The Economic Paradigm in Management Account Research: an Empirical Study About Economic

The economic paradigm in management account research: an empirical study about economic results in different management accounting profiles

Fábio Frezatti, PhD

University of São Paulo

Abstract

Like any other investment alternative, the effort to provide management accounting tools for the entities exerts an impact: it requires money. Considering the traditional investment decision perspective, the benefits of management accounting artifacts may be less evident than other alternatives. This may be due to the power of the economic paradigm, which is much more difficult to apply to management accounting tools due to the fact that the entity knows how much to pay but may not have a clear perspective on the economic benefit. If the investments require resources and there are different and competitive alternatives, when the benefit is harder to identify, in the economic and/or qualitative sense, acceptance is more complex. Thus, research to provide evidences on the efficiency of this kind of investment is crucial. For a long time, discussions about the efficiency level of management instruments were essentially based on directly obtained results, which is extremely hard to demonstrate according to the rules of “tangible” perspectives. This study aims to analyze entities’ conceptual framework adherence, with different levels of success in obtaining return for the stockholders. The resulting database allows the researcher to try to associate variables and suggest some kind of relation between management accounting profiles and level of return on equity. In this sense, it was observed that organizations with higher return rates focused more on tactics and control than on strategic tools.

Keywords: management accounting, management practices, Brazilian companies.

The authors want to register his gratitude for the support provided by CNPq and FIPECAFI for the project that originated this paper.

Introduction

Zimmerman (2001) and Lukka & Mouritsen (2002) developed interesting and distinct points of view on management accounting. Zimmerman offers the pragmatic view of “positive accounting”, which identifies the utility paradigm based on the economic view. In other words, information is valuable when it exerts an economic impact. Lukka & Mouritsen, on the other hand, criticized Zimmerman´s approach, the monoparadigm, as an important risk for the development of management accounting research, due to the fact that Zimmerman proposed the classification of elements that could not be included in the economic paradigm as outside the area of interest, which means they should not be included in studies.The main point of Lukka & Mouritsen´s arguments is much more “how” entities perform their activities than the approach focused on “whether” events can be verified. The “how” approach has efficiently been treated, mainly in case studies. This research considers that the “how” approach alone does not stand without at least a partial solution of the “whether” analysis. It means that the tools (elements) should only be recommended if they “seem” to be useful or to exert an economic impact on internal agents. On the other hand, the “how” response has to be dealt with when focusing on the benefit for entity performance.

Consultants insist that they have the solution to the company problems. Their discourse has to be strictly pragmatic, seeking consistency and trustworthiness. Otherwise, they would not survive. Researchers, on the other hand, look sceptically to the news, but they know that agents in their market expect a dynamic approach, offering answers to questions related to instruments’ utility and efficiency. As a result, in various cases, no-win situations are observed. This occurs because, with respect to management accounting methodology, empirical studies are in a stage in which many things still have to be proved according to academic rules that are acceptable in other areas but not equally applicable in management accounting. Consequently, due to the state of the art of management accounting, extreme positions are equally useless. Differently from economy, finance or financial accounting and as an intrinsic part of its focus of interest, management accounting has a lot of limitations in terms of population size, internal data reliability and distrust by internal respondents about the usefulness of empirical research, which makes researchers´ lives hard and often frustrating. In an extreme situation, if strictly guided by Zimmerman’s approach, management accounting research is restricted by the peculiarities and the relative scarcity of critical mass available. In this sphere, the contribution by Lukka & Mouritsen comes up and demands an important reflection and chance of wider field research.

In some cases, when possible, positive pragmatism can be mixed and adjusted with a certain level of tolerance, which can allow for future knowledge progress. Stockholders and managers see investment as necessary to obtain future benefits and the management team has to demonstrate the corresponding return. Investments in intangible assets such as information systems, strategic planning, Balanced Scorecard System, for example, are not easy to discuss from the perspective of future return. When confronted with other kinds of assets, the idea of usefulness is very complex and abstract. In some cases, the maximum that can be aimed for is the comfort of perception. Managers know that one element is not sufficient to guarantee success, but they also know that, without it, many organizations simply cannot be managed. Bhimani (1993) considered that the organization, to survive and run successfully in the permanently competitive environment, partially depends on the availability of information to enable managers to act. If this is true, why should we not try to identify organizations’ economically successful performance and analyze their construct in terms of adherence to the conceptual framework of management accounting? It is not the first time that this kind of study is prepared and methodological questions are vital for the credibility and clearness of the analysis in order to identify useful associations. It is fair to say that when the authors treat performance, they are not necessarily considering only several different versions of income, EVA or EPS for example. They may refer to specific and even non-monetary elements too. Among others, the following papers can be mentioned, which tried to associate the utilization of management accounting tools with performance:

• Chenhall and Langfield-Smith (1998) found an association between what they called the most advanced management accounting tools (Activity Based Costs/Management, strategic planning, benchmarking, etc) and entities’ performance measured by a set of financial and non-financial elements;
• Abernethy and Lillis (1995) discussed the use of manufacturing measures in management control and their impact on performance, and found they were linked up. For them, performance is a group of elements, including cost efficiency, flexibility and quality; and
• Perera and Poole (1997) went ahead with Abernethy e Lillis’s research and found no evidence of any link between metrics and performance.

