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  1. ADVANCED MANAGEMENT ACCOUNTING Theories of Management Accounting and Control Systems

  2. Introduction • Management Accounting researchers use both traditional and emergent theories to study management accounting and control in organisations. • Traditional and emergent theories offer differing insights into organisational phenomena and suffer from different shortcomings. • Nevertheless, these two approaches to management accounting and control research lead to increase in knowledge and understanding about a phenomenon or phenomena. Dr. Owolabi Bakre

  3. Introduction (Continued) • A major problem confronting a new researcher is the choice of appropriate theory that could act as the ‘Map’ and ‘Lens’ for their investigations. • Theory is seen as the interrelations of substantive problems, sources of evidence and of larger assumptions about society, history and the purposes of scholarship (Skocpol, 1984, p. x). • As a result, three theoretical perspectives have emerged. Dr. Owolabi Bakre

  4. Theoretical Perspectives of Management Accounting and Control Systems • Positivism Perspectives • Interpretive Perspectives • Critical Perspectives Dr. Owolabi Bakre

  5. Positivism - Normative Perspective • Normative models mainly describe what ought to be done by practitioners. • These were based on neo-classical economic assumptions: • Decision makers are profit maximizers • All the information required is available at no cost and no uncertainty • Arrive at a profit maximizing solution using the principles of marginal Analysis • The decision maker is either the owner or shares the owner’s goals • Individual decision maker can be isolated from other decision-makers within the organisation Dr. Owolabi Bakre

  6. Normative Perspective (Continued) • To relax some of the above assumptions, researchers developed more sophisticated analytical models of management accounting and control within the framework of neo-classical economics • The gap between theory and practice has widened. • The recognition of this gap affected management accounting research in two ways: • Firstly, there was increasing interest in studies that explored the nature of management accounting practices. More research towards positive accounting research i.e. looking for explanation to observe practice and; • Secondly, changes that took place in the theory of management accounting and control research Dr. Owolabi Bakre

  7. Positivism - Agency Theory • Assumes a world of two person (explicit or implicit) contracts between owner and employee in which both parties behave in a rational utilitarian fashion motivated solely by self interest. • It views agency relationships as a contract under which the owner (or principal) delegates decision-making authority to the manager (agent) who then performs services on behalf of the owner. • Agency theorists rely on neo-classical economic theory and the techniques of information economics. • When an agent possesses more information than the principal, his/her risk and effort averse, and faces imperfect monitoring from the principal, then the agent shirks when he/she has a chance to do so. Dr. Owolabi Bakre

  8. Agency Theory (Continued) • Given that agents are utility maximizers, it seems the agent will not always take actions that are in the principal’s best interests. • The owner, however, can limit such aberrant behaviour by incurring auditing, accounting and monitoring costs and by establishing, also, at a cost, an efficient incentive scheme. • An efficient incentive scheme should ensure that the utility the manager gets from the job is at least as great as the utility available elsewhere in the market for managers. Dr. Owolabi Bakre

  9. Agency Theory (Continued) • Two types of Agency Problem • Adverse Selection • adverse selection problem arises when employees have private information • Moral Hazard • A moral hazard problem arises when owners cannot observe the actions of employees and must therefore evaluate performance and base compensation contracts on imperfect surrogate of behaviour. Dr. Owolabi Bakre

  10. Positivism - Contingency Theory • Contingency approach advocates that there is no one ‘best’ design for management accounting and control system, but that it all depends upon the situation factors. • There is no universal appropriate management accounting and control system application to all organisations in all circumstances. • Contingency theory attempts to identify specific aspects of management accounting and control system that are associated with certain defined circumstances and to demonstrate an appropriate matching. Dr. Owolabi Bakre

  11. Contingency Theory (Continued) • The situation factors represent the contingent variables: • Culture • Environment • Strategy • Organisational structure • Size • Technology Dr. Owolabi Bakre

  12. Contingency Theory-The Concept of Fit • The Selection approach • most common interpretation of fit: Organisation must adapt characteristics of its context if it is to survive/be effective. • Looking for an equilibrium between environment and organisation. • The Interaction Approach • Fit=an interaction effect of organisational context and structure on performance • The interest is not with causes and effects that may exist between organisational context and design, but more in organisational performance on the interaction of organisational structure with its context. • The System Approach • The systems approach is based on and uses the conceptual frameworks of systems theory and seeks to further these approaches through empirical analysis. Dr. Owolabi Bakre

  13. Alternative ApproachInterpretive and Critical Theories • Non-Positivisms • Subjective • Predominantly qualitative in nature • Interviews, observations • Socially constructed • Power and Knowledge Dr. Owolabi Bakre

  14. Interpretive Theories • Symbiolic Interactionism • Enthnomethodolgy • Structuration theory • Pragmatism • Institutional Theory • Actor-Network Theory • Grounded theory Dr. Owolabi Bakre

