Deze samenvatting is gebaseerd op het studiejaar 2013-2014.

Article A: The organizational context of accounting (Birnberg, Turopolec and Young)

The role of an accounting system in organizations: 3 important questions occur when trying to relate the role of the accounting system within an organization to research problems:

• How is management expected to use accounting?

• What are the various inter- and intraorganizational relations affecting the use of accounting?

• How do members of the organization attempt to utilize the information system to their own ends?

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This article focuses on the third question. It implies that people can use the accounting information system for their own ends. Prakash & Rappoport suggest that the information system is an essential part of the decision maker’s environment. Moreover, information system try to explain what has happened, the reality is as far as the recipient is concerned. Therefore, the accounting information system and what it communicates are critical to the reality’s perceptions. As a result, managers can react in the following ways:

• Affecting the outputs of the information system

• Selecting those actions that will reflect their behavior in the best possible manner

Task characteristics and control: the task and/or process that a manager is supposed to carry out are a significant concern that has a direct impact on the information and control system. Thompson & Tuden examined this issue along two dimensions:

• Beliefs about outcomes

• Consensus objectives

The main concern in their study was what managers thought they knew and not if their beliefs were right. For instance, a management team can think that they know how a task should be performed when actually, their view could be challenged by an alternative analysis. Therefore, as they think to know what should be the tasks, the problem can be approached as being resolvable by computation.

The Thompson-Tuden model: See figure 1 in the article.

Perrow examines the intersection of the elements of management to the task itself. Its framework is focused on the degree to which a task can be reduced to a well defined set of rules.

According to him, the organization’s response to the planning and control processes is related to:

• The degree to which the task is analyzable

• The extent to which the activities in the process are homogeneous among different performances of the task (the dimension is called “exceptions”)

Perrow’s technology variables: See figure 2 in the article.

Viewed together, Thompson & Tuden and Perrow propose an association between task and control: See figure 3 in the article.

Here, the system of control can also be described along the dimensions of administrative, self and social control. The bottom row concerns situations with a more tenuous set of rules and emphasizes the significance of social and self control that is explained in Ouchi’s work.

The Ouchi model: See figure 4 in the article.

Ouchi’s focuses more on processes rather than decision processes. In this research, cell 1 characteristics are implicitly assumed. Ouchi assumes that agreement on goals exists and that in cell 1, the agreement results in an obvious common goal while in cell 4, it is reflected in a “clan” behavior. In cell 2 and 3, the goals should determine which output measures and/or process measures are chosen for use in the control system.

Budgetary and organizational control:

Budgetary control: initially, the budgetary control process was perceived as simple and rational. A superior set of standards was explained to a subordinate and then, those standards were used in performance evaluation and for the preparation of the next period’s budget. A superior’s task was then to set that level of standards that would maximize employee outputs. However, it was still not easy to plan the appropriate budget level.

Stredy examines the relationship between budget levels and performance and the aspiration levels of subordinates. According to him:

• Higher standards led to better performance

• Lower standards tended to reduce aspiration level and subsequent performance

Moreover, Stredy & Kay and Hofstede observed that using budgets to influence motivation was limited. Hofstede noticed that “motivation at first increases up to a certain limit of standard tightness; over this limit, motivation decreases again”. As a result:

• Budgets were not accepted by all employees

• Standards that were perceived as unfair or exploitive were not internalized by the subjects and as a consequence, motivation and performance decrease.

However, as some form of internalization was seen as essential for budgets to be motivating, participation by the subordinates in the budget setting process emerged as one means for dealing with the problem.

Participation: many analyses defend the following conclusions:

• Higher job related satisfaction and self actualization

• Positive attitude toward the job and company

• Better acceptance of standards and a better performance

• Motivation to achieve the budget

However, it is still complicated to evaluate the special effects on performance and productivity because many other factors are important when determining the effectiveness of participation. Examples of other factors: leadership styles of managers, organizational structures or manager’s time in a position or the firm.

Expectancy theory: a model that shows the relationship between budgets and the behavior of an employee can be useful in studying control process. For example, Ronen & Livingstone propose a model that explains that employees will make more efforts if they think/know that it will result in a positive outcome that will offer them intrinsic and extrinsic satisfactions. However, expectancy theory has some limitations in identifying and measuring some parameters of the model.

Evaluation style: Hopwood and Swieringa & Moncur mentioned that little or no dysfunctional effects are produced when evaluation styles place less emphasis on standards and use standards in s flexible way. As a result, a rigid style of budget evaluation (Hopwood: “budget conscious style”, Swieringa & Moncur: “involved exponent”) is due to higher tensions, ambiguity and manipulation of accounting reports. It was then thought that in the long run, organizational efficiency would have been reduced due to the consequences of a rigid evaluation but Otley discovers that a budget oriented style of evaluation was associated with higher budget accuracy and not with job ambiguity or dysfunctional effects of tension.

Organizational control: more modern studies have adopted a larger view of control and believe that a cell 1 world is not appropriate anymore for an uncertain environment. This implies that it would be more appropriate for studying complex interrelationships in organization. In the view of contingency theorists, the design of accounting information and control systems is based upon specific characteristics of the organization or its environment. Moreover, Ouchi’s work takes a contingency perspective by proposing that control systems should diverge according to the amount of knowledge one has about the transformation processes and the availability of output measures.

Distortion of the information system: this part of the text discusses the behavior that can occur when a cell 1 world is inappropriately assumed by a control system. One way to do that is by using accounting information system. However, if the manager can influence the operation of the accounting information system by using one or more of the category listed below, he can take advantage of the control process for himself and can even use the information system to influence the behavior of his superior by manipulating the message received by the superior.

In short, as long as information is created for evaluation purposes, users and producers will try to manipulate it for their own advantage.

Method of distorting the information system: dysfunctional behavior can be categorized into 6 broad classes:

1. Smoothing

2. Biasing

3. Focusing

4. Gaming

5. Filtering

6. “Illegal” acts

Smoothing: smoothing represents a situation when a manager can affect the natural or preplanned flow of data without altering the actual activities of the organization and it results when a message is accelerated and sent now while the event happens only in the future. Therefore, this kind of behavior allows a manager to use the information system to his own advantage and create a perception of reality that is different from the perception of reality that a manager experienced.

Biasing: biasing happens when a manager can choose between different possible messages, a signal that is likely to be accepted and that is favorable to him. Generally, those situations imply that the manager needs to have some estimates of futures events. Biasing is linked to the concept of “creative behavior”. It means the fact that biasing behavior is applied to the reporting of past periods activities. The managers try to obtain the most appropriate message that can be sent, subject to the event that actually occurred. As a result, the manager will put more effort through the biasing process if the system is onerous and if the implicit and explicit rewards from sending a favorable message are large.

Focusing: focusing behavior happens when information has some enhanced elements or degraded elements. The article gives the following example of focusing behavior: professors that apply for faculty positions will “market” themselves at different institutions by either enhancing their teaching or research records, depending on the institution.

Gaming: by far the most commonly discussed form of manipulation is gaming. The 3 behaviors mentioned above are strategies intended by the sender to manipulate the receiver by influencing the set of data available to the receiver. Here, gaming makes reference to behaviors for which the sender through his job related acts sends the desired message. The superior sets the rules of the game (e.g. budget level in incentive scheme, etc.) and thus, the subordinate selects his act in order to maximize his payoff. If the rules are set correctly, the payoff of the subordinate will also be maximized. Gaming exists because the superior utilizes a surrogate measure of performance rather than the principle. “Moral hazard” is needed in order to clarify the fact that a subordinate will send a message that the superior wants to receive and therefore, the message will be credible to the superior.

Filtering: data need to be filtered in order to communicate only the most desired elements. An alternative strategy is to the report until it is too stale to be of use. Three other strategies that are used for information filtering are:

• Over-collection (obtain more information that needed to make a decision)

• Over-presentation (the receiver is confused because he received too much information)

• Aggregation (the information is aggregate to a high level and therefore, essential aspects are lost. By doing this, the subordinate may in effect eliminate attention directing information from the report.)

“Illegal” acts: it represents an act that is not conformed to private or public law. For instance, Flamholtz illustrates the fact that a toy company was caught because it has changed the sales figures by manipulating accounting transactions in order that net income increases.

Possible information manipulating behavior:

Cells 1 and 3: management with a small outlay can verify the important aspects of the subunit’s presentation.

Cells 2 and 4: the data are highly subjective and/or very costly to evaluate.

See figure 5 in the article.

Article B: Control in an age of empowerment (Simons)

In the 1990s, managers challenged a basic problem: how adequate control should be exercised in organizations that demand flexibility, innovation, and creativity. To answer this question, Simons classifies control in 4 levers:

• Diagnostic control systems

• Beliefs systems

• Boundary systems

• Interactive control systems

Diagnostic control systems: one of the major goals of diagnostic control systems is the elimination of the manager’s burden of constant monitoring. Diagnostic control systems allow managers to:

• Guarantee that the main objectives of the organizations are attained effectively and efficiently

• Link progress to individuals, departments, or production facilities toward strategically significant objectives

• Measure progress toward targets (e.g. market share, revenue growth, etc.)

• Adjust inputs and processes in order for future outputs to be closer to the objectives set. This can be done because outputs are measured and compared with present standards of performance.

However, diagnostic control systems have also some disadvantages: they are not adequate to ensure effective control because pressures can be generated and that can lead to control failures. Therefore, there are built in danger when employees are responsible for performance objectives and have to reach them. In other words, when objectives are set and performance targets are based on rewards, managers think that the can move on to other issues because employees will work carefully in order to meet the firm’s objectives. Yet, the potential for control failures as the performance bar is raised and employees’ rewards are put at risk underscores the need for managers to think about the 3 other essential levers of control.

Beliefs systems: Beliefs systems allow to:

• Empower individuals

• Support them to seek for new prospects and new ways to create value

• Communicate core value and mission

• Motivate all participants to commit to the organization’s purpose

• Increase diagnostic control systems in order to provide a greater amount of control

A central issue is that core values and mission need to be correctly communicated otherwise employees will have some difficulties to define acceptable behavior depending on the unpredictable circumstances they encounter.

