How many times, as a management accountant, have you been asked for a “True” cost? Have you ever thought about what this means? What cost did you provide that was not “true”? And did you lie when you provided it?
“True” cost usually means a cost other than the cost calculated by the cost accounting system that generates information for regulatory financial reporting. Sometimes the inquiry is more tactfully addressed by asking for a “relevant” cost. Relevant meaning pertinent to the decision that an individual is trying to find information to help them make. In both cases, the information you provided (probably from the cost accounting module of your financial reporting system) isn’t true or relevant, but you didn’t lie or intend to mislead or confuse. What’s going on? Apparently, this is why you often hear people asking for ONE version of the financial truth.
The problem is the accounting profession has not been very clear on the term “Truth”. Regulatory financial reporting has a standard of “truth” set forth in generally accepted accounting principles created by FASB, IASB, or another national standard setting body. These rules are the result of a social consensus by many stakeholders. They create “general purpose financial statements” that are meant to provide information to investors and creditors that is fairly standard and can be audited to provide confidence in public capital markets. I refer to this type of truth as the “Laws of Men”.
Truth for financial information for internal decision making is less clearly defined by the accounting profession. Logically, it should reflect reality and follow the same rules as science – truth must correspond to facts. The IMA Conceptual Framework for Managerial Costing focuses only on internal decision making. It defines the key principle for creating internal information as Causality, or accurately reflecting operational cause and effect relationships with monetary models. I refer to this type of truth as the “Laws of Nature”. Neither is superior or inferior, but they are very different and financial personnel must be clear about what perspective they are presenting…….And stop the myth that ONE version of the financial truth can be created or ever exist.
If you are interested in reading more on financial or monetary truth from an internal decision support perspective, a good article is The Foundation of Truth in Managerial Costing.
Larry R. White, CMA, CSCA, CPA, CGFM
Executive Director, Resource Consumption Accounting Institute