The Definition of Management Control Systems

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Researchers have been plagued with the difficulty of clearly defining the notion of management control systems (MCS).The different perspectives from which researchers have approached the study of MCSs have created these variations in definition (Malmi and Brown 2008). The disparity in views has led to numerous definitions of MCS with some of them overlapping, while others remain quite distinct (Abernethy and Chua, 1996; Chenhall, 2003; Alvesson and Karreman, 2004). For instance, Kling and Iacono (1984) from a political perspective see control as an avenue of asserting influence. They posit that controls are designed by controllers to buster their own interest and predilection. Orlikowski (1991) distinguished between internal and external forms of controls. Internal forms of control according to him involves superiors personally observing subordinates, detailing the 'job description', laid down rules and procedures and 'technical infrastructures', while external controls may take the form of professional indoctrination and training. Kirsch, (1997) argued that individuals who work in self-managing teams are in control of their own activities and that controls may take the form of 'traditional hierarchical relationship' or may be exerted through meticulous hiring and training as well as shared ideologies. Handerson and Lee (1992) from a theoretical perspective opined that control mechanisms involve classification of roles, assignment of responsibilities and evaluation. Some other researchers have taken a wider view of the concept of MCSs to include management accounting (MA) practices like budgeting, as well as components of management accounting systems (MAS) which is the methodical application of MA directed at achieving organizational objectives (Malmi and Brown, 2008) and MCS which incorporates MAS and includes other forms of control like clan and personal controls making it a broader term (Chenhall, 2003; Ouchi, 1980). Merchant and Van der Stede, (2007) took a narrower view of what constitutes MCS by separating management control from strategic control and defining 'management control as dealing with employees' behaviour' (p.8) and a necessary guard to cushion against opportunistic behaviours and reduce the possibilities of people acting contrary to organizational precepts(Eisenhardt, 1989).

The seminal work of Simons, (1995) has been widely referred to in the literature. In his framework, he defined management control systems (MCS) as 'the formal, information-based routines and procedures managers use to maintain or alter patterns in organizational activities' (Simons, 1995, p.5). Merchant and Otley (2006) and Widener (2007) defined MCS in terms of purpose-providing information necessary for planning, decision-making and evaluation. Some other researchers have referred to control as a means of achieving goal congruence in organizations. Flamholtz et al. (1979) for instance defined controls as 'attempts by the organization to increase the probability that individuals and groups will behave in ways that will lead to the attainment of organizational goals' (p.36). Langfied-Smith (1997) suggested that MCSs serve as avenues for gaining cooperation among group of individuals or units of an organization that may have common objectives that are not fully congruent and directing efforts to specific organizational objective. Malmi and Brown (2008) posit that the discrepancies and inconsistencies in the conceptualization of MCS has created some problems in MCS research with respect to the interpretation of results obtained and the design of MCS. They then suggested that these issues could be made clearer by starting with the "managerial problems of directing employee behaviour. Those systems, rules, practices, values and other activities management put in place in order to direct employee behaviour should be called management controls." (p.290). They explained further that if these systems are complete instead of simple rules, then they could be referred to as MCSs and that accounting systems designed with the intention of supporting decision making at any level in the organization but that does not involved monitoring those systems should be disregarded as MCS and rather be termed MAS. Bisbe and Otley (2004) defined MCS as a "a set of procedures and processes that managers and other organizational participants use in order to help ensure the achievement of their goals and the goals of their organizations" (p.709) and that it constitutes both formal and informal control systems which includes social and personal controls.

2.1 Formal controls

"Formal controls are written, management initiated mechanisms which influence the probability that employees or group will behave in ways that support the stated objectives of the organization" (Ayers Gordon and Schoenbachler, 2001, p.135). Formal controls include elements of organizational structure such as decision-making rules, well-outlined statement of expectations, precise reward structures, and criteria for evaluation (Jaworski, 1988; Ayers et al., 2001). According to Leatherwood and Spector (1991) formal control systems are designed wholly or partly to monitor the principal agent relationship in business organizations. These involve high degree of output and process control (Cravens et al., 2004).

