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This study largely assesses the boundaries of the system of accountability within an organisation vis-à-vis the boundaries of accounting.
Management researchers have laboured since the 1970s to attempt to understand the intricacies of the processes that form management accounting practices in organisations. Research has also tried to understand the boundaries of accountability and accounting systems functioning therein. It is observed that multifaceted influences that give shape to management accounting practices, also give rise to the multiplicity that is seen in the practices within organisations.
The Agency theory is useful in that it aids the explanation of accountability and can be used to track the development of the audit discipline. Simply put, the agency model means that principals do not trust their agents due to information asymmetries as well as self-centeredness (ICAEW, 2005). The relationship between a company's shareholders, its directors and auditors exemplifies the agency theory. The audit function helps explain its relevance regarding organizational boundaries. Thus, the Agency Theory is one theoretical framework that can be used to support the argument that accounting helps the boundaries of an organisation being defined by the boundaries of the organisation's system of accountability.
This study endeavours to analyse the boundaries of the system of accountability within an organisation that defines the organisational space that is bound by its accounting systems. It also tries to study the role of accountants and accounting practices in managing such a contemporary organisation.
Meaning of Accounting
The meaning and scope of accounting is hard to define. Since accounting obtains its worth from the social value pertaining to the environment within which it is developed, its definition and scope transform with time. Broadly, it is debated that accounting is related to furnishing information concerning the performance, financial position and changes in financial status of an organisation that is valuable to an extensive range of possible users to make economic decisions (Glautier & Underdown, 2001).
Glautier & Underdown (2001) indicated that accounting theory has developed through a lengthy passage of time throughout which considerable changes in market structures and human behaviour have occurred. It is also acknowledged that accounting intermingles with society and that the environment transforms the accounting innovation process.
This has led accountants to devise from experience certain widespread assumptions on the basis of which an organisation's financial results and statements are prepared. These assumptions or the popularly known 'accounting concepts', define the regulations.
It is very difficult to keep the owners posted about each and every thing regarding the organisation. Therefore, numerous self-styled boundary rules exemplified by the basic accounting concepts of 'going concern, entity and periodicity' have been developed so as to resolve the inclusion or exclusion of items to be reported. This then defines the boundaries of reporting that accountants follow.
The definition of the boundary should then establish how the accounting data ought to be documented (in terms of money measurement, realisation, historical cost, matching, accruals, materiality and duality). Finally, so as to restrict possible individual manoeuvring, numerous ethical rules (e.g. objectivity, consistency and prudence) have evolved. These rules put forward the existence of the moral and governance dimensions of financial reporting (Glautier & Underdown, 2001).
It is critical to appreciate the basic distinction between concepts, bases and policies that rule accounting worldwide. Accounting bases are the different methods of the application of accounting concepts which have been developed and are in practice (e.g. methods of depreciation and stock valuation).
Accounting policies are the explicit accounting bases selected and applied by an organisation in the preparation of its financial statements, expectantly those most appropriate for its particular state of affairs.
In numerous countries (including UK), accounting policies are required to be disclosed by an organisation in its annual financial reports so as to help readers to properly interpret and understand the financial statements.
It is for this reason that all audit reports report a 'true and fair' instead of a 'right' representation of the books of accounts. This applies equally to statutory and internal audits.
Meaning of accountability
Among the numerous definitions of accountability in the public domain, one definition specifies accountability to denote the obligation to express and be responsible for performance taking into account agreed expectations. It further clarifies that there is a distinction between accountability and responsibility. The distinction is that responsibility is the duty to act whereas accountability is the duty to answer for an action (Beechy, 2007).
Another definition, for instance, affirms that accountability denotes that "a program is effective and in conformance with its coverage, service, legal, and fiscal requirements." Evidently, merely the fiscal prerequisites of accountability can be satisfied through financial reporting (Beechy, 2007, p3).
Accountability is all-encompassing. Being held accountable motivates individuals to be proactive in fulfilling their responsibilities. Although these definitions of accountability differ significantly, their larger sense implies that managers are also answerable for clarifying their performance to all the concerned stakeholders.
Accounting research has conventionally been concerned with the manner in which accounting facilitates the business of production. Conversely, it also raises the question of the manner of involvement of accounting in the creation of the organisation.
