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26,7

Management accounting and risk
management in Malaysian
financial institutions

566

An exploratory study

Received 30 March 2010
Reviewed 28 January 2011
Accepted 15 March 2011

Siti Zaleha Abdul Rasid
International Business School, Universiti Teknologi Malaysia,
Kuala Lumpur, Malaysia

Abdul Rahim Abdul Rahman
Department of Accounting, Kuliyyah of Economy and Management Science,
International Islamic University Malaysia, Kuala Lumpur, Malaysia, and

Wan Khairuzzaman Wan Ismail
International Business School, Universiti Teknologi Malaysia,
Kuala Lumpur, Malaysia
Abstract
Purpose – The purpose of this paper is to examine the link between management accounting and
risk management. The paper measures the extent to which management accounting practices help in
managing risks and the extent of the integration between these two important managerial functions.
Design/methodology/approach – The study used a mail survey of financial institutions listed in
the Malaysian Central Banks’ web site. The respondents to whom 106 questionnaires were sent were
the chief financial officers; the response rate was 68 percent. A total of 16 post-survey semi-structured
interviews were also conducted with selected respondents to gain further insights into the survey
findings.
Findings – The findings from the survey indicate that analysis of financial statements was perceived
to contribute most towards risk management. The majority of the respondents were of the view that
the management accounting function was greatly involved in the organization’s risk management.
Consistent with the survey findings, the interviewees also perceived that budgetary control,
budgeting, and strategic planning played important roles in managing risk.
Research limitations/implications – This is a study conducted in Malaysian financial
institutions and thus, results may not be generalizable to other contexts. The findings of this study
strengthen the importance of both management accounting and risk management in complementing
each other to form part of the corporate performance management systems.
Originality/value – This paper contributes to the literature as very few studies have examined the
significant link between management accounting and risk management.
Keywords Management accounting, Risk management, Financial institutions, Malaysia
Paper type Research paper

Managerial Auditing Journal
Vol. 26 No. 7, 2011
pp. 566-585
q Emerald Group Publishing Limited
0268-6902
DOI 10.1108/02686901111151314

Introduction
Financial institutions play an important role in the economy. They act as intermediaries
between the surplus and deficit units and this intermediary role is crucial for the efficient
allocation of resources in the modern economy (Sinkey, 2002; El-Hawary et al., 2007).

As observed from the latest US financial crisis, a collapse of the financial institutions
affects the stability of the whole economy, and, hence, it is crucial to maintain the
soundness and the stability of the financial institutions. They face a diverse customer
base with a highly integrated business value chain and consequently are exposed to a
wide array of risks. Therefore, financial institutions should have robust risk
management systems to maintain the safety and soundness of their operations
(Bank Negara Malaysia, BNM, 2008; Blunden, 2005).
Financial liberalization and technological revolution have also intensified
competitive pressures among financial institutions. They are given the flexibility to
develop their own strategies to remain competitive. At the same time, advances in
technology have allowed them to develop new and efficient delivery and processing
channels, as well as to be more innovative in delivering new products and services.
The complexity of the financial services business is also increased due to the emergence
of these increasingly innovative products and distribution channels. Within this
complex environment, managers need relevant financial and non-financial information
for decision making. The ability of management to make informed decisions is linked to
the quality of management information available to them (Kafafian, 2001; Rezaee, 2005)
and good information arises from an effective management accounting system (MAS),
an important tool in providing decision-making information (Cole, 1988).
Both management accounting and risk management functions are expected to
complement each other (Bhimani, 2009; Collier et al., 2007; Mikes, 2006) and serve the
purpose of aiding decision making. Both practices undertake “ex ante” and “ex post”
perspectives. Management accounting provides information for planning (“ex ante”)
and control (“ex post”) in an organization. However, risk management through
risk-taking decisions are considered an “ex ante” perspective and once risk decisions
are made, risk monitoring takes place from an “ex post” perspective (Bessis, 2002). For
financial institutions that are in the business of managing risks (Bowling and Rieger,
2005; Hakenes, 2004; Bowling et al., 2003), management accounting contributes in
providing information for risk management. Hence, this study examines the link
between management accounting and risk management and two research questions
are being addressed:
RQ1. Are management accounting techniques and tools being used in managing
risks?
RQ2. What is the extent of the integration between management accounting and
risk management functions?
This paper contributes to the management accounting literature in two ways.
It provides empirical evidence concerning the linkage between management
accounting and risk management, as little research has been previously conducted
to provide this evidence. The paper also seeks to contribute to the underdevelopment of
management accounting research in the financial services sector (Helliar et al., 2002;
Billings and Capie, 2004).
Motivations for the study
There are two motivations for the study. First, the linkage between risk management as
an internal control system (Collier et al., 2004; Williamson, 2004; Soin, 2005; Mikes, 2006)
and management accounting as another control system (Otley, 1980; Gul and Chia, 1994;