Boundary systems: the main characteristics of boundary systems:

• They set up the rules of the game

• They identify actions and difficulties that employees have to avoid

• They are based on a “power of negative thinking” and are therefore seen as a negative term or as minimum standards.

The boundaries in modern organizations, embed in standards of ethical behaviors and codes of conduct, are invariably written in terms of activities that are off-limits. There are a company’s brakes and are needed in each organization. Moreover, the fastest and most performance-oriented firms need to have the best brakes. Usually, people want do the right thing and act ethically but attaining superior results are driving by pressures that can collide with strict codes of behavior and as a result of those pressures in the workplace, employees may choose to bend the rules.

However, not all boundaries are related to standards of ethical conduct. For example, strategic boundaries are concentrated on ensuring that people steer clear of opportunities that could decrease the competitive position of the firm.

Interactive control systems: interactive control systems are created to share emerging information and to harness the creativity that often leads to new products, line extensions, processes, and even markets because senior managers have less personal contacts with employees in a firm when the firm becomes larger. Interactive control systems allow top-level managers to:

• Be concentrated on organizational attention and learning on strategic uncertainties and key strategic issues

• Learn about threats and opportunities as competitive conditions change

• Respond proactively

• Participate in the decisions of subordinates

Interactive control systems have 4 characteristics that set them apart from diagnostic control systems:

• They are concentrated on constantly changing information that is identified by top-level managers as potentially strategic.

• The information is quite important to have frequent and regular attention from operating managers at all levels of organization.

• The data caused by the interactive system are best interpreted and discussed in face-to-face meetings between supervisors, subordinates, and peers.

• The interactive control system is a catalyst for an ongoing debate about underlying data, assumptions, and action plans.

Article C: Some reflections on the evaluation of organizational control (Birnberg)

The focus on control systems has shifted from the issue of controlling the individual/task to the problem of controlling the organization and therefore, this article is concentrated on the impact of this change that is due to the dynamic nature of the environment within which organizations now exist.

Classical organizational control systems (OCS): figure 1 shows the organization control system as seen by Anthony where strategic, management and operational control functions are separated and distinct activities. Figure 2 illustrates the important dimensions of the OCS issue facing management. The 2 dimensions are:

• Task (internal dimension)

• Environment (external dimension)

The environment could be stable/predictable or unpredictable and the task could be routine or non-programmed.

Routinized task: the appropriate procedures are known and the control problem is mechanistic and takes the form of standard costs, flexible budgets, etc.

Non-routinized task: the procedures are not known and control can not be implemented easily.

Predictability: the ability of the firm to anticipate the change in the environment in order to adapt the firm’s behavior. Changes in a predictable environment can be:

• Incremental with short lead time

• Significant with long lead time

Critical assumptions of the classical organizational control process:

• The external environment is stable and any change implies some changes in the parameters in the model rather than changing the model.

• At the operational and managerial levels, tasks are routinized. This is characterized by the facts that supervisors have a high level of knowledge and the results of the efforts of managers or workers are measurable. Moreover, bureaucratic elements dominate the model.

• Management control system is concentrated on the individual and its goal is to control individuals and to coordinates their activities.

• The supervisor and subordinates are economic actors.

Those suppositions lead to cell 1 (in figure 2). Characteristics of a cell 1 are standard costs and budget and responsibility accounting. Characteristics of cell 2 are repetition of the task, grow of the knowledge of the task until success after which, the task changes from non-programmed to routinized. Furthermore, cell 1 and 2 are concentrated on the individuals as the object of control. The problem is how the various kinds of feedback, task and environmental are utilized by individual in order to learn how to perform the task properly. The predictability of the environment helps learning behavior.

Moreover, solving problem in cell 2 requires the decision maker to learn appropriate behavior/decision model for a given set of facts that leads the task to be routinized and seen as a cell 1.

Characteristics of cell 3: the environment in which the task is performed can change without the possibility to adapt before the change occurs. If there are no conflicts between those changes and the existing routine task behavior, the manager will still continue to face a cell 3 control problem with permanent underpredictability. Therefore, the manager should identify the need to be open to change and be able to:

• Exercise the routine between positively reinforced through past successes

• Be alert to signs of change so that they can alter underlying world view that directs their behavior

Moreover, managers in cell 3 takes decision based on the best available information at that time but it does not mean that it will lead to the desired outcome as unanticipated external events can occur. As a result, OC in cell 3 is more tentative than the classical model and information is classified as asymmetrical because people involved in the decision would probably be the first to know any changes in the external environment. Therefore, a manager in a cell 3 is trying to understand the environment better as well as the changes that his model may needed. However, if important changes occur in the environment, the task can be obsolete and thus, the main focus of the manager is to try to avoid a cell 4.

The cell 4 has been only study by few researches. Cell 4 is defined as unpredictable environment, poor task as well as managers’ available knowledge. However, many companies have experienced situations like cell 4 because the environmental changes needed new behaviors to resolve problems.

Figure 3 provide a summary of the characteristics of each cell.

Organizational control in turbulent times: environmental turbulences like in cell 4 put the maximum amount of stress on both the firm’s control and its information system. Therefore, the firm and its support systems need to achieve two purposes together:

• Lean

• Adapt

If both dimensions are not problematic, it is easy to learn and adapt. However, when the dimensions are problematic, the nature of organizational planning and control differs from the 3 other cells. Control systems of the organization are independent and should be integrated rather separated.

Therefore, due to those interdependencies, the information system is changes in 2 ways:

• Decision support system rather than an information system

• Greater stress is placed on the coordination function of information system

Moreover, control needs to be seen as an organizational problem and process rather than treated separately each level and problem.

Therefore, communication is important since it represents across divisions and functions an integral part of planning and decision making from the outset.

In addition, uncertainty and change support multi-directional communication for 2 reasons:

• More uncertainty signifies that individuals will try to adjust data to unexpected changes in the organization’s environment for which they can possess the expertise required to resolve the problem. However, no one individual/unit possesses the all expertise on his own to solve the problem.

• More complex problems require inter-unit decision making and implementation.

Diverse sets of individuals being involved in the decisions depend also of the complexity of the task. For example, in cell 1 or 2, a formal database and decision model used by one individual is enough to solve the issue while in cell 3 or 4, knowledge is more likely to be found in the decision maker than in a database for which a group of individuals is involved to solve the problems.
 

In short, control problem is different depending on the cell. Managers in cell 1 or 2 are able to rely on facts and what has been learned from past experiences. This leads to converge into a routinized set of behaviors and a formal control system. Managers in cell 3 or 4 should have an OCS that allows them to analyze changes in their environment and adaptation needed. Learning in cell 3, can be called “learning about” (acquiring factual knowledge about existing conditions). This differs from the “learning to do” found in organizations in more predictable environments such as cell 2.

Implications for research on organizational control:
 

Groups / Teams:

Difference between groups and teams:

Group: 3 or more members of an organization working together for a common purpose

Team: group in which, each member has a designed function

Interdependencies among members in a team are greater than in a group due to the specialization of its members.

Difference between groups and individuals performing tasks:

• Groups consist of 3 or more members

• Groups involve the merging of the inputs of multiple participants to achieve a common outcome

• While the activities of a group member may be measurable, it is difficult to sort out the contribution of each member to the group’s output

• Groups have their own organizational structure and decision-making process

• It may not be possible to impose the individual control paradigm on a group

The control environment can be influenced by the nature of the task for which the groups were constituted. Moreover the nature of the task can also interact with incentive system and can influence the type of reward (specific and outcome related (monetary) or more indirect). Moreover, the nature of the task also influences the choice to use a group or not but the firm should carefully evaluate the success of the group because it could be possible that the objectives of the group may differ from the objectives of management.

Cooperation and trust: cooperation and trust have a larger impact in a turbulent environment and when decision-making is group oriented because information about the changing environment needs to be shared with all the members involved. This is especially important in cell 4. Therefore, this requires interaction between employees for which a key element is communication for which the receiver must trust the sender and the message, otherwise jobs in an uncertain environment will not be correctly performed. Consequently, the sort of control processes that are required must reflect the organization’s needs that strengthen cooperation rather than self-interested behavior.

Article D: Contingency theory, management control systems and firm outcomes: past results and future directions (Fisher)

This main point of this article is concentrated on control at the manager level. Management control is characterized as the control that managers have over other managers and it is the process by which corporate-level manager guarantee that mid-level managers achieve organizational objectives and strategies. There is still difference about control in organization:

• It can be applied at multiple levels

• Requirements can diverge between levels

Control is important because it supports managers to make relevant decisions according to organizational goals. With no appropriate control, managers may achieve personal goals that differ from corporate goals, may not understand what they are expected to do, etc. As a result, control tries to support employees in achieving objectives.

Contingent control theory: contingency theory notes that the design and use of control systems is contingent upon the context of the organizational setting in which these controls operate. A better match among the control system and the contextual contingency variable should result in an increased organizational (individual) performance.

Contingent variable: a contingent variable is pertinent to the degree that organizations that diverge from that variable also show major distinctions in how control attributes or actions are related to performance. The contingent control variable studied in prior management control researches are shown in figure 1 in the article.

Some researchers have mentioned that control centers on 2 questions:
 

• Is the strategy implemented as planned?

• Are the results produced as those intended?

Control in complex organization can be separated between 2 sorts:

• Involvement of the direction of subordinates in their activities

• Cybernetic control

Cybernetic is described as a system in which standards of performance are determined, system gauge performance is measured and the standards and actual performance are compared. Moreover, in cybernetic control, feedback provides information on the variances and includes formal financial budgeting systems and incentive compensation systems. Cybernetic processes also include incentive compensation systems.

Figure 2 shows an example of contingent control framework. Contingent factors could be determined exogenously or by management decisions. At some point in time, the organization chooses the markets in which it competes and the strategy in these markets, and thus, initially controls all contingent factors.

However, after certain strategic and product line decisions, many contingent factors are not under the direct control of the organization anymore. Consequently, certain of the contingent factors are selected by the firm, whereas others are a result of prior decisions and external factors.

Contingent studies have provided insights on control systems but results have not been developed into a widely accepted theory of management control because:
 

• Cybernetic control is multidimensional and is part of a total system of organizational control.

• Most studies have researched only one contingency factor at time and it is therefore, not easy to analyze the relationship and causality between the contingent variables. Moreover, many contingent factors may have little correlation, giving rise to the possibility of conflicting contingencies.