In order to organize and guide the analytical rationale, this paper proposes the following research question: Does exist any linkage between the level of conceptual adherence to management accounting in medium and large-sized companies in Brazil and their different levels of return?

Level of conceptual adherence intends to capture different potential intensity of the usage of concepts and elements defined in management accounting literature. In this study, return will be measured by the institution’s percentage of Return on Equity, since this ratio connects stockholders and the entity. Moreover, this is the most popular indicator used nowadays referring to stockholders, despite frequent discussions about it effectiveness.

In spite of the research limitations with respect to sample size, as well as due to the fact that the return of one single year was collected, the conclusions of this analysis can be important not only for researchers, but mainly for stockholders and managers.

Conceptual review

In order to explicit the conceptual approach, Anthony and Govindarajan (1998) mentioned that management control is the way to guarantee that strategies are followed and goals are reached. It includes activities such as planning, coordination, communication, evaluation, decision and influence on the persons involved so as to change their behavior.

In order to obtain data about the status of management accounting, some studies must be analyzed, starting by Ward (1992), who considered that management accounting plays a very positive role, supporting the financial needs of managers in planning and controlling the business to the best interest of stockholders and other relevant agents. In addition, financial analysis is required to define the status of the business and to guarantee that the strategy is realistic and makes sense. In these conditions, Otley (1986:9) mentions that the design of the management control system continues being more art than science, with organizations learning from their mistakes and adjusting their systems. This comment allows us to understand how crucial it is for entities to customize management elements and practices, so as to be able to use them. This idea is important and limiting at the same time, due to the fact that, according to their desires, organizations can have different profiles and compositions of artifacts and practices at their disposal. This perception intrigues the author due to the fact that such customization may involve availability of the element (some organizations do not have ERP, for example), comprehensiveness of the elements (some organizations think they have strategic planning simply because they defined the company vision, for example) or the relative importance attributed to the element (some organizations can consider the costing system as something merely bureaucratic, as a part of management accounting while, in others, it is the heart of the management process, for example).

A reasonable amount of background literature is available for conceptual support, dealing with perceptions and criticism against the elements, including:

• Budgeting elements (WELSCH, 1987), described to support the annual budget process in the organizations, nowadays opposed by the view called Beyond Budgeting (HOPE, 2000), which criticizes the traditional method and makes people think about managers’ needs, affecting various decades of accommodation.
• The costing process has a long history (Horngrenet al., 2000) and is significant to the extent that Activity-Based Costing (ABC) has produced important reflections on the organizations’ modus operandi (Shank; Govindarajan, 1997). The behavioral question impacted by the costing systems is also treated in literature (Hansen; Mowen, 1996).
• The Balanced Scorecard, discussed by Kaplan et al (1996) and other authors who, at the time of publication, possessed information about the American market but knew little about the European market in terms of BSC usage, presenting a culturally biased view on the issue;

The Management Information System issue has been discussed by various researchers. In his study, Ouchi (1979) focused on the control perspective and on setting an adequate taxonomy for distinguishing between the market (with prices as informational demands), burocracy (with rules as informational demands) and group (with traditions as informational demands).

In view of the criticism and understanding exposed above, at the end, what is included and what lies outside the cost-benefit relation? This question is difficult to answer, due to the fact that organizations are different, not only with respect to activities, but also size, experience, complexity, competitive environment and collective internal behavior.

Research design: general approach

Carmines and Zeller (1979) studied the validity of research evaluation doing it in a very focused way, considering three elements: criteria, contents and structure. It is essential for research success to attain the three elements, mainly as a result of the current stage of management accounting.The research structure is based on the rationale developed by Henry (1990, p.46), which joins study characterization, sample definition, variables of interest, subpopulations and information sources. The following specific objectives were aimed at:

• Identifying entities’ success measured by Return on Equity, considering 2001 as a typical year;
• Identifying organizational groups according to Return on Equity profile clusters, specifically for medium and large-sized Brazilian companies;
• Verify if there exists any linkage between management accounting profiles elements and the entity’s return in its different levels.