Formal controls according to Langfield-Smith (1997) are those objective components of the control system which are more visible and include standard procedures of operation, rules and budgeting systems. He noted that most empirical research on MCS has focused on formal controls which include results or output controls and are feedback oriented. They are controls intended to achieve specific objectives (Langfield-Smith, 1997). Formal MCS consist of tenaciously designed, information based routines, precise sets of structures, procedures and processes that managers employ to make sure that their organization's strategies and policies are carried out or, where necessary that they are adapted (Bisbe and Otley, 2004). Formal control systems serve as mechanisms for minimizing uncertainty and may also have a self-effacing effect in controlling real work (Sandelin, 2008). The effectiveness of formal control systems are enhanced in a stable environment where routine behaviours are required by employees and can be monitored and output measured (Baucus and Near, 1991; Ouchi, 1977; 1980). Formal systems encourages employees to pay more attention on factors that drive the economic interest of the organization and tailor behaviour towards the achievement of set economic goals (Falkenberg and Herremans, 1995). Falkenberg and Herremans (1995) identified key elements of formal control systems to include, organizational objectives, budgets, performance measurement system, reward criteria and codes of ethics. They opined that formal controls set the standards upon which employees behaviours are compared to make them more predictable and thus reduce uncertainty for an organization's management.

The work of Simons (1995) levers of control which focused primarily on formal routine activities, processes and procedures that encompasses budgets, plans, monitoring systems, market share as well as informal processes that have effect on behaviour has been widely referred to in the literature (Bisbe and Otley, 2004; Sandelin, 2008; Toumela, 2005; Widener, 2007, Abernethy and Brownell, 1999, Mundy, 2010). Simons' distinguished between beliefs, boundary, interactive and diagnostic control systems. According to Simons (1995), two of the levers of control (i.e., beliefs systems and boundary systems) direct the organizations search activities and are both variations on formal control systems.

2.1.1 Beliefs systems

The complexity of the business environment in recent years has encouraged organizations to set out an outlined beliefs system with well structured mission statements, visions and strategies that enable it to remain competitive (Simons, 1995; Mundy, 2010). 'A belief system is the explicit set of organizational definitions that senior managers communicate formally and reinforce systematically to provide basic values, purpose and direction for the organization' (Simons 1995, p.34). Beliefs systems are formally initiated and communicated in organizations through documents like mission statements, statements of purpose and credos. They express massages about the core values of the organization and serve the purpose of inspiring and guiding the organizational search and discovery (Mundy, 2010). Beliefs systems help in tackling problems and implementing strategies and also serve as avenues for motivating individuals to search for alternative ways of creating value (Simons 1995, Simons, 2000). The organizational beliefs systems enables managers to transform the abilities of individuals in the organization into unified organizational output by making sure that every individual has a clear understanding of the organization's purpose and what contribution or role he/she has to play towards actualizing such purpose.

2.1.2 Boundary Systems

The boundary system as the name implies sets the limit or demarcates the acceptable domain to which participants activities are allowed (Simons, 1995; Bisbe and Otley, 2004; Widener, 2007). Boundary systems in contrast to beliefs systems do not stipulate positive ideas but rather create barriers based on acceptable business risk when embracing opportunities. The organization's beliefs system and boundary system work together. While the beliefs systems provides organizational rationale and impetus that motivates and guide individual seeking opportunities within an unrestrained space, the boundary systems conveys the limits within the domain that is acceptable (Simons 1995). Working in tandem, the beliefs systems and boundary systems alter opportunity space into a focused sphere of influence that participants are encouraged to exploit and thus reduce waste of organizational resources (Mundy, 2010). Financial risks are checked by the use of financial data to establish limits, while the non financial data sets boundaries for strategic applications (Tuomela, 2005).

2.1.3 Diagnostic control systems

These are formal MCSs that provide a comparison between results obtained from actual activity and planned objectives (Mundy, 2010). Diagnostic control systems relay responses that gives direction as to the appropriateness or otherwise of actual performance and serve as the nerve centre of traditional management control systems by ensuring the predictability of accomplishing set targets (Simons, 1995).

Mundy (2010) points out that managers use diagnostic controls to detect variation and exception from set objectives. That while the financial data designate when objectives are being realized, the non financial procedures assist managers to control decisive success factors. The complexity of operating a large organizational setting necessitates the use of self initiative by subordinates in reaching vital decisions, thus diagnostic control systems help in ensuring that outcomes are in tune with plan(s) and necessary corrective measures implemented to check deviations of outcomes from plans (Simons 1995). Diagnostic controls have also be lauded for their ability to motivate managers towards achieving outlined objectives rather than being just constrains on managers' influence (Mundy, 2010).