The concept of 'boundary maintenance' helps to comprehend the manner in which this differentiation is achieved. Boundaries are conceived in two ways, as thresholds and as structures. They deem accounting as information as also a system of accountability. They also consider accounting as a moral order as well as a legitimising institution in the framework of the organisation's production and also re-production via the management of boundaries (Llewellyn, 1994).
Organisations are entrenched fixed in the wider society, though an important factor in their development is when they become different and continue to remain different from their environments. However, the differences are also limited by the extent to which boundaries can be stretched.
Perspectives on margins of accounting
Miller (1998) stated that the concept of 'margins of accounting' helps us to understand the continuous transformation of accounting, its accessibility to other bodies of know-how, and the manner in which accounting has evolved from practices and thoughts drawn from elsewhere. To highlight the margins of accounting is to stress on the movable and flowing character of accounting. Practices currently regarded as essential to accounting could have existed at the margins earlier, and practices at the margins currently could move to the centre of accounting someday within as less time as ten years. The views on costs for decision-making, cost accounting and discounting techniques for decisions regarding investment appraisals, and cost accounting as a method of managing the factory are cases in point.
Accounting is torn with tensions regarding its identity as well as its boundaries. Proposals for novel methods of calculation only heighten and make evident such worries (Miller, 1998). This results in the introduction of numerous methods and theories of accounting. It further establishes that the accounting discipline is rather flexible in the deployment of such methods and attempts to resolve the disagreements. Yet such flexibility is subject to the boundaries within which organisations function.
There are no broad principles via which one can judge as to what should fall inside and what outside accounting. In light of the above, for the 'postmodernists' who have learnt about 'fragmentation', and are actively seeking it ubiquitously, including within accounting, it can be highlighted that fragmentation is inherent in accounting, is intrinsic to managerial capability more commonly, and undoubtedly to other publicly legitimated disciplines (Miller, 1998).
Contemporary issues in management accounting
Researching management accounting practices is challenging and motivating, since management accounting is a group of practices that are frequently loosely joined to one another and diverging across time and also space (SSE, 2010).
Extensive systemic changes including political regime changes, novel theories of management controls, influence of globalising pressures on commercial affairs, changes in concepts of governance, ethics and effective knowledge management as well as technological advances, together with the rise of broadband, have all influenced management accounting efforts. The field continues to be fast changing. The relevant spheres of conventional management accounting topics for example budgeting and responsibility accounting, contingency frameworks, contract theory analysis, strategic cost management and performance measurement systems can be regarded within the perception of evolving concerns confronting contemporary organisations and modern management thought (Bhimani, 2006).
Management accounting practice has seen the recent emergence of different methods of research. Many of the methods have not only changed over time but have also spread around the world haphazardly. Even the management accounting phraseology varies from country to country. During the last ten years, management accounting has observed changes not only within present domains but has also seen changes beyond its recognised limits of activity. Yet, it has not changed beyond the organisational boundaries in terms of the same systems being used without major shifts in thinking over the last four decades.
Role of accountants
Recent practices and changes within the environment are frequently foreseen as guiding management accountants to espouse a business orientation. However, the statement that experiential evidence pointing towards basic shifts in the functions performed by management accountants continues to be comparatively scarce is mentioned by Lambert & Sponem(2009). Data gathered from interviews conducted with employees of ten multinational organisations helped identify four styles assumed by the management accounting function: the safeguarding, the discrete, the partner, and also the omnipotent styles. It is evident that every style can be related to a specific role in terms of socialisation of managers, discrete control of managerial behaviour, and facilitation of decision-making and also centralisation of power respectively. Detailed examination of the management accountants' roles discloses that these roles can both be connected to unforeseen benefits, for instance promoting creativity, and also unexpected disadvantages, for instance drift in accountability and governance. Further research results reveal that the greater part of management accounting functions studied have only limited authority and hence a limited boundary of accountability.
It is evident that the limited authority vested in the accountants is drawn from the limited authority of their line managers who also are bound by the boundaries vested in the directors. This is true not only for the management accountants. It is as well true of internal auditors who are independent 'agents' of the board of directors in companies with a clear focus on accountability.
