Use of management accounting information among Libyan SMEs

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The period between 1990 and 2000 witnessed opening of the economies of most less developed countries. Many public companies have privatised, with the removal of most of the protectionist barriers , Ultimately altering the competitive environment in these economies (Narayan, Godden, & Reid, 2000).

In the implementation of privatisation programmes in least developed countries (LDCs) managers should be familiar with concepts such as continuous improvement and quality consciousness. On another hand, social relationship would emerge in the workplace.

Performance measures in addition to budget and Reparations instruments help all the managers expectations (Hopper, Tsamenyi, Uddin, & Wickramasinghe, 2004), and attention that has been paid to cultural issues.

There is a lack of interest for management control systems in small and medium-sized enterprises on the part of researchers for various reasons: Larger companies offer opportunities for more interesting issues; it may be easier to identify larger companies and to get access to data; a lack of interest for management control systems between smaller and medium-sized firms; tradition; and, perhaps most important, the availability of financing. But the phrase "large is beautiful" appears to apply to the management control systems research of management accounting , but regardless of the reason for the shortage of studies, we perceive a real need for increased knowledge about management control systems in smaller and medium-sized firms which have great impact on the national economy.

This study investigates, how small & medium size firms use information of MCS in addition to the statutory annual accounts and financial reports. More specifically, the focus is on the relationships between the use of MCS practices and information, and contextual factors of small firms (Top Management Team (TMT) demographic characteristics and culture ) as well as their impact on small & medium firms' financial performance. Moreover, this study concentrates on the organizational level of small & medium firms in identifying possible causal relationships between variables.

This paper presents evidence from five SMEs firms in manufacturing sector in Libya. In particular, it explores management accounting and control practices of small and medium sized firms post -privatization, and what is the influence of societal culture and top management team demographics characteristics on MCS. Using a manifold case studies approach, this study uses contingency theory to clarify the findings.


The transition in Libya from a planned economy to a market economy, which commenced in the late 1980s, has resulted in fundamental changes such as the restructuring of state-owned enterprises, a noticeable growth in foreign direct investment, and an emerging private sector. These changes put immediate pressure on accounting practice to change to meet the demands of the new business environment.

In an attempt to rehabilitate the factories and in order to boost their productivity, the state has intervened by privatizing all the factories at the first stage of the privatization programme, transferring ownership of factories to the existing workforce and management. As a result, many problems and difficulties have emerged, including: (i) most of the former managers carrying on their duties in the same way as before; (Barker Iii, Patterson, & Mueller) some of the workforce after becoming the owners of the factories, still thinking at the same style in public sector, reflecting their lack of understanding of the privatization process; (Barker Iii et al.) inadequate capital for running the privatized factories; (iv) the privatized factories were still operated as part of the public sector, especially during the first five years following privatization (for instance, total dependency on the state in obtaining foreign currency to buy raw materials and other equipment); and finally, excess unsold stock was accumulated as a result of the lack of efficient marketing policies. These phenomena have prompted the present research given the fact that these factories are still underperforming despite the privatization process (Alfaitori, 2004; Hawadana, 2003; Mirza, 1989, 1995).

Small and Medium Enterprises (SMEs) are the main driver of economy and growth in most developing countries and Libya is not exception, where SMEs enjoy tax, privileges and exhibit unique characteristics with the ability to rapid change to create and develop. They are the main absorber of labour and real driver of investment, economic growth and competition. Acknowledging the uniqueness and importance of SMEs, the Libyan government started privatization programme with focus on transfer ownership in the first stage of privatization programme on small and medium firms (SMEs).

Management control systems (MCS)

In business firms, management control systems play a critical role, as they provide as an instrument to survive in an uncertainty environmental. Both internal and external environmental changes have can have great impact on the nature of business today. And consequently on MCSs. Management Control Systems (MCS) has been defined as a system which gathers and uses information to evaluate the performance of different organizational resources like human, physical, financial and also the organization as a whole considering the organizational strategies (Otley, 1994). MCS also impacts the behavior of organizational resources to implement organizational strategies (Otley, 1994).

