Designing Internal Accounting Reports for Business Managers
When designing internal accounting reports for business managers, the accountant should ask, “Who’s entitled to know what information in the internal accounting reports?” In general, the board of directors, the CEO, the president, and the COO are entitled to know anything and everything.
By virtue of their positions, the financial vice president and chief accountant (often called the controller) have access to all financial information about the business.
Other managers in a business have a limited scope of responsibility and authority. The accountant should report to them the information they need to know, but no more. For example:
The vice-president of production receives a wide range of manufacturing information but doesn’t receive sales and marketing information.
The reporting of information to individual mangers should follow the organizational structure of the business; this practice is called responsibility accounting.
The accountant should identify a particular manager’s specific area of authority and responsibility in deciding the information content of accounting reports to that manager.
From the accounting point of view, the organizational structure of a business consists of profit centers and cost centers:
A profit center could be a product line, or even a specific product model. For example, a profit center for Apple Computer is its iPod line of products; another profit center is its iTunes Music Center (where customers download audio and video files). Within each broad product line, Apple has sub-profit centers. For example, each type of iPod is a sub-profit center.
A cost center is an organization unit that doesn’t directly generate sales revenue. For example, the accounting department of a company is a cost center.
The accounting reports that go to the manager of a profit center should be oriented to the profit performance of that organization unit. The accounting reports that go to a manager of a cost center should be oriented to the cost performance of that organization unit.
Helping managers understand their accounting reports
Most managers have limited accounting backgrounds; their backgrounds are usually in marketing, engineering, law, human resources, and other fields. Business managers are very busy people with little time to spare. Yet accountants often act as if managers fully understand the accounting reports they receive and have all the time in the world to read and digest the detailed information they contain. Accountants are dead-wrong on this point.
One function of the management accountant is to serve as the translator of accounting jargon and reports to business managers — to take the technical terminology and methods of accounting and put it all into terms that non-accounting managers can understand. Management accountants can perform a valuable service by improving their communication skills with non-accounting managers.
Involving managers in choosing accounting methods
Some business managers take charge of every aspect of the business, including choosing accounting methods for their businesses. But many business managers are passive and defer to their chief accountants regarding the accounting methods their businesses should use.
The hands-off approach is a mistake. Ultimately, the chief executive officer of the business is responsible for these decisions, as he or she is responsible for all fundamental decisions of the business. But such accounting decisions may not be on the radar screen of the chief executive.
In choosing accounting methods, the chief accountant shouldn’t allow managers to sit on the sidelines and be spectators. The chief accountant shouldn’t select an accounting method without the explicit approval and understanding of top-level managers.
In particular, the head accountant should explain the differences in profit and asset and liability values between alternative accounting methods. The business’s accounting methods should reflect its philosophy and strategies, so if the business is conservative in its policies and strategies, it should use conservative accounting methods.
The chief accountant can find himself or herself between a rock and a hard place when top-level managers intervene in the normal accounting process. This interference may be referred to as massaging the numbers, managing earnings, smoothing earnings, or good old-fashioned accounting manipulation. If the accountant accedes to management pressure, he or she should make clear to the manager what the consequences will be the following year.
Generally speaking, there’s a compensatory effect, or trade-off, between years; pumping up profit this year, for instance, causes profit deflation next year. Massaging the numbers produces a robbing Peter to pay Paul effect, and the accountant should make this very clear to the manager.