Management accounting practices in Europe: a perspective from the States

I provide a perspective from the States on four questions primarily based on information inManagement Accounting: European Perspectivesedited by Al Bhimani (1996). First, seven factors are identified as having shaped management accounting practices in European nations—academics, education, government, professional associations, consultants, technology, and the inter-nation transfer of information. Second, evidence supports the view that, across European nations, more changes are occurring in management accounting practice terminology and techniques than in the purposes and styles of using management accounting techniques. Third, evidence indicates that there is convergence across European nations in management accounting practices, especially in terminology and techniques, but less convergence in the purposes and styles of using techniques. Fourth, management accounting practices in European nations, particularly terminology and techniques, is converging on a global management accounting practice model. I propose that management accounting practices—particularly terminology and techniques—is converging across nations (at least for those firms that are affected by the global economy)anddiverging across industries both within and between nations.     

Heterogeneous student perceptions of accounting course importance and their implications for SET reporting and use

This research tests for an association between student perceptions of accounting course importance (PCI) and student evaluation of teaching (SET) ratings of satisfaction with instructor performance, course quality, and grading procedures. The study also investigates whether instructor rankings constructed from SET ratings vary across student groupings based on PCI. Using responses from students enrolled in introductory accounting classes at three AACSB-accredited accounting programs we find that SET ratings vary significantly with PCI. We also find that instructor rankings constructed from SET ratings vary with PCI. These findings suggest that, when heterogeneous perceptions are present, satisfying all students enrolled in a course may not be possible and that reliance on aggregated SET data may obscure important differences in student opinion. In this circumstance, disaggregating SET data by PCI and emphasizing the feedback of students holding higher (stronger) perceptions of course importance may enhance SET diagnostic value.     

The process of measurement in managerial accounting: A psycho-technical systems perspective

This paper develops a formal framework of the act or process of measurement in managerial accounting. Although the traditional paradigm of measurement underlying accounting treats it as a technology designed to represent properties of events and transactions in numerical terms, this paper is based on the notion that managerial accounting measurement is intended to facilitate behavior, and thus requires an alternative view of measurement as a “psycho-technical system”. The paper presents the psycho-technical framework and examines its application in selected areas of managerial accounting: human resource accounting, social accounting, divisional performance evaluation, zero-based budgeting, standard costing, and evaluation of internal control systems.     

Accounting in organized anarchies: Understanding and designing accounting systems in ambiguous situations

This paper explores the relationship between organizations in ambiguous situations, the technology of choice and the uses of internal accounting systems (systems of cost accumulation, performance evaluation and budgetary control). Accounting systems are examined in terms of the two elements of March's technology of foolishness (Civilokonomen, May 1971, pp. 7–12). Relaxation of traditional prohibitions in choice behaviour against imitation, coercion and rationalization suggest that accounting systems might be understood both in terms of their impact on sustaining and influencing an organization's culture and language and in terms of their ideological and legitimizing influence in maintaining systems of power and control in organizations. Allowing playfulness in the choice process suggests that accounting systems might be designed to facilitate creativity and innovation in organizations, insofar as these characteristics are appropriate in contributing to organizational effectiveness.     

Blockholder ownership: Effects on firm value in market and control based governance systems

In this study, Granger tests are used to examine the relationship between blockholder ownership and the values of the largest companies in the European Union and the US. Previous studies on US data have found that blockholder ownership has no systematic effect on performance. We propose that these results may not apply to Continental Europe, where ownership concentration is typically higher, the level of investor protection is lower, and influential blockholders may have objectives other than shareholder value. In accordance with previous research, we find no significant association between blockholder ownership and prior or subsequent firm value in either the US or the UK. Nonetheless, in Continental Europe we find a negative association between blockholder ownership and firm value or accounting returns in the next period. Further analysis reveals that this association is significant only for companies with high initial levels of blockholder ownership (> 10%). We interpret this finding as evidence of conflicts of interest between blockholders and minority investors. The percentage of blockholder ownership in Continental Europe may be too high from a minority shareholder value viewpoint.     

Development of accounting regulation in Jordan

This study examines the development of accounting regulation in Jordan with emphasis on the dominant environmental factors that influence it. In order to have a better understanding of Jordan's present accounting practices, and its future development tendencies, we examine the path of accounting in Jordan since the early days of the nineteenth century, and analyze how Jordan's accounting environment — political, economic, legal and cultural — influenced the development of accounting in Jordan. We also examine Jordan's recent move towards full adoption of International Financial Reporting Standards (IFRS) and find that Jordan's colonial past has exerted a strong influence. In addition, we conclude that political and economic factors, through privatization and the resulting accounting reforms, contributed more to the development of accounting practices than other environmental factors. Privatization led to reforming Jordan's disclosure regulation and laying down of the corporate-governance policy framework. Our conclusions could be of interest to other countries, particularly developing countries, who want to improve the quality of their accounting disclosures and practices.     