Chenhall (2003) mentioned that "the terms management accounting (MA), management accounting systems (MCS), management control systems (MCS), and organizational controls (Rockness & Shields) are sometimes used interchangeably". In this case, MA refers to a set of practices such as product costing or budgeting. However MCS refers to the systematic use of MA to achieve some goal and MCS is a broader term that encompasses MCS and it also includes other controls such as personal or clan controls, While (Rockness & Shields) is sometimes used to refer to controls built into activities and processes such as statistical quality control and just-in-time management.

According to Simons (1995) "Management control systems are the formal, information-based routines and procedures use to maintain or alter patterns in organizational activities". This definition of MCS by Simons establishes a critical bridge between the disciplines of strategy and accounting and control, by showing how managers control strategy (strategy formation and implementation).

In the context of SMEs, accounting information is important as it can help the firms manage their short-term problems in vital areas like cash flow, expenditure and costing, by provide information to support monitoring and control (Son & Pru, 2006). Accounting information is also useful for firms operating in a dynamic and competitive environment as it can help them integrate operational initiatives within long-term strategic plans (Ismail & King, 2005). However, despite the importance of accounting information for their survival, many researchers found SMEs do not strategically use accounting information to their advantage (Marriott & Marriott, 2000; McMahon, 2001; Perren & Grant, 2000; Son & Pru, 2006).

According to the general view prevailing in the management accounting literature, small firms have very simple structures that they do not need nor use formal management accounting practices and information (Simons & Dávila, 2000). On the other hand, during the past decade some studies have depicted that also small firms, even tiny micro but potentially growing firms use management accounting practices and information, particularly if they are high technology (Laitinen, 2001; Reid & Smith, 2000). Additionally, consistent with this view, studies in the area of strategic management have widely found that considerable numbers of small businesses are using formal (strategic) and sophisticated planning (Berry, 1998; Gibson & Cassar, 2002; Orser, Hogarth-Scott, & Riding, 2000). The use seems to evolve especially when a firm passes its microfirm status (Perren, 1998; Perry, 2001).

Davig, Elbert, & Brown (2004) adapted balance scour card to survey small industrial firms with less than 250 workers, he found that firms that included nonfinancial performance measures were likely to perform somewhat better than those concentrating only on the traditional financial and accounting- based measures. Also he found in most firms in the study a lot of data collected appeared not be used, and less than half of the firms in the survey used their unit cost data to undertake initiatives to improve performance. The use of data on reject rate, rework rates and supplier performance measures was used even less, and only 16% of firms used the data in decision making.

Noor & King (2007) by using mail questionnaire, collected data from 214 small and medium size firms, and the finding suggested that accounting information alignment and use was related to the firm's: level of information technology maturity; level of owner/manager's accounting and IT knowledge; use of expertise from government agencies and accounting firms; and existence of internal IT staff.

Sandino (2007) studies the adoption of an extended set of management accounting systems from a sample of 97 young U.S. retailers. She found that most of these companies have adopted set of management accounting systems including budgeting system, pricing systems, and inventory control.

Noor. Azizi Ismail & Zin (2009), in their study on 136 small and medium sized firms (SMEs) in Malaysia, found that about 20 percent of the firms did not prepare income statement and 40 percent did not prepare aging schedules, and more than 40 percent did not prepare balance sheet. Important reports such as income statements are only prepared on an annual basis, while about half of the firms sought advice from accounting firms, more than 60 percent of them visited accounting firms only once a year. The findings suggest that most SMEs are still not aware about the importance of utilising accounting information for the benefits of their businesses. Furthermore, only 14 percent of responding firms that prepared accounting information internally use accounting software.

Managers, particularly from the TMT are expected to be the main user of accounting information. Therefore, it would be illuminating to examine the effects of top management demographics characteristics and culture on the use of management accounting information in the context of small and medium size firms.

Top management team (TMT)

During the past twenty years the upper echelon approach has been studied a lot, especially in the field of management, however, the focus was mainly on large firms (Carpenter, 2004; Weinzimmer, 1997).

