broad guidelines rather than that spell out specific do’s and don’ts or suggest proper behavior in a specific situation. Companies with a strong code of ethics can create strong customer and employee loyalty. While liars and cheats may win on occasion, their victories are often short-term. Companies in business for the long term find that it pays to treat all of their constituents honestly and loyalty. TYPICAL ETHICAL CHALLENGES Ethical issues can confront management accountants in many ways. Here are two examples: 



Case A. Roger Cruz, a management accountant, knows that reporting a loss for a software division will result in yet another series of layoffs, and has concerns about the commercial potential of software for which R&D costs are currently being capitalized as an asset rather than being shown as an expense for internal reporting purposes. The division manager argues that the new product will be successful and profitable but presents little evidence to support her argument. The last two products from this division have been unsuccessful. The management accountant has many friends in the division and wants to avoid a personal confrontation with the division manager. Case B. A packaging supplier, bidding for a new contract, offers the management accountant of the purchasing company an all-expense paid weekend to the Boracay Resort. The supplier does not mention the new contract when giving the invitation. The accountant is not a personal friend of the supplier. He knows cost issues are critical in approving the new contract and is concerned that the

supplier will ask for details about bids by competing packaging companies. In both cases, the management accountant is faced with an ethical dilemma. Case A involves competence, objectivity, and integrity. The management accountant should request that the division manager provide credible evidence that the new product is commercially viable. If the manager does not provide such evidence, expensing R&D costs in the current period is appropriate. Case B involves confidentiality and integrity, Ethical issues are not always clear-cut. The supplier in Case B may have no intention of raising issues associated with the bid. However, the appearance of a conflict of interest in Case B is sufficient for many companies to prohibit employees from accepting “favors” from suppliers. Figure 2-3 includes the IMA’s guidance on “Resolution of Ethical Conflict.” The accountant in Case B should discuss the invitation with his immediate supervisor. If the visit is approved, the supplier should be informed that the invitation has been officially approved subject to his following corporate policy (which includes the confidentiality of information). CODES OF CONDUCT ON THE INTERNATIONAL LEVEL In July 1990, the International Federation of Accountants (IFAC) in which the Philippines through the PICPA is a member, issued the “Guidelines on Ethics for Professional Accountants” which governs the activities of all professional accountants throughout the world; regardless of whether they are practicing as independent CPAs, employed in the government service or employed as internal accountants. In addition to outlining ethical requirements, in matters dealing with competence, objectivity, independence, and confidentiality, the IFAC’s code also outlines the accountant’s ethical responsibilities in matters relating to taxes, fees and commissions, advertising and solicitation, the handling of monies and cross-border activities. When cross-border activities are involved, the IFAC ethical requirements must be followed if these requirements are stricter than the ethical requirements of the country in which the work is being performed. The Board of Accountancy of the Professional Regulation Commission approved the implementation of the Revised Code of Ethics for Professional Accountants in the Philippines effective January 1, 2016. INTERNATIONAL CERTIFICATIONS The tree certifications available to management accountants are as follows:  Certificate of Management Accounting (CMA)  Certificate in Public Accounting (CPA)  Certificate in Internal Auditing (CIA) CMA. A Certified Management Accountant is one who has passed the rigorous qualifying examination, has met an experience requirement, and participates in continuing educations. The CMA Certificate is granted by the Institute Management

Accountants (IMA). CPA. A Certified Public Accountant is one who has met pre-qualification educational requirements, passed the CPA licensure examinations given by the Professional Regulatory Board of Accountancy and has satisfied all other legal and regulatory requirements of a public accountant. The CPAS’s main responsibility is to provide assurance concerning the reliability of the information contain in the firm’s financial statements. CIA. Since one of the management control responsibilities of the management accountant is to develop effective systems to detect and prevent errors and fraud in the accounting records, it is common for the management accountant to have strong ties to the control-oriented organization such as the Institute of Internal Auditors (IIA) granting Certification in Internal Auditing (CIA). To attain the status of Certified Internal Auditor an individual must pass a comprehensive examination design to ensure technical competence and have the required number of years of work experience. INSTITUTE OF MANAGEMENT ACCOUNTANTS (IMA) Management accountants have gained status in recent years as they now spend more time analyzing a company’s operations and less with the problems of recording and computing costs of products. The Institute of Management Accountants (IMA), the principal organization of management accountants in the United States, has instituted a program to provide certifications for management accountants and financial managers. The Certified Management Accountant (CMA) examination was first given in 1972. A listing of the required subject areas in the CMA examination indicates the breadth of knowledge expected of the professional management accountant. The examination consists of the following four parts: Economics, Finance and Management; Financial Accounting and Reporting; Management Reporting, Analysis and Behavioral Issues; and Decision Analysis and Information Systems. The Certified in Financial Management (CFM) examination was first given in 1996. The CFM examination is similar to the CMA examination with one major difference: The Financial Accounting and Reporting section is replaced with Corporate Financial Management. The IMA also promulgated a code of ethics for management accountants, with is discussed in the previous section. The Institute of Management Accounting (IMA) is a professional organization that publishes the monthly magazine Strategic Finance. Since 1973, the IMA has conducted a comprehensive examination to test the knowledge a management accountant must have in a complex and fast-changing business world. More than 3,000 individuals take the exam each year. Those who pass the exam are issued a Certificate in Management Accounting and are proud to indicate the designation CMA on resumes and business cards. For details on student and professional memberships in the IMA and for information on the CMA examination, visit the IMA Web site. One of the contributions of the IMA is the development of standards of ethical conduct and maintenance of an ethics hotline that members can call to discuss ethical conflicts.

One may also visit the IMA website to review these ethical standards. PHILIPPINE ASSOCIATION OF MANAGEMENT ACCOUNTANTS (PAMA) PAMA was established in 1972 as the National Association of Accountants (NAA) Philippine Chapter, Inc. It is affiliated with NAA in New York. It was founded primarily to provide its members with educational and professional activities that supplement in the knowledge of management accounting practices and methods. Monthly technical meetings, seminars and workshops are held to present relevant and current topics by leading speakers from the government, private and educational sectors. The open forum provides the nerve for the exchange of ideas and experiences among the participants and the speakers. Publication of technical materials is also part of the Association’s efforts to serve its members. To propagate and professionalize Management Accounting in the Philippines, PAMA conducts the Certificate in Management Accounting (CMA) Program through its continuing education arm, the Philippine Institute of Management Accounting (PIMA). Basic objectives of the program are: 1. To establish management accounting as a recognized profession by identifying the role of the management accountant and the underlying body of knowledge, and by outlining a course of study by which such knowledge can be acquired. 2. To foster higher educational standards in the field of management accounting. 3. To assist employees, educators and students by establishing an objective measure of an individuals’ knowledge and competence in the field of management accounting. Assessment: Essay: (to be uploaded in your MS Teams Class) REFERENCE :  Chapter 2 : Strategic Cost Management 2019-2020 Edition by Ma. Elenita Balatbat Cabrera and Gilbert Anthony B. Cabrera

Which of the following is a controller responsibility?

Is planning more vital than control?

Is an integral part of the planning and control process decisions are made to reward or punish managers and decisions are made to change operations or revise plans?

What roles do management accountants perform?