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Chong, 1996; Chenhall, 2003) as has been recently recognized. Management accounting
has always been associated with the intent of aiding enterprise decision making. Risk
management is also central to the decision making concerns of both internal and
external parties to an organization. Management accounting and risk management
should complement each other as integral parts of the performance management of
financial institutions. However, empirical evidence of the linkage between these two
functions is limited.
Second, there is also a growing interest in the implementation of enterprise risk
management (ERM) among financial institutions. The reason for this growing interest
is twofold:
(1) continuing regulatory scrutiny; and
(2) the release of a new ERM framework from the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) (Bowling and Rieger, 2005).
ERM goes beyond compliance and has increasingly been seen as a source of competitive
advantage, as it is broad in scope and does not limit consideration to the specific items a
regulator may require (Platt, 2004). Under ERM, performance management of business
lines is integrated with risk management and risks are aggregated across different types
of risk and across business units to obtain enterprise-wide risk. Both are integral to
strategic planning and performance assessment in an organization. At the same time,
performance management is seen as the main task of the management accounting
function (Otley, 2001).
Additional empirical data are required to support the limited evidence of the linkage
between management accounting and risk management. Since the core business
function of financial institutions are managing risks (Bowling and Rieger, 2005;
Hakenes, 2004; Bowling et al., 2003), risk management should be an essential part of
the business processes. At the same time, MASs, which are essential for performance
management and control (Williamson, 2004), are also an important part of the business
processes. Hence, this study aims to contribute by exploring the linkages between
management accounting and risk management in the financial institutions.
This paper is organized as follows. The next section reviews the relevant literature
on the link between risk management and management accounting. The subsequent
section elaborates the research method for the study. The final section of the
paper covers the data analysis and discussion of the findings and conclusions of the
study.
Background literature
The International Federation of Accountants (IFAC, 1998) defines management
accounting as the process of identification, measurement, accumulation, analysis,
preparation, interpretation, and communication of information (financial and operational)
used for the planning, control, and effective use of resources by management. Thus,
management accounting becomes an integral part of the management process in an
organization. It provides information essential for:
.
controlling the current activities of an organization;
.
planning its future strategies, tactics, and operations;
.
optimizing the use of its resources;

.
.
.

measuring and evaluating performance;
reducing subjectivity in the decision-making process; and
improving internal and external communication (IFAC, 1998).

Management accounting is a tool for achieving high performance, as it provides a
measurement of performance, warning of risks, information for decisions, and data for
planning (Cole, 1988). Management accounting is also used as a tool to manage a firm’s
resources. Cole (1988) specifically argues that a good MAS does the following:
.
identifies the cost and profitability of doing business by organization, product,
and major customer;
.
avoids surprises;
.
allows all managers to explain their performance as it is reported;
.
permits everyone to participate in planning, and plan-to-actual reporting is used
as a management tool;
.
provides timely, accurate, relevant, and comprehensive reporting;
.
ensures that only one set of numbers is floating around the organization; and
.
reduces or eliminates complaints about information availability.
Hence, management accounting plays an important role in planning, controlling,
communicating, monitoring, and linking together the various sections and divisions in
an organization (Atkinson et al., 2001; Soin, 2005).
Risk is generally referred to as the possibility of danger, loss, injury, or other adverse
consequences and the major risks faced by financial institutions include credit risk,
market risk, interest rate risk, liquidity risk, and operational risk (Bessis, 2002). Risk
management may be defined as “any set of actions taken by individuals or corporations
in an effort to alter the risk arising from their primary lines of business” (Cummins et al.,
1998). The generic risk management framework includes four major risk management
components – risk identification, risk measurement, risk mitigation, and risk
monitoring and reporting (Bessis, 2002). Financial institutions are governed by the local
regulatory framework as well as an international regulatory framework. All the
financial institutions[1] in Malaysia are regulated by the Central Bank of Malaysia.
The banking institutions are subjected to the Banking and Financial Institutions Act
1989 and, in addition, Islamic banks are subjected to the Islamic Banking Act 1983.
Complementing the banking institutions, the non-bank financial intermediaries (NBFIs)
are under the supervision of various government departments and agencies.
The insurance industry has been under the supervision of the Central Bank since
1 May 1988. To ensure the soundness and safety of the Malaysian financial institutions
on the international front, they are also subjected to the Basel Committee on Banking
Supervision, an international financial regulation. This committee has developed a
framework known as International Convergence of Capital Measurement and Capital
Standards: A Revised Framework, which is generally known as Basel II. It consists of
three pillars, namely, minimum capital requirements, supervisory review, and market
discipline. In complying with Basel II, financial institutions are encouraged to have risk
management systems that will satisfy internal use as well as regulatory purposes
(Blunden, 2005). This compliance came into effect in January 2008.

