Which MBA?

Eminent professors explain their subjects

The accounting system measures and reports on the performance of an organisation, its components and its personnel. It can be broken down into distinct areas: 

Financial accounting refers to reporting to those outside the organisation, such as owners, bankers, potential investors and labour unions. It involves the preparation, interpretation and use of the primary financial statements: balance-sheet, income statement, statement of cash flows, statement of shareholders’ equity and statement of comprehensive income. An MBA course will cover the basics of how these statements are prepared, but typically more emphasis is placed on being able to interpret and analyse the information as well as the role these statements play in attracting and investing the organisation’s capital. 

The recent financial crisis, and the accounting failures that it threw up, has given the subject a new resonance. One area under scrutiny is earnings management, whereby managers used discretion to cast the organisation’s financial condition and performance in a favourable light. There is also increased emphasis on the estimation and use of fair market values, instead of historical costs, as the basis for the measurement of the organisation’s assets and liabilities. The adoption of rules such as the United States Generally Accepted Accounting Principles (US GAAP) and International Financial Reporting Standards (IFRS) is another area that finance professors are watching closely.

Managerial accounting covers the internal production and use of financial information that managers need to manage the organisation more effectively. Reports are created to support management’s planning and decision-making, as well as to control the organisation’s operations. MBAs normally cover the subject from a strategic perspective, examining the organisation’s strategic positioning and value chain and how accurately they are reflected in the managerial accounting reports. Most courses attempt to develop not only a basic understanding of how costs are measured, but also how these measures are used to evaluate and motivate desirable behaviour by management. 

Tax accounting refers to an organisation’s income-tax reporting process. Tax law is extensive and very complicated, and MBA programmes typically do not delve too deeply into the details, but rather tend to emphasise the strategic elements involved in the relationship between taxes and the organisation’s business strategy. This will include effective tax planning, both explicit and implicit taxes, and the relationship between taxes and the organisation’s operating, investing and financing decisions.

Jamie Pratt: Alva L Prickett Chair of Accounting at the Indiana University Kelley School of Business