2.7 Management Accounting and Organizational Change
2.7.1 Management accounting and structural change
Organizational structure is one of the primary factors in establishing the overall control system within an organization, so that the activities of the organization can be carried out. According to Moores and Mula (1993), MAS forms an important part of the information and control systems that reinforce and support the basic intent of the formal structure. They reported that findings from previous research show that large and technical sophisticated firms were associated with administrative control strategies defined by decentralisation and structuring with a strong emphasis on MAS. Whereas, small and dependent firms were associated with interpersonal control strategies (described by centralisation and lack of autonomy; organic structure with future oriented information; and decentralisation with perceived usefulness of aggregated and integrated information). It is also suggested that when the firm is confronted by high uncertainty a decentralised structure is required, and consequently a more sophisticated MAS (Abdel-Kader & Luther, 2008). More sophisticated reports from MAS can help to reduce uncertainty and improve managerial decision making (Chong & Chong, 1997). This finding leads to a conclusion that the design of MAS and the control process depend on (or are contingent upon) the context of the organizational setting in which these controls operate. However, very few accounting-control researchers have examined the direct effects of this organization structure on MAS design (Gerdin, 2005).
MAS innovation is influenced by the propensity of organizations to innovate and their capability to implement innovations. Organizational structure encourages or discourages the implementation of innovations (Gosselin, 1997). Gosselin (1997) also stated that organizational innovation theories have been developed and tested empirically in many organizations, mainly from the non-profit and public sectors.
Very few of these theories were tested in manufacturing environments, and none of these innovation theories have been studied in an accounting setting. However, this study does not intend to test the organizational innovation theories, but to investigate the existence of any interrelationship between MAS and organizational structure, and whether the alignment between them can improve performance.
As much research focuses on the need for structural change to improve performance (Michael, Barsness, Lawson, & Balkundi, 2004; Miller & Friesen, 1982), very
limited research has focused on the what drives this change. Baines and Langfield- Smith (2003) have identified competitive environment, technology and strategy as drivers of structural change. But, the role of MAS in structural change has not been incorporated. Some of the previous research (Gosselin, 1997; Scott & Tiessen, 1999) studied the association between MAS and organizational structure. However, they do not explicitly consider the interrelationship between MAS and organizational structure and whether the alignment between these two variables can improve performance.
A study by Gosselin (1997) classified activity-based costing (ABC) as an administrative innovation, where its implementation may lead to new administrative procedures, policies and organizational structure. They show that more centralized and more formal organizations tend to adopt ABC. In recent years management accounting innovations such as total quality management (TQM), ABC and activity- based management (ABM) have developed as a response to the changing nature of operations and competition (Chenhall & Langfield-Smith, 1998a). These management accounting practices are not restricted to production processes, but also include innovative approaches to restructuring work practices and developing new planning and control systems. Many management accounting innovations associated with these change programs rely on promoting a high degree of employee involvement, often using work-based teams. The result is that much of the responsibility for delivering change lies with not only the shop-floor employees (Cohen & Bailey, 1997) but also senior management. Ma and Tayles (2009) found evidence that the new management accounting techniques would be adopted if it met the needs of senior management and it would not have taken place without their support.
Centralization (or vertical structure) has probably been the most prominent structural factor in the previous empirical research studying MAS design and changes (for example, Chenhall & Morris, 1986; Libby & Waterhouse, 1996). In a centralize structure, the decision making process is less effective and costly because knowledge has to be transferred to the person who has decision rights. Whereas, under decentralization the decision rights are transferred to the person who has the knowledge (Matejka & De Waegenaere, 2000). Matejka and De Waegenaere (2000)
found centralized organization will implement changes in their accounting systems less often than decentralized ones. This result is supported by Chenhall (2008, p.
525), where he noted that accounting systems are consistent with horizontal (or decentralized) organizations. He suggested that “strategic management accounting has characteristics related to aspects of horizontal organization as they aim to connect strategy to the value chain and link activities across the organization...”.
According to Chenhall (2008), a common approach in horizontal organization is identifying strategic priorities with a customer-oriented focus and then developing process efficiency and continuous improvements, flattened structures with a team- based focus and empowerment to help institutionalize change. On the other hand, Verbeeten (2010) found decentralization has negatively associated with major changes in the decision-influencing components of MACS.
A critical aspect of adopting team operations is the process of empowerment. Teams cannot simply be delegated responsibilities. Empowerment places both authority and responsibility at low levels in an organization. Changing the organization structure, including the use of teams and employee empowerment, will result in changed employer and employee expectations, including increased access to relevant information (Scott & Tiessen, 1999), particularly, management accounting information.
In an exploratory study of the relationship between an organization’s environment, structure and MAS, Gordon and Narayanan (1984) concluded that structure was not significantly related to MAS. Instead they found that MAS and organization structures are both functions of environmental uncertainty. This is consistent with findings of Moores and Mula (1993). They found that organizational structure appears to be of major importance relative to environmental uncertainty and as a driving force behind the design of MAS. Haldma and Laats (2002) found organizational structure to be one of the organizational aspects influenced MAS to change. Whereas Ma and Tayles (2009) found a considerable evidence of how adoption of new strategic management accounting techniques and approaches support the new organizational structure. Thus, it would appear that MAS and structures are perhaps designed contemporaneously as internally consistent control packages.
The role of management accounting in this changed organization structure is not simply to deliver cost data, but to provide a service that empowers team members to make the best decision in the light of current changing conditions (Gordon & Miller, 1976). The management accounting of an organization is seen to be both one element of organizational structure and a consequence of the chosen structure (Luther &
Longden, 2001). Gerdin (2005) also agreed that management control subsystems may not only complement each other but also substitute for each other. However this relationship is rarely, if ever, addressed in the previous research. By using a contingency framework this study aims to address this gap.