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Financial services companies were among the first to adopt ERM techniques and
appoint chief risk officers (CROs) (Platt, 2004; Beasley et al., 2005) to manage all the
risks in the organizations. The appointment of a CRO is considered as an indicator for
ERM implementation (Liebenberg and Hoyt, 2003). An organization assesses and
analyses risks holistically with ERM by identifying areas of concern and proactively
developing measures to comply with regulations. Contrary to the traditional risk
management, in which each type of risk is managed separately, in ERM, firms manage
a wide array of risks in an integrated, holistic fashion (Liebenberg and Hoyt, 2003). The
commonly adopted framework for ERM is COSO’s (2004) ERM framework which
consists of eight interrelated components. These components are internal environment,
objective setting, event identification, risk assessment, risk response, control activities,
information and communication, and monitoring.
On the other hand, based on the IFAC (1998) framework, management accounting
evolved from cost controlling (stage 1 – pre 1950) to value creation (stage 4 – by 1995).
In stage 1, most companies focused on cost determination and financial control. Simple
management accounting techniques were used and the main sources of data were
financial statements consisting of income statements, balance sheets, and cash flow
statements. By 1995 (stage 4), it became important to identify the drivers of customer
value, shareholder value, and organizational innovation. Contemporary management
accounting techniques such as just-in-time, target costing, balanced scorecard (BSC),
and strategic management accounting (SMA) gained dominance during this period.
These management accounting tools and techniques are capable of considering a broad
spectrum of information that can be used for decision making, planning, and control.
An MAS is part of the management control system (Chenhall, 2003) and “it is inept to
consider management control as being distinctly separate and independent from risk
management or corporate governance concerns” (Bhimani, 2009, p. 3).
Although the linkage between management accounting and risk management is
recent, it is rapidly growing. Some authors (Williamson, 2004; Collier et al., 2004; Soin,
2005; Collier and Berry, 2002; McWhorter et al., 2006; Mikes, 2006) have explored this
linkage. Williamson (2004) proposed that management accounting and management
control can contribute to the practice of ERM. Williamson (2004) argued that
management accountants have expertise in identifying, analyzing, and communicating
management information for planning, control, performance measurement, and decision
making and should, therefore, be able to help develop techniques for ERM. In addition,
with an understanding of organizational, behavioural as well as economic implications,
management accountants should be able to better interpret and communicate risk
management information. Furthermore, risk-based management accounting can be
carried out in which assessed risks are compared to objectives, standards, forecasts,
budget, and actual performance. Subsequently, the risk implications can be considered
in strategy; planning; control; management of revenue; costs and cash flow; and
management of value drivers. Hence, management accounting is seen as supporting risk
management and control, whether by quantifying objectives; estimating the
consequences of potential outcomes from risk events; analyzing the cost and benefits
of risk management processes; or comparing actual performance to risks faced
(Williamson, 2004).
Some empirical studies on risk management and management accounting have
been conducted. Soin (2005) investigated the contribution of management accounting

and control information on the practice of risk management in the UK financial
services sector. Consistent with Williamson (2004), she argued that management
accounting has a potential role in supporting risk management. Soin (2005) examined
whether current MASs support the changing patterns of demand for information about
risk by corporate stakeholders. However, the study suggested that risk management
systems in the financial services sector were not utilizing management accounting
techniques and that there was no clear role for management accountants in risk
management. The lack of emphasis on management accounting control systems in the
financial services sector was cited as the reason for the findings. There was some
emphasis on budgeting, cost control, and performance measurement, but not in relation
to risks. Similarly, Collier et al. (2004) found that there was very little integration
between risk management and management accounting. The study found that the
systems and controls that were in place in the UK financial services sector were very
closely matched to the requirements set out by the regulator (Soin, 2005).
Mikes (2006), on the other hand, examined both risk management and management
accounting control as multiple control systems in an organization. She conducted a case
study to explore the changing context and internal dynamics of a multiple control
system acting as the divisional control in a financial services organization. Based on a
political and institutional perspective, the study showed how two control systems,
namely, firm-wide risk management system and accounting controls, complemented
each other (as the contingency theory suggests), as well as competed with each other for
relevance and attention from top management. Accounting control has been found to
possess institutional appropriateness compared to risk control (ERM) and was
extensively used in decision making (Mikes, 2006).
In another study, Woods (2009) conducted a case study on the risk management
control system in a public sector organization. Contingent variables that affected the
risk management system at the operational level were central government policies,
information and communication technology, and organizational size. The most
important contingent variable was central government policies as many of the strategic
objectives were driven by government policy and resources were also determined by the
central government (Woods, 2009). This is similar to financial institutions where
government regulation drives the risk management system.
The issue of risk and management accounting was also examined in manufacturing
and not-for-profit organizations (Collier and Berry, 2002). They conducted an
exploratory case study to understand the relationship between risk and budgeting.
The budgeting process is a formal method by which plans are established for future time
periods, thereby implying a consideration of risk. However, there was a separation
between budgeting and risk management. Despite managerial perceptions of risk, in
which each organization faced some sort of risk, there was no explicit regard to risk in
the budgeting process or the content of the budget document. Budgeting did not appear
to be a tool used in managing risk (Collier and Berry, 2002).
In another study, Collier et al. (2007) investigated the roles of management
accountants in managing risk. Similar to Williamson (2004) and Soin (2005), they
viewed that management accountants – who have skills in analysis of information,
systems, performance, and strategic management – should play a significant role in
developing and implementing risk management. The survey results show that there
was little integration between management accounting and risk management and that

