Professional Dominance: The Relationship between Financial Accounting and Managerial Accounting, 1926-1986

Richardson, Alan J., Accounting Historians Journal

Abstract: This paper examines the relationship between financial and managerial accounting as reflected in articles, editorials and letters to the editor published in Cost and Management, the Canadian trade magazine for management accountants, between 1926 and 1986. It has been claimed that during this period management accounting techniques lost their relevance to manufacturers, in part, due to the dominance of financial accounting over managerial accounting. This is also the period in which management accounting struggled to become recognized as a profession distinct from financial accounting. The analysis thus focuses on the jurisdictional dispute between financial and managerial accounting and the mechanisms by which managerial accounting was subordinated to financial accounting. The paper identifies the technical, organizational and professional mechanisms used to subordinate managerial accounting. The paper also demonstrates that management accountants were aware of the consequences of their relationship to financial accounting for the relevance of their techniques. Contemporary events suggest that the intersection of financial and managerial accounting remains disputed territory.

INTRODUCTION

Since the publication of Johnson and Kaplan's [1987] critique of the relevance of traditional management accounting techniques to managerial decision-making, there have been numerous articles either heralding a new era in management accounting [e.g., Berliner and Brimson, 1988] or fighting a rearguard action to prevent accountants from redeveloping the wheel [e.g., Shank, 1989]. Professional associations of management accountants have taken up the challenge of regaining relevance by redesigning their training programs to emphasize the role of their members as decision-makers rather than information preparers. (1) There has also been a boom in consulting firms offering to replace "obsolete" management accounting systems with new systems focused on activities, time, quality or through-put. (2) It is clear that management accounting has entered a new phase in its development in which it is seeking to reinvent itself and reaffirm its legitimacy as a key part of modem management practice.

The attempt by manufacturing firms, professional associations, consulting firms and academics to change management accounting must take into account the institutional context in which management accounting is practiced. If we do not understand why management accounting lost its relevance to manufacturing firms (3) and whether or not these conditions have changed, we are unlikely to be successful in making lasting change in management accounting practice [Shields and Young, 1988; Luft, 1997].

In this article I examine one potential factor (4) explaining the inability of management accounting to generate information suited to a changing manufacturing environment: the relationship between managerial accounting and financial accounting. Johnson and Kaplan [1986, p.260] speculate "the dominance of financial accounting procedures, both in education and in practice, has inhibited the dynamic adjustment of management accounting systems to the realities of the contemporary environment". (5) This sentence is a strong statement about the relationship between financial and management accounting during the period considered by Johnson and Kaplan. The use of the term "dominance" implies a relationship of power (i.e., if financial accounting is dominant then management accounting must be subordinate). This relationship is claimed to extend to both practice and education. Finally, Johnson and Kaplan imply that management accountants recognized the "realities of the contemporary environment" and had preferences for different techniques but were "inhibited" by the demands of financial accounting.

The possibility that financial accountants could affect the development of management accounting is consistent with Freidson's [1970] analysis of the role of professional dominance in structuring related professional fields and Abbott's [1988] emphasis on the role of jurisdictional disputes in the development of professions. Freidson's work is concerned with the effect of the dominance of one group of professionals (in his case, doctors) over other professionals in interdependent fields (health care more broadly). The existence of professional dominance implies that one group within the division of labor has significant influence on the definition of problems, the selection of intervention strategies and the organization of work. He suggests that professional dominance can prevent an entire system of professions from meeting the needs of clients. Freidson, however, regards professional dominance as an institutionalized aspect of practice and recommends empowering the client and the administrative structures w ithin which the profession practices as a means of overcoming the attendant problems. He does not enquire into how these relations of dominance between professions are created andlor maintained.

Abbott contends that the relationship/boundary between professions is subject to negotiation and suggests, "effective historical sociology of professions must begin with case studies of jurisdictions and jurisdictional disputes" [Abbott, 1988, p.2]. For Abbott, then, professional dominance is not inherent in the structure of the professions but an outcome of processes of negotiating boundaries between different professional groups. Abbott [1988, p.230] asserts that cost accounting "has been without question the most contested information jurisdiction in American history." His analysis of jurisdictional disputes related to cost accounting, however, focuses on the period up to 1925 and on the boundary between cost accounting and such professions as statistics, engineering and operations research [ibid., pp. 226-239]. He concludes that by 1925 accountants, as a broad profession, had gained control of this field. Further he suggests, "since cost accounting took place within organizations, it rapidly lost many of its links with public accounting and became largely independent" [ibid., p. 232]. Contrary to this view of the resolution of jurisdictional disputes in cost accounting, the claims by Johnson and Kaplan that managerial accounting was subordinate to financ ial accounting suggests that this process of jurisdictional negotiation has failed or is incomplete.

