International Management Accounting - Essay Example

International Management Accounting International management accounting research has largely examined the use of accounting information in relation to decision-making strategies of business organizations by focusing on evidence in the Anglo-American contexts. However, very little rigorous research has been conducted in other countries, which may have different historical, political, economic and social contexts” (Heidues & Patel, 2008). Critically comment on this statement by selecting one non-Anglo-American country and undertake a literature review to assess the extent to which accounting information is used in decision making in organizations operating in that country. Answer: In the era of merging cultures and competition in businesses, the criticality of management role and decision-making strategies has increased significantly. Decision making on the basis of estimates and assumptions has far been obsolete. The need of a systematic approach for decision-making has been felt, by companies and organizations to improve the authenticity and accuracy of the decisions made (Gelinas et al., 2010). This need urges the researchers and analysts to devise a methodology, which covers the useful data and information about the company’s revenue, loss and expenditures, which could aid in making company plans and decisions accordingly. Previously, the method used for gathering information, which would be the base of management decisions, was the Management Information System (MIS) (Gelinas et al., 2010). This system was based on manual data collection and there were great chances of human error and delay in forming reports. Maintenance was another viable issue with this system, causing company much time and problems in extracting old data and statistics. Practices show that the ambiguity in the system, leads to unfair approach in the decision-making process, due to lack of accountability of executives to the investors or creditors (Gelinas et al., 2010). MIS was also influenced by the environment and society norms of the region. In many organizations, cultural and economic factors influence the decision-making strategy and proposals of the top level management (Nicolaou, 2000). Managers from two different religions, or two different backgrounds, would have different decision-making criterion and approach. Many a times this factor influences largely on their problem handling and planning approach, which differs from the real interest or objective of the organization. Thus, a functional method was needed, which could curtail the influence of cultural and socio-economic factors from the decision-making phenomenon (Nicolaou, 2000, pp.103). These factors accounts for the design of the accounting information method to use in decision-making by executives and managers. It is commonly known as the Accounting Information System (AIS), in the corporate market. Its function is to collect information and generate accurate statistical and financial reports of the company or organization. These reports are available to both the internal management and executives and the external management that are the shareholders, investors or the taxation agencies (Gelinas et al., 2010). With the accuracy and transparency AIS provides in its reports, people related to the company have a clear idea and company’s standing, and the financial ups and downs. Looking into the history of AIS, we can draw a picture, of the limitations and problems in its implementation on a wider scale. Based on computer-aided technology, AIS was installed as legacy systems, which were expensive to install and maintain. Moreover, only professionals could operate the format and language used in those systems, with high complexity in generating report and comparing two or more data (Beke, 2010). The recent upgraded systems, have overcome many of the previous drawbacks, and have proved effective in collecting millions of statistical figures and generating financial reports with high accuracy in minimal time. The trouble in reviewing thousands of transactions and analyzing them at the end of the month was always a massive hurdle for the executives. The Consolidation feature of the AIS, consolidates all the transactions, during a certain period, and generates a summarized report. This makes the decision-making and planning procedure, relatively easier and efficient than the conservative accounting systems (Beke, 2010, pp.25-30). Contrary to the facts and benefits of the AIS described above, the implementation of the system has not been common in many countries to date. In addition to this, researches show that there have been enough study and work done on this subject, which is a matter of concern for companies, wishing to sustain in the competitive market (Heidhues & Patel, 2008). The use of the conventional information system would injure the quality of company’s analysis and planning approach. And it would be difficult for such companies, to produce a reliable and complete report to their investors and shareholders. Research shows that, in the lack of development of the Accounting Information System, historical, political, social and economic factors have a significant influence. Organizations from the same region follow similar management strategies for decision-making and accountability addressing. This characteristic neglects the uniqueness of nature of each organization and is influenced by the social factors. This essay will focus on the descriptive literature review, on the causes of restriction to the accounting information. And the influence of social, political and other factors of as a whole and of ‘Germany’, in the deficiency of research and implementation of AIS, in their business setups (Heidhues & Patel, 2008). Several studies and researches made, on the lack of implementation of the accounting information, bring to light the influence of contextual and environmental factors on it. The research carried by Flamholtz (1983) highlights many organization environments, where the employees involve in the budgeting of organization’s resources and revenue, look for personal benefits in it. Personal interest is preferred over organizational interest, and such personnel thus discourage the implementation of AIS, so to accomplish their personal motives (Flamholtz, 1983, pp.153). In the era of globalization, many organizations are coming closer for trade and business. This accounts for the need of similar accounting practices, for proper trade and communication of organization’s figures. Moreover, the new government policies and business regulation forces the organization to be transparent in its budgeting and financial report submitting to the income tax department (Beke, 2010). This all augments the current need and benefits of accounting information research. However, the behavioural factors penetrating in different societies, restricts the accounting system implementation, criticizing