Examining the Organisational Context of Management Accounting

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"Accounting involves the binding of organisational space in the very real sense in which one of the most important boundaries of an organisation is defined by the boundaries of its system of accountability. To be part of an organisation is to be subject to that organisation's system of accountability" (Robert and Scapens, 1985)

Ever since the corporate scandals involving very large companies such as Enron and WorldCom, many contemporary organisations most noticeably accounting practices, have been subject to their organisations system of accountability. The result of these events is that big question marks have been placed over the competence and accountability of accountants (Gray & Manson, 2008).

This essay will critically discuss the statement and explain the role of accountants and accounting practices in managing contemporary organisations. In support of my argument, I will consider theories and concepts.

Bacharach (1989) has argued that the primary goal of a theory is to answer the questions of when, how and why. Therefore to support my perspective, I will be applying the 'Contingency Theory' into the framework of this thesis.

Boundaries of Organisations & Organisational Space

Organisations may perhaps situate important limitations to bind 'organisational space' in line to avoid risking any actions which would harm the organisations prominence. Consequently such boundaries are requisite; however is accountability one of the most important boundaries? I believe it is unquestionably one of the most significant.

In the fullness of time, boundaries became considered to be abstract distinctions made by social actors to categorize objects, people, practices, and even time and space. They are tools by which individuals and groups struggle over and come to be of the same mind on definitions of reality (Lamont & Molnar, 2002). Thus boundaries can be seen to act as systems of classification to bring order to the social world, acting as tools with which to bind space. These boundaries can be defined by the internal and external environment of an organisation. (Hatch, Schultz 1997). Thus, the boundary is symbolizing the moral unity of the organization where an assumed common purpose absorbs social tensions by binding together the separate goals of all organizational members.

Boundaries can also be defined in a number of different spheres of organizational activity; the physical, financial, psychological, legal and temporal realms are all areas where boundaries are represented. The boundaries of the organization in physical/special terms are co-terminous with its employees and with those departments which interface most directly with the environment (Llewellyn 1994).

The word 'environment' has previously been mentioned several times, and coincidentally it is one three main variables (along with technology and the organisation structure) in the contingency theory stated by Otley (1980) and Thiessen (1978) for organisations. Thus we can use this theory in support of Llewellyn's explanation.

Contingency theory has two basic underlying assumptions: Firstly, that there is no one best way to organize. Secondly, any way of organizing is not equally effective. (Galbraith, 1973). The position of the organizational theorist is that "the best way to organize depends on the nature of the environment to which the organization relates." (Scott, 1992, page 89)

But what is an organisation? According to Huczynski and Buchanan (2001) an organisation is a social arrangement for achieving controlled performance in the pursuit of collective goals.

Again in support of Llewellyn (1994), this definition emphasises that people in the organisation interact in order to achieve some objectives and in terms of business those certain purposes always appear to be related to the binding of organisation space. In such an organization space, there are no fixed locations manifesting themselves in physically measurable forms. In support of Lamont & Molnar, Yeung (2005) stated instead; locations and distances in an organizational space are relational and thus discursively constructed through actor-specific strategies and practice. Even so, what is the distinction to a 'contemporary' organisation?

Post modern organisations are characterised by flexibility; transcending the bounds of conventional and universal social norms outlined by modernity. Nohria and Berkely (1994) develop this notion of the postmodern organisation, explaining how contemporary organisations no longer exist as a rational physical system.

Yet again looking into a contemporary organisation perspective, we can use the contingency theory approach that focuses on adapting performance to the particular circumstances of the organization and to each given situation. This perspective differs from the "one best way" that the traditional theorists sought because they assumed that principles are universal in all cases, despite the organization's distinctive circumstances.

Regardless of the obstacles the accountants encounter, organisations have some latitude in the choices they make and in the actions they instigate. However, things that we took for granted in accountability are not there anymore (Miller, 1998). But what is accountability?


Accountability is concerned with giving explanations through a "credible story of what happened, and a calculation and balancing of competing obligations, including moral ones" (Boland and Schultze, 1996, page 62). Others have seen accountability as a relationship involving the "giving and demanding of reasons for conduct" (Roberts and Scapens, 1985, page 447; Robinson, 2003, page 172).

It is this aspect of accountability which has been a focus in the accounting literature (Jacobs and Walker, 2004). Nevertheless why is accountability such a hot topic today? It is approximated that a lack of systemic accountability costs Corporate America tens of billions a year in terms of inefficiency, workplace conflicts and errors.

Accountability may be dictated or implied by law, regulation, or agreement or expectation; the accountants have to bear the consequences for failure performance as they are accountable for (Hoskin, 1996). As Emmanuel (1990) states, there are different ways where control in an organisation can be accomplished. Nonetheless, the most effortlessly implemented to understand is accounting. For that reason, accounting is to all intents and purposes, a means of control in the organisation.

