The Organisational Context of Management Accounting - Essay Example

The Organisational Context of Management Accounting Briefly outline the main issues in the case study in relation to management control and accountability. Analyse the case using at least two different theoretical perspectives from those in Organizational Context of Management Accounting. Compare and contrast the two perspectives. How does the interpretation of the case differ between each theoretical perspective?  March, 2009 Table of Contents 1.0Introduction 1.1 Case Overview 2.0Structure and work design 2.1Main issues in the Case 2.1.1 Cultural Change 2.1.2 Restructuring of the Management Control and the Finance Functions 2.1.3 Institution of the Six Sigma Initiative 2.1.4 Cultural redefinition of the Game Theatre 2.2 Management Control System of the Game Centre 2.3 Analysis based on Agency theory and Contingency Theory 2.3.1 Agency Theory 2.3.2 Contingency Theory 3.0Comparism of Agency and Contingency theory Perspectives 3.1Differences between the Two Perspectives 3.2Similarities between the Two Perspectives 4.0 Conclusion and the way Foreward 1.0Introduction Organizational change or change in general can be defined from a variety of points depending on the perception of the user. An individual or employee in an organization may look at a new post or position as a change while higher management may feel it is unimportant. (Cao et al, 2000, p187). Changes viewed also by management may also not be looked upon as change by outsiders like competitors or suppliers. This has led to the categorizing of change in various ways, some of which include strategic and non-strategic change, incremental and radical change, changes of identity, co-ordination and control, planned and emergent change, change in terms of scale, human-centered change in terms of individual, group and inter-group or organizational level, quantum change and so on. (Cao et al, 2000, p187; Todnem, 2005, p372). Changes can also be structural, that is dealing with the physical alteration of an organization like its buildings and equipment or even employees. (Bennett & Durkin, 2000). On the other hand, it may be a change in process, that is, the way the related groups of tasks are combined to create value for a target customer. (Cao et al, 2000, p188). A change can as well be in functions, that is, the decision system or policy and resource allocation duties of a particular element of an organization. There can also be changes in values, beliefs and human behavior in terms of social rules and relationships and so on. (Cao et al, 2000, p187). Lastly, there can be changes in the distribution of power and level of influence with an organization. These four types of change have different implications on their total quality management. 1.1Case Overview This paper focuses on the analyses of the implementation of management control at the Royal Danish theatre. Under the assumptions that, performing arts institutions are often reported to have serious financial problems and difficulties in Western countries, the authors, thus expand on present understanding of the nature implementation of budgetary control in the performing arts. The authors address two important questions, how different agents in an organization respond to the imposition of a centralized budgetary control system and the likely consequences between the budgets setters (external change agents) and various other agents inside the theatre. In the case we understand that, the change process begins with identifying the need for a change in the foregoing state of the art. You need to identify the necessity first for a change and then have belief in yourself that you can do it. The change process involves factors such as making the employees aware of the change to come and taking away resistance to designing an efficient and effective organizational structure. (Hoogendoorn et al, p1). Only a part of the organization may be affected by the change or the entire organization. The initiator of a change in any institution may be an individual within the organization, the institution itself or the external environment and also may involve only members within the organization or other agents from outside the organization. (Hoogendoorn et al, p1). Here was the situation with the implementation of the budgetary control systems that highlighted the need for change. 2.0Structure and work design This paper is aimed at analyzing the case study of the Royal Danish Theatre (RDT). In an attempt to implement budgetary and management control system into RDT that met with resistance from different actors. The objectives of this paper can be examined from three dimensions. In the first instance, the paper seeks to outline, analyse and discuss the main issues concerning the case study of the Royal Danish Theatre in relation to management control and accountability. In the second part of the paper, the paper identifies the study’s methodological assumptions of the case study using agency and contingency theory. Finally, the paper interprets the similarities and differences of the case study from each of the theoretical perspective. Following a series of budgetary control and a number of reforms which were instituted to push RDT towards the break even point. Thus; in our analyses we will be evaluating the management control system of RDT as described in the case study in section ; analyzing the case using agency and contingency theories in section; comparing and contrasting agency and contingency theory perspectives as well as looking at how the interpretation of the case differ from each theoretical perspective in section . 2.1Main issues in the Case This section identifies and discusses the various issues raised in the case from an academic and professional perspective. These issues are presented under different subsections below. 2.1.1 Cultural Change The main idea in this area included improving the speed of operations, reducing the cost of operations in the organization. It involves challenging the taken for granted assumptions, as public theatre were previously known as loss making institution, now challenging these assumptions mean challenging the taken for granted, through redefining routines, rituals, and up rooting resistance to change. No wonder, the CEO resigned during the change implementation process. Organisational culture is a tool in the management strategic armory which appears to be invisible yet it influences “why” “how” “what” and “when” things are done in an organisation (Dwyer & Kemp 2000) or “it is the way things are being done here” (Johnson 1992:28, Johnson & Scholes 1997:66). 