its technical aspects and in not maintaining the importance of the cultural and economic factors. The focus on isomorphism in MIS has increased the number of countries, adopting management accounting in their organizations. In this regard, organizations have an option in representing their status and policies, different to different clients or parties (Heidhues & Patel, 2008). This is more like, having the flexibility in showing partial or fake information about the organization, as per the need and type of party. National culture has also a strong influence in this aspect. Government organizations tend to hide part of organization’s figures, including their funds and debits, to be less answerable to public. The AIS is not preferred, due to this business ethnicity as the transparency offered by the system is negated as per society and cultural norms and needs (Heidhues & Patel, 2008). The definition of power, authority and gender superiority in a culture or community, also affects the practice of accounting information. As per the organization framework and environment, different management and decisions making strategies are devised, which corresponds with the organization culture and norms (Anedo, 2012, pp.92-93). For example, the people of China work well in a team or group form, where the task and control is divided among the members. On the other hand, the people of Africa have an attitude of working individually. They consider working in a group as a sign weakness lack of authority over their work. This gives the difference of culture and mentality in individualism and collectivism. By this fact, we can conclude that organizations in China have been following a considerably different decision-making and management strategy, than those in Africa. Therefore, both countries will have a different approach in the utilization of their accounting system, which suit their culture and values (Anedo, 2012, pp.93-96). Another cultural factor limiting the research and utilization of accounting information in management is the behaviour and ability to perceive events. These factors are directly related to the social and political contexts of that country. For the illustration of this fact, we can throw light on the difference in the perceiving and decision making approach of Europeans and Asians (Kimmel et al., 2011). Europeans by nature are generally precise and structured in their management approach, and rely on facts and calculations, to draw a conclusion and plan their decisions. Conversely, Asians are more imaginative in nature and perceive events and results, based on their experiences and intuitions. Their decisions-making approach and preference are influenced by the environmental and contextual factors. Hence, the role of accounting information in formulating management approach would be different in these continents. Europeans, to a greater extent, depend on the accounting information than Asians, to build their management and decision-making strategies (Kimmel et al., 2011). Some of the researchers, who manage to get a deep insight of the involvement of cultural factors in limitation of accounting research, evaluate the financial and historical conditions to be of significant importance in this aspect (Beke, 2010). The pressures of financial crises, competitive market, sustaining company’s standards and globalization, play a key role in defining the decision-making technique of executives and entrepreneurs. The interviews carried out by some of the managers and executives of renowned organizations, showed their hesitation in modifying the management system. They were content with the conventional rules of management accounting, to avoid being a victim to financial loss or spoiling company’s reputation (Beke, 2010). Many of the business leaders and executives, perceived AIS as a management system, which would divide the centralized authority from their organization. The transparency provided in the statistical reports and analysis of the accounting information, would make it difficult to gratify their investors and government officials at the same time (Beke, 2010). Analyzing Germany in its cultural connotations through available literature, many scholars have found the business approach in the country as significantly different from Anglo-American countries, like the U.S.A., or the U.K. Business terms of corporate management and authoritative control, are defined in a different frame of mind in Germany. This is the reason that tough management laws and policies in Germany are predefined and exclusive, they still divert from these definitions in the practical world. The research conducted by Carr, Tomkins and Bayliss (1994) found out the effect of cultural forces on their management strategies and in the utilization of accounting information for decision-making (Carr, Tomkins and Bayliss, 1994). In the workplace of Germany, experienced personnel are preferred over educated ones, especially in the management sector. The reason is their perception of handling an adverse situation. They believe that the judgment skill of a person and the ability to come up with workable and risk free solutions comes with the experience and not with the education (Carr et al., 1994). This gives the impression, that their decision-making approach is based more on experience than on current facts and data. Moreover, historical events of the corporate sector in Germany, have taught the management to think in long-term basis. This perception also aids in negating the use of accounting research and relying on manual research methods. For planning and designing a strategy, they consider personal ideas and believe to be more valuable then accounting information (Adamek & Kaserer, 2006). The Contingency Theory on accounting information system can be used to compliment accounting standards in Germany. It states that, the accounting system designed, should consider the social and environmental needs and values of a society or country. And it should be implemented within a broad and adaptive framework (Gordon & Miller, 1976, pp.59). The survey of German GAAP found that it is governed on conservative accounting principles. The accounting system is characterized by highlighting monthly or yearly losses of any organization (Adamek & Kaserer, 2006). The reporting and budgeting is done, considering the unrealized losses and not the unrealized gains. Timely gains or additional profits earned by the organization are not mentioned in the report. In the eyes of US-GAAP, this is considered as asymmetric accounting, and manipulation of profit and loss statements. Although, in German context, it helps organizations in building up concealed reserves and reporting only part of earning that are enough to satisfy shareholders and new investors (Adamek & Kaserer, 2006). The use of accounting research in decision- making is suppressed by the accountability factor, practiced in their business culture. They consider