Chapter 1: MS Concepts, Practices, and in the coming years by gradual reduction in

Standards rates over a period of time.

Advisory as an accountancy field-common  Professional and technical services are now
name in stage of unification where MRA (mutual
• Management services recognition agreements) among member
• Advisory services nations are starting to be in place.
• Business advisory services  International trade is expected to be more
• Financial and advisory services fluid and freer flowing.
• The intensity of meeting business survival and
The market demands for innovative services beating competition led managers to improve
their processes
• The increasing complications in terms of • Because of this, advisory/consulting services are
customer behavior, demands, need and wants, in high demand
whether discovered or created, have contributed
to a great shift in managing organizations. Reasons for emergence & growth of MS
 Business organizations have gradually Consultancy
geared towards service orientation not just in • Growth in size and complexity of business
terms of product quality but more in terms of firms
processes- on how the service is delivered. • Complexity in managing and conducting a
• Organizational structures, systems, and business
processes are redesigned to meet and beat • Lack of competent staff
competition, not to exist but to survive. • Trend towards industrialization
•Technological revolution has deeply influenced • Need for adequate and timely information in
the way things are done in a society, organization decision-making
and at individual levels • Development of techniques to solve
• Convenience & comfort became the major management problems & businessmen’s
aspirations for technological innovations and awareness of their usefulness
improvements.
• Converging of markets globally has made Foundation of Management Services
business operations even more complex (EU, • Section 4 of RA 9298 or the Philippine
NAFTA, ASEAN, APEC) Accountancy Act of 2004 states that:
 World Trade Organization (WTO) has been “Section 4. Scope of Practice - The practice of
playing a dominant role in integrating tariff, accountancy shall include, but not limited to, the
trade and services among its member following:
countries. a) Practice of Public Accountancy
 Tariff rates are envisioned to be eliminated b) Practice in Commerce and Industry
c) Practice in Education/Academe
d) Practice in Government expertise to help define problems and recommend
The practice of management services is not solutions, except those covered in auditing,
explicitly mentioned in Section 4 of the Philippine assurance, tax and legal services.
Accountancy Act of 2004. • The job of an advisor is to provide advice
and technical assistance to managers.
Management Advisory Services- practice of • The practice of advisory is services is
accounting concerned with providing advice and essentially consultancy in nature.
technical assistance to help management • Not governed by specific standards and
improve the use of resources in achieving procedures
organizational goals. It primarily serves the needs • The professional practicing in the field of
of top management accountancy should introduce himself as a
Advisor or consultant- the CPA who practices certified public accountant (CPA)
MAS work • He should not introduce himself as tax
expert, financial auditing expert, legal expert,

The manager as the MS client management expert and the like.

• Management is entrusted with organizational

resources to make wealth. Analytical approach and process
Governance- being the duty of the BOD, is  “Typically involves more than an incident
engaged in setting the strategic goals and policies effort devoted to some combination of
of the enterprise. activities in determining client objectives,
• Management puts in the structure, develops fact- finding, opportunity, problem definition,
operating standards or systems and executes evaluation of alternatives, formulation and
plans to achieve firm goals follow-up.”
• Manager or Management Team is entrusted to  Systematic, objective, and rational method of
increase the wealth of the business solving organizational problems
• Management is facing inherent & • It involves a professional competence to find
uncontrollable risks facts and define the basic problem (not the
• Management is always involved in decision- symptoms), identify alternative solutions, and to
making activities adopt the most applicable solution under the
In these activities, management may get the circumstances.
services of independent professional advisor. Phases in Analytical Approach & Process …
(continued)
The CPA as advisor or consultant Analysis Stage
• The practice of management advisory services 1. Ascertaining the pertinent facts and
arises when an independent CPA is contracted by circumstances
a manager to render his professional and business 2. Seeking and identifying objectives
3. Defining the problem or opportunity for
improvement
Design Stage
4. Evaluating and determining possible solutions
5. Evaluating findings and recommendations
Implementation Stage
In case the client requests the consultant to proceed, the latter may also be involved in:
6. Planning and scheduling actions
7. Advising and providing technical assistance in implementing