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the involvement of management accountants in risk management was only marginal.
However, results from post-survey interviews indicated that management accountants
did actually play an important role in risk management, especially in analyzing the
impact of risks to support risk managers. The finance director was identified as having
a pivotal role in risk management (Collier et al., 2007), and, in most organizations,
management accounting functions are normally under the responsibility of the finance
director.
Integration between management accounting and risk management is more likely
in the area of performance measurement. There has been a call for integrating the
BSC as a strategic performance measurement system and ERM as a proposed best
practice for risk management (Ballou et al., 2006; Scholey, 2006; Beasley et al., 2006;
McWhorter et al., 2006). The scorecard can be enhanced by including goals and
objectives for risk management and by capturing performance-based risk metrics. The
BSC has four perspectives, namely, learning and growth for employees, internal
business processes, customer satisfaction, and financial performance.
Beasley et al. (2006) proposed some guidelines of how the integration can be done.
First, in order to ensure that all employees embrace a common set of definitions and
perspectives on risk management, training objectives, and performance measures
related to learning and education about risk management can be added to the learning
and growth perspective of the BSC. Second, as risks can also arise from internal business
processes, goals related to the variation of risks within a business process and related
risk performance metrics should be integrated into the internal business processes
perspective. Third, risk goals and performance measures related to customers, markets,
and reputation in the customer should be part of the satisfaction perspective. Finally,
any risk management system should consider the costs of responding to risks relative
to its benefits and the financial performance perspective of the BSC provides the
natural connection for ERM cost/benefit analysis of response (Beasley et al., 2006).
McWhorter et al. (2006) provide empirical evidence that strategic performance
measurement systems improve risk management.
A review of the various studies above reveals that management accounting seems to
support risk management in several ways. First, management accounting expertise in
identifying, analyzing, and communicating management information for planning,
control, and performance measurement and decision making can help develop
techniques for communicating, and embedding risk management across the whole
organization. Second, management accounting should be able to provide channels
within organizations for linking strategy, risk management, performance measurement,
and accountability by identifying relevant information and issues for management
attention. Third, both management accounting and risk management functions are
concerned with costs and, therefore, generate possibilities for the use of management
accounting techniques in risk management.
Empirical evidence (Collier et al., 2004; Soin, 2005) suggests that there is little
integration between management accounting and risk management. However,
interviews conducted by Collier et al. (2007) suggest that management accounting
can actually play an important role in assisting risk management. Nevertheless,
integration between strategic performance measurement systems (such as BSC) and
ERM will be more beneficial to organizations. BSC can be used to benefit ERM and,
in addition, the integration allows ERM to increase the effectiveness of BSC.

Looking from a political and institutional perspective, ERM (as part of control) will
complement (as contingency theory suggests) another form of control in the
organization as well as compete with it. This may lead to the preferential use of one
control system over the other.
Research method
Data were collected using postal questionnaires survey and post-survey semi-structured
interviews. This study selected the whole population of finance and insurance
companies listed on the Malaysian Central Bank web site. The choice of a single industry
in this study will minimize environmental heterogeneity (Moores and Yuen, 2001).
Questionnaires were sent to 106 financial institutions (including commercial banks,
Islamic banks, merchant/investment banks, discount houses, development financial
institutions (DFIs), and insurance companies). The questionnaire was mailed to the
chief financial officer (CFO, or the most senior position in the finance department) of
each firm.
Questionnaire development
A questionnaire was developed to seek the respondents’ perception on the extent to
which management accounting practices help in managing operational risks based on
a Likert scale of 1 (not at all) to 5 (to a very great extent). The management accounting
practices were listed based on the IFAC’s (1998) framework, which is also used by the
National Award for Management Accounting (NAfMA)[2] Award Organizing
Committee. However, only practices relevant to the services industry, particularly
the financial services industry, were selected for this study. Footnotes explaining some
of the practices were also included in the questionnaire.
Operational risk is a type of risk that measures the potential loss due to any disruption
in the firm’s operational processes (Marshall, 2001). The Basel II definition of
operational risk is “the risk of direct or indirect loss resulting from inadequate or failed
internal processes, people and systems or from external events”. “It covers all
organizational malfunctioning, of which consequences can be highly important and,
sometimes, fatal to an institution” (Bessis, 2002, p. 12). Global operations, with the
emergence of more complex products and services, and consequent increase in volume
and volatility of transactions, lead to greater operational risk (Marshall, 2001). In the
context of operational risk management, the main function of management accounting is
to provide information for internal decision making relating to business processes,
people, and investment in systems. Relevant information provided by MASs will help
managers to make more effective decisions, which, in turn, help to prevent unexpected
loss. According to IFAC (1998), management accounting information consists of both
financial and operational information. This information will provide indicators on the
performance and actions that could be taken to improve future performance. Thus, this
study only focuses on the operational risk as it is assumed to be more directly related to
the management accounting information function compared to other types of risk such
as credit and market risk. Andersen (2008) asserted that accounting and management
control systems are important tools in managing operational risks. Strategic business
planning and a well-organized budgeting process and consistent follow-up with any
operating variances to budget can limit unexpected losses due to operational deficiencies
(Marshall, 2001).

