INTERACTIONS BETWEEN FORMAL AND INFORMAL CONTROLS IN ORGANISATION

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The effectiveness/ efficiency of organizational control system(s) is a sine qua non to achieving set objectives (Ayers, Gordon and Schoenbachler, 2001). Controls are vital for coordinating and directing organizational resources towards set goals (Chong and Chong, 1997; Van der Stede, 1997). The effectiveness of a control system requires an understanding of the pros and cons of the various components that constitute the control system (Dalton and Miner, 2001). The tendency that individuals would pursue their own goals to the detriment of the organization is a reason why organizations may need to institute controls (Eisenhardt, 1989; Falkenberg and Herremans, 1995).

An effective way of instituting sustainable control measures is the employment of management accounting tools in the evaluation of the factors leading to proper decision making and control (Langfield-Smith, 1997). Empirical evidence suggests that accounting information is employed in decision making by many organizations and are associated with formal control (Chenhall, 2002; Davila, 2000). The term formal control is used to describe a form of control where mechanisms are initiated with the intention to control employees' behaviour so as to achieve the desired objectives (Jaworski, 1988). Decision making rules, well defined statements of expectations, clear reward structures and evaluation criteria which are constituents of management accounting information make up formal organizational controls (Jaworski, 1988).

However, several researchers have identified forms of control other than accounting controls, and have termed it informal (see Ouchi, 1977; Ouchi, 1980; Leatherwood and Spector, 1991; Noreen, 1988, Sitkin and George, 2005, Friedkin, 1983; Gomez and Sanchez, 2005, Jaworski et al., 1993). The need to incorporate various forms of controls in organizations has been stressed, as effective control cannot be achieved using one form (Dalton, 1971, Jarworski et al., 1993). Bruce, (1994) noted that controls in most organizations coexist or are entwined and could be spotted when examined. Falkenberg and Herremans, (1995) however argue that little is known about the interaction between formal and informal control systems and the impact of these interactions on ethical behaviours. It is therefore pertinent that a study be carried out to explore the forms of controls that exist in organizations and how they coexist to drive organizational objectives.

RESEARCH PROBLEM AND QUESTIONS

Although there have been a lot of research implicating management accounting in the decision making and control process of various forms of organizational setting (Janes, 2009; Friedl et al., 2009, Inglis and Clift, 2008; Lea, 2007, Frezatti et al., 2006) evidence shows the existence of forms of control other than that implied by management accounting (Ouchi, 1977; Noreen, 1998; Sitkin and George, 2005). However, the coexistence of these forms of controls and their mode of interaction leading to the attainment of predetermined organizational goals needs further studies. The current work will seek to address this gap. Secondly, most of the researches investigating various forms of controls have been based or conducted among the developed economies with the exception of few done on emerging economies or less developed countries (LDCs) (Tsamenyi et al., 2008; Uddin and Hopper, 2001), it is therefore worthwhile investigating what controls exists in such economies, how they are used and how different forms of controls coexist in driving organizations to their goals.

Sequel to that, the following research questions are intended for answers by this research:

1. What types of formal controls are used in the case under study?

2. What types of informal controls exist alongside the formal controls?

3. How does the formal control system coexist with the informal control system?

4. What factors influence the way controls operate in the case organization?

Aims of Research

This research work intends to evaluate and identify the forms of controls operating in the organization under study, the functionality, effectiveness, modus operandi and coexistence between the various forms of controls driving the objectives and strategy of the organization.

The outcome of the investigation will be of utmost benefit to the organization under study as it is intended to give insights into managing and aligning the different forms of controls that exist within their confines to achieving their set goals.

The academic community and practitioners (accountants and managers) stand to benefit from the findings which are intended to give an understanding of how formal rules and standards of operation could be enhanced by complimenting them with other informal rules within the organization.

It will bring to bear the nature of controls and manner of interaction and operation in an emerging economy which has received less attention in prior researches that have addressed the issues of controls, give clues that could be further studied by other researchers to enhance better understanding of controls in such societies.

Methodology

This study adopts the case study strategy. Robson (2002) defines case study as 'a strategy for doing research which involves an empirical investigation of a particular contemporary phenomenon within its real life context using multiple sources of evidence' (p.178). A case study strategy has been adopted as it will give an in-depth understanding of the perspective of the research and the processes being instituted (Saunders et al., 2009).

Different types of case study approach have been identified by writers. These include; single case study, multiple case study, holistic case and embedded case study. However for the purpose of this research, a single case study approach will be more ideal given the time constraint and the uniqueness of the setting under which the study is to be conducted.

Informal access has been arranged in the case organization (a public limited company) which will guarantee access to staff at managerial and subordinate positions as well as documents relevant for the research.

The research will adopt the interview method of data collection. Managers at different levels of the organization will be interviewed to gather relevant data relating to the operation of controls in the organization. Staffs of the organization at various levels will also be interviewed. The structured and semi-structured types of interviews will be employed. Under this context, similar set of predetermined questions will be asked to the managers, while certain variations to the structured questions may be applied when interviewing other employees. The responses of the interviewee(s) will be tape recorded for further transcription if such procedure is allowed, otherwise notes will be taken. At least 8 people will be interviewed in the course of this study.