• It is difficult to have access to databases because in contingency theory, researchers must generally create their own database and therefore, obtain data through surveys that may have bias and reliability issues.

Contingent control classification: Fischer categorized previous research on a level of analysis complexity. While the research design becomes more complex as the analysis level increases, this does not imply that a level 4 analysis is superior to a level 1 analysis.

Level 1 analysis: a contingent factor is correlated with a control mechanism. The level 1 suggests that the existence of a contingency factor will result in an increase probability that a firm uses a certain control mechanism. Moreover, there are no efforts that are made to evaluate if the correlation between the contingent factor and the control mechanism has any effect on firm outcomes or if the control mechanism is correlated with other control mechanisms.

Level 2 analysis: this level analyzes the joint effect of a control mechanism and a contingent factor on an outcome variable. A contingent factor and a control mechanism are assumed to increase effectiveness or ineffectiveness.

Level 3 analysis: this level focuses on the joint effect of a contingent factor and multiple control mechanisms on an outcome variable. This kind of analysis involves complementary/substitution relationships among the control variables. Those control variables can be uncovered by including multiple control mechanisms in the analysis. Control system substitution means that the use of diverse control mechanisms can attain the same desirable result. However, according to the contingent factors and control strategy of the firm, control mechanisms are used either in a complementary way or as substitutes.

According to Waterhouse and Tiessen, 2 contextual variables have an effect on control system design:

• Technology

• Environment

A centralized control system is optimal when a firm technology is known and the environment is predictable.

As the variables become more uncertain, subjective (organic) control is preferred. A subjective control system implies for example, monitoring of outputs that results from the manager’s effort, high manager discretion, careful selection and socialization of group members.

Level 4 analysis: this level contains multiple contingent factors in determining the optimal control design. When many contingency factors are taken into account, the demands placed on the control system may conflict. Designing the control system to many contingencies implies trade-offs that prevent a “fit” to all contingencies. If all the same kind of control for optimality was asked by all contingent factors, then, designing the control system would be straightforward. Conflicting contingencies are the result of inconsistent demands and involve that the control system design will diverge from the demands of at least one contingency, making the optimal control difficult. The resolution of this conflict is not straightforward. One solution is to design a hybrid control system that contains control components for each contingency. Unfortunately, such a control system may not be internally consistent because it addresses conflicting contingencies. Child (1975) found that internal consistency in control system design was linked to higher performance. Lower performance is a result of misfit in design. A control system can also be designed in order to be consistent with one (dominant) contingency factor while ignoring the others. Nevertheless, not paying attention to contingency factors can lead to lower business unit performance. The conflicting contingency framework recognizes that some misfit, or design deviation, may occur as a functional response to multiple contingencies. This implies that research flaws can exist at the 3 other levels. If other contingency factors are not controlled by empirical analysis when performing univariate analysis, then the control/contingency relationship may be misstated.

Article E: Operation of management control practices as a package: a case study on control system variety in a growth firm context (Sandelin)
 

This empirical case study analyzes the operation of management control practices as a package in a growth firm context. In the growth firm context, the more comprehensive management control package has been explored to a limited extent: organizational culture, socialization practices as primary control mechanisms or MAS and formal standard operating procedures have been examined.

Equifinality: the potential to reach the same final state by diverse configurations of control elements and systems in the face of similar contingencies. Said differently, organization designers have the latitude to decide about how to achieve organizational goals. Some studies have argued that equal control of activities can be achieved by an informal control practice or by different formal control systems.

Many alternative conceptual frames are available for studying control elements as a package. This study, therefore, draws primarily on Merchant’s (1998), Merchant and Van der Stede (2007) object-of-control framework because it concentrated on the variety of control practices, but still provides sufficient rigidity with the specific control objects of culture, personnel, action, and results.

Parts of this article make reference of 2 specific cases. The description, characteristics, environment and analyzes of both firms can be directly found in the article.

Sandelin uses contingency factors for its analysis. Those contingency factors are:

• Technology

• Environment

• Strategy

• Size (employees)

• Scope

• Board of directors (internal or external)

• Cash balance

Types of control:

• Results controls: control of employees on the basis of certain specified results/performances to inform employees as to what result areas are important.

• Action controls: ensuring that employees perform (or: do not perform) certain actions known to be beneficial (harmful) to the organization.

• Personnel controls: controls which make it more likely that employees will perform the desired task satisfactorily on their own.

• Cultural controls: controls which shape organizational behavioral norms and encourage employees to monitor and influence each other’s behaviors.

Control contains objective and subjective judgments, financial and non-financial elements, quantitative and qualitative elements.

From the comparative analysis of the cases, the following various conclusions can be found:

• If a high degree of conflict in functional demands is found, two forms of equifinality are possible: suboptimal and configurational. The type of equifinality depends on the degree of latitude with respect to the structural (the control package) arrangements.

• Configurational equifinality: different combinations of control elements with which the firm achieved both growth and profitability.

• Typical for newly founded and family businesses, the senior management had somewhat unconstrained latitude to implement and organize control practices.

• Conflicting functional demands: if emphasizing new product development and innovation or efficiency and development of firm infrastructure.

• If the senior management particularly emphasizes new product development, results controls would be used only at the senior management level in order to preserve culture and protect the innovative, technological core of the firm from administrative bureaucracy.

• The functionality of different organizational configurations has been argued to depend on internal consistency, in both equifinality and control package literature.

• Abernethy and Chua (1996) argue that the control systems operate as a package when they are internally consistent (they are designed to achieve similar ends). Their findings suggest that each control element contributes independently and directly to reach objectives.

• The internal consistency of the control packages had little to do with the independent yet goal-consistent operation of control elements, thus suggesting a different logic from the one found by Abernethy and Chua (1996).

• Appropriate management control packages are not mere functions of a single control element, like culture or results, but are based on combinations of control elements that can support a particular control orientation or management philosophy, at least in a growth firm context.

• Internal consistency requirement is not limited to formal systems such as MAS, but to their linkages with organizational structure and culture and informal but systematically applied control practices as well. This implies that organizational culture (and structure) should not be regarded merely as premises, but also as a form of management control that complements or is complemented by MAS, for instance.

• The equifinality of the control packages does not come without limitations. The financial crisis (in the first case) demonstrated that the control package was sufficient only for the short term.

• As operations spread to the international scene, the control package proved to be insufficient because it was significantly dependent on the presence of human actors and was unable ‘to act at a distance’.

• The stability of the control package seems to reside in its functionality

• It is argued that informal cultural, personnel, and action controls, if they are internally consistent and hence functional, form a substitute for the need to adopt more formal control systems.

• The appropriateness of informal control practices seems to be conditional on operational complexity (e.g. complexity originating from the geographical dispersion of operations and product portfolio expansion that induces a functional demand for processing greater amounts of information). It is therefore argued that by keeping the organizational control package relatively simple and thus internally consistent, a growth firm can successfully manage relatively local and limited operational complexity. However, as operational and geographical complexity augments the need for adopting more formal, information mediating control practices increases.

• The design of the control package was mainly affected by the managerial

• Some caution is needed in interpreting the findings. Equifinality of the control packages does not follow the traditional reasoning of functional equivalence. The control packages are evaluated against overall objectives achievement instead of functional performance. However, equifinality is a theoretical concept; it is rarely a perfect match with empirical settings.

Article F: Linking the balanced scorecard to strategy (Kaplan and Norton)

The balanced scorecard gives a balanced picture of current operating performance as well as the drivers of future performance. It contains financial as well as non-financial measures (e.g. customer satisfaction, employee attitudes). However, most of the non-financial measures have some of the same limitations as financial measures. For example, they give little guidance on how to deal with the future or they are not associated to some particular strategic objectives. Measures (financial and non-financial) listed on the Balanced Scorecard need to be developed from the business-unit's unique strategy and should contain outcome measures as well as the performance drivers of those measures. The Balanced Scorecard helps and allows to:

• Translate the vision and strategy of a company into a coherent and linked set of performance measures.

• Articulate the strategy of the business

• Communicate the strategy of the business

• Align individual, organizational, and cross-departmental initiatives to achieve a common goal.

The Balanced Scorecard is the used as a learning system as well as a communication and information tools if the measures give a good description of the long-term strategy of the firm.

Four features are represented on a Balanced Scorecard:

• Financial

• Customer

• Internal business processes

• Learning and growth

Financial: this measure characterizes the long-run goals of the business unit. Firms with many products in the early stage of their life cycle can stress rapid growth objectives, and mature firms may emphasize maximizing cash flow. Here, 3 different phases can be identified:

• Rapid Growth

• Sustain

• Harvest

Rapid Growth: businesses are at the early stages of their life cycle and may have to make important investments to enlarge and enhance new products and services (e.g. build operating capabilities, invest in systems, infra-structure, and distribution networks that will support global relationships, etc.)

Sustain: most of the business units in a firm will be in that phase in the life cycle. Investment and reinvestment can still be attracted. They take the form of expanding capacity, and enhancing continuous improvement. However, the return on their investment needs to be excellent. Those businesses are presumed to keep their existing market share and maybe grow it from year-to-year. Investment projects will be assessed by standard, discounted cash flows and capital budgeting analyses.

Harvest: when the mature stage of the life cycle is reached and firms want to harvest their investments made in previous stages. Investments are not important anymore. They are just enough to maintain equipment and capabilities, but not to expand or build new capabilities or adding new spending in R&D. Moreover, it needs to have definite and short payback periods. The major objective is not to maximize the return on investment but to maximize cash flows back to the firm. Therefore, an immediate and certain cash paybacks needs to be obtained for each investment in the harvest phase.

In these 3 phases of the life cycle, financial objectives differ:

In the growth phase, financial goals will stress sales growth, sales in new markets and to new customers, sales from new products and services, maintaining adequate spending levels for products and process developments, systems, employee capabilities and establishment of new marketing, sales, and distribution channels.

In the sustain phase, financial goals will stress traditional financial measurements (e.g. return on capital employed, operating income, and gross margin, etc.).

In the harvest phase, financial goals emphasize cash flow.

