The role played by the management accounting
The role of management accounting in the organization’s risk management process includes recording, collecting and the reporting of financial data that come from different departments within the same organization. The management accounting as well the accountant is very useful in matters to do with observing, suggesting how funding and allocation of money should be done. All these steps are mainly to the benefit of the risk management process as well as the analysis of the budget that should be included in the whole process (Kaplan, 2009). The management accounting is responsible for estimating the cost of raw material, manufacturing that is incurred and all the labour cost that will be incurred in making the risk management process a success at the very end. The management accounting seeks to ensure that sales and advertising, as well as the services of the social networking, are well coordinated. This makes sure that the internal operations of the company are facilitated by the right plan, and nothing less can interfere with them at all cost. An overall functionality of the company has to be made by the management accountants through coordinating with the concerned departments in the whole organisation to facilitate the risk management process. The management accounting ensures that all funds are made available and that the relevant information has to be reported to the board of directors as well as the senior management and board of trustees.
The management accounting ensures that budgeting is well done for the risk management process to be facilitated. All small businesses guide this provided to explain more on the expenditures that will be used in promoting the success of the risk management process. The management accountants use historical data in making sure that they prepare an accurate prediction that will be used in fascilitating the risk management process is well budgeted for accordingly. When the management account avails the budget that ought to be used in facilitating the process they help to ensure that there is proper coordination that exists between the entrepreneur and his employees regarding all the plans of the year ahead of them (Kaplan, 2009).
The management accountants are very sensitive on matters to do with time management because; all the functions of the organisations are time bound and have to be coordinated within the given period. All the predictions, budgets and reports have to be stipulated by the management accountants within the required time to ensure that they get to the implemented at the date of risk process if need be. The working capital of the organisation has to be in line with the budget that the management accountants have provided to be used in the risk management process. When the budget is made right, it will facilitate smooth working of all activities of the risk taken. Any budget that is by the available capital will ensure that the market uncertainties are stopped immediately (Kaplan, 2009).
The management accounting is very keen to ensure that all the information that they have presented is very accurate and will help in the correct decision making of the risk management process at hand. The management accounting plays a significant role in preparing financial records and ensures that they do perfect analysis as well as forecasting. The management accountants are very supportive and helpful in making sure that they help in dissemination of digital information that is required as well as the processing of digital information (Mikes, 2009).
Challenges of management accountants in carrying their role
In carrying the above functions, the management accountants encounter some challenges in their work. One of the challenges is evident where they are predicting the extreme event whereby; the error results from the complete records owned by the management accountants in predicting Black Swan events.
Focusing on extreme events
When the management controllers put more focus on extreme scenarios, they end up incurring a lot of challenges in their work to some extent they cannot even bear it. Putting more attention on extreme scenarios implies that some other possibilities are ignored and might pose the same importance in managing the risk process in the organisation (Kaplan, Mikes, Simons, Tufano, & Hofmann, 2009). When the consequences are given more attention, then things will work out for better, and evaluation of the extreme events will be easier. Due to realising of this importance, most of the energy companies have shifted their focus from predicting accidents to preparing eventualities as this is a good strategy for reducing challenges in their work. The management accountants sometimes act in ways that are very alarming when absorbing the impacts of Black Swan events; hence, put then risk management process under tremendous challenges. They do not try to calculate the odds that the ignored events will undoubtedly occur, rather, they are only concerned with what will have to be done if such events were to occur. In the case of buying a house, one is not really aware of the cost of insuring the house after buying it. The management accountants are not always prepared to tackle consequences, and this is then reason as to why they undoubtedly face challenges.
Lack of listening to advisers
The management accountants don’t really listen to advice that are given to them concerning what they should really do. For instance when one is advised not to smoke due to the many consequences that result from smoking he is not ready to listen to that, so he is bound to suffer a lot of challenges by tobacco use. The lack of the management accountants to focus more on the consequences that seek to ensure that all then possible impacts associated with extreme events are evaluated makes they incur a lot of challenges in their work. Listening to advice prevents more problem-solving activities that are time-consuming by the management accountants. When the management accountants listen to advice concerning how they should do their work, they prevent accumulation of significant exposures to low-probability that could be insolvent to them. Lack of listening to advice given to them makes the management be contributing to small profits achieved in the organization, and this is then reason as to why then psychologists distinguish between the act of commission and omission. The risk management team does not treat the commission and an omission act the same, and this poses a significant challenge to the management accountants who treat them equally. The management accountants are more concerned with gaining of profits rather than preventing loss whereby when they incur, they endure a great challenge (Taleb, Goldstein, & Spitznagel, 2009).. When a company avoids losses, it can be successful compared to its competitors who are more focused with profit making alone. The company’s that focus on profit making alone tend to go bust, and this becomes an opportunity for the management accountants who prevented losses since, they secure the market shares and become the best. When the management accountants treat risks as independent entities from a profit making process, they definitely incur a lot of challenges in their decision making. It is advisable to integrate all the risks management activities in all profit centers, especially to companies that are susceptible to Black Swan events.
Assumption that risk can be measured using the standard deviation method
When the management accountants assume that risk can be measured using the standard deviation techniques, they definitely make a big mistake because standard deviation should not be used in risk management (CIMA, 2010). Whenever, this happens, it means that complications will be high through the utilization of the squares and square roots. It is better for the management accountants to avoid the use of measures that are connected to the standard deviations such as; regression model, betas and R-squares that reduce the challenges incurred. Many people poorly understand standard deviation and the management accountants shouldn’t use it in their working.
The management accountants do not appreciate that what is equivalent to mathematic is not psychologically so. Lack of understanding this makes the activities of the administration to be more complicated and full of challenges in correcting the risk management process (CIMA, 2010). The management accounts are required to frame a risk well because failure to do so will increase the challenges in their working and also influence the way people understand the challenges. The management accountants are advised to very cautious in providing the best scenario that will lead to an improved appetite for risk management process within the given company. The manager ought to appreciate all their working for it to yield better results in the process of risk taking. The management accountants are advised to be more careful on the efficiency of their work that works to maximize the shareholder value and as well reduce redundancy tolerance that might interfere with the process of taking the risk.
CIMA (2010). Reporting and managing risk: A look at current practice at Tesco, RBS, local and central government. http://www.cimaglobal.com/Documents/Thought_leadership_docs/R267%20Manage%20risks.pdf
Kaplan, R. (2009). Risk management and the strategy execution system. Balanced Scorecard Report, 11 (6), 1-6
Kaplan, R., Mikes, A., Simons, R., Tufano, P., & Hofmann M. (2009). Managing risk in the new world. Harvard Business Review, 84 (10), 68-75
Mikes, A. (2009). Risk management and calculative cultures. Management Accounting Research, 20 (1), 18-40
Taleb, N., Goldstein, D., & Spitznagel, M. (2009). Six mistakes executives make in risk management. Harvard Business Review, 87 (10), 78-81