Professional dominance: The relationship between financial accounting and managerial accounting, 1926-1986

Accounting Historians Journal, The, Dec 2002 by Richardson, Alan J

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 throughput.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 modern 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 firms3 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 within 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 and/or maintained.