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«Paul M. Collier Aston Business School, Aston University Accounting for Managers Accounting for Managers: Interpreting accounting information for ...»

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Interpretive perspectives, and their underlying concerns pertaining to the cognitive decision-making issues of the organizational decision-making model, the Weberian concern for the politics of rationality, and the ethnomethodological concerns for the construction of social reality, have perhaps been most forcefully developed within institutional theory. Following Selznick’s (1957, 17) definition ‘‘... to institutionalize is to infuse with value beyond the technical requirements of the task at hand,’’ the general theme of the institutional perspective is that an organization’s survival requires it to conform to social norms of acceptable behavior as much as to achieve levels of production efficiency. Among the sociologists whose work reflected the Weberian tradition, Selznick (1957) viewed organizational structure as an adaptive vehicle shaped in reaction to the characteristics and commitments of participants as well as to influences and constraints from the external environment. Institutionalization refers to this adaptive process: the processes by which societal expectations of appropriate organizational form and behavior come to take on rule-like status in social thought and action. In particular, institutional theory extends beyond the focus of contingency theory on an organization’s task environment, which has received much attention in managerial accounting research, to instead focus on its institutional environment. According

to Scott (1987, 507):

Until the introduction of institutional conceptualizations, organizations were viewed as being shaped largely by their technologies, their transactions, or the power-dependency relations growing out of such interdependencies.

Environments were conceived of as task environments... While such views are not wrong, they are clearly incomplete. Institutional theorists have directed attention to the importance of symbolic aspects of organizations and their environments. They reflect and advance a growing awareness that no organization is just a technical system and that many organizations are not primarily technical systems. All social systems, hence all organizations, exist in an institutional environment that defines and delimits social reality.

The general theme of the institutional perspective is that an organization’s survival requires it to conform to social norms of acceptable behavior as much as to achieve high levels of production efficiency. Thus, many aspects of an organization’s formal structure, policies and procedures serve to demonstrate a conformity with institutionalized rules, thereby legitimizing it, to assist in gaining society’s continued support (Meyer and Rowan 1977; Scott 1987; DiMaggio and Powell 1983, 1991). Meyer and Rowan (1977) proposed that such externally legitimated, formal assessment criteria as managerial accounting information play a heightened though ritualistic role in a variety of settings as organizations grope to find, conform to, and demonstrate for their internal and external constituents some form of rationality in order to gain legitimacy. Thus, rather than merely representing some notion of an objective reality, managerial accounting may serve as a ceremonial means for symbolically demonstrating an organization’s commitment to a rational course of action. Here accountants gain their power by the responsible development and application of generally legitimated categories.

Similarly, Zucker (1977) argued that the rationalization in formal control systems is


an important part of a network of political and power relations which are built into the fabric of social life, a process of transforming the moral into the merely factual.

Covaleski and Dirsmith (1988a, 1988b) adopted an institutional perspective to examine the manner in which societal expectations of acceptable budgetary practices are articulated, enforced and modified during a period of organizational decline. They examined a large university system’s budgeting process both through extensive archival documents and through in-depth interview with budgetary actors (see also Covaleski and Dirsmith 1983, 1986 for work pertaining to health care settings). Covaleski and Dirsmith (1988a, 1988b) followed a university budget category through periods of ascent, transformation and decline, describing the process of how a university challenged and rejected a traditional institutionalized budgetary framework for allocating state funding when this framework became inconsistent with the university’s goals and interests. Self-interest is foremost in the minds of the various parties who propose, oppose, co-opt and contest the budget category. Covaleski and Dirsmith (1988a, 1988b) show how conflicting interests get couched in the common and legitimate language of budgeting, thus concluding that the budgetary process is an important manner in which societal expectations are reproduced.

Ansari and Euske (1987) also drew from institutional theory to examine the role of accounting information in the public sector, identifying this role in terms of documenting institutional compliance, i.e., seeking external legitimation or masking underlying sociopolitical reality. Ansari and Euske (1987) examined the manner in which cost information is used in the Department of Defense, finding disparity between the formally stated objective of the system to improve organization efficiency, and the lack of accounting system use for this purpose. The authors drew from an institutional perspective to explain the use of accounting information in the Department of Defense, in the light of this agency having ambiguous missions that foster rationalizing uses of accounting information.

Mezias (1990) examined the financial reporting practices of the Fortune 200 and concluded that the institutional model adds significant explanatory power over and above the models that currently dominate the applied economics literature. Recognizing the institutional work that has been done pertaining to the accounting practices of not-for-profit organizations, Mezias (1990) studied relationships between institutional variables and the financial reporting practices used by for-profit organizations. Mezias and Scarselletta (1994) extended this work by examining the decision process of a public policy task force that plays a role in establishing financial reporting standards to determine the affects of the kinds of decisions made. Drawing upon institutional theory, this study modeled the decision process as an organized anarchy embedded in a larger institutional context of accounting.

In summary, Carruthers (1995) argued that institutionalism views accounting practices as one of a larger set of features that can legitimize organizations through the construction of an appearance of rationality and efficiency. As Carruthers (1995,

326) stated, ‘‘Accounts are the quintessential rationalized myth, and it is surprising that new institutionalists have not devoted more time to studying them.’’ Perhaps the single most important contribution of institutional theorists to the study of


organizations is their reconceptualization of the environments of organizations.