According to the theory of upper echelons introduced by Hambrick & Mason (1984) executives of organizations shape the organizational outcomes. The theory proposes that the top management team (TMT) affects strategic choices of a firm, profitability and variation in it, growth and survive. Actually, the firm performance reflects the values and cognitive bases of powerful actors or top managers of a firm.

MCS provides the same information to all managers within the TMT, but the actual selection and use of information depends on personal preferences. the literature of Upper echelon considers that these preferences are based on the demographic characteristics of managers such as, age, education background, seniority and experience (Hambrick & Mason, 1984).

Simons (1994) suggested that new managers often bring with them new visions and strategies. Naranjo-Gil, Hartmann, & Maas (2008) suggested that the style of using MCS information is related to TMT characteristics. Hambrick & Mason (1994) also suggested that managers will be more familiar with the information to which they were exposed during their education and thus will be in that domain of knowledge.

Based on the data of 74 firms employing from 5 to 98 employees and taken from the Compustat II database, (Weinzimmer, 1997) has found that functional heterogeneity and size of management teams were correlated significantly and positively with small business growth rate. However, industry heterogeneity and age of a management team were not found to be associated with small business growth.

Birley (1990) have reported some empirical indications that small growing firms were also using greater number of managerial functions and management meetings.

Berry (1998) examined strategic planning in small high tech companies. She has reported interesting results on management structures and strategic planning in those firms. According to Berry's (1998) examinations, formal planning was positively related to growth in sales and to managers' satisfaction.

In respect to the relationship between top management team and firm performance, Naranjo-Gil (2009) found that TMT diversity, which found that TMT heterogeneity is related to better performance, innovation and change.

The importance of management control systems (MCS) to organisations resides in their role in providing information for planning, controlling, evaluating performance, developing and improving competitive strategies and making decisions.

The relationship between management accounting and organizational performance has also been under investigation. In general, the literature supports the proposition that a fit between management accounting and business environment will result in better organizational performance (Baines & Langfield-Smith, 2003; Chong and Chong, 1997; Chong & Chong, 1997; Hoque & James, 2000; Mia & Clarke, 1999). However, some studies report a weak association between these variables (Williams & Seaman, 2002), whereas in other case, the relationship between the change in management accounting and the organizational performance is agreed to be indirect, through mediating variables, such as managerial relevance information.

Gul, (1991) suggested that the effects of MCS on firm performance were dependent on environmental uncertainty, under high levels of uncertainty, sophisticated MAS had a positive effect on performance but under low levels it had a negative effect.

Duh, Xiao, & Chow (2009) reported that there is a positive association between usage of some MACs and firm performance.

Although TMT homogeneity or heterogeneity may affect the use of management accounting information derived from MCS, national culture can also influence the way TMT use this information.

National Culture

Hofstede (1980), de¬nes culture of a nation (national culture) as " the programming of the mind that is manifested in the values and beliefs of a society". Values are re¬‚ected in an individual's preferences for certain states of affairs. Hofstede identi¬ed four work-related values or national culture dimensions that differ systematically across nations: power distance, individualism collectivism, masculinity-femininity and uncertainty avoidance. Subsequent research reported by Hofestede (1988), identi¬ed a ¬fth national cultural dimension, namely, Confucian dynamism.

Hofested dimensions for Arab countries and Libya:

The findings of the four cultural dimensions are presented in the following table. In addition to the present study, other results reported by Hofstede (1980), for Arab countries are also presented for comparison. Hofstede's four dimensions of societal culture generated the following findings. Surprisingly, the results of Twati's study (2008) in an era of technology, globalization, and the internet, Libyan results were similar to Hofstede's (1980) index. While many countries' indexes worldwide have changed since Hofstede's predictions of the 1970s Libyan results still representing Hofstede's results of the 1970s. Numerous countries in the region including some of the Arab countries are different now of what Hofstede had predicted. Twati (2008), has found that Libyan culture consists of high power distance, high uncertainty avoidance, collectivist and moderate masculine society, these values indicate that Libyan organizational culture will be more on control-oriented cultures and mechanistic structures.

