Institutional Accountability - Literature review Example

Institutional Accountability Name: Institution: Course Title: Tutor: Date: 1.0 Introduction There is the growing knowledge under corporate governance that the responsibility of business organisation is not only to make profits as anchored in the utilitarian and shareholder value approach, but also a realisation that business organisation has a obligation to other significant stakeholders apart from major shareholders such as minor shareholders, customers, employees, public and the government (Pigou, 1920 cited in Benabou & Tirole, 2010, p.1). This allows them to gain legitimacy (Oliver, 1991, p.149).the question that lingers in the organisational theorist and experts is that which organisational structure, concepts and formats in relation to power, and responsibilities best address the issue of institutional accountability (Montana & Charnov, 1993, p.155)? The ultimate purpose of this discourse is to critically interrogate whether “institutional accountability is best achieved through dispersed power and delegated responsibilities rather than through centralized control”. To create a vivid picture on the same the paper first examines the concept of institutional accountability. Secondly, it outlines the concept of dispersed power & delegated responsibilities and centralised control. Lastly, the paper assesses the advantages and disadvantages of the two competing power structures in addressing organisational accountability. 2.0 Institutional Accountability 2.1 Accounting and Concept of Institutional Accountability Mulgan (2000, p.555) notes that the issue of accountability has undergone continuous metamorphosis over the years from a mere call to ‘account’ and is continuing to moult. This then makes it difficult to come up with one cross cutting definition on the same. The same observation is affirmed by (Kearns, 1994) who notes that the concept of accountability is ill structured as result of numerous assumptions and diverse contextual issues (p.187). Owing to such diversity and dynamism in definition, Kearns (1994) settles on the definition Romzek & Dubnick (1987) that summarises numerous debates on accountability (p.187). Romzek & Dublick (1987, p.228 cited in Kearns, 1994, p.187) observes that “accountability involves the means by which agencies and their workers manage the diverse expectations generated within and outside the organisation”. Strategic Management Accounting plays an integral role in ensuring institutional accountability (Cadez and Guilding, 2012, p.486). The principal concept in Strategic Management Accounting that is directly linked to institutional accountability is Sense Making (Tillmann and Goddard, 2008, p.80-81). Tillmann and Goddard (2008) perceives the role of management accountants within the context of sense making as that of organising, harmonising, bridging, contextualising and balancing within the precinct of existing information and professional knowledge. According to Dervin (1998, p.36), organisations experiences knowledge gaps in various aspects of operation, thus, it is the onus of the responsible authorities to advance solutions that addresses theses gaps. It is this solution finding that is called sense making. Toit (2003) consequently notes that sense making entails critical synthesis of complexities in organisation so as to emerge with insights and ideas that addresses the expectations of all stakeholders who include shareholders/ owners, customers, employees, public and the government. The plausibility of the above argument is that all these observations boils down to institutional accountability. Since sense making empowers decision makers in profit or non profit organisation to establish dyad relationship between strategy and management control systems (Cinquini and Tenucci, 2010, p.229). 2.2 Framing Institutional Accountability Theory and research on institutionalisation has grown over the years so as to asses “institutional rules, myths, and beliefs as shared social reality and on the processes by which organizations tend to become instilled with value and social meaning” as strategic responses to the concept of institutional accountability (Oliver, 1991, p.145). The ultimate embodiment of institutional accountability is in the corporate governance framework. Gillan and Starks (1998 cited in Gillan, 2006) define corporate governance as “the system of laws, rules, and factors that control operations at a company”. This creates an organisation that is transparent and beyond reproach. The theoretical model that guides such argument is the nonconsequentialism theories such as Kantian ethic that urges every individual to do what is right irrespective of the reward by acting in good faith, adhering to honesty and openness. This is opposed to consequeantialism theory such as utilitarian model that cajoles individuals to maximize pleasure while avoiding pain (Sunita, 2005, p.110-112). Accountability can be in terms of financial disclosure, social disclosure, sustainability management disclosure and diversity management disclosure (Lodhia and Jacobs, 2013, p.596). For instance, under social disclosures, the companies seek to push their course by aligning their operation with stakeholders’ values with the hope of avoiding legal and economic penalties (Williams and Adams, 2013, p.456). 3.0 Discussion 3.1 Concept of Dispersed Power and Delegated Responsibilities v Centralised Control Within the ideology of empowerment, power sharing and democracy, there is the realisation that a leader cannot do everything single handed, he or she needs others input and contribution and thus the growth of dispersed power and delegated responsibility (Hollander & Offermann, 1990). Dispersed power seeks to remove authority from one centre of control to numerous lower levels so as to ensure check and balance. This is mostly attained through decentralisation programme (O’Donell, 1994). Montana & Charnov (1993, p.155) conceptualises delegated responsibilities as “the process that makes management possible because management is the process of getting results accomplished through others. Delegation is the work a manager performs to entrust others with responsibility and authority and to create accountability for results”. On the other hand, centralised control occurs when minimal authority is delegated. 