  15. Symbolic Interactionism • This is primarily concerned with meanings whether shared or not and less concerned with the reasons for their existence. • Human beings are free thinking, independent and unpredictable. • As a result, meanings will vary considerably. • To access these meanings we need to get inside the actor’s world and see it as he/she sees it. • There is a a need for imaginative, reflective methods to allow this to happen. Dr. Owolabi Bakre

  16. Ethnomethodology • This attempts to move beyond the understanding of human behaviour in terms of the meanings constructed be each individual in social interaction to a a systematic search for the ways in which shared meanings come to be taken for granted in human society • It concentrates on making known ‘taken for granted’ shared meanings and the reasons for their existence • Concerned to learn about the ways in which people order and make sense of their everyday lives. • Every lives are assumed to be ‘rational’ and ‘ordered’ (from the actor’s varying viewpoints) although not always understood. Dr. Owolabi Bakre

  17. Structuration Theory • Emphasis on the capability of individual to make choice and the reproduction of social structures. • The routine of human behaviour explains the replication of given structures across time, although change is still possible. • Human beings can still choose to act differently from the norms and rules. • Highlights the mutual impact our behaviour has on society and likewise. • Provides small yet distinctive contribution to accounting and management practices. Dr. Owolabi Bakre

  18. Institutional Theory • Focuses on socially generated rules instead of aggregation of individual actions. • Influenced mostly by institutionalism of organisational theory and sociology which focus on cognitive and cultural explanations of institutions. • Motivates the existence of various technical and institutionalised environment, legal, professional regulatory. • Management accounting and control practices are influenced by the complexities of these environments and their expectations. Dr. Owolabi Bakre

  19. Actor-Network Theory • Focuses on understanding of management accounting control technologies in the context of network of human and non-human ‘actants’. • Illustrates how management accounting numbers are developed to accommodate and persuade diverse interest within organizations. • Reflects how diverse interests are converted into facts. • Introduces distinctive idea of translation to characterisations of management accounting control practice. Dr. Owolabi Bakre

  20. Pragmatism Theory • Truth is ‘what is good in the way of belief’, e.g. the essence of aspirin could be the belief that it is good for headaches; the essence of management accounting could be the accepted belief that it serves some functional, practical purpose. • This belief is not ‘right’ or ‘wrong’, or ‘true’ or ‘false’. It can only be judge from the practical repercussions of holding such a belief and the relative attractiveness of these to the believer. • The distinction between fact and value, description and prescription, morality and science are not important. All insights boil down to the relative attractiveness of various concrete alternatives • Wider agreement on relative attractiveness can only be gained through discussion with reference to practical implications Dr. Owolabi Bakre

  21. Grounded Theory • Do not believe in all forms of prior theorisation • Data collection are completed before the selection of the appropriate theory Dr. Owolabi Bakre

  22. Alternative Approach - Critical Theories • Marxian and Labour Theory • Habermasian theory • Weberian Closure theory • Faculdian theory • Power theory Dr. Owolabi Bakre

  23. Alternative Approach -Non-Rational Design School • Argues on the presumptions of rationality in organisational choice. • Focuses on management accounting and control system and organisational functioning. • Helps us to better understand the construction of management accounting and control and their limited roles in organisational decision-making Dr. Owolabi Bakre

  24. Alternative Approach-Naturalistic Approach • Study the daily practice of accounting and management. • Each study addresses a unique aspect of management accounting and control practices due to different nature of organizations. • Enhance our understanding on the various local values, meanings and nuances in different organizations due to different management accounting and control technologies adopted. Dr. Owolabi Bakre

  25. Alternative Approach-Radical Perspective • Adopted the idea from Marx, Frankfurt School and labour process. • Management accounting and control practices are being seen as free from political restrictions. • Emphasis on how management accounting and control practices are implicated in the creations and perpetuation of an unequal society (unequal distribution of wealth, education and justice). • Used critical ways of writing and radical theories to develop empirical evidence in and management and control. • Provides a platform for critique, change and improvement, particularly within organisations and generality in society. Dr. Owolabi Bakre

  26. Alternative Approach-Foucauldian Perspective • Based on work of Foucault (1977) on discipline and docility which have resulted in provocative constructions of accounting and management control. • Generates new histories of accounting and management which examine the social and organisational practices and knowledge. • Enables particular accounting and management technologies to emerge at given times and places. • Suggests that accounting and management practices are complicated and unpredictable due to different forms of discourses and institutional structures. • Provides strong contrast to traditional characterisations of accounting and management control. Dr. Owolabi Bakre

  27. Summary and Discussion • Conventional wisdom of management accounting and control-Normative models. • Economic approach – Agency Theory. • Organisation Approach- Contingency Theory. • Alternative Approach – Interpretive and Critical Theories. Dr. Owolabi Bakre

  28. Summary and Conclusion • Understand why and how to choose an appropriate theory for your term paper or thesis. • Advance reasons for the suitability of your particular choice to your kind of investigation • Advance reasons to convince readers of why alternative choices you have rejected may not be suitable for your kind of investigation Dr. Owolabi Bakre