Firms use 3 financial themes to achieve their business strategies that can be used with the 3 phases of the cycle life: (see Exhibit 2)

• Revenue Growth and Mix: make reference to expanding products and services offered, reaching new customers and markets, changing the product and service mix towards higher-value-added offerings, and re-pricing products and services.

• Cost Reduction/Productivity Improvement: make reference to efforts to lower the direct costs of products and services, decrease indirect costs, and share common resources with other business units.

• Asset Utilization/Investment Strategy: managers try to decrease the working and physical capital needed to support a given volume and mix of business.

Customer: managers are able to identify:

• The customers

• The market segments in which the business unit will compete

• The business unit's performance in these targeted segments

The generic outcome measures include: (see Exhibit 3)

• Market and account share in targeted segments: it shows how well a firm has access to a desired market.

• Customer retention: allows maintaining or increasing market share in targeted customer segments.

• New customer acquisition: it can be measured by either the number of new customers or the total sales to new customers in these segments and allows firms to grow their business.

• Customer satisfaction: allow the firm to see how well it is doing. Repeating purchase behavior is only made when buying experience is rated as completely or extremely satisfying.

• Customer profitability: can show which targeted customers are unprofitable. Moreover, the 4 previous generic outcome measures do not certify profitable customers. Low price is one way to have satisfied customers.

Customer’s value propositions characterize the features that supplying companies’ offer, through their products and services, to create loyalty and satisfaction in targeted customer segments. It is an important notion to understand drivers market and account share, retention, acquisition and satisfaction. Characteristics that organize the value propositions are divided in 3 types (see Exhibit 4):

• Product/Service Attributes

• Customer Relationship

• Image and Reputation

Internal Business Process: the critical internal business processes are identified and allow the business unit to:

• Deliver on the value propositions of customers in targeted market segments

• Satisfy the expectations of the shareholders for excellent financial returns

This should be made in order to increase customer satisfaction and reach the financial objectives. The internal business process perspective divulges 2 basic differences in performing measurement between the traditional approach and the Balanced Scorecard:

• Traditional approach improves existing processes while the Balanced Scorecard identifies new processes that allow the firm to meet customers and financial objectives.

• Traditional approach and the Balanced Scorecard do not incorporate innovation process in the same way. The traditional approach centers on the processes of delivering present products and services to current customers. However, this is done only for the short-term operating cycle (the company tries to control and improve existing operations) even if the long-wave of value creation is a better driver for future financial performance. Therefore, the Balanced Scorecard includes measures and objectives for both the long-wave and the short-wave operations cycle.

Learning & Growth: infra-structures that the firm should build in order to generate long-term growth and improvement is analyzed by organizational learning and growth. Learning and growth come from 3 main sources:

• People

• Systems

• Organizational procedures

Usually, the 3 others features on the Balanced Scorecard will show some gaps between capabilities of systems, people and procedures and what will be needed to attain objectives for breakthrough performance. Therefore, organizational growth and learning will tend to decrease those gaps. For this, firms will have for instance to invest in re-skilling employees, enhancing information technology and systems, and aligning organizational procedures and routines.

Cause and Effect Relationships: it can be stated as a succession of “if-then” statements.

Outcomes and performance drivers:

Generic or core outcome measures: characteristics are:

• Define the common objectives of diverse strategies

• Define the similar structures across companies and industries

• Consist of profitability, market share, customer satisfaction, customer retention, and employee skills

Drivers of performance: characteristics are:

• Tend to be unique for a specific business unit

• Define the unique features of a business unit’s strategy. For example: the drivers of profitability, the market segments in which the unit chooses to compete, etc.

It is important for a Balanced Scorecard to have a mix of outcome measures and drivers of performance because:

• Outcome measures without drivers of performance:

  • Do not say how outcomes should be achieved

  • Do not give any early indication to see if the strategy was implemented successfully

• Drivers of performance without outcomes measures:

  • Do not reveal if operational improvements have been translated into expanded business with existing and new customers.

How many measures should a Balanced Scorecard have? Most of the firms have more than 16 to 25 measures. Moreover diagnostic measures and strategic measures need to be differentiated. Diagnostic measures refer to measures that monitor if the business stays 'in control' and can signal when unusual events that require immediate attention occurs. Strategic measures refer to measures that describe a strategy designed for competitive excellence.

Advantages of the Balanced Scorecard:

• It defines the future vision of the firm

• It creates a holistic model of the strategy that permits all employees to see how they can contribute to success of the firm (shared understanding)

• It is concentrated on change efforts

• It allows organizational learning at the executive level

Article G: Performance management: a framework for management control systems research (Otley)

The performance management framework: there are 5 major questions that need to be evaluated in order to develop a framework for managing organizational performance:

1. What are the key objectives that are central to the organization’s overall future success, and how does it go about evaluating its achievement for each of these objectives?

2. What strategies and plans has the organization adopted and what are the processes and activities that it has decided will be required for it to successfully implement these? How does it assess and measure the performance of these activities?

3. What level of performance does the organization need to achieve in each of the areas defined in the above two questions and how does it go about setting appropriate performance targets for them?

4. What rewards will managers (and other employees) gain by achieving these performance targets (or, conversely, what penalties will they suffer by failing to achieve them)?

5. What are the information flows (feedback and feed-forward loops) that are necessary to enable the organization to learn from its experience) and to adapt its current behavior in the light of that experience?

In accounting terms, it is necessary to react on the 3 questions mentioned above because it allows to design and build budget planning and control systems properly. The first question focuses on acceptable outcomes and results. The second question focuses on the development of plans by which the results are expected to be delivered and the third questions focuses on the performance standards that can be expected. Those questions are not just necessary to develop a budget but also for managerial processes. Measurements may be non-financial or qualitative and some characteristics of performance that are seen to be significant may not even be measured.

The fourth question is concerned with motivation and incentives and inspect the consequences that follow from the achievement (or the failure to achieve) the performance targets which have been set. Consequences may imply financial rewards or consequences such as reputation, status or recognition.

Information is also very important because information on actual performance is compared to standards and deviations. Moreover, information can also be utilized to forecast the need for corrective action before that negative consequences are observed. Therefore, there is a role for immediate corrective actions as well as for improvement in the system.

Budgeting: performance is usually described as profitability where the overall measure of performance involves a balanced-mix between output and input measures. The budgeting process usually implies a given level of outputs or sales and tries to determine a suitable level of spending.

Therefore, a budget needs an underlying plan that show how the firm’s goals are going to be reached and that serve as the basis for the cost structure underlying the budget.

However, it seems that dissatisfaction between practitioners of current budget increases: budget process becomes too infrequent due to change in the current environment. However, frequent budget revisions ask too much time and can lead to control loss.

Some questions that arise from the preceding framework include:

• How can budgeting be better tied into the achievement of strategic goals?

• How can resource allocation be matched to strategic imperatives?

• How can budgeting be adapted to monitor and control the business processes along the value chain running from the extraction of raw materials through to the delivery of products to the final consumer?

• Are there better ways of setting budgetary targets than the usual incrementalism based on historic achievement?

• Can we avoid the distorting effects that arise when managers are given a reward for achieving budget targets?

• Can variances be used in processes of learning and adaptation rather than in the apportionment of blame?

• Above all, can the budget process be harnessed to add value to organizational activities rather than representing a drain on organizational and managerial resources?

Two methods have been developed in order to improve organizational control:

• The Economic Value Added

• The Balanced Scorecard approach

Economic value added (EVA): it is a measure of financial performance that is concentrated on value creation to shareholders.

The first question is answered by the fact that the single goal of such a stock market quoted organization is to deliver as much value as possible to the shareholders. However, the second question is principally not answered.

Another main concern about EVA is reward structure. It is said that reward should be paid for example over a 3-years period and payable in full only if performance continue in the future rather than paying directly in cash. This method allows avoiding dysfunctional short-term behavior.

In short, EVA works well and is one of the most consistent performance management systems. However, it still presents some disadvantages: EVA is a weak in measuring and monitoring the means by which managers have adopted to reach their overall objectives.

The Balanced Scorecard Approach: the main strength is the weight it gives to linking performance measures with business unit strategy. However, this seems to be weak in most organizations. So the Balanced Scorecard gives a practical approach to address this issue.

Other advantages are:

• It pays attention to measuring the achievement of the components of the strategic plan that the organization has adopted.

• Senior mangers are supported to address the fundamental issue of effectively deploying an organization’s strategic intent.

• The balanced scorecard literature also indicates that it as much the process of establishing a scorecard that yields benefits as the resultant measurement schema.

Weaknesses are:

• Little detail is provided on how to choose specific performance measures for the Balanced Scorecard.

• It is usually referred that the upper left-hand boxes (financial and customers) characterize results measures, whereas the bottom right-hand boxes (business process and innovation and learning) characterize the means by which the desired results will be achieved. However, this is clearly right only in the most simple-minded terms.

• Little or no direction is given in the Balanced Scorecard literature on how means and ends should be linked analytically.

• Reward structures can have the potential to destroy the impact of an otherwise well-designed scorecard. For instance, bonuses are still given based on the achievement of budget targets when a scorecard has been implemented. By contrast, one organization has reinforced its commitment to the balanced scorecard approach by linking bonuses particularly to scorecard measures. In particular, if threshold levels of performance were not achieved on every scorecard measure, then no bonus would be paid despite high achievement elsewhere. Feedback gives information about how an organization is achieving its key strategic aims. However, too much attention is paid to it.

• All the areas identified should be on the scorecard only if they are important to the success of the firm. Here, setting targets are crucial but surprisingly, they are not mentioned. The level of difficulty of attaining the required level of performance in different areas defines the relative levels of attention that managers need to pay to them. Thus, target setting is an important aspect of well-implemented balanced scorecard, and worthy of much more detailed attention.

• The Balanced Scorecard is a dynamic tool for which the contents change when strategies and key success factors change. This is shown in the literature but not so much is said about how to manage it.
   

Article H: Practice developments in budgeting: an overview and research perspective (Hansen, Otley and van der Stede)

Problems with budgeting in practice: budgetary control has many limitations. Neely et al. (2001) mentioned the 12 most cited weaknesses of budgetary control (see in the article).