2.1.4 Interactive control systems

Interactive controls make certain a free flow of communication between managers and subordinates and ensure the involvement of both parties in reaching a decisive agreement on the fundamental assumptions and action plans that propels organizational activities (Mundy, 2010). Managers employ interaction to prioritize organizational objectives and to encourage the formulation of new strategies (Simons, 1995, Mundy, 2010).

Mundy, (2010) asserts that 'any MCS that facilitates formal process of debate can be used interactively. For example, managers involved in budgetary processes and the design of performance measurement systems in order to share information and reduce gaps in knowledge' (p.3) is an interactive control system. Interactive control measures pave way for discussion in a facilitative non invasive way and enables managers to keep informed with subordinates activities (Mundy, 2010; Abernethy and Brownell, 1999; Simons, 1995). Formal systems of control are more apposite to control behaviour when ethical issues of priority are issues related to funds, assets or fraud, however because of the complexity of the business environment, monetary issues are a minute part of ethical concerns and the formal system is lacking in scope, suppleness and sensitivity required to tackle the complexity of ethical issues (Falkenberg and Herremans, 1995). The traditional measures of control and behaviour have been found lacking in efficiency in circumstances where the ability to measure outcome is low and where there exist imperfection in knowledge of the transformation system (Pierce and Sweeney, 2005). Controls in organizations have also been found to take different forms like personal surveillance requiring superiors' observation of subordinates which is a non formal control mechanism. The charisma of the superior in question has also been acclaimed to be a useful form of control (Daft and Macintosh, 1984; Ouchi, 1977).

2.3 Informal Controls

In addition to the establishment by researchers that decision-makers depend on formal control structures as well as measures to give decisions the glaze of objectivity and independence, it was also established that pressure to organizational trust and legality can be reduced by appealing to customs and norms (Sitkin and George, 2005). Although companies have traditionally relied on formal control mechanisms like planning, standardization and centralization, many organizations are increasingly resorting to informal mechanisms of control like partaking in committees and teams as well as allowing inputs in the decision making process and generally control that emanates from the shared norms and values in organizations and the socialization of members to these values (Gomez and Sanchez, 2005).

Informal controls are unwritten mechanisms, usually initiated by workers, designed to impact the behaviour of personnel in organizations (Jaworski, 1993). According to Friedkin (1983), informal control is defined as comprising of "a process for monitoring and evaluating performance and a process for influencing the monitored and evaluated performance (p.55). In a communication network, informal control process seldom includes persons who are more than two steps apart in the network or who share a small number of contacts in the connection, but rather occurs where there is a high degree of cohesion in the network (Friedkin, 1983), suggesting that whereas formal mechanisms are tangible in nature the informal mechanisms are rather subtle and elusive (Gomez and Sanchez, 2005).

Informal controls are usually not laid out in document form (Jaworski, 1988). Two forms that informal control could assume are: individual level and clan or group level (Kirsch, 1997). Clan control involves instituting common values, beliefs and norms, specific goals or objectives which are usually unidentified at the beginning of an activity, but instead evolves over time (Ouchi, 1979; 1980). Individual level of control applies when individuals set their own targets for a particular task, and go ahead to ensure they discipline themselves to perform, caution and reward their efforts (Kirsch, 1997). Clan control could be observed when organizations have development standards that are not laid out in documented form but rather in the form of 'unwritten policy of using field names as defined in the data dictionary' (Kirsch, 1997, p.217); Ouchi, 1979; 1980). According to Kirsch and Cummings (1996), the demonstration of self control is more frequent among professionals who spend longer term in the organization and are opportune to improve, redefine and extend the work procedures and methods that exist. The informal systems focused on preserving peer pressure and enhancing appropriate personal values applied to social imperatives (Chenhall, 2003). It is more concerned with encouraging socially responsive decision making that are in tune with organization's documented values (Norris and O'Dwyer, 2004).

The adoption of a system of cultural control in organizations has implication on the selection process, training as well as monitoring of employees. It requires the integration of employees into the organization culture (Baliga and Jaeger, 1984). Thus attention is given to employee selection process and skills required for the job must be backed with a compassionate conformance to organizational culture (Baliga and Jaeger, 1984). In the face of uncertainty in both perspectives, cultural and clan control is more suitable (Wilkins and Ouchi, 1983). The preeminence of informal systems emanates from its control of behaviour in vague and unanticipated circumstances (Falkenberg and Herremans, 1995). Informal strategies contravene almost all conventional prescription of wisdom (Fortado, 1994).

