Accounting controls as a part of the organizational control package
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Accounting controls as a part of the organizational control package. Teemu Malmi Helsinki School of Economics. AGENDA. Why we should care What do we know today What should be studied next – a research agenda Two examples of recent research on control packages

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Accounting controls as a part of the organizational control package

Accounting controls as a part of the organizational control package

Teemu Malmi

Helsinki School of Economics

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Agenda
AGENDA package

  • Why we should care

  • What do we know today

  • What should be studied next – a research agenda

  • Two examples of recent research on control packages

  • Some thoughts about the road map

  • Concluding comments

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Why we should care
Why we should care? package

  • At the end of the day, we should be able to tell, which accounting controls to use, how and in which circumstances

  • In research terms, this is to demonstrate which accounting controls, and how used, produce desired performance in which circumstances

  • Control refers to those practices intended to gain congruence between organization’s strategic and other goals and organizational actor’s goals and activities

  • Hence, there are lot of potential substitutes and complements for accounting controls, making the study of accounting controls alone potentially misleading

  • It seems that in the context of decision making, accounting may be studied alone more often than in the context of control

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Why we should care1
Why we should care? package

  • Manager is ultimately interested in achieving desired outcomes (what ever they may be) and to make sure non-desired actions are not performed

  • This is to say that s/he is not interested accounting controls as such, but those controls, accounting included, that are most effective

  • To give advise on which accounting controls to use, how and in which circumstances, other controls available are likely to be more important than say, for example, some of the traditional contingency factors

  • In research, we might be better off if we try to explain the success of certain accounting controls by including other controls used in studied organizations into our models

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Literature
Literature package

  • Contingency research has attempted to explain the form, use and performance implications of various controls

  • Also a lot of research on “novel” accounting methods

  • Usually a single system studied at a time, e.g. BSC, budgeting

  • Otley (1980) and others (e.g. Flamholtz, Das & Tsui, 1985; Dent, 1990; Fisher, 1998; Chenhall, 2003) have called for the study of controls as a package

  • Chenhall 2003 states that only studying specific systems at time has “the potential for serious model under specification”

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In modeling terms from this
In modeling terms from this package

Contingency

factors

Accounting

control(s)

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To this
To this package

Contingency

variables

?

?

?

?

Design

&

Use

Control

package

Performance

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What do we know
What do we know package

  • Limited number of empirical studies so far

    • Macintosh & Daft, 1987

    • Simons, 1995

    • Abernathy & Chua, 1996

    • Alvesson & Kärreman, 2004

  • We know that many different controls are normally applied in large organizations

  • M&D, 1987: Managers may make choices between controls and interdependencies of organizational areas may be an important consideration in overall design of MCS

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What do we know1
What do we know package

  • Simons suggest four levers of controls and argue that successful firms find balance between these

  • Abernathy & Chua, 1996

    • Governance structures part of control package

    • Organizations may use other controls to substitute accounting controls

    • Control package design partly rational, partly emergent/evolutionary

    • Institutional environment influence controls used

  • Alvesson & Kärreman, 2004

    • Socio-ideological control systems are tied to technocratic controls

    • These controls do not operate as alternatives, but as complements

    • Technocratic control systems provide the vehicle to communicate the messages of the socio-ideological control

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Agenda1
AGENDA package

  • Why we should care

  • What do we know today

  • What should be studied next – a research agenda

  • Two examples of recent research on control packages

  • Some thoughts about the road map

  • Concluding comments

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What should be studied next
What should be studied next? package

  • Somewhat limited scope of what controls are included in these studies

  • First issue is to discuss what should be included into a concept of control package, i.e. how do we define this construct of interest

  • Number of authors have provided their definitions / classifications: Ouchi, Otley, Flamholtz, Simons, Merchant & Van der Stede, etc.

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- package


What should be studied next1
What should be studied next? package

  • We do not have broad empirical evidence on what kind of control packages organizations use, how do they use those, and why

  • Neither do we know the performance implications of various packages and their potential contingencies

  • Are some controls more likely to remain stable through times than some others?

  • Do managers choose among number of controls at time or do they make decisions regarding one control system in time (suggesting some form of path dependency theories)

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What should be studied next2
What should be studied next? package

  • Systems can substitute and/or complement each others

    • Which ones can complement / substitute which ones successfully in which circumstances?

    • The concept of equifinality

  • Relations seem to exists, but none of the studies have conceptualized these relations or analyzed how systems influence each other or organizational performance

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Two examples of recent research on control packages
Two examples of recent research on control packages package

  • Brown, Malmi & Booth study on controls of a global consumer products company

  • Baker, Brown & Malmi study on environmental strategy implementation in an Energy company

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Brown et al background and motivation
Brown et al. – background and motivation package

  • A study of BSC in a large successful multinational, BSC existed but was hardly making a difference

  • Bewildering array of controls in use

  • Why so many? Are they all truly necessary? Are some more important than the others? Which ones are really used to drive business?

  • We ended up asking how this whole system works / operates? To answer this, it seemed that we need to study how these systems relate to each other

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Loose coupling theory
Loose Coupling Theory package

  • Orton & Weick, 1990, AMR

  • Distinctiveness

    • Focus

    • Use

    • Components

  • Responsiveness

    • Dependence

    • Directness

    • Strength

  • Degree of distinctiveness and responsiveness determine the type of coupling

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Values package

Culture

Organisation

Outcomes

Meeting Objectives

Long Range Planning

OGSM

Strategy

Objectives

Activities

Action Planning

Budget

Organisation

Outcomes

Short Term

Financial Performance

Dashboard

Financial Measures

Scorecard

C.A.