Statements 1, 4, 9, and 10 make reference to the fact that their assumptions are usually outdated by the time budget are used and therefore, reduce the value of the budgeting process. As Wallender argues, conventional budgets can never be valid because they cannot measure the uncertainty involved in rapid changing environments. Moreover, 2 aspects are needed for the operation of a useful budgetary control system:

• A high degree of operational stability so that the budget gives a valid plan for a reasonable period of time (typically the next year)

• Managers must have good predictive models so that the budget provides a reasonable performance standard against which to hold managers accountable

When those 2 elements hold, budgetary control is useful but starts to be less useful in a turbulent environment.

Statements 2, 3, 5, 6, and 8 make reference to the fact that budgetary controls impose a vertical command-and-control structure, centralize decision making, stifle initiative, and center on cost reductions rather than value creation.

Statements 7, 11, and 12 make reference to organizational and people-related budgeting problems. It is said that vertical, command-and-control, responsibility center-focused budgetary controls are incompatible with flat, network, or value chain-based organizational designs and impede empowered employees from making the best decisions.

Improving or abandoning budget? Both developments come from the same organization: the Consortium for Advanced Manufacturing-International (CAM-I), one in the US, one in Europe. The Activity-Based Budgeting (US CAM-I) supports the fact that budget system should be improved by associated a more complete activity based operational model with a detailed financial model. It centers on improving budgeting’s support of operational planning. The Beyond Budgeting (European CAM-I) advises a two-stage approach:

• The first step focuses on budgeting issues when they are utilized for performance evaluation. It argues that traditional budgetary controls, combined with planning and performance evaluation, lead to both poor planning and dysfunctional behavior. As a result, Beyond Budgeting advises to change completely traditional budget-based performance evaluations or eliminating totally the budget process.

• The second step consists of a complete decentralization of the organization where more freedom is given to lower-level managers and employees.

The Activity-Based Budgeting (ABB) approach: the ABB group’s fundamental thrust is to expand activity-based and capacity management concepts into budgeting. They argue that budgeting primarily roles is planning.

However, it also suffers as the financial-oriented, higher-level budgeting process is not adequately connected to the underlying operational model of the organization. The essence of the ABB approach to budgeting is the Closed Loop Model shown in Figure 1. This model creates an operationally feasible budget before generating a financial budget.

The operational loop (step 1) utilizes activity-based concepts to translate the estimated demand for products and services into activity requirements using activity consumption rates, and then converts activity requirements into resource requirements using resource consumption rates.

The financial loop (step 2) develops a financial plan based on the operational plan. If the original financial plan is not balanced, the ABB approach permits to the organization to adjust five potential factors to reach the budget target:

• Activity and resource consumption rates

• Resource capacity

• Resource cost

• Product/service demand quantity

• Product/service price

Traditional budgeting processes do not collect information on activity and resource consumption rates and therefore, they offer fewer possibilities to adjust the budget.

Advantages of ABB (Hansen and Torok 2003):

• By first balancing operational requirements, the ABB method avoids useless calculations of the financial effect of operationally infeasible plans. More significantly, the ABB method concentrates on generating a budget explicitly from activities and resources.

• The more sophisticated operational model in the budgeting system provides a richer set of tools for balancing capacity. In addition to adjusting demand or changing the amount of resources supplied, the firm can also adapt the activity or resource consumption rates. Furthermore, the explicit analysis of resource capacity and the increased visibility of resource consumption allow organizations to identify capacity problems and make adjustments earlier in the budgeting process than under traditional budgeting processes, which do not track resource consumption patterns.

• Lower-level managers and employees can more easily understand and communicate budgeting information in operational rather than financial terms.

• Activity-based approaches strengthen a horizontal process view of the organization cutting across departmental borders, in contrast to traditional budgeting’s vertical orientation.

In short, the ABB method consists of a more complete operational model with a detailed financial model. A possible limitation of this method is information availability about activities, processes, and resources, and the cost of creating and maintaining the information.

The Beyond Budgeting (BB) Approach: the BB method seems to avoid the annual performance trap that implies dysfunctional behaviors that stem from evaluating line managers vis-à-vis budget targets that are set without reference to a credible (outside) source and remain fixed for the next budget year. To avoid such behaviors, the BB suggests replacing rigid annual budget-based performance evaluations with performance evaluations based on relative performance contracts with hindsight. The relative performance component sets budget targets using benchmarked performance, where the benchmarks are either internal or external. The hindsight component of the BB proposal is to evaluate performance against targets with hindsight: rather than setting fixed targets at the beginning of the period, targets should be by looking back and incorporating the actual operating and economic circumstances during the period. To implement the hindsight component, the BB suggests that rewards should be based on subjective performance evaluations with an emphasis on group rather than individual performance. Furthermore, the BB proposal also advises to estimate performance by utilizing various nonfinancial measures that are aligned with strategic objectives. The hypothesis is that by attaining appropriate levels of performance on the measures included, the desired financial performance and strategic goals of the organization will be attained. This is identical to the concept underlying balanced scorecard-type performance measurement systems. The BB argues that by freeing planning from budget-based performance evaluations, planning will become more accurate and useful because it can be adjusted to changing circumstances instead of continuing to direct organizational efforts and decision making toward preset targets even though they have become obsolete. Although abandoning budget-based performance estimations gives a first step in improvement, the BB views it only as a starting point toward more radical decentralization, which offers an even greater potential.

Traditional budgetary controls fail to:

• Generate a high performance climate based on competitive success as a fixed target is the definitive measure of success.

• Make people accountable for satisfied customers because financial performance measures predominate.

• Empower people to act by giving them with resource capabilities because resources have been committed for the budgeting period.

The common thread for both the ABB and BB methods is that the inability to do adequate planning in uncertain environments makes the budget less useful. Based on this observation, the ABB suggests a more sophisticated, activity-based model to improve planning. However, it does not take a position on how the performance evaluation system should be designed.

In contrast, the BB argues that planning will improve only when it is disconnected from the performance evaluation function embedded in traditional budgetary control systems.

Therefore, the main concentration of the BB is to modify the performance evaluation system and to decentralize the organization completely. Like this the ABB approach could be used inside the BB approach. For instance, it can create the financial and operational plans for the BB-approach. Conversely, the BB approach could be used in conjunction with the ABB approach. For example, it can modify incentives to follow relative performance evaluation principles.

Anthony (1965) distinguished management control from two complementary control processes:

• Operational planning: different forms in different organizations, reflecting technological and operating differences, are taken.

• Strategic planning: irregular activity that takes place in the higher echelons of an organization, but which provides the guiding goals and objectives for the management control process.

Anthony’s model produced an accounting-based view of control, since only accounting-based systems were common to all organizations. Given that control needed standards against which performance could be evaluated, the budget started to be the natural standard of comparison. The success of Anthony’s (1965) accentuates on management control necessarily decreased the focus on the two complementary processes of operational and strategic planning.

Beyond Budgeting Issues:

The BB is in favor to evaluate firms and/or their managers by comparing their performances with those of competitors on key performance dimensions. While theory has laid out the benefits and limitations of relative performance evaluation (RPE), empirical researches to date have cast doubt on its prevalence and feasibility in practice. The authors agree partly with this because most firms do not simply have good relative performance data, maybe because they are in highly competitive, rapidly changing industries. However, such situations are exactly where RPE potentially could be the most useful.
 

Diverse factors has been mentioned by theory in order to support or discourage the use of subjective performance evaluations and why and when it is effective to use them compared to a formula approach. Here also empirical evidence remains sparse. Subjectivity allows managers to exploit pertinent information that occurs during the measurement (budget) period. This benefit is particularly significant when changes in environments occur rapidly for which fixed budget targets can quickly become obsolete. To be efficient, subjectivity needs that the evaluator makes fair, unbiased judgments, and that the evaluatee accepts the judgments without making undue efforts to influence them inappropriately. However, more research is needed in order to understand the conditions under which subjectivity works most effectively.

The BB addresses incentive issues associated with the use of budgets as a fixed performance contract. According to previous researches, those problems can be mitigated through various incentive plan features (e.g. by including nonfinancial performance measures, long-term performance measures, performance thresholds in incentive plans, etc.), or by relying on alternative performance evaluation methods without necessarily abandoning budgetary control completely. However, to the extent that incentives theory is informed primarily by economic agency theory, it may overlook many potentially pertinent variables descriptive of the totality of the organization’s incentives package (e.g. non-monetary rewards) and the specifics of the situation in which the incentives packages are used. Furthermore, the empirical incentives literature is heavily biased toward top executives who constitute only a small fraction of the labor market. Thus, a successful direction for research is to better understand incentives for lower-level managers and employees.

Article I: Accounting change in Dutch government: exploring the gap between expectations and realisations (ter Bogt, and van Helden)
 

Changes in the financial management of autonomized government organizations:

Autonomization: it is the fact that some parts of a government organization has more extensive powers of decision-making.

In the Netherlands, autonomization is generally divided into 2 categories: internal or external autonomization. Internally autonomized organizations remain part of a larger government organization while a decrease in responsibility is found in external autonomization. If external and internal autonomized organizations are compared, external autonomized organizations have more freedom: they can take more often decisions concerning operational management, products and production methods. A larger degree of autonomization suggests that the organization will be more affected by market forces. Therefore, autonomization can be the result in financial management changes.

Changes in financial management: due to changes in the management’s responsibilities and power concerning financial management, the study of the 5 organization shows the following results:

• Since the organization starts to be more autonomous, the formal budgetary powers and responsibilities of the management increase.

• Managers could substitute budget items without having formal approval of the supervisor.

• Management can also organize accounting systems according to their own needs.

• Autonomization also entailed various changes in financial accounting and particularly management accounting.

It has also been observed that four of the organization started to publish their own annual account. Moreover, a significant outcome of autonomization was the development of plans to reinforce the planning and control cycles in the organizations. The objective of the plan was to guarantee that more freedom for the autonomized organizations also lead to an obligation for them to give more and better information and to account their action.

Changes in the organizations in actual practice: the real changes in financial management had some limitations and results in somewhat better control of financial budgets and in timely financial reports. The organizations studied paid still attention to outputs and to an economic underpinning of decisions. For example, management reports were mostly concerned with financial budgets rather than actual output.

Planning and control in medium-sized municipalities:

An underdeveloped attitude to planning: the success of the financial management of an organization should depend on 3 aspects (van Loon):

• Available tools

• Financial expertise

• Users’ attitude to planning

In their study, it was found that the first two aspects were scored positively and fairly positively.

