Managerial Accounting in Complex Organizations Contemporary developments in the organization and technology of manufacturing and in the deregulation of service industries are generating demand for entirely new approaches to cost accounting and managerial control. The traditional direct labor focus of most cost accounting systems has become obsolete in light of the much smaller ratio of labor to total manufacturing costs and the increased importance of capital costs and knowledge workers. Current research is exploring the initiatives of innovative organizations across a wide variety of industries to deal with these changes.
The role of management accounting systems, including the use of multiple non-financial measures to supplement traditional profit and loss statements, is studied in relation to the firm's production, marketing and strategic goals. Accounting Data in Productivity Measurement and Strategic Decision Making As businesses strive to improve their profitability, it becomes vital to develop cost and profitability data that will support the firm's desire to promote their most profitable products and identify their most profitable market segments. Further, information needs to be collected and classified to ensure the firm's continuing commitment to enhanced productivity and adherence to budgeted performance.
Research is focusing on the implications for a firm's cost accounting system of these demands for improved productivity and profitability measurements. Financial Reporting and Industrial Structure Discussions of financial accounting disclosure policy by regulatory bodies such as the S. E.C. and the F. A.S. B. are typically phrased in terms of the effect of such disclosure on the efficiency reporting firms is rarely considered because such effects are thought to be negligible. However, the information produced by a reporting firm is received by its competitors as well as investors.
Recent research has studied the effect of different levels of mandated financial accounting disclosure on the behavior of the reporting firms. Of particular interest is whether the level of such disclosure increases the level of competition among the reporting firms, increases tacit collusion among them, or has no effect. These issues have been addressed using experimental markets. Empirical Evidence on the Relation of Accounting Information to Capital Market and Managerial Behavior Much work has studied the effect of publicly available information on the behavior of the stock market. One of the important sources of such information is the accounting data generated by a stream of recent research assesses how accounting information is processed in the capital market securities.
Related research examines the capital income, cash flows, and accruals. This research focuses on the market properties of the components of accounting numbers such as information content and relative importance of one information cue vis-a-vis the others in pricing corporate securities. Another avenue of research evaluates the influence of managerial incentives and market/regulatory forces on managerial accounting choice decisions, such as accruals. Cash Flow Accounting and Its Structure While investment decisions are based on cash flow forecasts their consequences are evaluated on the basis of current earnings, which include many non-cash adjustments like depreciation.
Such non-cash items are often quite subjective and susceptible to corporate discretion. It seems both feasible and desirable to build an accounting system that excludes such non-cash items, and is capable of providing a profitability indicator that is useful for performance evaluation. In this research, new concepts and measurement techniques are developed in order to construct such a system. Delegating the Choice of the Financial Accounting Method It is usually observed that shareholders delegate the choice of the financial accounting method to managers, and that the latter's compensation is at least partially based on the output of the chosen financial accounting method.
But this seems to create incentives for managers to choose the financial accounting method in order to maximize their compensation, rather than to most accurately report the results of operations. Recent research addresses the question of why shareholders find this arrangement in their best interest. This research indicates that production distortions are created when the choice of the financial accounting method is delegated to either the manager or the shareholders.
The delegation decision should therefore be based on minimizing these production distortions. This research establishes sufficient conditions under which it is optimal to delegate the choice of the financial accounting method to managers. The Returns to Monitoring and The Effect of Monitoring on Production and Allocation Distortions Much of the recent work in managerial accounting has been based on the principal-agent model in which managerial accounting systems are viewed as monitoring systems which produce information on which the principal (owner) and the agent (manager) base their contract.
Recent research addresses whether the gross returns to monitoring are always concave, as they are assumed for other inputs, or whether they can be convex. It is found that the gross returns to monitoring an agent's private information can often be convex. In other words, the better the monitoring system, the more valuable it is to improve it. In addition, this research studies how improvements in a monitoring system affect the size of the production distortion and the excess return or rent earned by the agent on his private information. Collusion in Auditing Historically, auditing arose to overcome informational asymmetries between owners of resources and the managers who traded or transacted on their behalf.
Therefore, the value of auditing depends crucially on whether the manager and the auditor collude. Recent research has studied a three-person problem consisting of an owner, a manager, and an auditor in which the latter two can collude against the former. The optimal owner-manager and owner-auditor contracts are characterized and the extent of distortion caused by the potential for collusion is studied.
The optimal owner-manager contracts are similar to those found in the leasing of income producing assets such as retail space and mineral and oil deposits. In these instances, it is difficult for the owner to independently verify the amount earned by the asset and the manager can consume any amount not reported to the owner. Empirical Implications of Agency Theory and Their Impact On Management Control Systems Agency theory research focuses on the optimal contractual relationships among members of the firm, where each member is assumed to be motivated solely by sef-interest.
Accounting researchers are interested in agency theory because it provides a model from which uses of managerial accounting information and managerial accounting systems can be derived and studies. Executive compensation contracts are important elements of management control systems and therefore, the compensation data can be used to empirically test the theoretical predictions of agency theory regarding the sensitivity of accounting based and non-accounting based performance measure to the total compensation package. A Contract Theory of Accounting and Control If organizations are seen as sets of contracts among economic agents who contribute resources and receive inducements in exchange, accounting and control systems can be seen as means of implementing and enforcing these contract sets.
Various forms of accounting for a variety of organization types can be examined in terms of how they serve the following functions; (1) measuring the contribution of each agent; (2) determining and disbursing the contractual entitlement of each agent; (3) informing various agents about the extent to which other agents have fulfilled their contractual obligations and received their entitlement; (4) providing information to potential agents in order to maintain a liquid market for contractual slots or factor of production; and (5) providing a pool of common knowledge of verified information to all participants to facilitate negotiation and contract formation.
This research examines various aspects of accounting practices and institutions in terms of this unified economic model. Market for Information When asset markets reveal the private information possessed by the traders to other participants through price and other market variables, the ability of information produces to recover their cost through trading is attenuated.
This research examines the complex interactions between, and equilibria in, the asset markets that reveal private information on one hand and markets for information on the other.