French revolution and German circumspection: reforming budgeting and accounting in national governments

In France in 2001, a revolutionary budgeting and accounting reform of the central government was begun and, in 2006, introduced—it is now almost complete. In 2006, the German federal government began a similarly revolutionary budgeting and accounting reform, but abandoned it in 2010. We identify the similarities in technique between the two countries' reforms but also significant differences. The authors conclude that, notwithstanding the importance of accrual accounting in the French revolution and in the abortive German revolution, the resilience of the traditional budgetary accounting systems is striking.     

The heteroskedasticity-consistent covariance estimator in accounting

The main purpose of this paper is to compare the White (1980) heteroskedasticity-consistent (HC) covariance matrix estimator with alternative estimators. Many regression packages compute the White (1980) heteroskedasticity-consistent (HC) covariance matrix estimator. The common procedure in Accounting and Finance research to deal with the heteroskedasticity problem is based on this estimator, despite its worse finite-samples properties when compared with other consistent estimators. In this paper we compare several HC covariance matrix estimators based on a sample of 3706 European listed companies from Austria, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden and the United Kingdom. We conclude that HC standard errors increase when finite-samples more appropriate estimators are considered and in the most part of countries the Ohlson (1995) model coefficients estimates became statistically insignificant. This can be explained by the high leverage points in the design matrix. To the best of our knowledge it is the first time that these alternative estimators are compared with the one of White (1980) in accounting research.     

Accounting diversity and firm valuation

We examine accounting numbers and stock prices across three countries: Germany, Norway, and the United Kingdom (UK). The accounting systems in the three countries differ in faithfulness to clean surplus accounting and in conservatism. We address three questions. First, are there systematic differences across countries in the value relevance of accounting? Second, are there systematic differences in the incremental and relative value relevance of book values and earnings per shape (EPS) across the countries? Third, do future earnings realizations (proxies for expected earnings) explain current stock prices? We find that accounting book value and EPS are significantly related to current stock prices across all three countries. German accounting numbers have the lowest relation with stock prices (R² ≈ 40%) and UK accounting numbers the highest (R² ≈ 70%), while Norwegian accounting numbers are in between (R² ≈ 60%). Second, the incremental and relative explanatory power of book value and of EPS differs across time and across countries. Book values explain more than earnings in Germany and Norway, but less in the UK. Finally, future income realization explain little about market prices not already explained by current book value and EPS.     

Trust for accounting and accounting for trust

This paper combines insights from the sociology of knowledge and the emerging practice-based literature on learning and knowing to extend the institutional framework of accounting change developed by Burns and Scapens [Burns, J., Scapens, R.W., 2000. Conceptualising management accounting change: an institutional framework. Manage. Acc. Res., 11, 3–25]. In particular, it explores how management accounting systems (MAS) can be implicated in processes of learning and culture change, and used to identify ‘trustworthy’ solutions in the face of organisational crises. A case study of an Italian company, which was subject to massive change following its acquisition by General Electric, is used to discuss how, when crises arise and organisation members find themselves under intense pressure for change, their rationales and routinised behaviour, which are driven by the existing knowledge and cultural assumptions, are challenged. The case illustrates how MAS can act as sources of trust for the processes of change – i.e., accounting for trust; while at the same time being socially constructed objects of trust – i.e., trust for accounting. Drawing on the concept of personal trust and the notion of roles as access points to organisational (expert) systems, the paper discusses how, in this case, finance experts facilitated the acceptance and progressive sharing of new rationales and routines. Clearly, this does not guarantee that change will occur or occur in some ‘desired’ direction in other cases, but it increases the possibility of replacing trust in the predictability of routines with feelings of trust for change.     

Predicting change in management accounting systems: national culture and industry effects

This study replicates the model developed in Libby and Waterhouse's [Libby, T., & Waterhouse, J. H. (1996). Predicting change in management accounting systems. Journal of Management Accounting Research, 8, 137–150] exploratory study of changes in a population of 23 management accounting control systems, and the five components of planning, controlling, costing, directing, and decision making, at the organizational level in Canadian manufacturing firms. The determinants of size, organizational capacity, intensity of competition, and centralization (replacing decentralization) are used to examine a sample of manufacturing firms in Singapore. Regression results from survey data partially support the cross-national transferability of their findings. Additional analyses show consistency between manufacturing and industrial firms but not service-oriented firms, suggesting limited generalizability of the model across different economic sectors.     