The informal system alternates from being the strongest point to the most delicate system for encouraging the desired behaviour (Noreen, 1988). The fragility of the informal system stems from its potency which ensures that congruent or incongruent behaviours are promoted depending on the implied knowledge created by the informal system (Falkenberg and Herremans, 1995). The informal system has a dominate role that influences ethical conflicts that are considered by members of an organization and thus the resolution process and characteristics (Sims, 1992; Noreen, 1988). The effectiveness of the informal control is more pronounced where it is difficult to monitor performance (Martinez and Jarillo, 1991). Informal controls have been found to have a dominant role in most organizations where they are prominent (Tsamenyi et al, 2008). However, Daft and Macintosh (1984) articulated the existence of different forms of controls operating in the organizational hierarchy.

2.4 Interaction between Formal and Informal Controls

Researchers have asserted that controls do not exist independently but combine to produce synergic effect that affect the attainment of set objectives (Anthony, 1952; Dalton, 1971; Hopewood, 1974; Jaworski et al., 1993). Martinez and Jarillo, (1991) argue that researches have revealed the incorporation of both formal and informal control mechanisms with personal and cultural controls as components.

Flamholtz (1979) noted that control systems are directed at certain goals and that the ideal purpose of a control system is not to make people conform to certain norms of behaviour but directed at influencing decision making and actions intended to achieve set goals. Unfortunately, the formal control system alone is lacking in capacity, suppleness and sensitivity to come to grips with the complications inherent in achieving these objectives (Falkenberg and Herremans, 1995). Sitkins and George (2005) for instance posit that although researchers have established that decision making depends on formal control structures and procedures to give decisions the strength of objectivity, it was also noted that threat to organizational legality and belief can be reduced by engaging to traditional norms.

Jaworski et al., (1993) distinguished two broad classes of control i.e. formal and informal controls and opined that to have a full understanding of the importance of management controls, there is the need to give priority to the concurrent use of multiple controls. This is in tandem with various assertions by previous researchers like Anthony (1952) who being one of the pioneers in the investigations of controls noted that controls do not exist in isolation, but that it is "easy to overemphasize the formal control mechanism and miss entirely or underemphasize the informal controls" (p.46). The placement of emphasis on formal controls is partly the result of their being easier to observe and assess (Jaworski, et al., 1993). Dalton (1971) argued that the various forms of controls are not autonomous of each other as echoed by Hopewood (1974) that formal controls alone cannot lead to an effective control system in a complex organization, but that professional controls must be managed concurrently. However, Kirsch (1997) argues that what constitutes a satisfactory formal control or gives the insight that an obtainable control mechanism is suitable remains unclear. That is how much of formal control that is appropriate before it could be supplemented with informal control or what situations warrant more use of either forms of control is not clearly defined.

2.5 Management control systems in developing countries

Despite being previously ignored, research on accounting in less developed countries (LDCs) has received an impressive attention in the last two decades with researches spanning across continents (Alawattage et al., 2007; Asechemie and Ikeri, 1999; Ezzamel et al., 2007; Hoque and Hopper, 1994; Tsamenyi et al., 2004, 2008; Baydoun and Willet, 1995). Their importance has been emphasized and welcomed as they are thought to be a development in the right direction because of the significance of LDCs in world trade (Hopper et al, 2009).

Findings from various researches point to the conclusion that there are no differences or in appropriate practices in accounting techniques in LDCs though they are presumed to exist in 'traditional sectors' (Hopper et al., 2009). Differences that could be attributed to MAS could be traced to cultural orientation, economic as well as political ideologies (Hopper et al, 2009). Although there has been growing interest in management accounting research in LDCs in recent years, the work of Hopper et al., (2009) is a well articulated and comprehensive research that has stretched the length and breadth of LDCs. Their work which reviewed existing literatures on researches in LDCs from the colonial era through state capitalism to market capitalism gives an adept insight into the existence, growth and development of MASs in LDCs.

An understanding of colonialism and its legacies are fundamental to the understanding of MASs and accounting as a whole in the majority LDCs. This is because colonialism changed the mode of production from its feudal nature where chieftains were in control of land ownership and productivity and income governed by assiduousness, needs and such elements (Hopper et al., 2009). Traditional societies were however not devoid of ways of accounting. Evidence supports the existence MASs built-into family and cultural values in Chinese Qing dynasty era, and acknowledged the separation of financial duties, use of cash controls and budgets, although their effectiveness and suppleness where subdued by power distance (Chan et al., 2001). Asechemie (1997) contends the persistence of traditional values in African Accounting systems in the informal economic sector. Accounting has also been found to be a useful tool for shaping cultural identities (Constable and Kuasirikun, 2007).

