Management, Uncertainty, and Accounting

367 Pages·2019·3.86 MB·English

by  Akira Nishimura

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Management, Uncertainty, and Accounting
Akira Nishimura
Management,
Uncertainty, and
Accounting
Case Studies, Theoretical Models, and Useful
Strategies
Akira Nishimura
Beppu University
Oita-City, Oita, Japan
ISBN 978-981-10-8988-6 ISBN 978-981-10-8989-3 (eBook)
https://doi.org/10.1007/978-981-10-8989-3
Library of Congress Control Number: 2018944442
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reface and cknowledgments
“What is accounting?” has been my research theme for a long time, ever
since Professor T. Okabe, my dissertation advisor, posed this question to
me at the graduate school of Kyoto University. This question has extended
to an inquiry into the essential nature of management accounting and
management since I made management accounting research my career. As
part of this inquiry, I wrote Management Accounting: Feed-Forward and
Asian Perspectives (Palgrave Macmillan, 2003), in which, based on the
practical connection between the creative control function of manage-
ment and the cognitive control function of accounting, I defined the func-
tion of management accounting as cognitive control for business value
creation. From this, I analyzed new management accounting practices and
theories in the 1970s and their future directions from a feed-forward view-
point and through comparative studies of Western and Asian management
accounting, after clarifying the fundamental development of traditional
management accounting. Coinciding with major global changes in the
political economy over the 14 years since this publication, business man-
agement and accounting systems have undergone great changes and
become more complicated. As the essential natures of these systems become
more intangible and incomprehensible with greater uncertainty, it is
increasingly necessary to examine them in relation to uncertainty and risks
from the well-honed feed-forward viewpoint. The present book examines
the relationship of management and management accounting with uncer-
tainty and explains the contemporary situation and structure of manage-
ment accounting based on this examination.
v
vi PREFACE AND ACKNOWLEDGMENTS
This book thus aims to clarify this relationship fundamentally through
a historical and global examination of contemporary management account-
ing and to understand both their positive features (harmony and social
creativity) and negative applications (discord and private manipulation).
To clarify the thesis of this book, it is desirable to sketch the position
and point of each chapter briefly in the context of the overall conceptual
framework of the book. In reference to the relationship of management
and management accounting with uncertainty, Chap. 1 introduces basic
concepts such as workmanship, emulation, control, scientific manage-
ment, and standard costing through the advanced early twentieth-century
theories of Taylor, Harrison, Veblen, and Knight. Following these theo-
ries, this book presupposes uncertainty as an unavoidable phenomenon in
human society, while remaining convinced of the human intelligence and
power to control it. Neither firms nor human beings can escape uncer-
tainty because the human instinct for workmanship and a propensity for
emulating each other in efficiency easily become negative work habits
(“irksomeness of labor” in Veblen) and wasteful and inefficient competi-
tion in a competitive ownership society. Firms cannot avoid uncertainty as
long as their subsistence relies on competitive production. However, they
also have instinctive intelligence and power to control risk and uncertainty
through workmanship and emulation for efficiency. Management and
management accounting take the form of measurement, evaluation, and
control to transform conflict and discord into harmony and stability, and
their development represents the process by which humans and society
have endeavored to cope with risk and uncertainty to secure reasonable
production and distribution for their existence.
However, emulation for efficiency has become the emulation for the per-
petual ownership of wealth beyond harmony and stability, causing intensi-
fied uncertainty. This also results from human propensities. Management
and accounting are abused in this case, and accounting in particular is
improperly used to deceive society in the form of window dressing account-
ing. These behaviors degrade business value. Society thus asks accountants
to secure business value through harmony between management account-
ing and financial accounting and to make trustworthy disclosures of the
corporate financial situation. Enterprises must organically manage opportu-
nity and risk, and managers should equip themselves with virtuous ethics
through regulation, which plays an important role in controlling the enter-
prise’s risks and uncertainty.