Policies & Procedures

Organisational Structure

Governance


Values package

Culture

Organisation

Outcomes

Meeting Objectives

Long Range Planning

OGSM

Strategy

Objectives

Activities

Action Planning

Budget

Organisation

Outcomes

Short Term

Financial Performance


Results insights from the analysis so far
Results / insights from the analysis so far: package

  • There seemed to be ”suboptimal” designs regarding e.g. transfer pricing, i.e. accounting based controls of P&L to assess BU managers performance

  • Still the company has been very successful in the past

  • Long range planning, budgeting, value statements and OGSM influenced behavior as well

    -> Suboptimal (accounting) controls can exists in parts of MCS package without major effects on organizational performance when this can be compensated by other controls in the package

    ->The case provides support to the idea that in order to understand the effectiveness of any individual controls (e.g., accounting controls), an understanding of what other controls are coupled to this is necessary

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Results insights from the analysis so far1
Results / insights from the analysis so far: package

  • Tension between short and long run outcomes

  • This firm seems to manage this tension by coupling OGSM and budgets to strategy and objectives, but decoupling them from each others

  • Both OGSM and budget have an impact on activities, some of which help to achieve long range objectives, some short run objectives

    -> Can some classic trade-offs / paradoxes in management actually be solved by certain control system package designs

    -> It may be that traditional contingency factors have an impact on the couplings of different controls as opposed to / in addition to certain controls directly

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Results insights from the analysis so far2
Results / insights from the analysis so far package:

  • Senior management did not have a broad understanding of the extent of MCS package in place

    -> we may question to what extent these control packages are (today) results of rational decision making (designed)

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Baker et al implementing environmental strategy with mcs package
Baker et al: Implementing environmental strategy with MCS package

  • Could accounting and control systems help in solving environmental problems?

    • Critical research skeptical

    • Most efforts in research focused on reporting as opposed to controlling/managing internally

  • A case study of a well known industry leader in Energy sector in Australia

  • What controls are used to implement environmental strategy

  • We provide some evidence that this control package actually impact on organizational activities

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EXECUTIVE COMMITTEE package

KPIs and Management Performance Assessment

EIP

2nd Planning Day

ENVIRONMENT STEERING COMMITTEE

Sustainable Culture

1st Planning Day

ENVIRONMENT SERVICES UNIT (ESU)

Top-down Budgeting

Policies and Procedures

SENIOR MANAGER

Environmental Audits

Training

PDS

PROJECT MANAGER

EIA

SUPERINTENDENTS

FIELD STAFF

STAKEHOLDERS

CONTRACTORS

TIME

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Results insights so far
Results / insights so far package

  • A large number of controls in use to make sure environmental strategy / plan is implemented

  • Accounting based controls / cybernetic controls do not play a major role, but are part of the package used

    • Difficult to measure and set clear targets, and even if that is possible, how do these targets compare to economic targets? Do managers make trade-offs to boost profits at the expense of activities directed towards saving the environment

  • Organization made themselves accountable to stakeholders by involving them to the environmental strategy work

    • This is contrary to the claims of critical research which tends to argue accounting is used for signaling but is decoupled from activities; or that some systems are used for management and some for signaling, but decoupled from each others

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Results insights so far1
Results / insights so far package

  • These controls were used as complements, in this single case setting we can not really address the question whether all these are truly necessary to implement environmental strategy in this kind of a setting

  • But this might suggest that using e.g. only BSC to translate environmental strategy into action might not be enough

    -> Is it more likely that by relying on only one control tool we end up with situations where this single tool is decoupled from real activities

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Some thoughts on the road map
Some thoughts on the road map package

  • The result of this research on management controls as a package should be a theory of MCS

  • It is not likely that such theory will be only economics, sociology or psychology based

  • To explain why certain packages produce better performance may require insights from all these major theoretical approaches

  • We may call it management control theory as it should explain (and predict) the designs (choices) of control packages and their associated outcomes given various contingencies

  • Single empirical research pieces should make it clear how they contribute to this development of MCS theory

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Some thoughts on the road map1
Some thoughts on the road map package

  • Is this a research program ending up of being “mile wide but only an inch deep”?

  • By clever research design, not necessarily all controls in a package needs to be studied at the same time

  • As package contains many elements, can survey instruments be designed and used to collect data

    • Large research groups aiming for large case samples one option for data collection

  • How to measure culture based controls?

  • Requires cross-disciplinary mind set and skills

  • As it seems fairly obvious that control packages we will observe are not really a result of intentional design, perhaps less effort should be directed in explaining why they are as they are and more to what combinations work, how used and in which circumstances

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Concluding comments
Concluding comments package

  • Management accounting is an applied science, our research should help the effective management of organizations

  • To be able to say something meaningful regarding accounting controls requires an understanding of potential substitutes and complements

  • Today we have little theory or empirical evidence on these

  • Despite some practical challenges, I believe this provides us a huge research opportunity as well as potentially strong identity as an academic discipline

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