3 frameworks that may help to explicate the gaps between proposed accounting change, the formally developed change and the actual usage of the developed is going to be now introduced:

An institutional approach: Burns and Scapens (2000) have tried to explain how organizations succeed in developing and applying new accounting methods. Their approach is built on the idea that a management accounting system can both shape and be shaped by institutions within an organization. Here, an institution is seen as a way of thinking or acting that is, to a certain extent, accepted and enduring and which is embedded in the habits or customs of a certain group of people. Therefore, this definition of institution is comparable to the concept of organizational culture.

An organization can have rules that help to regulate the behaviour of the participants in the organization. An example of organizational rules can be formal accounting procedures. Moreover, routines are the working methods actually used in an organization. Therefore, Burns and Scapens mention that the explanation for the gap between rules and routines may be found in the existing institutions within organizations. Consequently, it should be a link between institutions and day-to-day activities. Nevertheless, the links between rules and routines and between rules and institutions are not very clear: organizational rules can be simply modified by its executives but might not match its routines and institutions. A change in rules does not necessarily result in a change in institutions or routines. If the new rules are different from what is customary and accepted, it could be a long time before the gap between the rules and routines (and institutions) is bridged. This difference between routines and rules highlights the gap between actual and formal changes in accounting systems. However, the model of Burns and Scapens does not mention a lot concerning the causes and mechanisms of accounting change.

A pragmatic approach: a general model that allows to develop behavioral and organizational strategies for implementing cost management systems was proposed by Shields and Young (1989). They argue that an organization’s ability concentrated on behavioral rather than technical issues is a key success to the introduction of a new management. The implementation of a new accounting system should be centered on 7 general behavior and organizational issues that have a significant impact on success. Those factors, “The Seven Cs”, are:

• Culture

• Champion

• Change process

• Compensation

• Controls

• Continuous education

• Commitment

A behavioral approach: the behavioral theory of the firm proposed by Cyert and March (1963) can be seen as a general theory about information processing, decision-making and learning in organizations. They argue that some important features of organizational behavior are:

• Problemistic search: the search for a better option suitable depends on the decision maker’s satisfaction with the present option; search is relatively simple and based on past experience.

• Organizational learning: decision-making rules change according to past experience, which may lead to a repetition of successful decisions.

• Quasi resolution of conflict: conflicting interests are solved by local rationality, by sequential attention to goals, and by using ‘acceptable-level decision rules; this holds, in particular, in circumstances of organizational slack.

A central idea is that decisions within an organization are conditioned by rules (standard operating procedures) that reflect the processes of organizational learning by which the firm adapts to its environment.

Within the context of accounting change, an examination of Cyert and March’s ideas results in the following conclusions: if everyone is satisfied with the existing rules in an organization, there will be no reasons for changes. This involves that external or internal pressure is a prerequisite for the alteration of rules. Moreover, employees will be inclined to repeat behavior, and also the underlying rules, if this is seen to be successful. Conflicting interests can lead to incompatible rules, especially when organizational slack exists. Rules can change, but the changes will be influenced by past experience.

A framework for explaining accounting change in government: the framework includes 3 major types of variables:

• The first type makes reference to what we want to explain (e.g. the gap between formal and actually used accounting systems). In this respect, Burns and Scapens’ distinction between rules and routines is useful.

• The second type is related to pressures (or a lack of pressures) for accounting change, which can be related to the ideas of Cyert and March.

• The last type, given that accounting instruments will be changed, will depend on a thorough consideration of relevant internal enablers, for which Shields and Young’s framework provides promising clues.

Change processes in organizations are originated by stimuli from either external or internal sources. These stimuli or pressures influence organizational cultures as well as organizational goals.

2 types of accounting gaps exist:

• Development gap: difference between the ideal concept of technical changes and its ultimate development.

The development gap is characterized by technical specifications. A large development gap can be an incentive to search for new and better accounting instruments.

• Usage gap: the difference between the developed accounting instruments and their usage in practice. A large usage gap can either encourage the use of organizational enablers, such as training programmes or compensations schemes, or it can diminish ambitions to achieve formal accounting change.

Article J: Achieving full-cycle cost management (Cooper and Slagmulder)

A common quoted statistic is that 80% to 95% of the costs of a product are determined by its design and is therefore set before the item enters manufacturing. As a result, this statement has been used to involve the fact that cost management should be concentrate during the product development and not manufacturing. However, this study has shown other conclusions: the firm studied, Olympus Optical, is able to manage costs throughout a product’s life cycle. To allow this, 5 approaches are deployed:

• Target costing

• Product-specific kaizen costing

• General kaizen costing

• Functional group management

• Product costing

Target costing: this approach is affected during the design stage as a feed-forward mechanism through which engineers retool the design of a new product to decrease costs while keeping a desired level of product functionality and quality. In the company studied, Olympus Optical, the first phase is to set a price for which a new product would be sold and then to determine the free-on-board price (the amount that the firm will receive on the sale of the product). Then target costs are set and product engineers look for creative ways to attain the desired level of functionality and quality at the target costs. Engineering is affected in for different ways to allow cost reductions:

• It tries to decrease the number of elements in the product

• When it is possible, it removes expensive, intensive and mechanical-adjustment processes

• When it is possible, it replaces expensive material with cheaper one

• It makes pressure on internal and external suppliers to decrease costs more aggressively.

Product-specific kaizen costing: it allows during the early stage of manufacturing to correct any cost overruns of the rapid redesign of a new product. For example, Olympus Optical decreases its costs in four major ways: by decreasing the number of parts in the product, by replacing certain materials with cheaper ones, by managing supplier costs and by transferring production overseas where overall costs were lower.

General kaizen costing: this approach centers on how the good is manufactured. Here the hypothesis is that the product’s design is already set contrary to target and product-specific kaizen costing. General kaizen costing can be very effective when it addresses manufacturing processes that are used across several product generations because during the manufacturing cycles, savings realized could continue long after its withdrawal from the market. Usually, management sets cost-reduction objectives for production processes and encourages the employees to find way to reach them. The firm studied, Olympus Optical's, centers its attention on reducing material, labor and some overhead costs.

Functional group management: this approach breaks the production process into independent groups and considers each of them as a profit center instead of cost center. There are 2 causes for that:

• The throughput of the production processes can be increased when they are considered as a profit center. This occurs even if costs increase as well. Therefore, functional group management maintains actions that raise both profits and costs through greater revenues.

• Switching to profit centers allow the group to have a better view of their contribution to the firm’s profitability.

Product costing: it facilitates the coordination of the 4 previous approaches by giving significant up-to-date information. This approach contains 3 main tasks:

• To analyze if new products are in reality being manufactured at their target costs.

• To guarantee that production processes are operating at the expected level of efficiency.

• To identify unprofitable products for further actions (i.e. replacement, aggressive cost reductions, etc).

Cost reduction versus containment: in cost reduction, firms try to decrease their costs to predetermined levels. Cost containment is a more passive process that tries to maintain cost-reduction goals reached in the past. Anticipated manufacturing cost of a product to a predetermined level can be achieved by the help of target costs in the design stage. In the manufacturing stage, product-specific kaizen costing, general kaizen costing and functional group management are used for cost reduction and product costing for containment.

Product design versus process improvement: during the design stage, cost management consists only of target costing, which focuses essentially on improvements of the product design. However, in the manufacturing stage, cost management consists of product-specific kaizen costing, general kaizen costing and functional group management but only product-specific kaizen costing is targeted toward product redesign. General kaizen costing and functional group management concern the efficiency of the production processes. They each have different but reinforcing tasks: general kaizen is needed to decrease the cost of performing production processes. Functional group management is needed to raise output either by speeding up those processes or by increasing their yields. Product costing focuses on product costs because of the technique's role of cost containment.

Ad hoc versus systematic application: only product-specific kaizen costing is used in an ad hoc way. Particularly, it is usually applied for products that fail to reach their target costs but for strategic reasons it is launched anyway. The objective is to find any savings that could possibly be missed during the design phase.

In short: a firm can still have important savings through attempts targeted at making the product more efficient even if the environment of products is characterized by short life cycles and product design is focused on aggressive cost management. As a result, costs of products can be aggressively managed throughout their life cycle.

Then, multiple cost-management technique should be used through the all product life cycle. In addition, the stand-alone use of those techniques might limit their effectiveness. Integrating them can lead to even greater levels of cost reduction and superior overall performance as measured by on-time launches of profitable products.

The length of the manufacturing phase of their product's life cycle: if duration increases, the opportunity for cost reduction increases as well. Consequently, firms that have products with a long manufacturing phase should be especially active in exploring the value of integrating multiple cost-management techniques during manufacturing. This is also valid for firms that rely on production processes that are constant over time even though the product mix fluctuates.

Recommendations: firms that compete aggressively on cost should contemplate using a cost-management program. This cost-management program should include multiple techniques applied in an integrated manner to different stages of the product life cycle. Those techniques can have diverse goals and centers of attention. Moreover, some of those techniques can be used for all products while others are tailored made for a particular attention.

Article K: The coordination of internal transactions: the functioning of transfer
 

pricing systems in the organizational context (van der Meer-Kooistra)

An external or internal transaction can be divided into 3 phases:

• Contact stage: the parties look for suitable partners

• Contract stage: the parties are negotiating about the transaction terms

• Control stage: the transaction is completed according to the terms determined at the contract stages. It is possible that the original terms agreed upon due to environmental changes are adapted by the parties

A transfer price system consists of diverse aspects which affect the behavior of the parties involved in the internal transactions during the 3 phases above. The elements of a transfer pricing system are:

• Application area

• Starting points

• Profit centers’ authority to determine the transfer price and the supplier or buyer

• Transfer price (e.g. who set the price, when are changes allowed, etc.)

• Cost definition or market price definition

• Transactions terms (e.g. delivery, quality, etc.)

• Way of contracting

• Arbitration process

• Consultation structure (seller and buyer, profit center and the central management)

• Administrative support (e.g. processing of orders, etc.)