2.1.2 Restructuring of the Management Control and the Finance Functions As far as accounting is concern, the administration is charged with the responsibility of accounting and budgeting system. The administration consist of employees specialized in book-keeping, handling payments and salaries on a computerized system. As concerns management accounting in particular, the chief financial officer participated in budgetary formulation alongside the board of directors. While the budgets consisted of estimates of ticket sales and costs for the various stages and plays, there were no budgets for each production or various types of costs associated with productions. Because RDT was faced with a number of problems with its management accounting and control systems and was required by the State Audit Department to implement a number of reforms. Although attempts were made to implement these reforms, a few of them were implemented to the fullest while some were implemented only superficially and some were not even implemented over the period of the case 1974 to 1991. For example, in 1975, the State Audit department realized during phase one of the project that the Theatre lacked performance costing and that there was extravagant spending in the theatre. Recommendations for reforms were made but between 1980 and 1984 it was discovered that no changes had been made. In the second phase of the project 1985 to 1989, it was discovered that the Theatre had not implemented any of the recommendations of the State Audit Department. The CEO decided to resign criticizing the Department of increased control following the formation of a committee and three task group at the Department to improve organizational design, management accounting system and union agreements. Yet none of these were implemented. Only a few changes in the accounting system and organizational design were done during phase three of the project following the transfer of the duties of the accounting committee to the organizational committee. The main issues show that the management control and internal system was not good enough to implement appropriate controls that would enable proper accountability. There were a lot of loop holes that enabled the management to embezzle funds from the theatre. The accounting system had a budgetary system that did not include all cost elements. This implies that some of the costs were determined at the discretion of the management, thereby giving them bright-lines to defraud the system and fill up their private pockets. The system management accounting and control system was not designed in such a way as to motivate management to work according to the goals of the owners. 2.1.3 Institution of the Six Sigma Initiative Another important change that came as a result of the case is the introduction of an initiative that can be referred to as the six sigma initiative which refers to a ‘highly disciplined quality improvement initiative. Comprising of a range of tools, techniques and processes the objective of the six sigma initiative is to achieve very tight quality targets at every level of the organization. (Busco et al., p. 24). In RDT, the objective of this initiative was to reduce the cost of the RDT service to customers. 2.1.4 Cultural redefinition of the Game Theatre Recognizing the fact that RDT previous operations and culture was very different from the intended position desired for change, redefinition of culture was necessary to ensure that it meets up to the standards. Key concepts were redefined, and new concepts were refrozen on the personalities of the individuals as well as in organizational norms and routines. (Busco et al., p. 28) citing Schein (1992). Main cultural changes took place in the areas of management accounting practices, finance and measurement processes. (Busco et al., p. 28) Johnson & Scholes (1997) contend that, using the organisation paradigm a new cultural environment can be created. This is so because, by looking at the cultural web, you see what the organisation is like “now” and you mimic how you want it to be in future. The difference is the change the organisation intends to make. The same idea was supported by Dwyer & Kemp (2000) when the researchers argued that, most organizations only look at the paradigm during a change process. 2.2 Management Control System of the Game Centre-Methodological Assumptions The case study begins by telling us about the Theatre, its history, objectives, business divisions, employees, and the narrows down the discussion to the problems of the management accounting and control system of the Theatre. The case study adopts a contingency and an agency based approach. 2.3.1Contingency Theory Contingency theory is a theory that relates an organization to its external environment. The theory tries to explain how an organization responds to changes in its external environment. (Drazin and Van de Ven,1985). The Danish Royal Theatre had a number of stakeholders who were interested in seeing that their interests are maximized. For example, the organization had artists, producers, support staff and technical staff and the State. It made efforts to ensure that the interest of each stakeholder was maximized. For example, it deemed it necessary that hourly pay was not appropriate for its technical staff while it was appropriate for support staff, although the State Audit Department recommended hourly pay for all staff. Based on contingency theory it was faced with different stakeholders who all wanted to see that their interests are maximized. 