Organisational Context of Management Accounting - Article Example

Organisational Context of Management Accounting The University of Edinburgh, University College London (UCL) and University of East Anglia (UEA) were obliged to improve the efficiency of management accounting in their organisations in 1980. The three universities needed to change and modify their existing organisational structures along with their procedures for planning and controlling of resources, with a specific focus on maximising their limited financial resources. It has been observed that the three universities worked efficiently for the allocation of resources during 1985-1992. In 1991, the government declared that the number of students in the universities has to be increased in a cost effective and flexible manner (Jones, 1994). Agency theory has been considered as one of the significant theoretical paradigms in management accounting for the last 25 years. This theory is developed with the notion of conflicting aims between two groups, primarily agents and principals. One of the significant features of the agency theory is that it allows accounting researchers to unambiguously integrate ‘conflicts of interest, incentive problems and mechanism to control incentive problems’ (Lambert, 2007). The objective of this theory is to structure the contractual connection between the two groups: the agents take actions to exploit the welfare and benefits of principals. At the fundamental level, agency theory is utilised in accounting research in order to address two issues. The important issues involve accounting, information and compensation structure that affects incentive problems and the other significant issue is the presence of incentive problems that influence the structure and design of information, compensation systems and accounting (Lambert, 2007). On the other hand, agency theory fails to explain that the agreement between the agent and the principal is flexible in nature. This is a well known fact that principals used to possess shortage of information and are restricted in their sense of rationality; however, they are conscious that incentive related problems exist, when the contract takes place (Hauswirth, 2006). This theory can be applied in this case to understand the impact of budget cuts on the universities. The level of autonomy, as well as academic liberty in universities and colleges vary; thus it has been considered that universities act as agents, while the government acts as the principal (Auld, 2010). The contingency theory develops an expressive theory of management accounting systems (MAS). It implies that the effectiveness of a management accounting system is based on the structure of the organisation. According to this theory, the organisational structure is based on the environment and technology of the organisation. The existence of MAS enhances the effectiveness of managerial process which is dependant on the structure of an organisation. Along with the environmental and technological factor the structure of the organisation is also controlled by the situational attributes (location of information). In a ‘certain’ environment where technology is ‘routine’, there is an influence of external information. In an ‘uncertain’ environment with ‘non-routine’ technology, the information is considered to be internal. The decentralised authority is suitable for the contingency model where the environment is uncertain or technology is non-routine. When environments are certain or technology is routine, centralised authority is suitable (Martin, 1983). The contingency theory fails to explain the resemblance in the systems of management accounting across organisations. Furthermore, this provides little assistance in designing an organisational structure (Graubner, 2006). Various aspects of this theory can be applied to the case. The structural alteration in universities is dependant upon the situational factor and based on the situational factor the decision making process of the boards can be changed. Hence, it can be concluded that the structural alteration has an impact on the decision-making process. Due to budget cuts, British universities were forced to change the organisational structure as well as procedures for planning and controlling resources. However, differences exist between agency and contingency theories, when applied to universities. Agency theory in any academic institution is based on the role played by institution (agent) and the government body (principal). The government assigns the decision making authority and accountability to the institutions. After getting the authority the agent will serve the principal. At various levels, the universities are structured by contract between government and institution in the firm (Gregoriou & Et. Al., 2007). Agency theory also focuses towards long-lasting relationship between government (principal) and the institution (agent). In this case, principal provides instruction to the agent and the agent acts accordingly (Eisenhardt, 2008). According to contingency theory, the performance of any institution rises with the better shape of the management accounting of the organisation. The board faces situational problems in universities and it acts accordingly. Contingency theory believes that the organisation intends to use that management accounting technique which is best suitable for the organisation. But in certain cases misfit also occurs in the organisation. If the universities are compelled to cut the budget then they need to bring certain changes in the organisational structure and procedure (Luft, 2002). The budget cut has an impact on organisational structure of the institutions and the formal structure was created for planning and controlling resources in three different universities. The upper levels of the organisational hierarchy were similar in nature. All the three universities had a council or court, finance or resource committee and senate. These were having various functions in the universities. After adopting the formal structures by UFC (University Finance Committee), it did not solve the entire problem that rose from the decreased resources. Dominant type of management was developed by the senior officials. This was the reason for distortion in staffing and as a result University of Edinburgh faced difficulty while implementing the essential controls. Thus, sophisticated approaches for the planning of departments were developed. For example, though UEA PRC (Planning and Resource Committee) did not contain sub-committees, the members who were selected, designed the task forces that review departmental proposals to attain imposed cuts. Principal Advisory Group had an influence in the planning of University of Edinburgh and this group consisted of University Secretary and Vice Principal. In 1992, the formal organisational structure of UCL and UEA did not change further for resource allocation and control. But the structure of University of Edinburgh was modified in 1992 in order to solve the deficiency in the procedures along with structure of the existing committee. The structure that was modified also reorganised the faculties into four groups, which were responsible for maintaining the academic records along with financial management. The Central Management Group was responsible for managing, planning and budgeting mechanism for the whole university. As a result, the previous reporting anomalies were separated and integration of the organisation was constricted which enhanced the devolution of responsibility. The organisational structure varied in different universities in 1992 when it was involved with resource allocation and financial planning. The changes in the structure of organisation in three different universities were achieved in various stages at different times. The results of the three universities were almost similar to each other. They were exemplified by