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The respondents were also asked to indicate on a Likert scale of 1 (strongly disagree)
to 5 (strongly agree) whether there is great involvement of financial and management
accounting functions in risk management. Respondents were also asked to state whether
risks were considered in formulating budgets and also whether risk measures were
integrated into their performance measurement systems. The purpose of these questions
was to measure the extent of management accounting functions in managing risk. These
items were adapted from Collier et al. (2006).
The questionnaire was first pre-tested on seven academicians from the local
universities. They were either expert in management accounting and financial systems
or expert in research methodology. Pilot testing is important to ensure validity and
reliability of research instruments (Sekaran, 2000). Pilot testing was also conducted
with two senior finance managers and six managers from the financial institutions.
A revised draft of the questionnaire was prepared accordingly.
Questionnaire administration
The questionnaire was mailed to the CFO (or the most senior position in the finance
department) of each firm. The CFOs (or the most senior position managers) were chosen
because they are responsible for management accounting and are directly involved in
risk management in the organizations. According to Rodeghier (1996), in survey
research, contacts are very important and at least three contacts with the sample, each
slightly different in tone and content, are necessary to ensure a high return. Thus, one
week after the survey packets were sent, phone calls were made to ensure that the
organizations had received the packets. Five weeks after the first mailing, another set of
questionnaires was sent to the non-respondents. Follow-up was again made through
email and telephone calls after the second mailing.
Descriptive statistics were used in analysing the findings. Mean scores on the
management accounting practices perceived to be useful in managing risks were
calculated and the scores were ranked accordingly. However, this analysis will look into
the presence of management accounting in risk management but not the magnitude of
management accounting in risk management. Nevertheless, considering that this study
is exploratory in nature, the analysis would be sufficient as the interview findings have
further elaborated the linkages between management accounting and risk management.
Descriptive analysis was also used in identifying the extent of integration between
management accounting and risk management function.
Profile of respondents and firms
A total of 72 responses were received, representing a response rate of 68 percent. A test
for non-response bias was conducted by comparing the means on the variables of
interest between early and late respondents using independent-samples t-test. The
results indicate no significant differences between the responses for all the variables for
the early and late respondents, providing little evidence of non-response bias in the data.
As shown in Table I, the largest number of respondents was head of finance/general
manager finance/vice president finance (37.5 percent), followed by finance manager
(23.6 percent), CFO/director of finance (18.1 percent), senior manager finance/assistant
vice president finance (15.3 percent), and others (5.6 percent). The majority of the firms
(55 or 76.4 percent) had more than 100 employees. This indicates that the majority of the
firms involved in this survey were large in size.

Background variable Categories

Frequency Percentage

Job designation

CFO/director of finance
Head of finance/general manager finance/vice
president finance
Senior manager finance/assistant VP finance
Finance manager
Others
Number of employees Less than 100
100-499
500-999
More than 1,000
No information

13

18.1

27
11
17
4
15
23
13
19
2

37.5
15.3
23.6
5.6
20.8
31.9
18.1
26.3
2.8

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Table I.
Profile of respondents
and firms

Post-survey semi-structured interviews
Semi-structured interviews were conducted to gain a more in-depth understanding of the
link between management accounting and risk management. The respondents who
were involved in the questionnaire survey provided the basis for the sample selection for
the interviews. In total, 16 interviews were conducted and, overall, the background
shows that they were senior and experienced enough to represent their organization as
almost all of them were in the top management team, with an average age of 43 years,
and had served with the company on average for nine years and held their current
position on average for five years (Table II).

Interviewee Position
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16

Head of finance
Senior manager finance
Head of finance
Senior manager finance
Manager performance
managementa
Head central business finance
Head of accounts and MIS
Director of finance
Director corporate finance
Assistant general manager finance
General manager
Manager financeb
Senior vice president/company
secretary finance and
administration
Chief financial controller
Chief operating officer
Assistant vice president finance

Length of service Length of time in
in the company current position
(years)
Gender Age
(years)
23
17
2
14
10

10
4
2
2
3

5
7
7
3
17
4
12
3

2
7
7
3
2
2
4
3

2
22
2

2
10
2

Notes: aRepresenting the financial controller; brepresenting the head of finance

Male
Male
Male
Male
Male

47
53
37
38
35

Male
Male
Female
Male
Male
Male
Male
Male

39
42
51
38
39
46
38
50

Male
Male
Male

46
51
36

Table II.
Background
of the interviewees

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Results and discussion
This study examines the link between management accounting and risk management in
financial institutions. Management accounting is expected to provide information for
operational decision making as well as for long-term decision making. MASs should
provide relevant information for decision making, such as resource allocation,
introduction of new products or services or for performance evaluation. Table III shows
the extent to which management accounting practices (MAPs) help in managing
operational risk as perceived by the respondents.
Based on the rank of the mean score, the results show that analysis of financial
statement were perceived to help the most in managing operational risk. This is
probably because financial statements analysis provides direct indicators of the firm’s
performance, which, in turn, are used for risk measurement. The findings can be
substantiated, as the focus of financial institutions in managing risk is to quantify the
operational risk in monetary terms (Dun & Bradstreet, 2007). There are three approaches
in determining the capital requirement for operational risks, namely, basic indicator
approach (BIA), the standardised approach (TSA), and advanced measurement
approach (Dun & Bradstreet, 2007). Under BIA, the capital charge is equal to a fixed
percentage of the gross income. Under TSA, a fixed percentage will be multiplied with
the gross income of each business line (Dun & Bradstreet, 2007). Hence, the gross income
information becomes important information in calculating the capital charge for
operational risk (Basel Committee on Banking Supervision, 2004). It becomes an
indicator for overall operational risk exposure. The capital adequacy ratio can be
computed by dividing total capital by total risk-weighted assets. Financial information
from the financial statement is used as a proxy in measuring operational risk.
The income-based model and the expense-based[3] model, for example, used financial
statement information to measure operational risk.
The next three items that were perceived to help the most were budgetary
control and budgeting, business planning, and business strategy. This is expected as
a well-organized budgeting process, and consistent follow-up of any operating variances
MAP

Table III.
Extent to which MAPs
help in managing
operational risk

1. Financial statement analysis
2. Budgetary control and budgeting
3. Business planning
4. Business strategy
5. Benchmarking
6. Productivity analysis
7. Cost control and cost management
8. Statistical analysis
9. Relevant costing and decision-making analysis
10. Cost-benefit analysis
11. Balanced scorecard
12. Strategic management accounting
13. Quality improvement activities
14. Strategic cost management
15. Economic value added
16. Activity-based costing/management
17. Standard costing

Min.

