Management, Uncertainty and Accounting – Case Studies, Theoretical Models and Useful Strategies

Management, Uncertainty and Accounting – Case Studies, Theoretical Models and Useful Strategies

“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 management and the cognitive control function of accounting, I defined the function 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 viewpoint 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 management 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 uncertainty and explains the contemporary situation and structure of management accounting based on this examination.

This book thus aims to clarify this relationship fundamentally through a historical and global examination of contemporary management accounting 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 management, and standard costing through the advanced early twentieth-century theories of Taylor, Harrison, Veblen, and Knight. Following these theories, 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 uncertainty 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 competition 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 perpetual ownership of wealth beyond harmony and stability, causing intensified 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 accounting. These behaviors degrade business value. Society thus asks accountants to secure business value through harmony between management accounting and financial accounting and to make trustworthy disclosures of the corporate financial situation. Enterprises must organically manage opportunity and risk, and managers should equip themselves with virtuous ethics through regulation, which plays an important role in controlling the enterprise’s risks and uncertainty.

Accordingly, Chap. 2 examines the contemporary situation of enterprise 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 management 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 transformed 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, opportunity 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 business 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 clarifies 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’ forecast 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 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 innovates, because the probability of profit opportunity and enterprise risk cannot 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 opportunity 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 elucidates the function of management accounting and profit design systems as an expansive form of cost design, linking these with innovations and continuous improvements (Kaizen in Japanese), in terms of profit opportunity/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 innovation 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 management 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, transform risk into profit opportunity, and minimize risk. Previously, some accounting scholars have described the gap between strategic and organizational requirements and financial accounting information as a defect in traditional management accounting. From this, they have developed activity- based costing (ABC) and balanced scorecard (BSC) based on nonfinancial 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 organizational management. Considering these gaps, strategic management accounting must be forward-looking, globally cognitive, and comprehensively control oriented (Chap. 6). Thus, Chaps. 5 and 6 clarify the direction and problems of contemporary management accounting.

Chapter 7 examines cost design as a recent strategic management accounting method from a forward-looking, global viewpoint. As consciousness of environmental protection and health and safety deepens, some Japanese companies spatially and temporally introduce risk management into cost design, for example, transforming it into an environmentally conscious cost design system that includes supply chain and product life cycle costing. This transformation aims at reducing risk in the production 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 management 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 sustainable business growth. The chapter examines the risk recognition of Japanese firms and suggests the application of the model to risk management 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 business 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.

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 remaining two chapters describe changes in management accounting and contemporary enterprise risk management in Chinese enterprises, because no planned economy or state-controlled society can be immune to uncertainty 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, progressing from Chinese domestic markets to Asian, African, and Western markets 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 competitive 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 governmentbased enterprise risk management in contrast to the COLC model. As governmental 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, simultaneously 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 enterprise strategies with governmental policy, the COLC model has become increasingly ineffective in China. Thus, a completely different model from the COLC model will be needed in the future.

It follows from the above mentioned that uncertainty had profoundly influenced management and management accounting in their structures and development, while these systems have grappled with uncertainty and risk as the object of control for a long time. Moreover, as far as the Western and Japanese enterprises are concerned, the COLC model and the unified management of profit opportunity and risk exactly express the latest development in enterprise risk management and the control of uncertainty.

Lastly, I would like to express my own devotion to this research and my gratitude to many researchers and friends for their heartfelt support. Honestly, I do not yet completely understand the essential nature of bookkeeping and accounting, despite having continually studied them for over 60 years, since I first encountered them in high school. Even so, I am convinced that we can logically understand them only by gaining a clearer conception of workmanship and control, emulation and management, uncertainty, harmony, and cooperation. This book was motivated by this conviction. Although the bookkeeping that forms the foundations of accounting is such an intelligible method as to be able to keep accounts after studying a simple entry method based on the two rules of addition and subtraction, questioning the fundamental truths of its procedures leads one into a labyrinth. No calculation system is better at simultaneously recognizing and controlling stocks (balance sheet) and flows (income statement) and synthesizing economic activities at a given point of time into periodical accounting than double-entry bookkeeping of debit and credit accounts. This system allows bookkeepers, accountants, and managers to recognize and control economic activities simultaneously. Considering the unsuccessful history of resistance to attempts to replace ‘debtor and creditor’ accounts with ‘increase and decrease’ or ‘revenue and expenditure’ accounts, the double-entry bookkeeping with ‘debtor and creditor’ accounts is a historical crystallization of human instinct and propensities. Still, over the course of its historical development, the bookkeeping has taken such multifarious and complicated forms that it is difficult to grasp its substance. In particular, when the bookkeeping takes the modern forms of financial and management accounting systems to discharge accountability through disclosure and controllability, its substance becomes invisible because of the capital and management relationships in an organization.

Contemporary bookkeeping and accounting are so complicated that human beings can be strongly influenced by their application. We should discern the substance of bookkeeping and accounting scientifically and apply it to human well-being and social harmony. However, we are apt to make light of scientific and historical examinations of this substance, owing to the simplicity and lucidity of the system and the convenience of profitability recognition. This book is a clue in the mystery, a scientific approach to the complexity of simplicity.


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