MAS engagements
• Full scope engagements – covers all 7 phases of the analytical approach and process
• Special study engagements – involve only the first 5 phases of the analytical approach and process
Role of Consultant – limited to that of an advisor; in the implementation stage, his role is merely to provide
technical assistance
Role of Client – supply pertinent information and make the decision on the case

Areas of MS Practice
• Operational advice - counseling management in its analysis, planning, organizing, operating, and
controlling functions.
• Special studies - conducting special studies, proposing plans and programs and providing guidance
and technical assistance in their implementation.
• Organizational analysis - reviewing and suggesting improvement of policies, procedures, systems,
methods, and organizational relationships.
• Innovations - introducing new approaches, methods, techniques, and concepts to management.
Areas of Advisory Services:
Pioneering consultancy services
1. those relating to finance and accounting - include financial accounting, management accounting, and
finance management.

2. those not relating to finance and accounting - include all other areas rendered in the field of advisory
services such as:
a. General management
b. Project feasibility studies
c. Organization and personnel
d. Industrial Engineering
e. Marketing
f. Operating research
Emerging consultancy services

Management consulting Transaction and restructuring Risk Consulting

1. Business performance services 1. corporate finance 1. accounting advisory services
2. Business effectiveness 2. restructuring services 2. financial risk management
3. Financial management 3. transaction services 3. forensic
4. people and change 4. forensic services 4. internal audit, risk, and
compliance services
5. IT advisory services 5. valuation services 5. global risk and management
solutions
6. business recovery services 6. dispute analysis and
investigations
7. investment advisory services

MAS Classifications based on required expertise

Usual services Somewhat specialized services Highly specialized services
 Evaluation of form of business  Assisting in the installation of  Reviewing the organization
organization mechanized accounting system structure
 Analysis of financial and operating  Making a cost analysis of operations  Auditing management policies
statements
 Design and installation of accounting  Finding sources of capital and  Conducting motion studies
systems figuring the appropriate cost of small
business loans, bond issue and stock
issuance
 Design of filing systems for storing  Giving advice on dividend policy and  Surveying an industry for current
accounting records plans for expansion trends
 Suggestions for improvements in  Calculations on government  Evaluating the desirability of a
internal control contracts and allocating costs in particular area for plant location
compliance with reporting
 requirements
 Establishment of control to assist  Advising on accounting and tax  Preparing market analysis
management and expedite audit matters relative to estate planning
process
 Preparation of insurance claims in  Surveying credit losses  Reviewing an insurance program
case of business interruption
 Advising on date processing
allocation

Standards in the conduct of his work

• Moral standards - governed by spiritual laws, canons, societal beliefs, and traditions that define
acceptable relationship with his creator and his environment.
• Ethical standards - relates to relationship with client, colleagues, fellowmen, and the society in
general. Has Code of Ethics for Professional Accountants in the Philippines
• Legal standards - meant to promote compliance, fairness, and justice to all men. Professionals have
the Constitution, or equivalent legal document, of his country to serve as the primary guide in respecting legal
standards. (RA 9298)

MAS Practice Standards

Controlling/General Standards Technical Standards
 Professional competence  Role of MAS Practitioner
 Due professional care  Understanding with the client (nature, scope &
limitations of engagement)

 Planning and supervision  Client benefit

 Sufficient relevant data; and client interest;  Communication of results
understanding the client