that fair accounting is worth doing, only when there is a market price (Gordon & Miller, 1976, pp.65). However, it asks for accountability and verification of every resource the organization has utilized over the time. Presenting fair accounting, by screening all the unaccepted benefits of the organization, can not only raise expectations of investors, but also make the organization liable to more taxes. In the same way, screening all the losses can de-motivate new investors and will result in lower cash flows of the organization in the future (Gordon & Miller, 1976, pp.65). In addition to the above survey analysis, several researches give another reason, for the lack of research and utilization of the accounting information in Germany. Organizations in Germany have been noticed, to be accustomed to the traditional methods of accounting, and awareness of the AIS is quite rare (Flamholtz, 1983, 153-169). The unfamiliarity of management analysts and investors in Information Technology is also the reason of less research done in accounting information sector. Investors and the government officials are themselves, not aware and educated of the advance means of fair accounting. This gives room to organizations, to veil the part of information they consider, will make them held answerable (Adamek & Kaserer, 2006). A few decades back, the German cooperative market was among one of the strongest and stable market in the world. However, the increasing pressure of globalization and building of corporate competition, has highly affected the business strategies and decision -making of the German companies and industries. Among these industries, the affect on dairy industry of Germany, is the most prominent (Heidhues & Patel, 2008). According to reports, the number of dairy companies in Germany by the year 1990 was more than 300. This includes their milk processing and dairy product manufacturing companies. By the year 2006, a large number of dairy companies in Germany were shutdown, with the remaining figure of around 101compnaies (Heidhues & Patel, 2008). This downfall was majorly due to the opening of many European dairy companies in this period, offering better quality products and service. This brought a considerable change in the strategic planning, business approach and decision-making of the dairy industry of Germany. Not only these companies were pressurized by the saturation of market by European companies, they also had the pressure of increasing prices from the retailer sector. These dairy companies had to redefine its short-term and long-term business goals, to meet the needs of retailers, customers and farmers. Another essential factor, underlying the reason of lack of implementation of the accounting information is the change in business transactions laws, in the dairy sectors (Heidhues & Patel, 2008). Previously, the dairy industry was practicing the quota system to ensure, that each farmer produces a fixed amount of milk. Overproduction was penalized by the dairy industry so that the farmers cannot supply milk to other industries. After the merger of other vendors and distributors with the German dairy industry, the quota system has been revised. The restriction of fix quantity of milk production has been over held from the farmers, giving them the option to business with any merchandiser in the market. This greatly limits resources of milk production for the dairy industry of Germany (Heidhues & Patel, 2008). Dairy companies have to merge them, with other foreign companies to sustain their business. These dairy companies have now become more market-oriented and have to evaluate the need and quality of their products, keeping the contemporary market conditions in mind. Moreover, the new Government policies of optimizing public welfare and justification, is another reason forcing dairy companies to improve their standards and services. These facts illustrate that they rely on the contingency theory of accounting, to sustain in the business world. Utilization of the AIS is thus limited, due to their current weak position in dairy market, and the ongoing changes in their management and decision-making strategies (Heidhues & Patel, 2008). From the above literature review and scenarios, we can conclude that organizations depend on several factors, other than the accounting information, in designing their management structure. Despite the fact that accounting information has been a powerful tool in forming decision-making strategies, its importance and utilization remains diminished in several countries. Rapid changes in the global market and business culture have been the prime factors, suppressing the use of accounting information in management and business planning. With the increase in competition and saturation of manufacturers and vendors, companies are forced to evaluate company strategy in a broader perspective, rather than just focusing on sales figures and statistics reports. In identifying issues, which causes a company’s downfall, executives are supervisors consider the cultural, social and economic factors, prior to considering the accounting information. Hence, the increase in importance of decision-making strategies in the globalizing world today, has affected the utilization and importance of AIS in the corporate world. List of References Adamek, C. & Kaserer, C., 2006. Lifting the veil of accounting information under different accounting standards: lessons learned from the German experiment. Research Report. Munich, Germany: Econstor Leibniz Information Centre for Economics. Anedo, O., 2012. China - Africa culture differences in business relations. African Journal of Political Science and International Relations, 6(4), pp.92-96. Beke, J., 2010. Review of international accounting information systems. Journal of Accounting and Taxation, 2(2), pp.25-30. Carr, C., Tomkins, C. & Bayliss, B., 1994. Financial or Strategic Controls? An Anglo German Case Study. European Management Journal, 12(1), pp.102-13. Flamholtz, E., 1983. Accounting, Budgeting and Control System in Their Organizational Context: Theoretical and Empirical Perspectives. Accounting, Organisations and Society, 8(2), pp.153-69. Gelinas, U., Dull, J. & Wheeler, P., 2010. Accounting Information Systems. Ninth ed. South-Western, USA: Cengage Learning. Gordon, L. & Miller, D., 1976. A Contingency Framework for the Design of Accounting Information System. Accounting Organizations and Society, 1(1), pp.59-69. Heidhues, E. & Patel, C., 2008. The Role of Accounting Information in Decision-Making Processes in a German Dairy Cooperative. Research Report. Sydney: Macquarie University Department of Accounting and Finance, Macquarie University. Kimmel, P., Weygandt, J. & Kieso, D., 2011. Accounting: Tools for Business Decision Making. 4th ed. New York: John Wiley and Sons Inc. Nicolaou, A., 2000. Accounting Information Systems. International Journal of Accounting Information Systems, 2(2), pp.103-24. Read More