Management control systems (MCS) can be viewed as a tool in understanding the systems of accountability. An accounting system is consequently a means of supplying information to managers to help them to be in command of the organisation.

Accounting Practices/ Management control Systems

Accounting practitioners should understand the practical opportunities and challenges of accounting practices by identifying what constraints they have in their activities. As a professional, they are intimated by the system of accountability. Further explication is needed of the external contingencies which constrain accounting practice beyond organizational boundaries, considering that situational variables are often more challenging than predisposing variables (Cancel et al., 1997).

An organisation can have in position accounting systems, but if they are not being exploited, then they are not helping the control of an organisation. These systems need to be utilised so that the organisation has a system of accountability which each practices and the accountants in the organisation is under the control of. Therefore, if it is under the control of the system of accountability, I believe it is being accounted for its part of the organisations boundary.

There used to be the general notion that accountants were 'bean counters'. Due to the dynamic, political and social transformative nature of the field, it has grown to occupy a more significant position within modern organisations, which enables better investment decisions (Hopwood A and Miller P, 1994). Accounting is not all about numbers but has a social perspective to it (Hopwood, 1971).

Calculations and the notion of marginal costing are central to contemporary management accounting (Miller, 1998), such practices support managerial decision making. This is supported by Chow, Shields and Wu, (1999). They hold the analysis that MCS are proposed as a means of motivating/influencing the employees of an organisation to act in its best interests; this is concerned with the decision making and actions of all employees. However are these decisions restricted to the organisations system of accountability?

No doubt accountability is a restriction of many aspects. No one will want to be accountable for any kind of loss in an organisation; therefore this restriction will hold them back from achieving a certain objective, and in effect hampering in binding the organisational space.

Organisational space is hugely reliant on how well an organisation is able to forecast and react to changes in technology and the environment. An extended view of contingency theory is that the structure of an organization is dependent on the company's technology and environment and the effectiveness of the MCS is contingent on the organization's structure (Waterhouse and Tiessen, 1978)

MCS is an arrangement which assembles and uses information to appraise the performance of different organizational resources such as human, physical, financial and the organizational strategies. (Otley, 1994). These strategies will form boundaries of many systems, one of which may be accountability. The graphic illustration below reflects my interpretation of these theoretical concepts.

The Contingency Theory of Organisations

In my opinion, a MCS should be to limit an accountants role in which their actions will hold consequences if they are not initiated properly. This view of MCS is also supported by Merchant and Van der Steede (2007). Rather than taking a strategic control view, they take the observation that MCS is concerned with ensuring employees of the organisation are behaving correctly, that is, within the confinements (organisations boundary) of what they should be undertaking.

Otely's variables of the contingency theory is also supported by Chenhall (2003) who discusses contingency theories from a functionalist perspective where the assumption is that MCS are developed, or adopted to aid in achieving desired organisational space.

Implementation of a contingency approach was a work of fiction because it required accountants to classify and consider the impact of contingent variables on the design of a MCS. Otley concluded that the presumption was better in recognizing contingent variables than it was in measuring their impact on the design of a MCS. He stated that this could be somewhat explained as the theory focused wholly on MCS's but in fact, organisations use a lot more other overall controls. What comprises a successful MCS consequently depends on the conditions surrounding its use (Drury 2004).

Consequently, the matching MCS is not suitable for every organisation, nor is it suitable for one organisation in different situations. Therefore for organisations to adapt to the environmental adjustments, they must become accustomed their MCS's.

However, it is not just management control systems that help managers effectively control the organisation. It is how they are used. The output of accounting systems is clearly the information that is provided. It is this information that must be used by managers and accountants alike to achieve effective MCS's.

Central to contingency analysis is the pursuit of equilibrium, as "adjustments" harmonize structural and contextual "variables". As contingency analyses assume that functional imperatives determine organizational restructuring, they cannot encompass the active accomplishment through agency of the organization as an embedded, but differentiated, part of wider society. (Willmott, 1990, page 45).

Systems of accountability reproduce an organization which is, physically and psychologically, more cohesive and coherent. Also, by creating reciprocal rights and responsibilities, they bind organizational members together and go some way towards banishing the potential disruptive influences of race, class and gender from the organizational arena: Systems of accountability also embody a moral order: a complex system of reciprocal rights and responsibilities. The practice of accountability institutionalises the notion of accountability; it institutionalises the rights of some people to hold others to account for their actions (Roberts and Scapens, 1985, page 448).

As an organisation increases its number of accountants, managing them in an ad hoc and inconsistent fashion becomes difficult. Therefore boundaries are required to ensure accountability and reliability. Therefore, I believe the majority of organisations' accounting practices are its systems of accountability.

Role of accountants

Different activities in an organisation will require the organisation to hold different departments in which each will hold its own set of managers. Therefore accountants can be perceived as managers in an organisation who are accountable for controlling the business activities in each department.