2.3.2Agency Theory Based on agency theory, agency theory assumes that an organizations shareholders or owners are the principal whereas the management represent the agent. (Jensen and Meckling, 1976). In addition the agency relationship assumes that the manager has more information than the owners and therefore costs are often incurred in monitoring managers through boards of directors. Agency theory also assumes that the interests of management are in conflict with those of shareholders. To align these interests therefore, shareholders must either design reward systems that provide managers with incentives to work in the best interest of the shareholders or owners. Another method of aligning the interest of management with those of shareholders is to monitor management closely so as to ensure that they are making the right decisions. Irrespective of the method adopted, there are agency costs with aligning these interests. (Eisenhardt, 1989). In the Theatre’s case, the main approach used was the adoption of a monitoring approach. The owners were interested in ensuring that a system was put in place that greater transparency is maintained in the operations of the organizations. As we can see in the case study, there was a lot of resistance from the part of the management as most of the recommendations were not implemented. 3.1 Differences between the Two Perspectives The main difference between agency theory and contingency theory is that contingency theory is concerned with the relationship between the organization and its external environment whereas agency theory concerns itself with the relationship between the shareholders and the company. Consequently, contingency theory establishes the relationship between the organization and all its stakeholders such as customers, employees, government, regulatory bodies, and tax authorities. Contingency theory is also concerned with how macroeconomic conditions affect the organization as well as the responses given by the organization to these conditions. Agency theory is only concerned with the relationship between the organization and its shareholders. Interpretation of the case therefore differ from both theoretical perspectives in that while contingency theory concerns itself with solving the problem of employees and the RDT, agency theory was concerned with aligning the interests of managers with those of shareholders. In addition, the agency based perspective involves just the owners and the management whereas the contingency based perspective considers the relationship between the organization as a whole and all the various stakeholders. In addition, there seem to have been more resistance in trying to reduce agency costs than in trying to satisfy the requirements of the different stakeholders. The State Audit Department for example, found a lot of difficulties in trying to ensure a proper management accounting and control system was put in place and it was never achieved. The government must have spent a lot of money to achieve this but yet it did not succeed. For example, the organization implemented only 2 recommendations out of 9 to the fullest while 3 were implemented partially and four were not implemented at all thus leaving the organization with a poor management accounting and control system. 3.2Similarities between the Two Perspectives The main similarities between contingency theory and agency theory are the fact that they all result in costs to the organization. Contingency theory affects the cost structure of the organization in that it prompts the organization to devote resources to activities that enable it respond to external uncertainties or contingencies. Agency costs arise as a result of the fact that the returns that shareholders receive are usually below the returns that could have been recognized if the shareholders were managing the firms themselves. In addition to these costs, the shareholders spend more money trying to align the interest of the managers with those of shareholders such as performance target compensation plans. from both the agency and contingency based perspective is the fact that conflicts of interests existed between the different stakeholders and the organization which can be explained from the contingency based perspective, as well as conflicts of interest existed between the owners and the management. In addition, there were difficulties in satisfying the requirements of the owners as well as the goals of the various stakeholders 4.0Conclusion Change is a gradual process. To successfully implement change will involve changing management activities from the start, involving people in the change campaign and communicating the change decisions to every affected party. It will be that of total organizational change which will be change designed to simultaneously affect multiple policies, practices, procedures and levels of the organization. (Schneider et al. 1996). It will be a change designed to sustain organizational health and vitality over time and will affect the psychology of everyone in the organization. (Schneider et al. 1996). If the change at RDT failed, it is because change implementer failed to hold people responsible, and to uproot resistance to change. References Bennett, H., & Durkin M. (2000). The Effects of Organizational Change on Employee Psychological Attachments: An Exploratory Study. Journal of Managerial Psychology. Vol 15, No 2 pp 126-147. MCB University Press. Busco C., Riccaboni A. Scapens R. W. (2006). Trust for accounting and accounting for trust. Management Accounting Research, vol. 17, pp. 11–41. Cao, G., Clarke, S., Lehaney, B. (2000) A Systemic View of Organizational Change and Total Quality Management. The TQM Magazine Vol 12 No 3 pp. 186-193 MCB University Press. Drazin R., Van de Ven A. H. (1985) Alternative Forms of Fit in Contingency Theory. Administrative Science Quarterly. Vol 30, pp. 514-539 Dwyer, K. & Kemp, S., (2000). An examination of an organisational culture- The Regent Hotel Sydney. International Journal of Hospitality Management. Vol. 20, Issue 1 Pp. 77-93 Johnson, G., (1992). Managing strategic change: strategy, culture and action. Long Range Planning 25 1, pp. 28–36. Johnson, G. and Scholes, K., (1997). Exploring Corporate Strategy, Prentice-Hall, Europe Schneider, B., Brief, A. P., Guzzo, R. A. (1996). Creating a Climate and Culture for Sustainable Organizational Change. Organizational Dynamics, Vol 24, No 4 pp 7-19. Todnem, R. (2005). Organizational change management: A critical review. Journal of Change Management. Vol 5, No 4 pp 369-380 University College, Edinburgh, UK Read More