Theoretical framework

The new institutional sociology (NIS) (DiMaggio and Powell, 1983) will be adopted in this analysis. The NIS provides clarification to the changes that occur in organizations. It recognizes the different institutional structures applicable to different countries (Phillips et al., 2009). DiMaggio and Powell identified three components of institutional change which they referred to as institutional isomorphism. The components are the coercive, mimetic and normative isomorphism. Scott (1995) identified these components as cognitive, regulative and normative elements. The cognitive element shows shared social knowledge and practices that are held in common, the regulatory element reflects the laws and laid out rules which tailor behaviour in a certain way, while the normative element reflects beliefs, values and norms that control behaviour and justifies expected actions.

Structure of Dissertation

The proposed work will be presented in six chapters with each chapter having subheadings to enhance understand when reading. The first chapter will be the introduction and background of the study, it will be followed with chapter two which will be the review of related literature, chapter three will look at the Nigerian environment (reforms, politics, demography, etc), chapter four will be the research methodology under which the method adopted, the advantages and limitations of the method, the approach employed under the method i.e. case study will be detailed. Chapter five will be the case results and analysis of findings, under this chapter the background of the organization will be discussed, findings about the organization will be presented, the types of controls identified in the organization will be discussed as well as how the various forms of controls interact to drive organizational goals. The last and final chapter will be chapter six which will be the conclusion and recommendation chapter. Under this chapter, summary of major findings, recommendation for practice, limitations of the research, and suggestions for further research will be given.

Brief literature review

Proper decisions making fostered by coordination and control are essential for organizations to reach their goals through strategic implementation (Jones, 2009; Nicos and Bellas, 2005). The relationship conflict arising from the differences in interest between the owner(s) and manager(s) and the cost borne by the principal in an attempt to control the agent(s) behaviour and reduce negative vices is referred to as agency problem (Eisenhardt, 1989) and gives enough reason for proper control structures to be put in place.

Control systems are built on the premise that people will be motivated to achieve organizational goals. These controls are based on probability and not certainty (Flamholtz, 1979). Organizational control systems focus on aspects of behaviour which will lead to the attainment of organizational objectives. Basic components of control systems will include; goals directed at activities performed, standards of performance required of each specific activity goal, performance measurement and monitoring and reward system that reinforces performance and motivates ( Flamholtz, 1979). Researchers have identified different forms of controls existing in organizations (Jaworski et al., 1993; Cravens et al., 2004; Ouchi, 1980, Ouchi, 1977, Noreen, 1988; Sims, 1992).

Management control structures identified are broadly classified into formal and informal controls. 'Formal controls are written, management initiated mechanisms which influence the probability that employees or groups will behave in ways that support the stated objectives of the organization' (Ayers et al, 2001; Jaworski, 1998). Formal controls in organizations come in the form of decision making rules, clear definition of expectations, precise reward structures and evaluation criteria (Song et al., 1997; Ayers et al., 2001). The control system operates effectively under conditions of stable environment, necessary routine behaviours, change process that can be monitored, and output that are measureable (Baucus and Near, 1991). They are designed totally or partially to check the agency relationship in organizations (Falkenberg and Herremans, 1995). Ouchi, (1980) argues that formal control systems offer limited guidance as controlling behaviour, using formal systems requires developing set of rules for definite situations before the situations occur and it is not possible to stipulate a set of written rules that will encompass all possible contingences.

A contrast to the formal system of control is the informal system which does not demand explicit rules to direct behaviour (Ouchi, 1980). Informal controls are usually not documented (Jarworski, 1988). The tacit rules instituted by the informal system produce an implied attitude or knowledge as to the functionality of the organization and what it expects. From this implicit knowledge an employee can infer an appropriate rule to govern any particular situation, informal systems therefore provides a stylish and comprehensive form of control (Falkenberg and Herremans, 1995). The seminal work of Ouchi, (1977) in which he identified what he described as 'clan control' has been widely referred to as a pointer to the existence of informal controls in organizations. Under clan control which requires instituting common values, beliefs and norms, no goals are specified at the beginning of an activity, but get evolved over time (Ouchi, 1977). The superiority of the informal system emanates from its ability to control behaviour in an unexpected or ambiguous situation (Falkenberg and Herremans, 1995).

Researches on management controls in LDCs has shown the informal control systems having a high degree of influence in organizations and that they coexist with the formal control systems and in many cases have dominant influence (Tsamenyi et al., 2008; Haque, 1995; Haque and Hopper, 1997; Uddin and Hopper, 1999; 2001, 2003; Tsamenyi and Hopper, 2003; Tsamenyi et al., 2004, Wickramasinghe and Hopper, 2005).

However, Bruce (1994) noted that formal and informal practices are often entwined. The interdependence of control systems was echoed my Dalton, (1971) and was acknowledged by Hopewood, (1974) who noted that the complexity of organizations implies that a single control system will be less appropriate, but rather simultaneously running control systems will be more adequate.

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