The Missing Link

The finance community has been concerned for many years about the absence of global accounting and financial reporting standards to help compare the financial statements of companies from different countries.

The International Accounting Standards Board (IASB) has gone some way towards rectifying this situation. Its mission is to develop a single set of high-quality, understandable and enforceable global accounting standards: the international financial reporting standards (IFRS).

Sir David Tweedie, IASB chairman, believes: "There isn't any reason why a transaction in Boston should be accounted for any differently than one in Brussels or Brisbane. And if they are accounted for in the same way, it's going to open up the capital markets. Say you are on Wall Street, reviewing a Dutch company. You'll have other things to think about, but accounting is not going to be one of them. That's going to reduce cost of capital. That will save a lot of money."

IFRS went live on 1 January 2005. However, this is far from mission accomplished. To begin with, there is the widely acknowledged problem that IFRS are a moving target, due to the ongoing process of releasing new / revised standards. There is also the issue of a convergence gap between IFRS and the generally accepted accounting principles (GAAP) in the US.

LOST CONNECTION

Another serious and almost entirely neglected aspect is that managers and auditors also need standardised and reliable internal controlling and management accounting data to support IFRS. This is essential for supporting management in their decision-making and steering their organisation towards the IFRS-based performance concept, as well as supporting IFRS-based financial accounting and facilitating 'fair value' valuation of goodwill and intangible assets.

IFRS represent a major step forward for transparency and comparability of companies from an investor perspective. However, we are still failing to acknowledge the links between traditional, local financial accounting standards or GAAP and locally developed management accounting practices.

These links reflect practices that have been developed over decades in companies and management accounting / controller communities in different countries. They ensure that companies have analytical data to support decision-making and performance management that are in line with financial accounts and the performance concept used in external reporting (based until recently on local GAAP). They are also the foundation for valuing certain financial statement items, such as inventories based on cost-accounting data.

IFRS and its fundamentally different accounting philosophy has broken these links through the introduction of a new era of financial accounting and reporting based on the previously unknown 'fair value' principle, which meets the international investors' requirements. This is very different from traditional concepts such as the continental European 'prudence principle', which protects local creditors.

TENTATIVE STEPS

Development of a new, proven best practice to create controlling, management accounting and analytical data supporting decision-making based on an IFRS performance concept is still in its early stages.

Most attempts to integrate IFRS-based financial accounting with management accounting do so only at a very high aggregation level, usually at the segment or business unit level; that is, for aggregated actuals only. There are no analytical / management accounting concepts based on the IFRS performance philosophy to support management in detailed day-to-day decision-making.

This is creating a performance management black hole because operational managers do not have instruments to align their performance with IFRS-based targets. It also makes it impossible for financial accountants to provide sound and auditable fair value valuations, which require detailed, reliable and testable planning data.

MOVING FORWARD

It is clear that a new approach to management accounting is needed. One that supports decision-making and financial accounting, just like management accounting and cost accounting did in the old days. The time has come for international management accounting standards (IMAS).

Companies and the controller / management accounting community need to focus on advancing the controlling and management accounting systems to better support the external IFRS view, steer the business proactively and come up with the analytical foundation to support IFRS valuations that are reliable and meet the expectations of auditors and the investor community.

There are three important considerations that need to be taken into account: the effect of globalisation, entrenched, antiquated processes and the fact that management accounting cannot be standardised in the same way as financial accounting.

The good news is that we do not have to start from scratch: many of the pieces required for a comprehensive redesign and redefinition of management accounting and controlling already exist; they just need consolidation.

Europe, in particular, has numerous well-tested and extensively developed management accounting and controlling concepts. Although they have only been developed and applied in a national context, there is great potential to advance and shape the management accounting and controlling practice globally.

The International Group of Controlling (IGC) has proposed a cooperation initiative to address all European controlling and management accounting associations and interested (corporate) practitioners as well as academics – and with the support of the European Commission as far as possible. Its mission is to develop IMAS in a holistic way by combining and consolidating the strengths of the different approaches and adding new concepts to fill any gaps. It also plans to encourage non-European parties to join the initiative to bring it to an international level.

The process began with a first meeting in London in July 2006, which I organised on behalf of the IGC. A second meeting in November 2006 in Paris formally initiated the project and also set up a working group.

This cooperation initiative already comprises representatives from management accounting and controlling organisations from Denmark, France, Germany, the Netherlands, Poland, Spain, Switzerland and the UK, several academics from European universities and business schools, practitioners from European multinationals and representatives from the European Commission.

The hope is that we can come together to develop a truly rigorous set of management accounting standards that can be applied internationally, allowing the entire finance community to move towards a system that is capable of dealing with the way business is done today and is transparent and understandable to all parties.