Management accounting – a concept exploration

Organisational control is a well known and widely acknowledged concept in business economics. As McLany and Atrill (2014) have stated, control is the process of “compelling events conform to plan” (p. 713). This is in like manner with Tannenbaum (1968), who state that organisations entail control on the grounds that control can help an organisation by keeping it on the right track confirm the original plan, or also called an organisation its strategy. Therefore, Tannenbaum (1968) states that “it is the function of control to bring about conformance to organisational requirements and achievements of the ultimate goals of the organisation” (p. 237).

One way of monitoring an organisation its progress and a way of keeping control over an organisation, is by management accounting. Management accounting, as defined by Anthony (1965) is a well known concept in both scientific research as well as among practitioners; “the process by which managers ensure that resources are obtained and used effectively and efficiently in the accomplishment of the organization’s objectives” (p. 27). In other words, management accounting can help organizations in all kind of businesses during their decision- and planning making processes, due to providing useful information (Tappura, Sievänen, Heikkilä, Jussila, Nenonen, 2015; Birnberg, 2011; Anthony, 1965; Merchant & Otley, 2006, as reffered by Widener, 2007). Despite the notoriety the concept has, there are multiple definitions available in academic literature. According to Tessier and Otley (2012),

this lack of clear definition is moreover the result of the multiple concepts which are still undefined regarding management control. There is for example, besides the widely acknowledged definition given by Anthony (1965) as stated above, a definition given by McLaney and Atrill (2014). They state that management accounting is the “identification, measurement and communication of accounting information for the managers of a business”

(p. 719). This is in like manner, with the definition given by Malmi and Granlund (2009), who state that management accounting is a practical discipline which can support managers with the planning and control process. As managers can impact or control individuals throughout the organisation by implementing and thereby an organisation its strategy (Govidarajan as referred by Thrane, 2007). The existence of all these different definitions is something which is acknowledged by Malmi & Brown (2008), who state that the different definitions of management control, are still a huge challange in management accounting research nowadays. Although management accounting is a well known and proven concept and exist for many decades, it has become a topic of much debate. Especially in the last century (Burns & Scapens, 2000) it has become a “multi-disciplinary management tool comprising a series of practical techniques such as standard costing, budgeting, cost-volume- profit analysis, internal transfer pricing, variance analysis, responsibility accounting and performance evaluation”

(Jun Lin & Yu, 2002, p. 448). It is a concept where accounting principles are adapted for an economic approach, in order to make decisions maintain organisational control (Scapens, 2006). Since the ‘90’s, research into management accounting and associated topics as organisational changes have been increased (Johansson & Siverbo, 2009; Baldvinsottir & Mitchell, 2010). This growth is inter alia reflected in the amount of published papers between 1990 and 2014, respectively 475 papers, as well as in the accelerated growth in management accounting oriented journals (Hopper & Bui, 2016). According to Hopper and Bui (2016) this accelerated growth is to blame due to the “dramatic changes” (p.13) in the management accounting field.

Figure 3.1: A reflection of the major changes in management accounting topics evolved over time. Figure retrieved from Hopper and Bui (2016).

The changes in interest towards the different management accounting concepts are reflected in figure 3.1. Based on this figure, it can be concluded that several topics such as budgetary control and management control systems show an increasing interest. On the other hand, topics such as cost management and inter-organisational controls show a decrease in interest. An explanation for the overall increasing interests into management accounting, and especially towards controlling mechanisms, can be found in the fact that due to nowadays difficult economic circumstances, organisations need to be “more responsive, more flexible and more

adaptable” (p. 415). In order to keep control over their competitiveness, organisations seek a constant need of information (Smith, Morris, & Ezzamel, 2005). This particular need for more organisational control is supported by Pavlatos & Kostakis (2015) who state that “new management accounting practices have merged in order to meet the growing needs of the larger firms, as well as the challenges of the changing economic environment” (Pavlatos & Kostakis, 2015, p. 150). These new practices can support organisations make strategic decisions, but can also affect their overall management accounting mechanism role (Ittner & larcker, 2001). Davila (2005) complements this by stating that there is indeed a need for extra and more intense management control systems in organisations, who are located in uncertain settings. This because a fully management control system can be a key element in knowledge intensive firms as it enhances innovation and can stimulate growth (Davila, 2005; Davila, Foster & Li, 2009). However, management control is not only crucial in organisations with highly innovative products and challenging economic circumstances, but also for organisations who face economic growth. According to McLean et al. (2015), an organisation its management accounting system should match the requirements for growth. This can be achieved by a management accounting system which support an organisation its managers by providing accurate knowledge and information. McLean et al. (2015) conducted a case study in order to examine the relationship between an organisation its strategy and management control during growth situations. Based on their research, they implicate that decisions were made upon management accounting information, which “evolved incrementally to match the growth requirements of the firm” (p.187). It therewith “grew to become a large, complex engineering firm at the forefront of technological and organisational development” (McLean, 2015, p. 187).

So, based on the above-described literature, it can be stated that management control has gained a lot of interest due to nowadays volatile economic circumstances and takes therewith a greater role in nowadays organisational control when implementing organisational changes due to for example corporate restructuring processes by M&A. Especially controlling systems and budgetary control have increased interest, with all probability due to nowadays challenging economic environments. Circumstances which asks organisations to adjust, monitor or even redesign their strategy and or organisation. As there are many ways of describing the management accounting concept, there are also different kinds of management control systems with a primary focus on controlling the internal organisation (Drury, 2001; Scapens, Bromwich, Otley, Hopwood, & Lister, 1984). However, it can be stated that there are only a few management accounting systems, who are predominate in almost every organization (Drury, 2001). These management control systems can be dividend into two core elements (Drury, 2001). The first core element focusses on the so-called formal planning processes, which contains among others both the budget- as long-term strategy planning (Drury, 2001). The second core element is the responsibility accounting principle, where responsibility accounting is used as a mechanism which enables an organisation to allocate results (both financial as non-financial) towards individuals within the organisation (Drury, 2001). Bay (2011) supports this by stating that an often used management control system is the responsibility accounting concept, due to its ability to adjust within a short period of time. Due to its ability to adjust, Rowe, Birnberg and Shields (2008) state that responsibility accounting

“is a key mechanism for how management accounting interfaces with the organisation strategies and structures” (p. 164). This mainly due to its characteristics, where “responsibility accounting is a system that measures the plans, budgets, actions, and actual results of each responsibility center” (Horngren et al., 2012, p. 221). This particularly alignment of both an organisation its strategy and organisational structures within the overall management accounting process is of importance. As a misalignment can limit an organisation or can even be a source of competitive disadvantage (Rowe, Birnberg, & Shields, 2008). The importance is once more underlined by Melumad, Mookherejee and Reichelstein (1992). They state that

responsibility accounting is a common used method in organisations, because it provides important information to the responsible managers about how they perform and how they need to intervene (Melumad et al., 1992). As Atkinson et al. (2012) indicates “for an organization to be successful, the activities of its responsibility units must be coordinated” (p. 467). In other words, the assignment of different responsibility units ensures financial control by evaluating and measuring the overall performances.

So, based on this section it can be stated that it management controlling system responsibility accounting indeed supports an organisation during changing circumstances, as it is a mechanism which provides information and delegates activities. It therewith suggests that it would be a mechanism which supports organisations in volatile processes such as M&A trajectories. However, before it can be stated that this relationship does actually exists, it is of importance to look into how the responsibility accounting phenomenon functions and which impact it has on an organisation its design. The following sections are likewise discussing those themes.