"Management control [therefore] is the process by which managers assure that resources are obtained and used effectively and efficiently in the accomplishment of the organisations objectives" (Anthony, 1965). This implies that managers are accountable for the accomplishments of the businesses aims. Seeing that this is a motive for the execution of MCS, it can be assumed that in the broadest sense, an accountant's role is to utilise and put into operation the MCS.

I believe the role of Accountants describe the process in which identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources.

As mentioned earlier boundaries can also be defined in a number of different spheres, and one I believe is fundamental to understanding accountability, which is psychological. Accountants play a big part in the stimulus and psychology of responsibility; setting budgets to setting individual targets. Through the interaction of departments, this is a form of binding organisational space.

The constant change of the nature makes a management accountant's role become more demanding than previously. They are accountable to have a through view related to the frauds and mishappenings that exists in a company.

The common role of auditing to bridge the gap between shareholders and directors, I believe is an important element of accountability in the sense of trust. Building up trust is not easy; accountants may have different motives and a lot of conscious effort has to be made in this direction. This requires accountants making constant efforts to reflect the true and fair view of the accounts. The more they explore, the more they can handle contradictions well. After all most of the problems in relationships occur because organisations do not want to open up. As a result, auditors tend to look at organisations with doubt. This will enhance their credibility, which will lead to building trust, and in return will bind the organisational space. The weight of accountability is immense on the auditor's behalf; if they are to be caught with negligence.

But why should this negligence or mishap occur in the first place? We can use the contingency theory again to explicate this discussion. Accountability is linked to contingency theory and is a broader notion than resource allocation as it focuses on both past performance and how the entity is positioned for the future.

Fiedler (1967) found that organisations are more successful in extremely 'favourable' or 'unfavourable' situations. The contingency theory allows for predicting the characteristics of the appropriate situations for effectiveness. One component determine the favourableness of situational control in relation to the degree of respect mutual, trust, and self-assurance is the task structure, referring to the extent to which group tasks are clear and structured.

Accountant's trustworthiness has been the downfall of such late since the closure of Arthur Anderson. It is imperative that the attitudes of accountants are sceptical in their role, but this is up to every accountant to how they want to practice.

These kind of attitudes are a boundary themselves, however if these mind-sets are universal; this itself is binding the organisational space by involving their surroundings and bringing the practices together. This brings us back to controllability which is an underlying concept of responsibility accounting. A manager should only be held responsible for those aspects he or she can control. In my view, this is concept is rarely applied successfully in accounting practices because of the system variation present in all systems. Again we can apply Llewellyn psychological sphere, as it provides a way to motivate lower level managers and bind the organisational space in culture.


The mere fact that standards change, and that old management accounting practices are regularly replaced by new ones, suggests that accounting has an arbitrary core. The basic assertion of contingency theory is that the environment in which an organization operates determines the best way for its management control systems to bind its organisational space (Scott, 1992). As accounting is a means of controlling these departments and activities which provide the limitations, anything that does not come under the compass of accountability is consequently not an element of the organisation.

Although accounting practices necessarily operate according to preset rules, managers of organisations do have the option of acting in a range of ways to bind the organisational space, and contingency theory recognizes this individuality. In particular, theorists have applied contingency theory to organisational problems of decision making, organization change, and organization structure. Although critics recognize the benefits of fitting these principles to individual situations, they also argue that contingency theory provides no useful generalizations for organisations to apply.

You'll see positive and negative reactions, because accountability is equal with responsibility, guilt, and ethics. It's ordinary for someone to oppose being accountable; not essentially because they don't want to do a good quality job, but due to the negative emotions that habitually come as a consequence. Accountability within accounting practices can once again revitalize the reliability of accountants. This in-turn will bind the organisational space.

Social psychology would suggest it is hard to get accountants to own up sometimes. Managers cannot expect to hold others accountable for their actions if they don't hold themselves accountable for theirs. Thus, accounting constructs particular forms through which information can be represented (Cooper, 1992). The "particular forms" in systems of accountability which accounting produces facilitate the binding of organizational space, thus maintain the organization as an entity.

In close, I am in agreement with the above statement, that one of the most important boundaries to bind organisational space is defined by its system of accountability. Management control systems are an example of a system of accountability in accounting practices implemented by organisations which can be recognised as another form of management accounting system.

However I have come to think that, MCS's itself is a system of boundary in controlling an organisation to a certain scale, where accountability is limited to certain roles of accountants. Additionally, trust is also another important boundary which is concurrent to the system of accountability. If there is no trust within the role of accountants and their accounting practices, how will an organisation pull itself together and bind the organisational space? From my thorough research, I believe contemporary organisations boundaries are limited to its organisations control systems introduced. It is of paramount significance that organisations have successful control mechanisms that will facilitate management to make sure the binding of organisational space.