Max.

Mean

SD

2
2
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1

5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5

4.13
4.04
3.99
3.94
3.65
3.63
3.61
3.59
3.49
3.44
3.35
3.34
3.28
3.21
2.84
2.76
2.67

0.844
0.818
0.819
0.860
1.084
1.124
1.021
1.202
1.120
1.105
1.172
1.133
1.124
1.153
1.199
1.221
1.248

to budget, can limit unexpected losses (Marshall, 2001). In addition, strategic and
business planning is a qualitative business technique (such as strengths, weaknesses,
opportunities, and threats analyses and scenario analysis) that is used to develop a
long-term direction for the business to prevent any unexpected losses (Marshall, 2001).
Benchmarking, productivity analysis, cost control and cost management, statistical
analysis, relevant costing, and decision-making and cost-benefit analysis were
perceived to be moderately helpful in managing operational risk. Nevertheless, these
practices provide relevant information for managers to make effective decisions.
Effective decision making is crucial for the long-term survival of an organization. BSC,
SMA, quality improvement programme, and strategic cost management were also
perceived to be moderately useful in managing operational risk. The BSC, which has
four perspectives, namely, learning and growth for employees, internal business
processes, customer satisfaction, and financial performance can be used to provide risk
indicators (Beasley et al., 2006; Marshall, 2001). The risk indicators will be useful in
analyzing the operational risk over time and thus focusing the operation manager’s
attention on problems before they get out of hand (Marshall, 2001). Quality
programmes, such as total quality management (TQM), assume that managers control
process outputs through the careful selection of the inputs and that many loss events
are the result of a poor-quality resource or process. Thus, TQM and other quality
management programmes seem to help in managing operational risks by changing the
risk profile of operational processes and resources. This is done by improving the
availability, quality, relevance, flexibility, reliability, conformance, and sustainability
of various process inputs and outputs (Marshall, 2001).
The three practices that were perceived as the least important in managing
operational risks were economic value added (EVA), activity-based
costing/management (ABC/ABM), and standard costing. Traditionally, management
accountants have always used standard costing in which predetermined costs of some
activities are determined at the beginning of the period, and these costs are then
compared with the actual costs at the end of the period to determine variances, known as
accounting or operating variances (Marshall, 2001). These variances are in fact one
measure of operational risk (Marshall, 2001). These three practices may not be widely
used in financial institutions, as they were not perceived to help directly in managing
operational risks. EVA is a relatively new concept of performance measures (Bardia,
2008) and the issue of whether the use of EVA for performance measures will lead to
improved shareholder value is still inconclusive. ABC/ABM is still not widely practiced
(Hussain, 2000; Chenhall and Langfield-Smith, 1998; Abdul Rahman et al., 1998; Innes
and Mitchell, 1995). Unlike manufacturing companies (Maliah et al., 2004; Abdul
Rahman et al., 1998) where the time taken to manufacture a certain product is quite
standardized and measurable, the time taken to render a particular service may not be
standardized causing difficulties in measurement and thus hinder the use of standard
costing. The fact that these practices are not widely used can also be attributed to the
lack of importance of these practices in managing operational risks. Nevertheless, the
overall relatively high mean scores for all the practices can be attributed to the fact that
financial institutions are highly regulated. The financial industry is required to comply
with all rules and guidelines issued by regulatory authorities.
In exploring whether management accounting and risk management functions are
integrated, the respondents were also asked whether financial and management

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Table IV.
Integration of accounting
and risk management

accounting functions were involved in risk management in general, whether risks were
considered in budgeting and whether risk measures were integrated into their
performance measurement systems. The results are presented in Table IV.
The majority of the respondents agreed (from moderately agreed to strongly agreed)
that there was a great involvement of both financial and management accounting
functions in the organization’s risk management. This is expected as based on a survey
in the UK, Collier et al. (2007) found that finance directors had a major role in analysing,
assessing, reporting, and monitoring risk and that they were identified with more
aspects of risk management compared to other job titles. The accounting functions are
normally headed by the finance director of the organization. Furthermore, as financial
institutions are required to comply with Basel II the finance units are expected to
collaborate with the risk units in order to deliver accurate profitability numbers to
management (Alexander and Hixon, 2005). In fact, a survey on the benefits of Basel
II cited that it brings closer alignment of the risk and finance functions (Alexander and
Hixon, 2005). This closer alignment will improve the quality of the data that supports
decision making, particularly through a more risk-sensitive approach to profitability
analysis and capital management (Alexander and Hixon, 2005).
About 88.7 percent of the respondents agreed (from moderately agreed to strongly
agreed) that risks were identified and factored in when formulating budgets.
This percentage was slightly higher than the findings by Collier et al. (2004). In their
study, it was found that 35 percent of the respondents said that risks were considered
to some extent in formulating budgets and another 47 percent said that risks were fully
considered, which made up a total of 82 percent. The majority of the respondents also
agreed (from moderately agreed to strongly agreed) that risk measures are integrated
into the organization’s performance measurement systems. It is very important for
financial institutions to incorporate their risk measures into their performance
measurement systems. Risk-based performance management is essential for long-term
survival of the institutions. Bessis (2002) highlights that financial institutions focus on
risk-based practices for three main reasons – to provide a balanced view of risk and