National culture dimensions have been used in cross-cultural studies in accounting (Frucot & Shearon, 1991; G. L. Harrison, 1992; Soeters & Schreuder, 1988). Harrison (1994) examines the effects of national culture on the level of decentralization on responsibility.

Chow, Harrison, McKinnon, & Wu (2002) and Hui (1984), studied the effects of national culture on all performance measurement and evaluation in manufacturing ¬rms. A more recent study is Hofstede's (1980) examination of national culture in international business. However, national culture has not been examined in the use of management accounting information in SMEs.

Tsui (2001) suggested that the interaction effects of MAS and budgetary participation on managerial performance were different, depending on the cultural background of the managers. These results have implications for the design of effective control subsystems and suggest that the management accounting theories developed in the context of Western economies may not be generalizable to the Chinese environment.

Etemadi et al., (2009) investigated the impact of Culture dimensions (individualism, power distance, uncertainty avoidance, and masculinity) on management accounting and managerial performance. The results indicate that management accounting tools and techniques, which improve managerial performance in one organization, may have dysfunctional impact in another organization with a different cultural background.

In this paper we explore the influence of national culture in the context of Libya following the changes in economic policy in Libya. Libya underwent a transformation from a centralized economy to a market economy. The Libyan government started the first stage of this programme with the SMEs.


This study adopted a pure qualitative research method. The rational for the choice of qualitative approach stems from the nature and context of this study. The researchers seek to understand the context of the research matter in term of how and why it occurs. That is, how TMT uses management accounting information and why.

The study selected a wide range of users using a random sample. Interviews were carried out with 21 of top management teams considered as users of management accounting information in small and medium size companies in Libya.

The respondents of interviews were 21 of top management team members who were from the 5 companies in different types of industry (2 companies, food industry; 1 company, furniture industry; 1 company textile industry; 1 company chemical industry). Three companies were medium size and two companies were small size, in this study, the size of companies is dependent on the number of employees as small size is defined as companies with less than 100 employees and medium-sized companies as having more than 100 employees but less than 500 employees. This classification is based on the Resolution of General Public Committee (Libya), No 31 of 2003 for privatization. (General Public Committee, 2003).

The interviews granted permission to tape record the interviews which were conducted in Arabic. These were then transcribed in Arabic, and then translated into English.

The following themes were listed in the interviews:

General information ( TMT, companies)

Business environment and competition post privatization.

Types of business strategy are pursued by small and medium size firms in Libya.

Chart of Accounting and cost centres.

Number of accountants.

The use of computer in accounting systems.

The number of reports is issued by accounting systems.

The time of prepare the reports.

Budget systems

Cost systems

Purpose of preparing accounting reports

Purpose of using accounting reports in information.

Level of understanding of accounting information.

How managers evaluated firm performance.

The impact of societal culture on:

- Accounting information disclosure.

- The relationship between managers and employees.

Results and discussion:

A frequency scale was developed to summarize the responses of the interviews conducted. The scale is calculated by counting the number of similar opinions about the same issue addressed in the interviews. The major issues are discussed in the following sections providing a deeper insight into the views of the respondents.

The impact of TMT demographic profiles and Culture on the use of management accounting information:

Budget is one of the oldest instruments of management control system, which used by both large and small organizations use budgets to plan their business ahead to get an idea of what the future will bring and also to review the situation to know how carry out the future plans. Planning and budgeting systems increase the amount of management control in organizations because they encourage long-term thinking achieves coordination and creates challenging but realistic goals, and there are changes in the use of budget information during pre-and post-privatization stages.

During Pre-privatization stage the purpose of preparing the budget is to avoid being accountable to any government body, and the firms prepared accounting reports only to fulfil requirement of ministry of industry.

"I think, pre-privatization our company prepare accounting reports just to avoid being accountable to any government body, we send our budgets to the ministry of industrial and after three of four months they send to us the unit price for our production, we did not care about the losses, every things come from up to down " (FMA)

"I think the financial reports, not important for us, they (accounting department) require many reports weekly and monthly, I think this is just additional work' (PMD).