• Relation to fiscal transfer pricing system

There are 4 transfer price bases:

• Market price

• Cost

• Market price and cost (supplying department uses a transfer price based on the market price and the demanding department uses cost as the valuation basis. The other way round when costs > market price)

• Negotiations

Factors related to the transaction: profit centers between which internal transactions take place, are connected. The degree of connection depends on:

• The frequency and size of the transactions: the connection is closer if the transactions are frequent or if the size of the transaction vis-à-vis the size of all the profit centers’ transaction grows.
   

• The degree and character of the asset specificity: the character of the transaction coordination depends on the character of the investments in assets needed for the production of goods or services being exchanged.
   

• A high degree of asset specificity results in seller and buyer being strongly dependent on each other when utilizing investments already made. Changing circumstances require an adjustment of the conditions under which internal transactions take place.

Due to their close relationship, both parties will profit from adaptations that are realized quickly without too many additional effort and without causing unilateral disadvantages.

4 forms of asset specificity distinguished by Wiliamson:

• Site specificity

• Physical asset specificity

• Human asset specificity

• Dedicated asset

• (Marketing asset specificity)

The degree of asset specificity and the form of asset specificity influence the way in which transactions are coordinated. A high degree of asset specificity with uncertainty about the transaction environment, as a result of which adaptations to changing circumstances are likely, require safeguards against opportunistic behavior of one of the parties. This protection will be assured by bringing the transaction under control of the hierarchical governance structure. The hierarchy has particular advantages in cases of information asymmetry between the transaction parties. The advantages of the hierarchy result from the characteristics which the transaction cost theory attributes to the hierarchy:

• Participants’ behavior is characterized by shared interests

• The variety and sensitivity of control instruments

• Economies of information exchange between the firm’s participants

Behavior factors: some factors affect the efforts that the decision-maker is willing to make when a firm’s management has positioned out authority to lower management level. The amount of effort is affected by the opportunities of obtaining additional wealth and by the level of wealth: at a lower level of wealth, a person is willing to make more efforts when an opportunity offers itself than at a higher level of wealth. There are 3 points of reference for profit center managers:

• The firm’s wealth (affects the demand that the central management makes on the results of each profit center)

• Other profit center’s wealth (the decentralized management seeks to keep in step with the results of other profit centers)

• The competitors’ wealth (when the competitors earn more, it is of great significance to the profit center management to improve its own results)

It is crucial that decentralized management should be well informed about the results of the diverse profit centers and be urged to take the activities of their competitors into account. As a result, this will increase their willingness to exert themselves more. The willingness is also affected by the possibilities to get additional wealth.

Consequently, in a well-functioning and profitable firm, there are more opportunities for the decentralized management than in an unprofitable firm.

The number of rules influences also the decision-maker. When the decentralized management is the decision-maker, rules imposed from above have a negative influence on the willingness to make efforts, because the number of opportunities is limited.

Another aspect that also influences the willingness to make efforts: the fear of loss (the attitude to risk) in the case of uncertain outcome.

Analytical model: the model is aimed at explaining the coordination of internal transactions. The characteristics of the internal transactions, the characteristics of the organizational context and the behavior of the participants determine the choice of a transfer pricing system. Some of these factors play an essential role: the factors of uncertainty, information asymmetry, asset specificity and risk connected with decisions about internal transactions.

The analytical model has 3 main explanatory dimensions (plus one additional). Each of those dimensions has its own characteristics. The dimensions which influence the way internal transactions are coordinated are:

• Characteristics of the organizational context

  • Organizational structure

  • The way in which performance is measured and evaluated, and the rewarding methods

  • Data processing methods

• Characteristics of the internal transactions

  • Degree of uncertainty with regard to the transaction environment

  • Degree of asset specificity

  • Size and frequency of internal transactions

• Characteristics of the parties concerned

  • Bounded rationality

  • Possibility of opportunistic behavior

  • Degree of information asymmetry between central and decentralized management and between the profit center managers

• (Characteristics of the transfer pricing)

Many hypotheses have been made in the research. The findings are the following:

• If one of the sorts of asset specificity is high, the internal transactions are prescribed by higher management level.

• It is assumed that the transfer price and the other contract terms will be prescribed by the central management if it is well-informed about circumstance within which the internal transactions between the internal parties take place, and about the characteristics of the internal transactions. However, if the central management is generally not well-informed, the transfer price and the other contract terms are determined by the management of the profit centers between which internal transactions take place.

• With a low degree of asset specificity, it is supposed that the internal parties are allowed to decide about internal and external selling or buying, and, in case of internal transactions, to decide on the transfer prices and the other contract terms.

• There is a relation between the degree of autonomy of the internal parties with regard to the coordination of internal transactions and the arrangement of internal transaction by formal contracts. If the coordination is delegated to the internal parties, the internal transactions are usually concluded by contract. If a higher management level is more involved in preparing, concluding and completing internal transactions, this results in more detailed rules.

• If the degree of asset specificity is high and the information asymmetry between the parties concerned is low, the transfer price basis is determined centrally and is derived from the administrative system. If both asset specificity and information asymmetry are high, then the internal parties are allowed to set the transfer price ad the other transaction terms themselves. Also, the choice of the transfer price basis especially depends on the information the parties have at their disposal via the administrative system.

• The administrative system is of great importance for the choice of the transfer price basis and the adaptations allowed. The choice of the transfer price takes in consideration the system of date processing, so that the transfer price can be extracted from this system by means of simple procedures.

• Choosing the market price as the basis for the transfer price is partly determined by the existence of independent market rates for well-defined products.

• The firm studied pay attention to the influence of the transfer pricing system on the decentralized managements’ behavior and therefore, on the decision-making process.

• If the profit centers are closely related to each others, so that the decisions of one profit center have consequences for the results of other profit centers, mutual adaptation is very important. This can be achieved by confronting both parties with the risks connected with decisions.

• Because of differences in the character of the internal transactions business units, the valuation of the internal transactions differs, as does the process of setting the transfer price and the transaction terms.

• When the organizational context and the characteristics of internal transactions change, the existing systems will change too.

Article L: Co-ordination of internal transactions at Hoogovens Steel: struggling with the tension between performance-oriented business units and the concept of an integrated company (van Helden and van der Meer Kooistra)

When a firm has independent units whose managers have delegated decision making powers, problems with transfer pricing will occur because internal transactions needs coordination and the more complex are those relations, the more complex will be the integration process. The main problem in such difficult transactional relationships is due to the relationship between the internal parties (position in the firm and vis-à-vis the external market).

Eccles (1985) and Colbert and Spicer (1995) developed models dealing with the relationships between transfer pricing and the delegation of authority over the internal transactions. Eccles supports the fact that transfer pricing policy and division of authority are determined by a strategy of vertical integration while Spicer (1988) asks why organizations have a strategy of vertical integration and diversification in the first place. To answer this question, cost reasoning was used and the result was that internal transactions should be compulsory if particular investments are needed for internal transaction and if the transaction environment is uncertain.

Colbert and Spicer mentioned diverse results regarding transfer pricing:

• When the level of transaction-specific investment is low, and as a result intermediate products have a low degree of customization, transfer prices will be set close to the external market prices.

• Costs of internal manufacturing will become the principal basis for transfer prices setting when there are higher levels of asset specificity because managers cannot find market prices for intermediate products caused by the idiosyncratic nature of the production process and therefore, they will rely on cost-based transfer prices. Here, a hypothesis is that transfer price is imposed on the transacting parties. This disagrees with Watson and Baumler (1975) who said that when relationships are complex, sophisticated integrative mechanisms are needed and simple transfer pricing mechanisms (e.g. standard cost, cost-plus. etc) are not appropriate.

• Complex coordination processes are needed when complicated internal relationship occurs. Eccles and Colbert and Spicer give also in their model a narrow vision of the coordination processes. They consider only 2 features of the coordination problem: authority and price. However, in complex relationships, there are more important features. For example, the internal and external positioning of the parties. The pricing of internal transactions is only one characteristic of the coordination of internal transactions that is as well only one part of the wider organizational controls which impinge on the transacting parties. Thus, to determine transfer prices, many different aspects of the coordination process need to be taken into account and this process has to be placed in the context of the other organizational control systems.
   

In addition, an important features to determine where and who should be involves in the terms of the internal transaction, is the availability and location of information.

If the parties are well informed (e.g. on customers, competitors, technology, etc), they can decide by themselves the terms of the transaction. However, if the relationship is complex, face-to-face meetings are advised in order to encourage the exchange of local and personal knowledge.

If standard costs are used to set transfer price, units that do not sell to the external market do not need to worry about the volatility of market prices and therefore, they can set their cost-based price but they will not show any profit. If units are evaluated on profits or when rewards are linked to the profitability of the units, problems arise. Moreover, when there are high levels of joint or common costs, information availability is another problem because cost information will be processed with difficulty. However, if market price information is available, transfer price could be based on the market price. This gives the advantage that it is possible to identify the value added at each stage of the production process.

Expenditures of costly time, opportunity behavior, etc. are able to occur if there are some kinds of disputes about the transaction conditions and as a result, the transaction cost theory argues that hierarchical relations should be preferred over market relations. However, those kinds of disputes can also occur within a hierarchy. If the internal parties can make the transaction conditions by themselves, then disputes and opportunistic behavior could arise. This will be translated in higher transaction costs. However, in a hierarchy, the senior management can supervise, solve such problems and reduce opportunistic behavior.

There are also other possibilities to reduce opportunistic behavior, for example, by using other management control mechanisms such as performance evaluation systems which take account of both unit-level performance and the performance of all the units as a whole.

Cooperative behavior could also be encouraged by linking for instance rewards to the result of all the interconnected units. By adjusting the management control systems, behavioral effects will be consistent and stronger.

For the purpose of the article, the authors suggested two alternatives to the individual controllers:

Alternative 1: allow the parties involved to determine both the transfer prices and the other terms of the internal transactions through negotiation.

Alternative 2: use a form of cost plus pricing for internal transactions. The mark-up could be calculated by transferring part of the budgeted profits of the business units supplying the external market to those business units which supply the intermediate products. Or, the mark-up at each stage of the production process could be determined by the extent to which each business unit meets relevant assessment criteria.

The authors asked the controllers to evaluate each alternative against the following criteria:

• Does the transfer pricing system help to match the responsibilities of the business units with the authority given to them?