There is a great involvement
of the financial accounting
function in the organization’s
risk management
There is a great involvement
of the management accounting
function in the organization’s
risk management
Risks are identified and factored
in when formulating budgets
Risks measures are integrated
into the organization’s
performance measurement
system

Strongly
Moderately
agree
Agree agree
(%)
Mean
(%)
(%)

Strongly
disagree
(%)

Disagree
(%)

0

4.2

25

47.2

23.6

3.90

0.808

0

8.3

26.4

37.5

27.8

3.85

0.929

2.8

8.5

29.6

42.3

16.9

3.62

0.962

2.8

1.4

30.6

44.4

20.8

3.79

0.887

SD

return from a management point of view, to develop competitive advantage, and to
comply with increasingly stringent regulations.
The issue on the link between management accounting and risk management was
further examined in the post-survey interviews. The interviews help substantiate the
survey findings. On the role of management accounting in risk management in general,
most of the interviewees agreed that risk management and management accounting
are interrelated as both are intended to help organizations in making decisions. In
relating his view, the head of finance of an Islamic bank said:
Management accounting (MA) function needs to be involved in risk management. If not, the
risk management would be incomplete [. . .] Because MA provides information for
decision-making. And whatever decision you make, you are taking risks.

A manager of an Islamic insurance further added that:
Management accounting has a significant role in risk management [. . .] It provides indicators
to financial stability, efficiency of processes to measure the financial and operational risk
profile of the company [. . .] Preventive and corrective measures can be thought of and action
could be taken to overcome the adverse effect of the risk.

The role of management accounting in risk management is more important in
companies implementing ERM. Six of the companies interviewed stated that their
organizations are implementing ERM. ERM is an integrated risk management system
that takes a holistic view of risks and everybody in the organization is responsible for
risk management. In explaining the concept of ERM, the chief financial controller of a
foreign Islamic insurance company stated:
Following our parent company, we have a system called Enterprise Risk Management (ERM)
[. . .] Everybody is involved in risk management. The head is only to coordinate [. . .] In ERM,
every employee has to take charge as if when they incur expenditure, it is their own
expenditure [. . .] Everybody has to assume or consider risk in carrying out responsibilities.

ERM identifies all sorts of risks related to the organization. The management
accounting function plays an important role in providing information in identifying the
risk profile of the organization. For instance, emphasizing the role of the management
accounting function in ERM, the director of finance of a large local bank commented:
We are in the enterprise wide risk management [. . .] We use SAS a lot in risk management
[. . .] SAS is a data mining system and a lot of information was actually fed by the finance
department to measure credit, market and operational risks [. . .] The risk management is
working hand-in hand with the management reporting team [. . .] Moreover, for financial
services sector [. . .] Risks have to move dynamically, together with the management
reporting function [. . .] A lot of information comes from the management reporting team.

Although other organizations did not mention specifically that they are implementing
ERM, being in the financial services sector they have their own risk management
systems in place. Most of the institutions have CROs that manage the different
departments that manage the specific risks. The appointment of a CRO is considered as
an indicator of ERM implementation (Liebenberg and Hoyt, 2003). The role
of management accounting in providing information for risk management was further
illustrated by the performance management manager of a foreign bank:

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Risk management uses a management accounting framework [. . .] Management accounting
function has to make sure that enough information is captured to say that you contribute
your resources towards the one that adds the most value to the organization [. . .] If there is a
loss, the management accounting function should be able to measure, to capture the loss,
so that the risk people will think of how to minimize or eliminate the loss.

Management accounting provides information for risk measurement as well as
indicators in performance management so that remedial action can be taken to
minimize or eliminate risks within an organization. The above examples show how
management accounting in general supports risk management. At the same time,
all of the interviewees emphasized the importance of budgeting and strategic planning
to their organizations and that risks are always considered in that process. For
instance, the finance director of a large local bank remarked:
Strategic planning and budgeting is very important to the group [. . .] The planning with
group finance, group strategy, strategic business units really takes the time of the CEO [. . .]
It is not just a presentation, but it is a thought process [. . .] First, is to have a quick view of
what you did last year, what went wrong, what went right, where do you get the pluses,
where do you get the minuses [. . .] Now the planning is becoming more intense [. . .] We look
at all the possible risks and how to mitigate [. . .] After the planning stage, you implement [. . .]
then we have the annual management dialogue [. . .] This will be the time the CEO will deliver
his message, the CFO will present the year’s performance, the budget and what each business
unit should strive for.

On the role of budgeting and planning that specifically relates to risk management,
the senior manager finance of an Islamic bank stated:
Budgeting and forecasting relate to risk management because budgeting or forecasting
figures will affect the risk [. . .] If we change the budget, the risk will be lower and higher
depending on how you look at the budget. If we want to offer more overdraft facilities, for
example, then you will be exposed to higher risk because you have no collateral attached to it.
So if the budget moves this way, we have to capture the risks associate with it and then look
at how we can mitigate it.