Earlier organizational and sociological models had emphasized technical facets.

Meyer and Rowan’s (1977) work, however, called attention to a neglected facet of environments: institutional beliefs, rules and roles – symbolic elements capable of affecting organizational forms independent of resource flows and technical requirements. They emphasized (drawing from Berger and Luckmann 1967;

Garfinkel 1967) that shared cognitive systems, although created in interaction by humans, come to be viewed as objectified and external structures defining social reality. This is an ethnomethodological view of human action as shaped by conventions, built up by participants in the course of interactions to the point that much behavior takes on a taken-for-granted quality. The more institutionalized the cognitive categories and belief systems, the more human actions are defined by a widening sphere of taken-for-granted routines (Weber 1947).

Reflecting a theme similar to institutional theory, resource dependency theorists argue that organizations are limited by a variety of external pressures (Pfeffer and Salancik 1978; Pfeffer 1981), that environments are collectivities and interconnected, and that organizations must be responsive to external demands and expectations in order to survive. Resource dependency theorists also suggest that organizations attempt to obtain stability and legitimacy, and that organizational stability is achieved through the exercise of power or control for purposes of achieving a predictable inflow of vital resources and reducing environmental uncertainty (Oliver 1991). In this tradition, Weick (1976) stated that the chief responsibilities of organizational administrators are to provide a common language from which to reaffirm and solidify ties with outsiders through symbol management, consistent articulation of a common vision, and interpretation of diverse actions in terms of common themes. In like manner, Burns (1986) observed that such ‘‘rule systems’’ as formal control systems, rather than being neutral or merely technical in nature, constitute power resources that actors use in advocating organizational structural forms which serve their own interests. On this theme, Boland and Pondy’s (1983, 1986) accounting studies highlight the ceremonial, seemingly irrational, aspects of resource allocation activities where, for example, they found that in a university case, the budget provided a context for state agencies to exercise their legitimate authority in allocating funds to particular priorities. At the same time the underlying flexibility was such that funds could be diverted from one program to another at will. In short, resource dependency theorists also have placed a strong emphasis on the role of political language, particularly in budgeting processes.

Generally, the resource dependency tradition has recognized that budgeting is closely linked with power, self-interest and political advocacy in contemporary organizations (Pfeffer and Salancik 1974, 1978; Salancik and Pfeffer 1974; Rose 1977;

Pfeffer 1981; Schick 1985). More specifically, self-interest and internal power and politics, actively expressed, for example, through budgeting systems, have been found to play heightened roles during periods of organizational decline in terms of resource allocation decisions made within organizations, possibly so that the organization maintains some semblance of subunit harmony (Hackman 1985; Hills and Mahoney 1978; Gray and Ariss 1985). In addition, not only do organizations


appear to use budgeting in a political mode to allocate resources internally, but the visibility of these internal budgetary allocations to external constituents also appears to influence the generation of resources (Hackman 1985). This dual role of budgeting in generating and allocating resources suggests an expanded linkage between the values of external constituents and the internal resource needs and uses of an individual organization, most particularly in times of financial stress.

Cyert and March (1963) have defined budgets as both the substance and result of political bargaining processes that are useful for legitimizing and maintaining systems of power and control within organizations. Similarly, Pfeffer (1981) argued that a particularly effective way of influencing resource allocation decisions is to do it as unobtrusively as possible, such as through the apparently objective mechanism of the budgetary process which tends to legitimate subjective and political decision-making processes (see also Pfeffer and Salancik 1974, 1978).

Here, according to Hopwood (1974), the trivial, dull, seemingly objective nature of accounting enables it to be used in taking the debatable out of the realm of open debate and into the realm of calculation. Consequently, these theorists considered managerial accounting information such as budgeting as a socially constructed phenomenon rather than a technically rational function driven by and serving the internal operations of organizations. Moreover, these perspectives recognized that once implemented, what a budgeting system accounts for shapes organizational members’ views of what is important and, more radically, what constitutes reality.

Budgeting, then, has been implicated in the construction of social reality rather than being the passive mirror of a technical reality. On this point, Pfeffer (1981,

184) concluded:

[t]he task of political language and symbolic activity is to rationalize and justify decisions that are largely a result of power and influence, in order to make these results acceptable and legitimate in the organization.

Regarding the political perspective of budgeting, Wildavsky (1964, 1975, 1979) long argued that budgeting systems achieve many purposes beyond control, that they are at once forms and sources of power, and that they serve both the guardians of scarce resources and the advocates of budgetary units. Wildavsky also reasoned that inherently conflictual organizations may use budgets in establishing and maintaining existing power relations as opposed to serving decision-making and problem solving directly in a technically rational manner. Instead, he argued, decision-making and problem solving are served by the sometimes asymmetrical political confrontation between budgeters and budgetees. Wildavsky concluded that the political nature of budgeting may well be inherent in complex organizational life, and is not an aberrant defect in budgetary practice. Resource allocation, he suggests, is not the consequence of dispassionate analysis, but emerges through a subtle role of advocates and guardians. Building on Wildavsky’s analysis, Jonsson (1982) sought to capture some of the implicit political dynamics by following the way in which the budgetary process unfolded over three years in a Swedish municipality in a time of financial stringency.

Edelman’s (1977) broader political view and his concern for probing the consent of the governed in American politics also reflects concern for the significance


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