• Does the transfer pricing system encourage the various business units to take account of developments in the market?

• Does the transfer pricing system produce the information required to take decisions about internal transactions?

• Will the transfer pricing system create conflicts of interests, and can steps be taken to minimize them?

• Is the transfer pricing system practicable as far as accounting is concerned?

• How will the transfer pricing system function during periods of boom or recession?

The individual controllers assessed the two alternatives against each criterion. Furthermore, when either alternative were seen as negative, it was possible to identify measures which could be taken to alleviate the negative effects.

The new reward system in Hoogovens Steel (HS) includes bonus payments based on two elements:

• The achievement of manager-specific targets

• The financial results of HS as a whole

The results show the following conclusions:

• The BUs managers’ rewards were not linked to their BUs financial results but on the financial results as a whole. Therefore, the financial results of the BUs were not influenced by the rewards of the individual managers.

• A bonus system has also been introduced for other staff. This system was also based on the financial results as a whole.

• However, when transfer pricing was taking into account, some managers would have preferred a rewards system based on the BUs performance and therefore, would have preferred a change from cost-based to market-based transfer prices as it gives a better picture of the contribution.

Cost-based transfer prices versus market-based transfer prices: the main reason for cost-based transfer prices was that the BUs would put their own interests ahead of the interests of HS as a whole. However, market-based transfer price would allow units to show profits but would encourage the BUs to put their own interests first.

In the traditional transfer pricing literature, including the literature grounded in transaction cost economics, tensions between the interests of the individual BUs and the entire company are generally resolved by either:

1. Providing autonomous BU managers with responsibility for their profits and using market-based transfer prices to control the interconnections between the units.

2. Centralizing decision making and making BU managers responsible for meeting their budgets and then using cost-based transfer prices.

Here, the conclusion of the study is that transfer pricing systems can only be understood in the context of the other control systems which are used for the coordination of internal transactions and for organization control in general. Transfer pricing should not be seen as a separate aspect.

Article M: Sikka: The Financial crises

This article seeks to stimulate a debate about contemporary auditing practices.

With external auditing a company wants to persuade its public that they can trust the company and that the firm and management is made accountable. An audit is a reassurance to everyone who has a financial interest in the organization. This is done by accountants, but because the accountability is frequently punctured by unexpected collapses, failures and frauds, it is wondered if auditors lack the independency, knowledge, expertise and incentives to construct a fair account of corporate affairs.

An important feature of the financial crises, is the fact that companies take excessive risks through financial instruments, corporate structures and regulatory mechanisms and the financialisation in western and US companies resulted in a abundance of credit.

The chief executive of a leading financial advisory business argued that a ‘‘big part of the problem is that accounting rules have allowed banks to inflate the value of their assets. Accounting has become a new exercise in creative fiction, with the result that banks are carrying a lot of ‘‘sludge” assets clogging up the balance sheet” (Reuters,4 30 October, 2008).

The financial crisis raises a number of questions about auditing practices. Traditionalists have often claimed that external audit adds credibility to financial statements. Such claims may be based upon the view that auditors have ‘inside’ knowledge and are thus able to restrain management enthusiasm and impart superior information. The difficulty with such a hypothesis is that the current financial crisis shows that markets and significant others were not comforted by unqualified audit opinions issued by major auditing organizations.

The issuing of audit reports is subject to organizational and regulatory politics. Auditors may be unwilling to qualify bank accounts for fear of creating panic or put at risk their liability position. During earlier banking failures legislators argued that auditor silence ‘‘caused substantial injury to innocent depositors and customers” (US Senate Committee on Foreign Relations 1992, p. 4).

The financial crisis poses questions about the role and value of external audits. Markets do not seem to have been assured by unqualified audit opinions and many financial institutions either collapsed, or had to be bailed out within a short period of receiving unqualified audit opinions. This increases the doubts that auditors lack the claimed expertise to provide an independent and objective account of corporate affairs.

The episodes give confidence reflection on the role, value and independence of auditors. They also present opportunities for research into regulation, independence, politics, production and knowledge base of auditors. An independent inquiry into the role of auditing, especially at financial institutions, would help to highlight the shortcomings of the current practices.
 

Article N: Ferreira and Otley: Performance management systems

The article provides a framework that delivers a broad view of the key aspects of a management control systems (MCS) and it delivers researchers with a holistic overview in the most efficient manner.
 

This article defines performance management systems (PMS) as all the aspects of organizational control including the aspects of management control systems. However, we view PMSs as the evolving formal and informal mechanisms, processes, systems, and networks used by organizations for conveying the key

objectives and goals elicited by management, for assisting the strategic process and ongoing management through analysis, planning, measurement, control, rewarding, and broadly managing performance, and for supporting and facilitating organizational learning and change (Ferreira & Otley, 2009). Hence we use the term performance management system to encapsulate these more general processes, and our working

definition of a PMS includes both the formal mechanisms, processes, systems, and networks used by organizations, and also the more subtle, yet important, informal controls that are used (Chenhall, 2003; Malmi and Brown, 2008).

Anthony (1995) defined management control as “the process by which managers assure that resources are obtained and used effectively and efficiently in the accomplishment of the organization’s objectives”. However, this definition causes a disconnection between between MCS and strategic planning and between MCS and

operational control. It also does not capture the richness of issues and relationships implicated in MCS design and use.

Performance management framework Otley (1999)

Otley’s framework has five important features, which need consideration with developing a rational structure for performance management systems. Fistly, one needs to identify the key objectives of the organization, and the processes and methods that are involved in assessing the level of attaining the objectives.

The second element is the process of formulating and implementing strategies and plans, and the evaluation of the implementation.

The third area is related to setting targets for performance measuring. The fourth element is defining the reward systems and setting the implications of failing or achieving the performance targets. The last one is related to the types of information flows that are required to deliver adequate monitoring of performance and to support learning.

The advantages of the framework of Otley are:

1. Helpful for analyzing MCS, because it is used to examine the processes of MCS as a whole and because it possible to use for profit and non-profit organizations.

2. Other frameworks can be used as complements.

3. The framework is straightforward.

4. It facilitates the process for handling data.

The disadvantages of the framework of Otley:

1. It does not explicitly consider the role of vision and mission in MCS.

2. It is focused on diagnostic control systems

3. It does not stress the manners in which accounting and control information is used in organizations.

4. It gives a snapshot at a specific point in time.

Levers of control framework by Simons

Four key concepts are attached to Simons’ LOC: core values, risks to be avoided, critical performance variables, and strategic uncertainties. Each of these is directly controlled by a particular system or, as designated by Simons, a LOC. Core values are controlled by the beliefs system, which guides the creative process of exploring new opportunities and instils widely shared beliefs. Risks to be avoided are controlled by the boundary system, which plays the negative, limiting role of circumscribing the domain where the company seeks new opportunities. Critical performance variables are controlled by the diagnostic control system, whose function is to monitor, assess and reward achievement on key areas of performance. Finally, strategic uncertainties are controlled by the interactive control system, whose role is to encourage organizational learning and the process of development of new ideas and strategies (Simons,1995). Simons argues that a successful implementation of strategy requires companies to use all the four levers in an appropriate combination.

There are a few advantages and disadvantages of the framework. It has been pointed out that the framework powerfully focuses on strategic issues and on its implications for the control system. It also offers a broad perspective of the control system by looking at the range of controls employed and how they are used by companies (Ferreira,2002). The association of specific uses to particular control mechanisms enables a better understanding of the design of the MCS. Importantly, the LOC framework provides a typology for alternative uses of the MCS that is widely viewed in the literature as meaningful and helpful. This aspect is mostly important because the way controls are used is key to determining whether all four LOC are employed and to determine the balance between positive and negative controls.

The disadvantages of the framework are:

1. The framework does not give sufficient emphasis to socio-ideological controls.

2. The framework is focusing too much on the top level of management.

3. The concepts can interpreted in a subjective manner.

4. It is not disposed to universal applicability.

The performance management systems framework

This framework is extended to 10 what questions and 2 how questions. The questions are:

1. What is the vision and mission of the organization and how is this brought to the attention of managers and employees? What mechanisms, processes, and networks are used to convey the organization’s overarching purposes and objectives to its members? It presents the overall direction that the organization is following.

2. What are the key factors that are believed to be central to the organization’s overall future success and how are they brought to the attention of managers and employees? KSF’s are those activities or resources that are critical to the success of the organization and ensure a competitive advantage.

3. What is the organization structure and what impact does it have on the design and use of performance management systems? How does it influence and how is it influenced by the strategic management process?

4. What strategies and plans has the organization adopted and what are the processes and activities that it has decided will be required for it to ensure its success? How are strategies and plans adapted, generated and communicated to managers and employees? A strategy is the direction that an organization wants to follow.

5. What are the organization’s key performance measures deriving from its objectives, key success factors, and strategies and plans? How are these specified and communicated and what role do they play in performance evaluation? Are there significant omissions?

6. What level of performance does the organization need to achieve for each of its key performance measures, how does it go about setting appropriate performance targets for them, and how challenging are those performance targets?

7. What processes, if any, does the organization follow for evaluating individual, group, and organizational performance? Are performance evaluations primarily objective, subjective or mixed and how important are formal and informal information and controls in these processes?

8. What rewards will managers and other employees gain by achieving performance targets or other assessed aspects of performance?

9. What specific information flows, systems and networks has the organization in place to support the operation of its PMSs?

10. What type of use is made of information and of the various control mechanisms in place? Can these uses be characterised in terms of various typologies in the literature? How do controls and their uses differ at different hierarchical levels?

11. How have the PMSs altered in the light of the change dynamics of the organization and its environment? Have the changes in PMSs design or use been made in a proactive or reactive manner?

12. How strong and coherent are the links between the components of PMSs and the ways in which they are used?

The writers of the article believe that the PMSs framework delivers a tool which can be used to describe the structure and use of the ‘package’ of controls deployed by management and designed to ensure that an organization’s strategies and plans are effectively implemented. At the very least, the framework provides a powerful means of obtaining an overview and appreciation of the structure of the PMSs that are currently in use in a specific organization. Research using the framework has considered it to be useful (e.g. Broadbent and Laughlin, 2007; Collier, 2005) and anecdotal evidence of the use of the framework for teaching purposes has also been very encouraging.