Technical Standards
 A professional accountant should carry out professional services in accordance with the relevant
technical and professional standards.
 They should also conform with the technical and professional standards of the following:
 Board of Accountancy/ Professional Regulation Commission
 Securities and Exchange Commission
 Auditing Standards and Practices Council
 Accounting Standards Council
 Relevant legislation
 the level required to ensure that a client or
Fundamental principles for CPAs in the employer receives competent professional
Philippines services based on current developments in
 Integrity - to be straightforward and honest practice, legislation and techniques and act
in all professional and business relationships. diligently and in accordance with applicable
- it is a hallmark of the accounting technical and professional standards.
profession • due care, competence, diligence
- an outward process
 Objectivity – fair, to not allow bias, conflict of Professional competence- practitioner’s
interest or undue influence of others to technical qualifications
override professional or business judgments - intelligence, expertise, and required skills
- information should be truthful & verifiable acquired through formal and programmed
- state of mind, a quality that lends value to a training and through non-programmed and non-
member’s services; a distinguishing feature of formal experiences as well
the profession; intrinsic mental value
- distinguishing feature of the profession Competence- process applied in an engagement
- practicing the principle of balance and the and is paramount in the practitioner’s work.
pursuit of truth Due professional care- exercise competence and
- information strictly held confidential utmost care from the date the engagement is
- inward-outward process being negotiated with the client.
- requires professional integrity
 Professional competence and due care - to - diligence and appropriate attention carrying an
maintain professional knowledge and skill at assignment
Confidentiality - to respect the confidentiality of
information acquired as a result of professional Engagement Planning
and business relationships and, therefore, not  A work program should be developed.
disclose any such information to third parties  It serves as the basis for scheduling and
without proper and specific authority, unless assigning tasks, controlling the
there is a legal or professional right or duty to engagement projects, preparing project
disclose, nor use the information for the personal progress report, reviewing and evaluating
advantage of the professional accountant or third the project, and billing the client.
parties.  It also includes engagement objectives
and scope of work, engagement approach,
Professional behavior - to comply with relevant breakdown of tasks/activities to be
laws and regulations and avoid any action that performed, staffing requirements and
discredits the profession. assignment of tasks to the team members,
- act in a manner consistent with the good and schedule of activities.
reputation

Engagement Execution
Application of Professional Judgment  This stage involves data gathering and
Professional Judgment must be used in applying data analysis.
Statement on Standards for Consulting Services in  Data gathering - the process of collecting
a specific instance since the oral or written sufficient relevant information about the
understanding with the client may establish engagement problem which includes
constraints within which services are to be identifying the data to be collected,
provided. locating the sources of the data needed,
and documenting the said data and the
MAS engagement negotiation- involves process of gathering it.
preliminary discussions with the client to  Data analysis - the systematic and logical
determine whether the proposed engagement evaluation of information in view of
should be pursued to reach a common developing and recommending a course
understanding of the action at the end, in relation with
MS Engagement Process the problem being studied.
Engagement Negotiation  Working papers- used to document data
 It involves preliminary discussions with gathering and analysis
the client to determine whether the
proposed engagement should be pursued Preparation of Engagement Results
to reach a common understanding with
 Engagement reports may be presented in
the client about the engagement.
oral or written form.
  Oral presentation advantages: on-the- schedule, source data and documentation,
spot clarifications and emphasis. and engagement results.
 Written report advantages: reference,
complements oral presentation Post-engagement Follow-up
Long form report- detailed descriptions of all the  It is made after a sufficient amount of
circumstances connected with the engagement time has elapsed to ensure that the
and generally issued when the client decides to systems, procedures, and other
implement his decisions without further recommendations implemented by the
assistance from the advisor. client are executed as designed.
Short form report- limited to the advisor’s key  done to make the necessary modifications
findings and recommendations; issued when or corrections that may arise from
interim reports were extensively used during the difficulties encountered due to
execution stage and when there was close misunderstanding of instructions or other
supervision between the engagement team factors not foreseen during the
members and client personnel implementation stage.
 Send a message that the advisor is ready
Implementation of Recommendation to make an after-the-sale service
 The advisor's participation is limited on
providing technical advice and assistance The MS Proposal Letter- formal written
to the client to maintain objectivity. The communication by the advisor to a prospective
following recommendations should also client for approval. It sets forth the purpose,
be considered: scope, general plan, and procedures, anticipated
 Client understanding. results and other terms of the proposal
 Client decision. engagement.
 Client expertise.  The objectives and benefits of the
 Client ability to maintain the new set-up. engagement.
Engagement Evaluation  The scope of the work and the role of the
 It is done to assess the quality of the work advisor.
and make any improvements or  The approach to be used in the study.
refinements in work quality for future  The project plan and organization.
engagements.  Fees and billing arrangements.
 The engagement should be evaluated in  Firm's qualifications, when appropriate.
terms of client's level of satisfaction in
achieving the engagement objectives. The MS engagement program- written detailed
 Areas normally evaluated are the plan of work to be performed in carrying out the
engagement proposal, program and MAS engagement; usually prepared by the advisor
and is reviewed with the client; reference point in  The role of an MS practitioner is that of an
monitoring activities. advisor.
normally includes:  The practitioner must not assume the role
 The objectives and description of of the manager in making decisions.
 the work to be performed.  He should not take any position which
 The description of measurable output at may impair his objectivity in performing
the end of the particular work. the engagement.
 A list and description of required  He should always maintain impeccable
personnel. independence to enable him to render his
 The estimated date of start and professional judgment and opinion with
completion. utmost objectivity.