tighter integration, extremely positive “chief executive style” of leadership along with increased delegation of budgetary responsibility (Jones, 1994). The formal structure, which was studied in the three universities in 1992 for the resource allocation and control, has not been transformed in UEA and UCL. This structure was more used to deal with incremental allocations which were applied to ‘historical bases’ in relation to resource allocation. The ‘Edinburgh Study Team’ criticised the above mentioned characteristics of the structure (Jones, 1994). The distribution procedure of considerable part of funds was significantly predetermined. This along with the prevalence of academic tenure, constrained flexibility towards the margins and also made the process of strategic management more difficult. UCL model was restricted to 10% of recurrent grant of UGC (University Grants Commission) which was correlated to non-salary cost in the departments (Jones, 1994). On the other hand, it was required to attain certain redistribution of resources by the incorporation of components which was reflected in outside base of funding. Therefore, the consultancy income as well as increment in research was rewarded and thus unit cost has an influence in allocation of resources in different universities in similar departments. The model of Edinburg was less complex. Moreover, it has been observed that the model encompassed the other departmental cost along with recurrent grants (10%). After examining the last part it has been observed that the result of the two approaches were almost similar. At the initial point the model represents certain utility as similar to the comparative costs. Both of these provide the device of objectives in order to confront with the allocation of resources along with efficiency and competency of the institution. Often it was found that the information bestowed was consisted of incomplete or unexplained anomalies. Though the study on UCL recognised merit in the rationality of its model, it recommended that such procedures could not be replaced fully for the employment of detailed costing. The study of Edinburgh suggested that the model as a rank was downgraded. The problems of management with academic term restrict the flexibility of relocation of resources, based on whatever resources may be adopted. In the last phase of 1980 and in the early months of 1990, Edinburg and UCL universities had developed revised planning and models of allocation. At the same period UEA also established a formal model for the first time. In that time the visibility for the methods of planning was raised by UFC. The teaching resources were well known and transparent to each and every funded student. The allocation of research for each one of the cost centres were made known by UCL (Jones, 1994). The ratios which were utilised for allocating essential expenditure to cost centre were also made accessible by it. Therefore, the model was constructed with the replication of UFC model but in respect of each one of the departments. This seems to be the rational starting point for the introduction of resource reallocations. The UFC also provide finance to the universities as ‘block grants’. The models were not applied in the similar way in each of the universities. For example, for resolving the major operating deficit along with severe problems in accommodation, the model of UCL was focussed on planning. Depending on the resources, this model integrated extremely sophisticated technique for allocation of fixed cost. To resolve financial crisis Edinburgh model was used. This model represents theoretical planning model which were not connected to operating budget. This approach was adopted partially due to committed model of expenditure and the desire to protect academic excellence in definite research departments. On the contrary, this model is used by UEA for both budgeting and planning. It also required making each department self-balanced within a few years in line with the model. During the phase of 1985 to 1992, the changes in the structure of the organisation along with approaches of allocation of resources go along with the changes in the role of accountants as well as in the process of accounting (Jones, 1994). The study reports of Edinburgh and UCL exemplified traditional treasury instead of management accounting, the need for changes and role of finance function. In the departments of UCL, formal monthly accounts were not prepared. The finance division controlled the monthly expenditure and consigned problems to the treasurer. The Study of Edinburgh suggested that annual accounts of expenditure were submitted to deans. The finance department prepared annual budget of both Edinburgh and UCL (Jones, 1994). The transformation of the structure of universities occurred due to budget cuts. In contingency theory, the universities or institutions decline the budget or profits in order to increase the profits. The structure of the organisation needs to be made much effective for efficient functioning of the organisation. As a result the changes and modifications need to be done in the structure of the organisation. The decline in budget will have a negative impact on both the organisation as well as their members. The association between the organisational structure and the environment is essential, as it reflects on the profits of the organisation. The bad affect of environment in the organisational structure may incline the organisation to cut their budget. Most of the organisation needs environmental support for effective functioning. But due to certain reasons, the relationship between them get slowed down, which may results in cut down of budget of the universities (Walonick, n.d.). According to agency theory, the universities undertake the budget cut when the conflict may arise in an institution or universities due to disagreement between the principal and the agent. As after the delegation of authority the principal will be served by the agent. When the cost of agency becomes high the principal does not spend resources on the agent (Shapiro, 2005). In the above discussion both the agency theory and contingency theory are highlighted briefly in order to conceptualise the facts related to reason behind the university budget cut. It is quite evident that how both the theories deal with the issue of budget cut in the three univerdities of the4 United Kingdom. Through the agency theory the relationship between the universities and the governments has been constructively described whereas in the contingency theory the situational analysis of the universities due to the issue of the budget cuts was enlightened. It has been observed that all the three British universities have adopted the method to modify the structure of the organisation and procedures in order to improve their efficiencies to work with minimum resources. As the government forced the universities to change their structure and planning of the institution with the purpose of increasing the efficiency, thus it leads to reduction in the number of resources and the teaching staff and increment in the number of students for higher education. They have adopted various procedures for planning and controlling the resources in their universities. The agency theory and contingency theory are different from each other but both these theories reflect that the budget cut has an extensive impact on the structure and procedures for planning and controlling resources of the three universities. References Auld, D., 2010. Principal Agent Theory. Strategic Planning and the Principal-Agent Issue in Higher Education Leadership. [Online] Available at: http://www.academicleadership.org/article/print/STRATEGIC_PLANNING_and_THE_PRINCIPAL-AGENT_ISSUE_IN_HIGHER_EDUCATION_LEADERSHIP [Accessed February 23, 2011]. Eisenhardt, M. K., 2008. Origin of Agency Theory. 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