Does it matter if management accounting exists as an independent profession rather than being under the control of financial accounting? There are a number of articles that demonstrate the dangers of using financial accounting information for managerial decision-making [e.g., Kaplan, 1988; Cooper and Kaplan, 1987]. These articles provide technical reasons why management accounting information should be independent of financial accounting. These articles however do not address the question of whether or not management accounting has emancipated itself from financial accounting in order to fulfill the role that theorists suggest it should play in organizations. The issue is of particular concern as the reform movement begun by Kaplan has come full circle. In early work, the need to separate cost accounting systems from financial accounting systems was highlighted but in more recent work the need to integrate information systems has been emphasized through the construction of enterprise resource planning (ERP) systems. [e.g., Cooper and Kaplan, 1998]. If the factors that originally caused management accounting systems to be dominated by financial accounting systems still exist, then the management accounting information supplied by these systems may still be irrelevant for managerial decision-making.

The remainder of the article is organized around three questions. First, is there evidence that management accounting was perceived by management accountants to be subordinate to financial accounting during the period 1926-1986? The evidence supports the induction that Canadian management accountants perceived three forms of subordination: (1) limitations imposed upon management accounting technique due to a requirement to integrate cost accounts into the general ledger (technical subordination); (2) limitations on the influence and innovativeness of management accountants due to their position within organizational hierarchies (organizational subordination); and (3) limitations on the profession of management accountancy originating from the role of chartered accountancy in its creation (professional subordination).

Second, what specific mechanisms brought about this relationship? The data suggest that the subordination of management accounting to financial accounting was a side effect of the new profession's search for legitimacy. Management accountants were under pressure from auditors and financial accountants to ensure that cost accounts reconciled with the general ledger as a test of their accuracy and these groups provided the intellectual capital (such as concepts and texts) on which management accountants based their practice. Furthermore governments and trade associations were pressuring management accountants to develop verifiable uniform costing systems thereby linking management accounting practice to audited statements. Each of these institutional pressures constrained the development of management accounting technique.

Third, were management accountants aware of the effect of environmental conditions on the relevance of their information to management decisions? The data provides evidence that management accountants were aware of the effect of competition and changing technologies on the relevance of their work throughout the period. There is a tension in the literature between approaches that reinforced the link between financial and managerial accounting and approaches that tried to carve out a distinct form of accounting linked to the economic and strategic decision-making needs of the firm. This tension relates to the question of whether the fortunes of management accounting as a profession were tied to the status of financial accounting (and more generally public accounting) or whether the profession could establish a value to clients independently of the value of financial reporting.

METHOD

This paper examines the relationship between management and financial accounting as reflected in the Canadian management accounting literature between 1926 and 1986. The use of Canadian data provides further insights into the development of the management accounting profession in Canada (6) and allows for identification of potential cultural biases in the work of Kaplan and Johnson and that of others drawing on the US experience.

The starting date used to define the time period examined reflects the claim by Johnson and Kaplan [1987] that all of the important management accounting innovations were developed by 1925. This claim is also supported by the work of Chandler [1977] and Garner [1954] but see Fleischman [1996] for a summary of contrary evidence. Johnson and Kaplan claim that, after 1925, the dominance of financial accounting over managerial accounting began to erode the relevance of management accounting for decision-making. The end-point for the period is the publication of Johnson and Kaplan's [1987] book in recognition of its impact in encouraging introspection by management accountants and innovation in management accounting technique.

The data on which this paper relies …

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Publication information: Article title: Professional Dominance: The Relationship between Financial Accounting and Managerial Accounting, 1926-1986. Contributors: Richardson, Alan J. - Author. Journal title: Accounting Historians Journal. Volume: 29. Issue: 2 Publication date: December 2002. Page number: 91+. © 2009 Academy of Accounting Historians. COPYRIGHT 2002 Gale Group.

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