MANAGERIAL ACCOUNTING

The natures of costs related to Managerial Accounting

The natures of costs related to Managerial Accounting

Introduction

Critique of such interpretation of managerial rationality has been mounted from various sources. Nobel laureate Herbert Simon and his coauthor, James March, and their students,' and their students have provided critiques based on behavioral assumptions. Simon underscored the limitations and constraints on human behavior, suggesting that actors are cognitively limited, producing satisfying rather than optimal rational decisions. Nobel laureates Daniel Kahneman and Amos Tversky have further developed Simon's notion of bounded rationality, showing that individuals act inconsistently (and therefore irrationally) under conditions of uncertainty.

Discussion

In addition to recognizing these traditional accounting and legal dimensions, organizations increasingly are construing the scope for fraud and misconduct to include behavior that violates standards of the organizations themselves, applicable professional guidelines, or ethical principles and qualities to which members of relevant stakeholder constituencies, including the general public, commonly assent, including honesty, fairness, and transparency.

Examples of recent practices that implicate the role of the CFO and that reflect all three of these dimensions of fraud are the massive financial reporting scandals of the early 2000s involving Enron, WorldCom, Andersen, and other organizations; the secret backdating of stock options to increase executive compensation without authorization; and secret kickbacks from mutual fund administrative vendors to mutual fund advisers in exchange for continuing favorable referrals (a diversion of mutual fund investors' money to the advisers without authorization).

In the context of the increasingly complex regulatory frameworks affecting accounting, finance, and legal professionals, and corporate governance practices, the CFO has had to join with other members of corporate leadership, including legal counsel and ethics and compliance officers, to assume a significant role in managing organizational risk, particularly the risk of fraud and misconduct. In addition to complying with GAAP in reporting financial information, CFOs for companies that fall under the de jure or de facto requirements of the Sarbanes-Oxley Act must take a leading role in preparing reports on their internal controls for their annual reports and in providing the bases for management to recite its responsibility for “establishing and maintaining an adequate internal control structure and procedures for financial reporting”). These reports also must contain management's “assessment of the effectiveness of the internal control structure and procedures” of the organization, an assessment to which the external auditor must attest as part of its examination.

The notion of managerial rationality first emerged in the 1880s in ...