In this sense, the research structure considered the following elements:

a) Study characterization

This paper is part of an exploratory research, based on primary data collected by the author and his team;

b) Definition of population layers, sample and information source

Data were collected on the basis of population segments. Originally, twenty-four layers were considered, which were then readjusted to seven (Picture 1). The following steps were taken into account:

• The Brazilian Economic and Social Development Bank (BNDES), an official financing agency, considers a medium-sized company as that company whose annual net revenues are superior to US$18 million. This criterion used in similar researches was adopted for the research;
• In Brazil, the magazine Melhores e Maiores was considered an adequate source to obtain the total population, including details from different sectors and considering the size of revenues. In total, 2,281 organizations were identified, whose revenues were equal or superior to US$ 18 million, with a total income of US$502 billion;
• Economic sector and annual revenues were significant variables considered in the study. Thus, the segmentation of the population considered the seven economic sectors and annual revenues in US$;
• The size of each layer was defined according to the probabilistic approach, considering the finite population, planned for a 10% error (in relation to the average), which corresponds to a planned sample with 125 entities. At the end of the field research, questionnaires from 119 entities were considered, with a 12.2% statistical error in accordance with the average parameter;
• During the field research, in those cases in which the respondent refused to answer the questionnaire, reposition occurred within the layer, considering sector and annual revenues, according to the same random criterion used for initial selection;
• Complementarily, when analyzing the integrity of data on return, the sample was reduced to 76 entities. In summary:

Total population (Brazilian medium and large-sized organizations2,281

Sample with probabilistic definition 125

Returned questionnaires 119

Organizations with consistent data about Return on Equity 76

See Picture 1 about here

c) Research variables

Carmines and Zeller (1979) mentioned that measuring is the process that connects abstract variables to empirical signs. In this sense, all variables of interest were captured by the questionnaire applied to the above mentioned sample. For the sake of better understanding, these variables of interest were divided in two groups: return variable and management accounting profile variables:

• Return variable. The analysis first focused on result variables that could give an adequate representation of the desired phenomenon. This typically involves quantitative information available in the form of intervals and the following indices were considered: Return on Equity, EVA and MVA, all of which have strong points and limitations. Return on Equity was chosen due to the fact that it attends to the following criteria: objectivity, range, possibility to link up stockholders and managers, as well as the possibility of being verified by the researcher with a significant level of consistency, since not all sample companies are obliged to make available/publish the basic information for the calculation. Therefore, the information used covered the data made available during the field research collection. The other indices demand a level of sophistication and involvement that could not be verified in this study. Next, entities were ranked according to the following return percentage intervals in 2001. In this sense, the more successful the company was from the perspective of Return on Equity, the higher the relative profile that was attributed:

• Lower than 0 %profile 0
• Equal or higher than 0 and lower than 10%profile 1
• Equal or higher than 10 and lower than 20%profile 2
• Equal or higher than 20 and lower than 30%profile 3
• Equal or higher than 30 and lower than 40%profile 4
• Equal or higher than 40%profile 5

• Management accounting profile variables. They are the variables that indicate companies´ stage of development according to the conceptual framework of the International Management Accounting Practice 1 (IMAP 1), which was published in March 1998 by The International Federation of Accountants (IFA) and adapted according to the contributions of authors who researched on the issue. All variables were treated in an ordinal scale from 1 to 5. The considered elements were:

• Structured and formalized costing system

Identified to the extent that it allows the organization to calculate cost per type, product line and group. From a qualitative perspective, a higher frequency of standard cost, as opposed to historical cost, would be expected. With respect to costing methods such as absorption, variable and direct, these alternatives were identified in the different sectors. Relevant elements to distinguish between organizations are: standard cost and costing methods, the latter of which is subdivided into absorption, variable, direct and ABC (Activity Based Cost).

• Strategic plan and budget

Although it is not a tool developed by management accounting, the linkage is strong and the area made a strong contribution to that. Due to the relationship with the budgetary process, strategic planning was included in the research. The key point was the objective to capture the extention of the process formalization, which was obtained through the following elements: vision, mission, long-term goals, long-term strategies and operational plans. With respect to annual budget, relevant elements for distinction were: assumptions, marketing plan, production + supplies + storage plan, human resource plan, capital budget and projected financial statements.

• Management reports

Performance analysis is based on the information system, which provides various and different reports. These allow management team to understand the process according to entity, business unit, products, cost center, etc. Relevant elements for distinction are: forecasted x realized data from income statement, balance sheet and cash flow per area, business unit, cost center, investment center, projects, etc.