The budget is also used as a control mechanism to ensure that an organization will not
go into high-risk activities. In explaining how budgeting contributes to risk
management, the assistant general manager finance of one cooperative bank stated:
Each branch has budget disbursement. Due to this budget, branches that exceed the
disbursements have to give explanation [. . .] Certain branches are very robust in giving
financing, so it relates to risk [. . .] Variances also give indicators on the risk standing.

Consistent with the survey findings, it was found that budgetary control, budgeting,
and strategic planning were perceived to contribute more towards risk management.
Risks are always considered in the budgeting and planning processes and this is
consistent with the findings of Collier and Berry (2002) that risks are considered but
not modelled and are excluded from the budget document.
The linkage between management accounting and risk management is always
existent in an organization that is practicing a BSC framework for performance
management. One particular bank that adopted a BSC framework for its performance
management also had key performance indicators (KPIs) for each perspective and
conducted risk analysis on the KPIs. The head of finance of one bank said:

For each KPI we identified the risk factor. We identified the likelihood that the KPI might not
be achieved [. . .] then we can identify the related key risk indicators (KRIs). Then initiatives
to meet the KPIs will be determined [. . .] And also the owner of the KPIs [. . .]

The combination of both BSC measures and risk management measures increase the
likelihood of organizations’ strategic objectives to be met (Beasley, 2006).
Conclusion
This paper seeks to answer two research questions:
RQ1. Are management accounting techniques and tools being used in managing
risks?
RQ2. What is the extent of the integration between management accounting and
risk management functions?
The findings from the survey indicate that analysis of financial statement was
perceived to contribute most towards risk management. Consistent with the survey
findings, it was found that budgetary control, budgeting, and strategic planning
played important roles in managing risk. As for the second research question, the
study showed that management accounting and risk management functions are highly
interrelated as both are intended to help organizations in making decisions.
This study provides empirical support for the theoretical argument put forward by
Collier et al. (2004), Williamson (2004) and Soin (2005) that management accounting
supports risk management. The study further supported that the management
accounting function has an important role to play in producing analyses of the impact
of risks to support risk managers (Collier et al., 2007). MASs are considered as part of a
wider management information system (Upchurch, 2002; Bouwens and Abernethy,
2000) and very important in managing risk. The information consists of both financial
as well as operational information. Financial information is normally used in
measuring market, credit and operational risks, and considerable operational
information is required in mitigating operational risks. Although Collier et al. (2007)
initially found that management accountants were not that involved in managing risk,
later, in further interviews, they found that management accountants were actually
undertaking risk management. Both management accounting and risk management
are considered as part of the integral activities of strategic planning and performance
assessment of the organization (Bhimani, 2009; Collier et al., 2007; Mikes, 2006;
Beasley et al., 2005). This is particularly true where nowadays the many functions of an
organization are being integrated under a common system known as the enterprise
management system (Brignall and Ballantine, 2004). In fact, under the ERM system,
where risks are aggregated across different types of risk and across business units to
obtain an enterprise-wide risk situation, financial institutions are integrating their
business lines performance management with risk management, thereby enhancing
the link of management accounting and risk management. Both management
accounting and risk management can be considered as the integral management tools
and internal control systems that complement each other to form part of the corporate
performance management system for financial institutions. In fact, the blurring
of functional boundaries, where the segregation of duties according to functions is
becoming less visible and teamwork is becoming more important, management

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accounting and risk management functions are more integrated with other core
functions in the organization.
Although previous studies found that there was no clear role for management
accountants in managing risk (Soin, 2005), this study found that management
accounting actually plays a very important role in risk management, which is
consistent with the findings of Collier et al. (2007). As shown in previous studies Collier
and Berry (2002) budgeting did not function as a tool in managing risk, however, in
this study budgeting was found to contribute towards managing risks. This could be
attributed to the nature of financial institutions where managing risk is one of their
core functions (Bowling and Rieger, 2005; Hakenes, 2004; Bowling et al., 2003).
The findings of this study provide avenues for further examination on the link between
management accounting and risk management by looking at the effect of fit between
the two functions. Future studies should also examine the intricate details of the
emerging relationships.
Notes
1. Generally, the financial system in Malaysia can be categorized into banking institutions and
NBFI. The banking institutions are the central bank – BNM, the commercial banks, the
Islamic banks, the investment banks, the money brokers and other financial institutions. The
NBFI consists of provident and pension funds, insurance companies (including Islamic
insurance), DFI, saving institutions and other financial intermediaries such as unit trusts,
Pilgrims Fund Board, leasing, factoring and venture capital companies (BNM, 1999).
2. NAfMA – award given to companies in Malaysia for management accounting best
practices. The organizers and the awarding bodies are the Malaysian Institute of
Accountants and the Chartered Institute of Management Accountants.
3. Income-based models analyze historical income or losses in terms of specific underlying risk
factors. Expense-based models associate operational risk with fluctuations in historical
expenses (Marshall, 2001).
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About the authors
Siti Zaleha Abdul Rasid is a Senior Accounting Lecturer at International Business School, UTM,
Kuala Lumpur, Malaysia. Siti Zaleha Abdul Rasid is the corresponding author and can be
contacted at: szaleha@ic.utm.my
Abdul Rahim Abdul Rahman is an Accounting Professor at Department of Accounting,
Kuliyyah of Economy and Management Science, International Islamic University Malaysia.
Wan Khairuzzaman Wan Ismail is an Associate Professor at International Business School,
UTM, Kuala Lumpur, Malaysia.

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