I recently published a paper in Accounting History Review about a company called Bennett’s and their accounting in the early 1900s. This company provided malt, mainly to Guinness in Dublin. In the research for the article, it became apparent that producers of malt did not do very much management accounting. Bennett’s, for example, seemed not to cost their production process very often and seemed to accept the market price offered by breweries like Guinness.
One would thus think Guinness may have been in a strong position to dictate the price of malt, but this seemed not to be so. In an official corporate history of Guinness, a note is made of the fact that the malt providers should make a “living profit”. What this means is not defined, but when I read this I could only think of the contemporary idea of a “living wage”. This latter concept is to pay staff more than the minimum legal rates of pay (if there is one) and give them enough income to live – but not too much. I did a Google search for the term “living profit” and surprisingly – at least to me – there are no explanations or mentions. I cannot help but think that today the idea of a living profit could be applied in many supply chains, and indeed companies (and their shareholders) could ask themselves do they really need to make so much profit – think Apple, for example. I firmly believe history can teach us a lot, and this is one good example where some altered thinking might benefit society as a whole.
On a recent research project I read an article from 1914 which was written by an “old” accountant of the time. On testing accounting students knowledge through examinations (s)he notes “we see interesting problems set out in symmetry and order”. This made me think about what has changed today.
Indeed we still use examinations in university and in professional bodies. They are a good tool to test knowledge, and increasingly examinations draw on methods such as case scenarios which are less structured in an effort to imitate real life scenarios. However, no matter what we do as teachers, we cannot replicate the real world. This is of course where professional development and on the job training come in. I do hope we at least provide the basic knowledge to help students hit the ground running when they start their careers. We can only improve the value of this basic knowledge by trying to get students to use their knowledge in an unstructured way. In an examination scenario, this means we need to use fresh ideas and new ways to ask standard material – this can be tricky sometimes, but it helps both students and us teachers to apply ourselves in a more real world fashion.
You may know that Ireland has been marking the centenary of the Easter Rising this year. There have been many events to mark the occasion all over the country. So, for what it is worth, I decided to write this short post on what accounting was like back then.
The first thing of note is that Eamonn Ceannt, one of the signatories to the Proclamation of a Republic was in fact an accountant. He worked in the city council, and according to an article in the Irish Times dated March 14, 1916, an Accountant in such a role earned £300-450. At this time not many accountants were actually professionally qualified as today.
Second, some useful insights are provided from a report of the AGM of The Institute of Chartered Accountants in Ireland – as reported in the Irish Times of May 22, 1916. The report notes that 82 members had enlisted for active service and were fighting on the European continent. The Easter Rising was condemned. The AGM report also notes an on-going wish to have the accounting profession legally recognised – something which was attempted in 1926, when the Irish Free State had been formed and began to enact its own legislation. It would not be until much later in 2003, that actual recognition was achieved. Finally, in a related point, the report notes the role played by Chartered Accountants in the calculation of excess income taxes to be paid to support the war effort. It is noted that the government of the time will likely not question any accounts or tax calculations prepared by responsible accountants.
A few weeks ago, the annual Academy Awards took place. At some point in the run up to the awards, I found a nice post by Cheryl Meyer in the Journal of Accountancy. The post “5 films to inspire CPAs” was not only a reminder of some great movies, but also a reminder of the varying and broad role accounting and accountants play in society.
On favourite on the list is The Shawshank Redemption. If you have never seen it, do. The lead character Andy Dufresne (Tim Robbins) makes life a little more comfortable for himself while serving time through doing tax returns for prison officers and keeping accounts of the Warden’s corrupt dealings. The good accounting allows Andy to take all the corrupt cash for himself on his escape from prison.
My second favourite is The Untouchables. The model used to imprison Al Capone in this movie is still widely used today – get the criminals on tax laws or “lack” of earning to match their lifestyle. For example, the Irish Criminal Assets Bureau uses this concept quite effectively. I’m a big Sean Connery fan too!
When some one asks me for a simple definition of management accounting, I typically say “the provision of decision-making information to managers”. This in my view covers all aspects of what a management accountant typically does, be it the provision of financial or non-financial information, short or long term view etc. Of course, some management accountants are also decision-makers, for example when they occupy a CFO role in a large company for example.
I don’t know if I should be surprised or not, but I read an old article from the Irish Times of 22 January, 1971 (by C Power) – a few years (but not many) before my time. The article was giving career advice to budding accountants of that time. I quote:
” A more specialist sector, however, is the cost accountancy field. This is a key area – indeed cost accountants are often referred to as management accountants because of their function of providing accounting information to aid management decisions”
The bit is bold is above is not that dissimilar from my simple definition I guess, with the exception being the maybe narrower word “accounting” as part of the definition. I do like simple definitions, as they often do stand the test of time.
As you know I’m sure, 2014 was 100 years since the outbreak of the Great War, or World War 1 as we know it today. Myself and a colleague were lucky enough to do some research on how management accounting was affected by the war. I will summarise our work here, but you can find the full paper here.
We studied how the war affected management accounting at Guinness – yes the world-famous stout. I had already carried out some research at Guinness, so I was aware that even before 1914 they had a relative complex management accounting system. They were quite good at allocating costs to various cost centres.
