Exploring the changes influenced by the financial crisis


The financial crises lead to changes in regulation of the organizations. (Tinker, 1997) Basel II (The New Basel Capital Accord) issued by the Basel Committee in 2004, it advances standards for measurement of financial and operational risk in the banking industry. The main objective of the Basel II is to improve the understanding and the quality of banking supervision worldwide. (Basel Committee, 2004a, 2006a, b).

From the study of the paper, it shows that for the practical implementation of Basel II, the staff from the interviewed bank expressed both positive and negative opinions of Basel II. The positive opinions were much more strongly expressed by staff at the banks with centralized management structures, however, the interviewees from the decentralized bank seems do not like to accept the regulations.

In this essay, the contingency theory will be used to discuss the main argument of the paper in relation to control and accountability. Moreover, the power distance theory of Professor Hofstede can give a reasonable interpretation to the argument of the essay. After the analysis under the contingency theoretical framework, the perspective is that the decentralized structure is more suitable with the organizations when they in the situation of the crisis. Cause of the managers consider variables in the environment of the organizations and make the reasonable decisions in time. Similarly, the organization can adapt its control systems to avoid or absorb uncertainty.

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In addition, the essay has a discussion of the role of accountants and accounting practices in managing contemporary organisations. As the role of management accountants are experiencing significant changes from traditional "scorekeeping" roles to proactive "consultancy" roles nowadays. Furthermore, the practices were at the margins previously, but now they are regarded as central to accounting.

Basel II consists of three interrelated pillar. The first one is to calculate the total minimum capital requirements for credit, market and operational risk. There are two broad methodologies for the calculation, banks can either use a standardized manner supported by an external credit assessments to measure the credit risk, or banks choose their own internal risk management models to measure the risks. The second pillar is focus on the supervisory review, in this pillar; the specific issues for supervisors are explicitly stipulated in the form of a framework for the supervisory process. The third pillar is market discipline which includes information about disclosure requirements for banks (Basel Committee, 2004a).

Everything has two sides. As the measurement of risk approach in Basel II is based on the assumptions that underpin measurement theory. The criticism argues that historical experience is a basis for forecasting the future. But the identification of the historical conditions maybe not suit for any current conditions sufficiently, and it will bring a misleading for the management to make decisions. Thus the risk escalated.

Nowadays, the measurement by using ratios and other methods which analyzed from the numbers and calculations in the financial sector is generally accepted by the users, as such measurements may easily be read and understood. However, the measurement of risks are over reliance on numbers, moral and ethical aspects of financial and accounting activities are sometimes obscured by such calculations. Also the literature recognized that the role of the researcher in society needs to be considered. They argue that the academic' role in society has changed and the education of university has little practical application to everyday practice. They criticize the researcher should be called for the academic community to take a greater role in promoting and facilitating improvements in practice.

For the practical implementation of Basel II, the staff from the interviewed bank expressed both positive and negative opinions of Basel II. In the study, the positive opinions were much more strongly expressed by staff at the banks with centralized management structures (The decision making authority is concentrated at the top of the organizational hierarchy) on the contrary, the interviewees from the decentralized bank (the decision making authority is devolved down the organizational hierarchy) voiced the negative opinion.

Contingency theory is an approach that argues that there is no one best organizational structure or management accounting technique but emphasizes the fit with factors such as task, product and levels of environmental uncertainty. (P483, Seal, Garrison & Noreen, 2006) contingency approaches often argue that the response to uncertainty should be for the organization to become more organic and less mechanistic. (P482, Seal, Garrison & Noreen, 2006) organizations should develop requisite variety whereby internal regulatory systems such as management accounting must be as varied as the environment of the organization.

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Control is the process of instituting procedures and then obtaining feedback to ensure that all parts of the organization are functioning effectively and moving towards overall company goals, and control involves those steps taken by management that attempt to increase the likelihood that the objectives set down at the planning stage are attained and to ensure that all parts of the organization function is a manner consistent with organizational policies. (P518, Seal, Garrison & Noreen, 2006)

Professor Hofstede's research link control with culture from the dimension of power distance refers to the extent to which people accept that power in institutions and organizations is distributed unequally. (P95, Hopper, Northcott & Scapens, 2007)

People with high power distance more readily accept power inequalities coming from wealth, status or position, and believe that powerful people have the right and responsibility to command, and are entitled to privileges and perquisites not available to less powerful people. (P95, Hopper, Northcott & Scapens, 2007)

Theoretically, high power distance cultures are characterized by a high regard for formally constituted hierarchies and an acceptance that authority and responsibility for leadership and decision making are vested at the upper levels. (P102, Hopper, Northcott & Scapens, 2007) therefore, the banks which were centralized management structure are high power distance societies. In this situation, the employees often should comply with the requests from the manager. As the Basel II has many significant advantages, the regulation was widely accepted by the centralized banks.

The interviewees generally considered that Basel II will improve the investing environment of the banks. The important reason is they recognize that Basel II released capital, and then improve the investments and make more profits. Additionally, the interviewees are quite satisfied of the measuring risk with the banks' own models. Also they believe that by the implementation of Basel II, the banks will have more efficient internal systems and the control of risk. These positive opinions were articulated by banking staff working closely with risk measurement, such as risk managers and project leaders for Basel II.

The consensus was that Basel II's emphasis on the measurement of risk using numbers imposed a degree of uniformity on the banks. It benefits the banks which were centralized management, it leads to increase the uniformity and control and, as a result, a further concentration of power at the banks' headquarters.