PREFACE AND ACKNOWLEDGMENT S vii
Accordingly, Chap. 2 examines the contemporary situation of e nterprise
governance and internal control systems and their meanings, with reference
to enterprise risk management. This examination is closely related to the
contemporary function of management and accounting—transforming
conflict and discord into harmony and stability. In this case, how does the
special cognitive control function of profit relate to uncertainty? When man-
agement and accounting must plan for and control opportunity, risk, and
uncertainty for strategic management, profit management becomes more
significant; even if profit is measured by a feedback method, its planning
must be practically founded on the feed-forward recognition of opportunity
and risk that is finally incarnated as accounting income. Under present
global and forward-looking business strategies, enterprises must forecast
and control profit opportunities and risk or invisible value that is trans-
formed into profit or loss. If managers cannot recognize this transformation
of business value from opportunity and risk to accounting income, they
cannot properly make strategic decisions to create business value. Regarding
this, Chap. 3 discusses the concept of business value. Simultaneously, oppor-
tunity is qualified as profit opportunity in terms of business strategy from
the same viewpoint of probability as risk. Both profit opportunity and risk
hold important positions in strategic profit management. I thus adopt busi-
ness value as a concept that connects profit opportunity and risk with
accounting profits in business management. This examination raises the
next subject: the meaning of accounting (cognitive control function) that
plans, measures, analyzes, and evaluates their intricate relations.
To address this, Chap. 4 first defines the concept of uncertainty, and
then profit opportunity and enterprise risk, referring to representative
scholars in the fields of business management and accounting. This clari-
fies how management and accounting recognize and control uncertainty
in business planning, implementation, and evaluation. This discussion
obtains the important meanings of Demski’s ex post programming model
in accounting control of uncertainty, in which the senior managers’ fore-
cast ability and the control ability of middle and lower management can be
measured and evaluated through forecast profit (or opportunity) variance
and opportunity cost variance by using linear programming and profit
variance analysis. This model is forward-looking in controlling uncertainty
and enterprise risk, even though it is structured on feedback control. This
book considers the epoch-making idea of this model on risk management
in comparison with traditional management accounting and, with
viii PREFACE AND ACKNOWLEDGMENTS
continual reference to this model, analyzes the features and structures of
contemporary enterprise risk management.
Chapter 5 practically examines profit opportunity and risk management
in connection with the strategic innovation and organizational structure
(i.e., resources and organizational capability) of an enterprise that inno-
vates, because the probability of profit opportunity and enterprise risk can-
not be predicted, regardless of innovation and organizational structure.
This book thus pays special attention to Simon’s “opportunity space” and
to Haynie’s concept, which considers the relation between opportunity
and resources. This chapter examines the exploitation of profit opportu-
nity and the elimination of enterprise risk in the three latest innovations in
production and management: the lean production method, agile supply
chain systems, and global innovation. The chapter simultaneously eluci-
dates the function of management accounting and profit design systems as
an expansive form of cost design, linking these with innovations and con-
tinuous improvements (Kaizen in Japanese), in terms of profit opportu-
nity/risk-based variance analysis and feed-forward control. This
examination leads to a strategic management control model that copes
with uncertainty through opportunity/risk variance analysis and innova-
tion or improvement under a cycle of feed-forward and feedback control.
Moreover, the present meaning of comprehensive opportunity/risk
management must be studied from the perspective of the strategic man-
agement accounting model. The strategic management accounting model
plays an important role in preparing proactive information and providing
managers with variance information to exploit profit opportunities, trans-
form risk into profit opportunity, and minimize risk. Previously, some
accounting scholars have described the gap between strategic and organi-
zational requirements and financial accounting information as a defect in
traditional management accounting. From this, they have developed activ-
ity-based costing (ABC) and balanced scorecard (BSC) based on nonfi-
nancial information. However, even if an accounting system measures
nonfinancial information, as long as it depends on feedback control, there
will be a critical gap between information and forward-looking strategies,
and the system will be useless for strategic and forward-looking organiza-
tional management. Considering these gaps, strategic management
accounting must be forward-looking, globally cognitive, and comprehen-
sively control oriented (Chap. 6). Thus, Chaps. 5 and 6 clarify the direc-
tion and problems of contemporary management accounting.