provides the following: Characteristics of an MS engagement

 Distribution of responsibilities.  Service is for management. No to third
 Determination of the completion of or other parties.
various parts of the engagement  Involves problem solving
 Specific approaches and techniques to be  Scope is broad. Areas covered extend
undertaken beyond the normal domain of finance,
 Basis for the preparation and comparison accounting, auditing, and tax services.
of the program reports.  Future orientation. Determination of
 Specific approaches and techniques to be present and anticipated problems geared
undertaken towards future benefits.
 Basis for preparation and comparison of  Non-recurring. Non-repetitive in nature.
the program reports Approach and processes from one client
vary to another.
Forecasts- intellectual approximations of  Highly-qualified staff
expected outcomes and conditions. Estimates are  Diversity (involves varied
measured results of future actions and events. assignments). Vary in scope, nature, and
 The practitioner must not vouch for the problem
achievability of the forecasts. Neither  Human relations play a vital role in each
should the practitioner allow his name to engagement
be used which may lead to the belief that
he is vouching for the achievability of the Consultancy Fees
forecasts.  the costs of consultancy shall be
computed based on the consultant's
Role of an MS practitioner actual services plus a reasonable level of
 management fee. 3. To provide information for decision making.
 Salaries or billing rates: overhead costs, Continuous improvement- searching for ways to
social charges, management fee increase the overall efficiency and productivity of
 Reimbursable costs: based on agreed activities by reducing waste, increasing quality,
fixed rate or agreed actual costs and reducing costs.
 Escalation. Adjustments of billing rates it strategic decision making- the process of
includes contingency choosing among alternative strategies with the
goal of selecting one or more strategies that

Methods of billing clients provide a company with a reasonable assurance of

• Actual fees charges plus per diem long-term growth and survival.

basis The Management Process- describes the

• flat or fixed fee basis functions carried out by managers and

• Retainer fee basis empowered workers.

• Maximum fee basis (1) planning, (2) controlling, and (3) decision

• Out-of-pocket expenses making.

Chapter 1 Introduction: The Role, History, and employee empowerment is the authorizing of

Direction of Management Accounting operational personnel to plan, control, and make

The management accounting information decisions without explicit authorization from

system provides information needed to satisfy middle- and higher-level management.

specific management objectives. they are Planning- detailed formulation of action to

described by activities such as collecting, achieve a particular end; it requires setting

measuring, storing, analyzing, reporting, and objectives and identifying methods to achieve

managing information. those objectives

Information on economic events is processed Controlling is the managerial activity of

into outputs that satisfy the system’s objectives. monitoring a plan’s implementation and taking