But after transfer ownership to employees within privatization programme, the purpose of budget is change and, the point of view of managers have changed according to changes in competitive environment and market conditions.

"Post-privatization the purpose of management accounting information was change we use management accounting information to evaluate organization performance, and we compare between planning and actual every four months, but we monitor the cash flow day by day. (FMA).

The finding shows that the purpose of preparing the budget has changed pre and post-privatization.

The finding also shows that there are differences in style of use management accounting information according to demographic characteristics of top management teams.

" my responsibility is implementation production plan ( quality and quantity), we are sending weekly reports to financial department and general manager, i think the accounting system has shown that such control system merely provides additional paperwork and incurs unnecessary costs" (Chapman).

"I believe that cause of Libyan organization' poor performance is the failure of Libyan managers to realize that there is different way to manage their organization - way that yields quality higher productivity more jobs and ability to survive the competition. Our strategy post-privatization requires more focus on accounting information. All managers agree with me about the important of accounting systems and productions cost"(FMD)

This result consistent with the finding of Naranjo-Gil (2008) which suggested that the style of using MCS is related to TMT characteristics, professional managers have a background, where the knowledge and experience in specific sector is of paramount importance. Therefore, based on their experience and education background, some managers are expected to be more operationally involved in organization activities than others.

There was consensus among all respondents upon the importance and role of cash flow statement;

".... the general manager is not an accountant and he does not listen or care with what we have to say or write. He is interested only on cash flow statement" (FMB).

"... We evaluate our company's performance through the budget system, income statement and cash flow statement" (FMA).

"We evaluate our company's performance based on cash flow ......" (GMC).

"... we send the cash flow statement every day to the general manger, and sometimes we discuses with him about the balance or the total of cash flow in and out" (FMC).

There was no strong evidence on the use of management accounting information in decision making, and its relationship to the manager's demographic characteristics and culture background. This results consistent with the finding of Hogarth (1993) which found that managers use different information for making decisions according to their previous knowledge and background It is noted that there are variance between managers in the use of management accounting information.

" we are a small company, so we have to focus on quality and quantity and leave the accounts for accountants....." (PMC)

"..we are selling our products based on market price not based on production cost, the general manager changes the sales price many times in the year" (FMA).

"We try to keep our costs under control and our productions are similar to our competitors, but at a lower cost and we focus on calculating the cost of production on a monthly basis the prices of our products cannot compete with the prices of products in the international markets'.(FMD).

"... the general manager is not accountant, so he does not listen or concerned with what we have say or write" (FMB).

Through the general information of respondents, showing that all general managers and production managers have educational background in engineering and do not have any experience in the accounting or finance domain. The target companies ware characterized as a companies with an engineer's culture. Engineers consist of the largest group in the firm's personnel. Thus, the technology, products and production have traditionally been considered very important in the target companies, while commercial and financial voices have played minor roles. (See table 4).

This result is consistent with the finding of Hambrick & Mason (1984) which reported that the upper echelon perspective which argues that managers perceive and use information differently, according to their experience and educational and background. Managers will be more familiar with the information to which they were exposed during their schooling and thus will prefer to remind experts in that domain of knowledge rather than venturing into another new and foreign area.

The use of computer also is very limited in accounting systems, and some of companies use old accounting system package, but most of them still use the manual methods for accounting data. This could also limit the communication of accounting information from the accountants to the managers and prevent organisational learning from taking place.

" we have one computer for accounting department, we use it for wages and salaries. However with regard to the annual financial statement we still use the manual recodes". (GMC).

" the usage of computer in our company is limited. Most of the financial reports prepared manually" (FMB).

" our accounting systems are computerised, but we still use old package of software, we have to make many adjustment to our accounting system...." (FMD).

With respect to the use of accounting information for evaluating performance most of firms rely on traditional statement and financial information in performance evaluation. Traditional costing with both full costing and variable costing methods is frequently used within the management control systems of small and medium size companies.