Further, the statutory auditors, as agents are accountable to the shareholders within the boundaries set by the organisational policies and practices. However, there is a clear conflict of interest since the audit function per se whether as part of the statutory or the internal audit discipline, cannot function truly independently. This is due to their boundaries being limited by the mutually agreed scope of work. The compensations towards such work are also compensated by the same principal.
Research results imply that entrusting too much authority to management accountants raises the possibility of operational managers disregarding essentials. This could be putting brakes on innovation and encouraging risk aversion (Lambert, & Sponem, 2009). This again limits the organisation's boundary of accountability.
The results of an experiment carried out to examine the predictions of a planned framework show that commitment to a specific cost allocation system results in higher preference for the selected system and reduced preference for the rejected alternative (Jermias, 2006).
The audit scope as applicable to certain companies in UK does not require 'accountability reporting' for instance conformance of certain companies to The Combined Code of Corporate Governance. Accounting in such spheres clearly limits the boundaries of the system of accountability in organisations. The Agency Theory here helps to substantiate that the agent i.e. accountant/internal or statutory auditor is accountable to the principal i.e. the board and needs to bridge the trust gap.
Role of accounting practices
Besides the requirements of external reporting, the necessity to construct the accounts can arise from a need to act on behalf of organisational 'reality', without really being party to it, for example when a manager is inclined to take decisions that are based on accounts, reports or figures without really engaging with reality (Kane, 2008).
Kane (2008) pointed out that performance measurement depends heavily on accounts. Eight distinct purposes concerning performance measurement have been proposed. They are in the need to: evaluate, budget, control, learn, promote, celebrate, motivate or even 'improve' in the overall sense.
These purposes appear quite dissimilar. It might therefore be questioned if a one-size-fits-all approach can be used to generate these accounts. It is evident that, though not understood what 'sizes' exist, the accounting approach espoused is relevant to the dynamics of an organisation. This implies that accounting approaches may permit some elbow room in providing for all the eight purposes in varying degrees (Kane, 2008).
It is evident that there is multiplicity within the evolving management accounting practices. One level places broad systematic pressures that shape management accounting practices. Such pressures arise from both legitimacy and economic considerations. As organisations strive to be technically proficient, different economic and institutional pressures from the character pertaining to their management accounting practices (Scapens, 2006).
The applicability of Agency Theory is evident in that management accounting practices are bound by the boundaries of accountability due to the systemic pressures arising from authenticity and economic concerns. The boundaries of the accounting practices are also formed because of their efforts to satisfy the expectations of their different stakeholders. Besides such external pressures, there are also internal constraints and pressures that bind management accounting practices.
It is the multifaceted 'mishmash' of interconnected organisational 'actors' and influences that gives shape to management accounting practices. This mishmash also explains the multiplicity that is witnessed in the practices of individual organisations (Scapens, 2006).
It has taken management researchers almost four decades to understand the complexities of the processes that shape management accounting practices. However, research has followed practice with researchers attempting to comprehend and theorise about what practitioners do and also how practices evolve. The challenge in future is to utilise this hypothetically informed understanding to offer insights that are useful and relevant for practitioners. This is required for management accounting research to have progressively more influence on practice (Scapens, 2006).
It is evident from the study that the boundaries of the systems of accountability define the limits of the accounting system within an organisation. The boundary of the system of accountability is essentially defined through the accountability vested in the board of directors bearing accountability towards the principal stakeholders. Encompassed within this boundary are boundaries that restrict the accountability of accounting system and practices and accountants.
From the study, it is seen that complex influences not only form accounting practices, but also give rise to the multiplicity that is seen in organisational practices. The role of accountants and accounting practices therefore assumes significance in the management of contemporary organisations especially in terms of accounting for realities and the performance management functions.
The agency theory supports this argument in that the principal-agent relationship both between the shareholders-directors or shareholders-auditors define the systems of the boundaries of the organisation to align their interests. This framework then limits the boundaries of the prevailing accounting policies and practices that aid the management of organisations.
Management researchers have taken about forty years to appreciate the intricacies of the policies and practices that characterise management accounting practices. The challenge in future lies in the utilisation of this theoretical understanding to furnish insights that are appropriate and valuable for implementation.