Outputs may include special reports, product corrective action as needed. Control is usually

costs, customer costs, budgets, performance achieved with the use of feedback.

reports, and even personal communication. Feedback is information that can be used to

The management accounting system has three evaluate or correct the steps being taken to

broad objectives: implement a plan; critical part of the control

1. To provide information for costing out services, function; financial or nonfinancial

products, and other objects of interest to performance reports- form of formal reports of

management. financial and nonfinancial feedback that compare

2. To provide information for planning, actual data with planned data or benchmarks.

controlling, evaluation, and continuous Decision Making- process of choosing among

improvement. competing alternatives

A major role of the management accounting
information system is to supply information for possible
decision making 4. Historical
orientation
Management Accounting and Financial 5. Information about
Accounting the firm as on very
financial accounting information system/ detailed information
external accounting is primarily concerned with a whole
producing outputs for external users, using well- 6. More self-
specified economic events as inputs and processes contained
that meet certain rules and conventions. flexibility—the accounting system should be able
Nature. The inputs and the rules and conventions to supply different information for different
governing processes are defined by the Securities purposes
and Exchange Commission (SEC), the Financial
Accounting Standards Board (FASB), and for A Brief Historical Perspective of Management
public companies, the Public Company Accounting Accounting
Oversight Board (PCAOB). Most of the product-costing and management
Objectives. preparation of external reports accounting procedures used in the 20th century
(financial statements) for investors, creditors, were developed between 1880 and 1925.
government agencies, and other outside users. Prior to 1914, many of the early developments
concerned product costing—tracing a firm’s
management accounting- identifies, collects, profitability to individual products and using this
measures, classifies, and reports information that information for strategic decision making.
is useful to internal users in planning, controlling, By 1925, most of this emphasis had been
and decision making. abandoned in favor of inventory costing—
Management Financial assigning manufacturing costs to products so that
Accounting Accounting the cost of inventories could be reported to
1. Internally focused 1. Externally external users of a firm’s financial statements.
2. No mandatory rules focused Some effort to improve the managerial usefulness
3. Financial and 2. Must follow of conventional cost systems took place in the
nonfinancial externally imposed 1950s and 1960s.
information; rules In the 1980s and 1990s, many recognized that
4. Emphasis on the 3. Objective the traditional management accounting practices
future financial no longer served managerial needs.
5. Internal evaluation information
and decisions based subjective Current Focus of Management Accounting
6. Broad, information Activity-based management- the demand for
multidisciplinary more accurate and relevant management
accounting information has led to the advantage.
development of this; a systemwide, integrated Two general strategies:
approach that focuses management’s attention on (1) cost leadership- to provide the same or better
activities with the objective of improving value to customers at a lower cost than
customer value and the resulting profit; competitors; to increase customer value by
emphasizes activity-based costing (ABC) and reducing sacrifice
process value analysis; improves the accuracy of (2) superior products through differentiation-
assigning costs by first tracing costs to activities increases customer value by increasing
and then to products or customers that consume realization; Providing customers with something
these activities. not provided by competitors creates a competitive
Process value analysis emphasizes activity advantage
analysis—trying to determine why activities are
performed and how well they are performed. The Value-Chain Framework
objective is to find ways to perform necessary Internal value chain is the set of activities
activities more efficiently and to eliminate those required to design, develop, produce, market, and
that do not create customer value. deliver products and services to customers;
Effective management of the internal value chain
Customer Orientation is fundamental to increasing customer value
Customer value- difference between what a industrial value chain is the linked set of value-
customer receives (customer realization) and creating activities from basic raw materials to the
what the customer gives up (customer sacrifice). disposal of the final product by end-use
What is received is called the total product. customers; critical for strategic cost management
total product is the complete range of tangible
and intangible benefits that a customer receives Two types of linkages:
from a purchased product. Internal linkages are relationships among
Customer sacrifice includes the cost of activities that are performed within a firm’s
purchasing the product, the time and effort spent portion of the industrial value chain (the internal
acquiring and learning to use the product. value chain).
Post purchase costs, which are defined as the External linkages are activity relationships
costs of using, maintaining, and disposing of the between the firm and the firm’s suppliers and
product. Increasing customer value means customers.
increasing customer realization, decreasing Supply chain management is the management of
customer sacrifice, or both. material flows beginning with suppliers and their
Strategic Positioning upstream suppliers, moving to the transformation
Strategic cost management is the use of cost of materials into finished goods, and finishing with
data to develop and identify superior strategies the distribution of finished goods to customers
that will produce a sustainable competitive and their downstream customers.
 may also be in charge of credit, collection, and
Cross-Functional Perspective- Managing the insurance
value chain means that a management accountant
must understand many functions of the business, Sarbanes-Oxley Act of 2002- passed on June
from manufacturing to marketing to distribution 2002; passed in response to the collapse of Enron
to customer service. and the revelations of securities fraud and
Total Quality Management- manufacturers strive accounting misconduct associated with companies
to create an environment that will enable workers such as WorldCom, Adelphia, and HealthSouth;
to manufacture perfect (zero-defect) products, has established stronger government control and
replaced the “acceptable quality” attitudes of the regulation of public companies in the United
past. States; applies to publicly traded companies,
companies that issue stock traded on U.S. stock
Time as a Competitive Element exchanges.
Time is a crucial element in all phases of the value
chain. Ethical behavior involves choosing actions that
Efficiency are “right,” “proper,” and “just.”
Cost is a critical measure of efficiency. The ten core values referred to in the quotation
follow:
Electronic business (e-business) is any business 1. Honesty
transaction or information exchange that is 2. Integrity
executed using information and communication 3. Promise keeping
technology; expected to grow significantly over 4. Fidelity
the coming years; 5. Fairness
Structure of the Company 6. Caring for others
line positions- Positions that have direct 7. Respect for others
responsibility for the basic objectives of an 8. Responsible citizenship
organization 9. Pursuit of excellence
staff positions- Positions that are supportive in 10. Accountability
nature and have only indirect responsibility for an Standards of Ethical Conduct for Management
organization’s basic objectives Accountants
controller, the chief accounting officer, supervises Institute of Management Accountants has
all accounting departments; member of the top established ethical standards for management
management team and is encouraged to accountants. In 2005, the IMA issued a revised
participate in planning, controlling, and decision- statement outlining standards of ethical conduct
making activities. for management accountants. Called the
treasurer is responsible for the finance function; “Statement of Ethical Professional Practice,” the
raises capital and manages cash and investments; revised statement was designed to accord with the
provisions of the Sarbanes-Oxley Act of 2002 and by many management accountants.
to meet the global needs of IMA’s international  Certificate in Internal Auditing (1974)
members. The revised statement is based on the certified internal auditor (CIA) has passed a
principles of honesty, fairness, objectivity, and comprehensive examination designed to
responsibility. ensure technical competence and has gained
two years of experience.
Certification
three of the major types: a
 Certificate in Management Accounting- by
IMA in 2005; was designed to meet the
specific needs of management accountants; to
establish management accounting as a
recognized, professional discipline, separate
from the profession of public accounting.
certified management accountant (CMA)
has passed a rigorous qualifying examination,
has met an experience requirement, and
participates in continuing education.
One of the key requirements for obtaining the
CMA is passing a qualifying examination.
Four areas are emphasized: (1) economics,
finance, and management; (2) financial
accounting and reporting; (3) management
reporting, analysis, and behavioral issues; and
(4) decision analysis and information systems.

 Certificate in Public Accounting- oldest and

best-known certification in accounting. Its
purpose is to provide minimal professional
qualification for external auditors.
Certified public accountant (CPA) is
permitted (by law) to serve as an external
auditor. CPAs must pass a national
examination and be licensed by the state in
which they practice. Although the Certificate
in Public Accounting does not have a
management accounting orientation, it is held