Sandino (2007) studies the adoption of an extended set of management accounting systems in a sample of 97 young U.S. retailers; and finds that almost all of these ¬rms adopt a basic set of managerial accounting systems including budgets, pricing systems, and inventory control. Also (Davila, 2007) suggested that managers how have adopted fewer management control system, have shorter tenures (shorter experience).

" I as a general manager, evaluate our company performance based on financial reports, like cash flow statement, sales reports. I know there is a lack in our accounting system, so we will make changes in accounting system next year. And we will start to use the new system at 1\1\2010."(GMB).

"We evaluate our company's performance through the budget system, income statement, cash flow statement" (FMA)

"We evaluate our firm performance when we compare between planning and actual in the budgetary systems especially cash flow statement, we also evaluate our firm performance through the balance sheet and income statement" (GMD).

Regarding to the impact of culture on the use of accounting information in small and medium size companies, according to (Hofstede, 1980; Twati, 2008), Libya is rated high on the power distance dimension: specifically Libya was 80 in Hofstede study 1980 and 72 in Twati study 2008, also Libya is rated high on uncertainty avoidance. Libya's index of uncertainty avoidance was 68 in Hofstede study 1980 and 71 in Tawti study 2008.

Some firms are suffering from financial difficulty, but the impact of Islamic culture, which prohibits interest, make managers reluctant to borrow from banks usury. It is also difficult for these SMEs to borrow from Islamic banks.

"...the shortages in hard currency is the main problem in our company, it's not strange for the factories to be stopped for many days because of the shortage of raw material or spare parts, because there is no enough hard currency, we are worried about interest......"(FMB)

Also the impact of culture on the relationship between managers and employees is evident in the Libyan society,

"There is a large and obvious effect of social relationships on the management processes which have created groups of people who have the same interests, advantages and benefits. These groups play an important role in reducing the effectiveness of organised management" (Chapman)

"The choice of the management committees in the industrial companies is based on social, tribal and friendly relationships rather than qualifications and experience".(PMD).

The study indicates that in Libya with a Muslim majority, cultural factors do affect accounting generally and particularly, the disclosure of accounting information. The national culture has strong effect on the choice of general managers and top management teams - all top management teams are males (see table 5). All the managers are males, reflecting that top positions are male dominated. This is an initial study and the results need to be con¬rmed in future research.

Conclusion and limitation

This paper reports the ¬ndings of an exploratory study analyzing users' perceptions and uses of management accounting information of SMEs in a transition economy. The study is based on contingency theory of management accounting and is conducted under the form of semi-structured interviews with a wide range of top management teams of privatized SMEs in Libya.

The finding of this study shows that the use of management accounting information is influenced by the demographic characteristics of male-dominated top management team. The use of computer in accounting systems is limited.

As with previous studies in the area, this study found that the competition have becomes very strong in Libyan environment post privatization period. The results reveal that a young management team with the average age between 30-40 years. Educational levels also differ (62% engineering, 14% accounting and 24% others). The study also finds that the language of accounting is not used as the means of communication between managers. The language of production (or, to be more precise, the language of construction, as measured in terms of quantity instead of costs) is used by managers at all levels in the enterprises, primarily because all general managers and most of top management teams members in the sample were male and educational background in engineering. These demographic characteristics have effected on the use of management accounting information.

The majority of managers did not seem perturbed by their lack of interest in financial information or its relevance in their decision making. They were more inclined toward the non-financial information such as meeting production targets and maintaining quality controls. These results are consistent with the finding of (Naranjo-Gil & Hartmann, 2007; Naranjo-Gil et al., 2008; Simeon, 2001).

Although accounting reports were prepared in the five Libyan privatized firms, they were oriented to the requirements of external agencies and the annual expenditure aggregation exercise and played little part in either planning or operational decision making and control

This study revealed that secrecy is in¬‚uenced by a range of cultural values: high power distance and uncertainty avoidance and low ranks in individualism and masculinity, therefore the ¬ndings cannot be generalised to other sectors. Amore extensive study is needed to test Gray' model in the Libyan environment.