By contrast, people with low power distance believe in egalitarianism. (P95, Hopper, Northcott & Scapens, 2007) therefore, the banks which were decentralized management structure (alternative hierarchical control) are low power distance societies. The complexity and wide range of activities in some organizations make it difficult to implement decisions and report actions. There are time lags between recognizing problems, making decisions about them and taking action because the various aspects of problem solving are passed up the hierarchy in complex organizations. (P236, Berry, Broadbent & Otley, 2005) With increased empowerment and autonomy came greater accountability in the decentralized bank, the decisions from the top management need a long time to be implemented as they have to consider about the suggestions from the directors. However, the centralized banks do not like to consider about these kinds of factors.

The negative opinions generally came from the officers in operation department. They argue that there is a knowledge gap between banking staffs, and some interviewees thought Basel II was too complex to understand. The bank officers recognize the model of risk measurement is unreality in practice, and the regulation was regarded as somewhat vague by many of the officers. Some interviewees mentioned the negative opinion about Basel II as overly resource intensive because of the large costs associated with its implementation, and some smaller banks would not have sufficient resources to develop models and collect data. At last, the interviewees from the decentralized bank considered that Basel II prefer centralization as a method to managing operations, and the new regulatory put the decentralized bank at a disadvantage.

The knowledge probably is the most essential reason to use decentralized structure. As organizations grow in size and complexity, organizational actors must specialize in particular areas of knowledge. Usually, the finance manager has superior knowledge of the financial factors. Similarly, the risk manager is more familiar with the risk measurements. These different and dispersed repositories of knowledge are valuable in that they have the potential to contribute to the success of the organization. (P246, Hopper, Northcott & Scapens, 2007) in the organization of decentralized structure, the manager can solve problems quickly as they have the authority. However, in the centralized organization, the manager may identify the uncertainties in time, but they do not have the authority to make any decisions, they have to report the information to the top management and wait for the feedback, normally they will miss the best time to solve the problems, thus the trouble may get worse and then bring a significant influence to the organization. Moreover, related with the accountability, as we discussed above, the employers of centralized structure are in a high power distance societies, therefore the staffs have less responsibility, this lead to a risk of motivation.

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Therefore, consider with the contingency theory, the decentralized structure is more suitable with the organizations. As the sub managers consider variables in the environment of the organizations and make the reasonable decisions in time. Also form the paper we can know at the time of the financial crisis in the beginning of the 1990s, the most decentralised bank was the only bank that did not have to ask the government for funding, moreover, the decentralised bank make more profit than the other centralised banks in the study. This is a strong evidence to prove that the decentralized structure is more suitable with the organizations when they in the situation of the crisis.

The recent investigation shows that role of management accountants are experiencing significant changes, i.e. from traditional "scorekeeping" roles to proactive "consultancy" roles. (P131, Hopper, Northcott & Scapens, 2007) regard to contingency theory, the role of accountants should be change follow by the change of the environment of the organizations. In recent years, some factors have driven business managers to seek new information, with consequences for the roles of accountants.

The increasing globalization of business in recent years had a great impact on the role of accountants and accounting practices in managing contemporary organizations. Because of global distribution networks, the transportation and real time information (e.g. through the Internet) are faster and cheaper. Thus most organizations now face the competition from international rather than local. The roles of management accountants also affected by the increasing speed of technological change significantly. (P119, Hopper, Northcott & Scapens, 2007) The increased capacity of computing has deeply affected the flows of information and organizational work. The corporate trend is another factor can impact business information needs, therefore it has profoundly affected for the roles of management accountants. (P121, Hopper, Northcott & Scapens, 2007)

These factors have the significant effect on the changing roles of accountants. Benefited from the improvement of technology, the information systems perform routine accounting tasks automatically. Normally today's accountants must assist in any way they can, but will not necessarily be involved in day to day routine accounting tasks. (P123, Hopper, Northcott & Scapens, 2007) Thus, the time has been freed up for accountants in many organisations, and they are engaging in advisory roles in business. Nowadays, management accountants are the important part of business strategy formulation, and business value creation. They are becoming from routine accounting to more proactive roles within the broader management process. (P126, Hopper, Northcott & Scapens, 2007)

Management accounting is adopted to assist managers, by using a systematic group of accounting practices, to achieve the objectives and goals of the organization. (Chenhall, 2003, p.129) Accounting is a collection of calculative practices and rationales such as budgeting and cost-volume-profit calculation (Miller, 1998). In the past, the practices were at the margins, but now they are regarded as central to accounting. The accounting practice such like budget with standard cost and activity based costing are now very important methods to measure the performance of organizations.

Activity based costing is a costing approach based on activities that is designed to provide cost information to manager for strategic and other decisions, and activity based costing may affect capacity and fixed costs of the organizations potentially. (P298, Seal, Garrison & Noreen, 2006)

The traditional management accounting was recognized as antiquated methods because it could not provide managers with relevant information. Activity based costing systems were advocated as the solution for restoring the relevance of accounting. If Activity based costing systems implemented appropriately, the company would enable to recover their competitiveness and profitability.

The budget is a detailed plan for the acquisition and use of financial and other resources over a specified time period. The accounting literature suggests that the generation of budgets should follow the organizational structure of responsibility and accountability. It should also be sufficiently detailed to ensure coordination. (P109, Berry, Broadbent & Otley, 2005)

A budget may be based on standard costs. The use of standard costs has a number of advantages.

Firstly, the managers can focus on other issues as costs remain within the standards. In the case of costs increase significantly outside the standards, managers will know that there may be have some problems and need to pay attention. Secondly, the standards provide benchmarks that employees can use to judge their own performance, in order to improve efficiency of work. Moreover, standard cost fit naturally in an integrated system of responsibility accounting, as the standards establish what costs should be, who should be responsible for them, and whether actual costs are under control. (P558, Seal, Garrison & Noreen, 2006)