3.2 Viewpoints Plausibility of dispersed and delegated responsibilities in ensuring institutional accountability is anchored on the fact that individuals can be called into account since there is a chain of command that creates checks and balances. Theoretically, such kind of thinking is premised on the argument advanced by Max Webber that individual rationality can be substituted with collective rationality (Benabou & Tirole, 2010, p.1). This is opposed to centralized control where all decisions are entrenched to one individual or office as opposed to numerous sub institutions or individuals within the organization. Centralised control is a disadvantage where internal control is weak therefore making it difficult to establish cause-effect relationships and linkages (Ahmed et al, 2010, p.353). Mulgan (2000, p.555) indicates that in a dispersed and delegated power/ administrative structure, the social interaction and exchange that is created is a two way traffic where the authorities/ individuals discharged with the mandate for ensuring accountability normally seeks explanations on the actions of a given office holder and rationality for doing so. On the other hand, the individual/ sub-institution being held responsible are expected to respond and in any case of failure disciplinary measures such as sanctions follow. Therefore a dispersed and delegated administrative arrangement creates rights of authority right from bottom of the organisation to the apex of the leadership of an organization. The only challenge associated with the same is that the leader loses control and this might make it hard to exert control in certain circumstances (Montana & Charnov, 1993, p.160). Dispersed power and delegated responsibilities is best contextualised within the frame of transformative leadership. In this regard, the top leaders utilises the effort of lower level individuals to attain organisational goals by providing leadership thorough various interpersonal skills so as to create aura of possibilities (Bolden et al., 2003). For instance, in a dispersed power arrangement structure and delegated responsibilities, the role of board of directors is to offer oversight authority to the CEO and top level management and being answerable to shareholders and public at large. The top level management is to formulate policies; low level management role is to supervise the implementation of the policies while the employees’ role is to actualise these policies (Simons, 1990). This creates a hierarchy of command that is easy to follow and examine where failures exist. In this regard, everyone is expected to be hand on and take responsibility of the process as embodied in systems approach. While centralised power system has an effective control system and uniformity in policy since they originate from one source, it has a weaker applicability in relation to accountability (Montana & Charnov, 1993, p.160). The rationale is anchored on the fact that the authority holder is the ultimate since he or she has concentrates power and gives duties according his or her whims. This is a challenge since this ultimate power holder who has no checks and balances can decide to abuse the powers vested on him or her since he or she is sure there will be no one to question his actions. To contextualise the expose on the shortcoming of centralised control in guaranteeing institutional accountability, let us examine the case of inadequate financial disclosure and earnings management. Top level management misconduct can interfere with maximisation of shareholder’s wealth when the top level managers (agent) manipulate figures so as to display a different picture in relation to bonuses and stock-price. The best explaining example of this kind of failed disclosure is earning’s management. This happens when there is weak internal control leading to manipulated corporate disclosures by firms trading in capital markets. The aim of this is to mislead a stakeholder about the real economic performance of the firm or to unduly influence contractual outcomes that rely on reported accounting numbers (Bargeron, Lehn & Zutter, 2010, p.35). For instance, the accounting scandals that were experienced in the US in the 2001 in companies such as Enron, WorldCom, Tyco, Dynegy, and Xerox is an example of failures associated with centralised power in regard to institutional accountability (Petra & Loukatos, 2009, p.121-123). Xerox, case example affirms such argument. Xerox CEO in the 90s was accused of exercising vast quantity of stocks trading huge chunk of shares. In their reporting, reported revenue was reduced by $2.1 billion there by deflating income by $ 1.4 billion as their accounting was inconsistent with GAAP leading to a cumulative total of over $ 20 million of value of options exercised. This forced SEC to sue Xerox for manipulating reported earnings and revenues as opposed to the real situation in the ground in1997-2001 (Bergstresser & Philippon, 2004). Based from the above interrogation, it can be deduced that Xerox as an organisation had a centralised control where the CEO in collaboration with other dubious employees/ accountants manipulated accounts to their advantage yet that was not the case. Such scenarios would have not happened if there was a decentralised power and delegated authority where one would be able to question the existing information gaps about the financial disclosure. 3.3 Findings From the above discourse, two paradigms emerge under the two extreme approaches. The fist is the creation of checks and balances under the dispersed and delegated model of power and the second is the theme of ‘loose of control’ under the same arrangement. On the opposite side of centralised control, there is the theme of ‘total control’ under hands on approach and the reduced checks and balances. From the two competing ideas on which one ensures accountability, the paper argues in the favour of dispersed power and delegated responsibility since it creates a chain of command with expected deliverables which can be objectively be measured so as to ensure individual and institutional accountability by examining where performance gap emanates as opposed to centralised system where an individual owns all the authority and employs them at his discretion since there is no appropriate authority for conducting check because that centralised system is the ultimate authority. 4.0 Conclusion The aim of the paper was to critical establish whether or not institutional accountability is best attained through dispersed power & delegated responsibilities rather than through decentralised control. is examining the same, two critical themes emerge in the discourse pertaining the two structure of power. These instance are strong or weak checks, balances & participatory levels and on the other hand strong of weak control levels. The paper established that dispersed power & delegated responsibilities is attained through decentralisation which creates an strong institutional with appropriate structure and channels thereby enhancing checks and balances as compared to centralised control where power is concentrated on one individual or institution. Such concentration is not well guarded are prone to abuse therefore compromising on institutional accountability. Hence, the paper concludes and affirms that institutional accountability is best achieved through dispersed and delegated responsibilities rather than centralised control. References Ahmed A.S., McAnally M.L., Rasmussen S & Weaver C 2010, How costly is the Sarbanes Oxley Act? Evidence on the effects of the Act on corporate profitability. Journal of Corporate Finance, Vol. 16, p. 352–369. 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