PREFACE AND ACKNOWLEDGMENT S ix
Chapter 7 examines cost design as a recent strategic management
accounting method from a forward-looking, global viewpoint. As con-
sciousness of environmental protection and health and safety deepens,
some Japanese companies spatially and temporally introduce risk manage-
ment into cost design, for example, transforming it into an environmen-
tally conscious cost design system that includes supply chain and product
life cycle costing. This transformation aims at reducing risk in the produc-
tion process from suppliers to their own factories and exploiting profit
opportunity through synthetic risk management, based on the integration
of high quality and low cost. This chapter introduces an environmentally
conscious type of cost design seen in Japanese enterprises and examines
the situation of Japanese enterprises in supply chains and environmental
protection from the viewpoint of cost and risk management.
Chapter 8 touches upon a comprehensive profit opportunity and lost
opportunity control (COLC) model into which profit opportunity/risk
management and feed-forward control are integrated, after summarizing
the cognitive control of uncertainty in existing management accounting
and reevaluating and extending the meaning and structure of cost design
with reference to the theoretical and practical development of manage-
ment and accounting. This COLC model, as well as unified management
of profit opportunity and risk, represents a framework of contemporary
management accounting that copes with uncertainty in pursuit of sustain-
able business growth. The chapter examines the risk recognition of
Japanese firms and suggests the application of the model to risk manage-
ment and its disclosure (accountability). Chapter 9 applies this model to
foreign exchange risk management, which uses the COLC model to plan
for profit opportunity and risk, encourage proactive measures (i.e., Kaizen,
continuous improvement) against financial risks, and provide protection
against unmeasurable change in derivatives and hedge accounting.
Integration of the COLC model with a profit design system allows wider
application of management accounting as a result of its strong strategic
direction and proactive cognitive control function.
In the next chapter, before turning to the examination of Chinese busi-
ness management and enterprise risk management, it is helpful for further
development of management and management accounting to describe the
synthetic relationship between value, environment, risk, cost design, and
profit design as its extended figure to which this book refers in connection
with uncertainty.
x PREFACE AND ACKNOWLEDGMENTS
As described above, this book clarifies the meanings of strategic
management accounting under strong economic uncertainty by shifting
the examination process from enterprise governance through the relation
between uncertainty and management accounting to the COLC model
and the unified management of profit opportunity and risk. The remain-
ing two chapters describe changes in management accounting and con-
temporary enterprise risk management in Chinese enterprises, because no
planned economy or state-controlled society can be immune to uncer-
tainty or risk, as long as there are negative labor habits (“irksomeness of
labor” in Veblen) and wasteful, inefficient competition. Chapter 11 depicts
changing management and accounting systems in Chinese firms. It
describes expanding strategic businesses in the global economy, progress-
ing from Chinese domestic markets to Asian, African, and Western mar-
kets by means of governmental support and price strategies, as well as
modular production and cheap labor costs. In relation to these businesses,
I refer to the reorganization of state-owned enterprises through absorbing
social capital and private enterprises. Correspondingly, as competitive
Chinese enterprises have grown in the international market, a gap has also
expanded between these global state-managed enterprises and small- to
medium-sized enterprises. The business model of global enterprises using
cheap labor, modular production, and agile supply chains to increase com-
petitive power internationally has overtaken the Japanese style of self-
developed technology and management in the international market in
terms of short-term price strategies. However, this method cannot also
escape risks and uncertainty.
Thus, Chap. 12 investigates characteristics and structures of government-
based enterprise risk management in contrast to the COLC model. As gov-
ernmental strategy in China shifts from ‘absorbing foreign power’ to ‘going
global’, enterprise risk intermingles deeply with political risk, and it becomes
more difficult to recognize and control enterprise profit opportunities and
enterprise risk proactively by using accounting information and methods.
Governmental support and the evasion policy of bankruptcy in the securities
market obscure the relation between profit opportunity and risk, simultane-
ously expanding, for example, bank profit opportunities and steel company
risks. The steel company can exist under heavy obligations while continuing
to pay rent and the bank regards this as a profit opportunity. Even so, social
risk and uncertainty substantially increase. As it is increasingly difficult to
recognize and control true enterprise risk while strongly integrating enter-
prise strategies with g overnmental policy, the COLC model has become