As the war broke out, the accountants and managers initially viewed it as a short-term event. It became apparent soon enough that would not be the case. Thus, Guinness started to view additional costs (such as extra insurance costs) as normal costs and allocated them to various cost centres. For example, if Guinness shipped to Liverpool or London, the freight costs were normally charged to the receiving depots owned by the company. With the war in full swing, the additional insurance costs for these trips was also allocated to the depots.
The company made other changes too, but the above example is a good case of existing practice being modified to deal with new business issues- something which management accountants still do a lot of today.
Quite a tough question above I guess. I have always been interested in what technology can do for business – both as a management accountant and academic. It is probably fair to say that the past decade has so much more technological change than previous decades. We have seen smart phones, tablets, the cloud and social media all appear and take over our lives and change how business is done.
Personally, I am watching how accounting in small business is now potentially so much easier than ever before. For example, all a sole trader needs is a smart phone and they can issues invoices, records expense and even get paid. I would hope that over time this will become a reality. However, at the same time I am quite aware that it will be while before we see small businesses not having some manual recording.
I have also recently become a little interesting in accounting history. It has been commonly accepted that symbols used on clay tablets used by traders in ancient Mesopotamia were a precursor to modern writing. These clay tablets were in effect what we call invoices or delivery notes today. One would imagine that writing would help simplify business of the ancient Mesopotamians, and replace the symbols on the tablets. Recent archaeological finds in Turkey however suggest otherwise. It would seem the tablets and symbols survived for many centuries after paper and writing were in common use. So I wonder will it a few centuries before small businesses take advantage of the present day accounting technology ? Incidentally, it seems tablets (but not clay ones) are probably a very simple way to manage small business accounting.
I have been reading a book recently on the history of the London Underground. It’s called Underground to Anywhere by Stephen Halliday and I actually bought it in the London Transport museum, on Covent Garden. Of course the tube is 150 years old this year, and you will find more about that here.
Reading the book I was quite surprised by how much accounting was in there. Two things stand out from the early days of the tube which related to accounting. First, the financing seemed to be quite precarious. As each line was built by private companies, private finance was raised. And when results proved less than expected, it seems quite a bit of creative re-financing went on. The author actually notes that without the somewhat suspect and complex financing, London’s Underground may not have grown to what it is today.
The second thing was the fares structure in the early days. Before lines were connected, the fares seemed to have been standard at say 2 pence. However, the author notes that the various companies started to raise and lower fares and certain times, or lower fares overall to increase passengers numbers and revenue- a classic cost, volume profit (CVP) scenario.
I recently have been lucky enough to study accounting records at a company over a period spanning from about 1870 to today. It was a truly great experience, and history is not really one of my favourite topics. But having seen accounting techniques that we still apply today develop over time, it really gave me an appreciation for where present day accounting came from. The other thing that struck me was the level of detailed communication that went on between the accountants and various other parts of the organisation in the past. At the particular archive I was working in, volumes of typed-out reports and many hand-written ledgers, memos and other reports provided a wonderful picture of accounting over more than a century. What really struck though was how bad we are today at leaving a similar trail of history. Most accounting information is now electronically stored, which may be a problem in itself for any future researchers of accounting history. But a bigger problem is more likely to be the dispersal of information across modern organisations. While the main accounting records may be stored in an electronic, but archivable format, there’s normally vast amounts of related information stored in emails, documents and spreadsheets all across a company. This may make it impossible for any future business/accounting historians to follow the story of accounting within organisations today. So if you are an accountant, future accountant or a manager, why not think about how centralised your important accounting information is. It not only makes sense that important information be available to all now (and thus centralised), but it also leaves a more complete picture for the business itself to look over historic records – and of course makes it easier for future story-tellers/researchers.
I read a piece in CIMA’s Insight e-zine last February, which mentioned a discussion on the CIMA website about cost accounting. It prompted me to remind myself (and you the reader) about the origins and sometimes forgotten simple basics of management accounting.
The history of cost accounting – which was the precursor to what we now broadly call management accounting – dates back to the Industrial Revolution on the 1700’s. As the steel, textile and pottery industries grew in England, economies of scale were realised. Around 1770, an economic depression occurred and many businesses failed. Those that survived were ones who had a handle on how much it cost to make their products.
The Wedgwood pottery firm is one often cited example of a successful firm of the time. At this time, firms like Wedgwood had no choice but to develop their own internal accounting systems as the accounting profession as such did not exist. Firms like Wedgwood used what were relatively advanced accounting techniques at that time, including cost control, overhead accounting, and standard costing. These techniques, although with shortcomings, helped firms to make decisions like dropping unprofitable products.
While any student, accountant or business owner might have a reasonable knowledge of these basic cost accounting techniques, I can’t help but think have some forgot the basics of cost accounting. Okay, I am writing this from an Irish perspective, but we are not the only economy where boom times seem to have led to a somewhat remiss attitude towards the basic ideas of cost accounting and cost control. Is it not interesting that firms like Wedgwood survived depressions (which were more frequent back then) by focusing on cost reporting? Of course, business nowadays is much more complex, but that doe snot mean we should forget the basics and keep costs under control. I cannot help but think about many Irish businesses who took on costs ways beyond their long term capability (e.g. high rents) who are now either struggling or gone out of business. Focusing on costs is not the only thing a businesses needs to do of course, but this very important task should not be forgotten about. So cost accounting is still very relevant in my opinion.
BBC Radio 4 are this week (Mar 8th, 2010) and next broadcasting a short history of the double entry system of accounting. Here’s a link. There are 10 episodes, each day Monday to Friday, at 15:45.