Traditional and capitalist mode of operation were embraced by the colonial states and evolved from merchants' capital to exports of commodities through to imperialism (Hindess and Hirst, 1977). Accounting has been said to support slavery in British empire and a means of wielding control in plantations from far distances and has served a vital means of subjecting activities to control (Annisette and Neu, 2004; Tyson et al., 2004; Bush and Maltby, 2004). Ethnicity was found to have an impact on MAS in the colonial era, (Alawattage and Wicramasinghe, 2008) found that conflicts between workers in Sri-Lankan plantation resulted in racially motivated MAS on tea estates. Similar findings by Robotham, (1989) and Ayensu, (1997) in Ghana suggest that ethnic and religious divide between the north and south was important to the way workers were regarded. These ethnic divide is said to still be influential on MASs functions in LDCs as it was in the past (Hopper et al., 2009). MAS employed by imperialist firms may have served the purpose of planning and directing focus on goals, however attention was placed on financial reporting for accountability and to keep abreast with expected remittances. Bureaucratic controls like MAS may have had little import in the colonial era because of the coercive nature of controls that existed (Hopper et al, 2009).

State capitalism presented a situation where the state had a dominant role in finance and capital markets, controlled greater part of the gross domestic product, employment opportunities, the funding of most industrial activities as well as distributing resources to public enterprises (Uddin and Hopper, 2001; Hopper et al., 2009). Legislative proceedings allowed the state substantial control over state owned enterprises with accounting playing a pivotal role. Audited accounts that were made available to the parliament via ministries were the life wire of accountability (Uddin and Hopper, 1991; Wicramasinghe and Hopper, 2005). Although prior MAS researches give credence to benefits of centralized planning, industrialization and public ownership with accounting playing a central role (Seidler, 1967; Bryceson, 1999), Needles (1976) contends that an in-depth understanding of the political, cultural, social and legal environment is vital.

Ghartey (1985) articulated cynicism over claims by Mirghani (1982) that ambiguity in development planning could be abridged by adopting a broader MAS encompassing local and not replicas of Western development models. He based his argument on government domination of control in most African countries, futile institutional structures and inconsistent policies among other factors.

Market capitalism are the direct results of the influences of the World Bank and International Monetary Fund (IMF) structural adjustment programmes (SAP) preconditions to be met in other to qualify for loans, requiring less government interference, competition, free trade, public sector reform and private sources of capital (Hopper et al., 2009). The mechanism of market capitalism should be able to stimulate economic performance through effective coordination and control giving off problematic accounting based on state dependent regulations (Peasnell, 1993).

Market capitalism has however been criticized for ignoring local resistance to privatization , poor financial systems for the sale of equity, local needs and questionable evidence that private enterprises perform better than state owned enterprises (Hopper et al., 2009; Cook and Kirkpatrick, 1995). Stiglitz (2002) argued that IMF (solutions) has not made things better but have rather worsen or created more problems by encouraging global financial interest.

Chapter Summary

Several researches exist implicating management accounting in the decision making and control process of organizational activities (Janes, 2009; Friedl et al., 2009, Inglis and Clift, 2008; Lea, 2007, Frezatti et al., 2006) evidence suggest the existence of forms of control other than that implied by management accounting and have been branded informal (Ouchi, 1977; Noreen, 1998; Sitkin and George, 2005). However, much has not been done to ascertain the mode of operation, coexistence of these forms of controls and how they interaction to accomplish predetermined organizational goals. The current work seek to address this gap and takes the investigation down to LDCs which have been found to play a significant role in world trade but have received minimal attention in this area of research.

The research work adopts the new institutionalism framework which acknowledges the existence of different institutional structures in different country to evaluate formal and informal modes of control. "Formal controls are written, management initiated mechanisms which influence the probability that employees or group will behave in ways that support the stated objectives of the organization" (Ayers Gordon and Schoenbachler, 2001). Gomez and Sanchez, (2005) among others posit that management of organizations are increasing resorting to other forms of controls other than the formal control procedures instituted by the organization.

However, researchers have also found that while these different forms of controls have much benefits to offer organizations, a coalition of controls (i.e. formal and informal ) sandwiched into the organizational control system produce the desired effects and drive organizations towards achieving their set goals. It therefore becomes pertinent that a study be made on how these controls interact to eliminate ambiguity in their application in organizations.