Objectivity in accounting

This paper defends the possibility of objectivity in accounting. The views presented are shaped by the antirepresentationalist philosophy of Donald Davidson, and in particular by the conviction that objectivity can and must be founded upon intersubjectivity. A critique of Shapiro’s [Shapiro, B. (1997). Objectivity, relativism and truth in external financial reporting: What’s really at stake in the disputes. Accounting Organizations and Society, 22(2), 165–185; Shapiro, B. (1998). Toward a normative model of rational argumentation for critical accounting discussion. Accounting Organizations and Society, 23(7), 641–664] essentially representationalist analysis of the presuppositions of financial reporting, and an exploration of the metaphor of accounting as a language, are used to elucidate the antirepresentationalist view of accounting advanced in the paper. The elucidation continues through a reconsideration of the question of presuppositions of accounting, and the issue of the politicization of accounting: it is concluded that accounting has no philosophical presuppositions, and that the difference between desirably objective and politically distorted accounts essentially lies in the practices carried out in the name of each.     

The impact of national GAAP and accounting traditions on IFRS policy selection: Evidence from Germany and the UK

The adoption of IFRS in the European Union in 2005 aimed to increase the comparability of publicly traded companies’ consolidated accounts. However, previous literature questions whether IFRS are applied consistently across countries with differing institutional environments, and therefore, whether de facto harmony has been achieved. We further examine this question by investigating IFRS accounting policy choices of listed companies in Germany and the UK between 2005 and 2009. We find that most firms, when choosing IFRS options, tend to retain accounting policies required by national rules. We also investigate national accounting traditions in the case of options under national GAAP and find that most companies continue these after adopting IFRS. Moreover, there appears to be little significant change in accounting choices over time from 2005 to 2009. Given the differences in accounting rules and practices that exist across countries, our results suggest that international differences in financial reporting are likely to continue under IFRS.     

The effect of internal control and risk management regulation on earnings quality: Evidence from Germany

We investigate the impact of mandatory internal control and risk management (ICRM) reform on earnings-based attributes of accounting quality in Germany. Although prior studies examine changes in accounting quality under SOX Sections 302 and 404, there is scant evidence of the accounting quality effects of ICRM reform in foreign jurisdictions. Such evidence is warranted given the ongoing global policy debate of ICRM reform in the post-SOX era. We extend existing research by examining changes in earnings quality following the 1998 German legislation on control and transparency (KTG). The KTG regime provides a unique setting in which the regulatory scope extends beyond internal control over financial reporting (ICFR) to include broad business and enterprise risk control. Using both a differences and difference-in-differences research design, we find that German firms experience an increase in timely loss recognition and a decrease in earnings smoothing after KTG. We also find some evidence of a decrease in loss avoidance behavior. Additional analyses show that the sensitivity of capital investment efficiency to earnings quality increases in the German market after KTG, suggesting that earnings quality effects of mandatory ICRM reform has positive consequences for capital resource allocation. Together, our results are consistent with the achievement of one of the intended outcomes of ICRM regulation—increased accounting quality through effective ICRM systems.     

Quantum information and accounting information: Exploring conceptual applications of topology

Our previous attempt resulted in a paper by the same five authors, “Quantum information and accounting information: their salient features and conceptual applications,” published in the July–August 2006 issue of the Journal of Accounting and Public Policy. We now extend the previous paper to examine topological quantum computation, a remarkably innovative approach to decoherence and imprecise quantum computation. In this approach, exotic topological states are created for a natural medium to store and manipulate quantum information globally throughout the entire system. The process is intrinsically protected against imprecision and decoherence. We also explore conceptual, if not technical, applications of topological quantum computation to accounting. This is done by introducing topology’s inherent emphasis of qualitative characteristics to traditional accounting which has been dominated by quantitative characteristics. Here, financial statements’ monetary amounts may be contrasted to internal controls’ error frequencies. Part I of the paper deals with applications of topology to quantum information, after a brief introduction to basic tools. In particular the use of Fibonacci anyon and its powerful results are explained. Part II deals with applications of topology to accounting information. Part III deals with applications of topology to other potential fields.     

A note on accounting conservatism in residual income and abnormal earnings growth equity valuation

The impact of conservative accounting on residual income (RI) and abnormal earnings growth (AEG) valuation models is investigated in this note. Limiting the analyses to information dynamics constrained models (the core models in Ohlson, 1995; Ohlson & Juettner-Nauroth, 2005), we find that both models can handle accounting conservatism if the persistence factors of residual income or abnormal earnings growth fulfil certain conditions. In a comparison of permissible time-series specifications, the AEG model can potentially handle more conservatively biased earnings in the first forecast period than the RI model. However, this requires that the growth of the conservative bias in the second forecast period is not too large. In a 0-NPV competitive equilibrium with a constant steady state growth, both models work equally well. Further elaborations indicate that, in the presence of accounting conservatism a reasonable value of the persistence factor of residual income in the RI model should be in the interval between 1.0 and R (where R = 1 + discount rate), whereas the persistence factor of abnormal earnings growth in the AEG model should be close to 1.0. This implies that the persistence factor in the RI model appears to have been understated while the persistence factor in the AEG model appears to have been overstated in previous empirical research.     

Incorporating real-options analysis into the accounting curriculum

In this paper, we argue that accounting curricula should be expanded to cover the topic of real options. Our argument relies on reference to the [American Institute of Certified Public Accountants (AICPA) (1999) (Core Competency Framework, New York, NY: AICPA <http://ceae.aicpa.org/Resources/Education+and+Curriculum+Development/Core+Competency+Framework+and+Educational+Competency+Assessment+Web+Site/> Accessed 21.08.08], the framework for curriculum change espoused by [Arya, A., Fellingham, J. C., & Schroeder, D. A. (2003). An academic curriculum proposal. Issues in Accounting Education, 18(1) 29–35], a global study of core competencies for management accountants [International Federation of Accountants (IFAC), (2002). Competency profiles for management accounting practice and practitioners. New York, NY: International Federation of Accountants], a global capital-budgeting “best practices statement” [International Federation of Accountants (IFAC), (2008). International good practice guidance: Project appraisal using discounted cash flow. New York, NY: International Federation of Accountants], current specifications of the CMA exam [Institute of Management Accountants (IMA), (2008). Certified management accountant (CMA) learning outcome statements (effective 07/01/04), updated 07/2008. <http://www.imanet.org/pdf/CMA%20%20LOS.pdf> Accessed 29.10.08.], and elements of the Albrecht and Sack report [Albrecht, W. S., & Sack, R. J. (2000). Accounting education: Charting the course through a perilous future. Accounting education series, Vol. 16. Sarasota, FL: American Accounting Association]. We make special reference to the linkage of the topic of real options to two broad educational goals: decision-modeling and risk analysis. Existing resources that accounting faculty can use to incorporate real options into the curriculum are limited. As a response, we provide an extended example that accounting educators can use to cover the topic of real options. This example uses a set of binomial trees (one for cash inflows and another for cash outflows). The step-by-step approach presented in this paper allows students without a technical/mathematical background to extend discounted-cash-flow (DCF) decision models (e.g., NPV) to incorporate real options that are embedded in proposed investment projects.     

The organizational context of professionalism in accounting

This study analyses the degree to which change in the organizational context, content and location (both of the individual within the organization and the organization within the field) of professional work has contributed to variation in attitudes toward professional ideology and institutions. Through an online survey of Canadian chartered accountants we observe that, contrary to current accusations, a majority of accounting professionals remain committed to their profession, despite profound changes in the context, content and location of their work. We do find, however, that the strongest espoused deviation from core professional values and logics has occurred in traditional work contexts (i.e. public accounting firms), and for the distinctive value of commitment to independence enforcement, the deviation is most pronounced in the elite core of the profession – the Big Four professional service firms. Accountants in higher ranks also tend to identify more with commercialistic values. We speculate on the implications these findings hold for the professional project of accountancy.     

Management accounting as practice

In this paper we outline a distinctive practice theory approach to considering the role of management accounting in the constitution of organizations. Building on [Schatzki, T.R. (2002). The site of the social: a philosophical account of the constitution of social life and change. University Park, PA: Pennsylvania State University Press] notion of arrays of activity we emphasise the ways in which organisational members actively reconstitute their management control systems by drawing on them as a shared resource. By tracing the skilful practices through which social actors in a restaurant chain understand and mobilise accounting to contribute in specific ways to what they regard as the objectives of their organisational units, we develop a notion of situated functionality. Situating the interrelationships between technical and interpretive accounting processes in the wider field of organisational practices we elaborate the ways in which management control systems as structures of intentionality both shape and are shaped by shared norms and understandings.     

Mandated accounting changes and debt covenants: The case of oil and gas accounting

The relationships among mandated accounting changes, bond covenants and security prices has been the focus of several studies. These studies have provided mixed evidence on the existence of a bond covenant effect on security prices. This paper suggests that inconclusive prior results are a consequence of inappropriately measuring the default risk of debt. Using an option pricing framework, it is shown that the debt to equity alone is not an adequate measure of default risk. In particular, both the debt to equity ratio and the total risk of the firm are necessary to adequately model the bond covenant effects of an accounting change. These theoretical propositions are supported by the empirical analysis of the security market reaction to changes in oil and gas accounting.