Knowledge that Transforms

Budgeting has different functions in the firm that are not necessarily congruent with each other but conflict. Specifically, in many firms, budgets are simultaneously set and used for both operative planning and performance evaluation. Although prior literature recommends using different budget levels for different purposes to resolve potential conflicts between these functions, empirical evidence indicates that the majority of firms use a single budget level for planning and performance evaluation. To examine the questions of whether and why firms do so, we identify economic and behavioral costs of using separate budget levels. We find that when deciding about the use of a single versus separate budget levels, firms trade off the costs of incurring higher variances against the costs of preparing a separate budget and reduced credibility of the performance evaluation system. Moreover, we find that using a single budget level for both purposes at the beginning of the year does not signify using a single budget level at the end of the year. Firms seem to respond to the various economic and behavioral costs either at the beginning of the year or, alternatively, in the course of the year and adjust budget levels for planning, performance evaluation, or both accordingly. Our study contributes to the literature on the integration of control-oriented and decision-oriented functions of management accounting instruments by reconciling discrepancies between descriptive empirical practice and recommendations from prior literature about the use of a single versus separate budgets for multiple purposes.

This study reports an experiment conducted to examine auditors' materiality judgments for nonfinancial performance information (NFPI) in the context of Integrated Reporting; a setting where auditors do not have well-established guidelines or benchmarks. We examine two fundamental factors underlying Integrated Reporting that are predicted to influence auditors' NFPI materiality judgments, namely, the level of strategic relevance associated with the NFPI being assessed, and the provision of a strategy map (a visual representation of linkages between the firm's strategic objectives) to auditors. Our study provides evidence that while auditors judge misstated NFPI of low strategic relevance to be less material than misstated NFPI with high strategic relevance, they only make this distinction when a strategy map is present. As integrating a client's strategy in the process of evaluating materiality is important, our result suggests that the presence of a strategy map potentially improves the efficient allocation of assurance resources. The importance of understanding how qualitative factors affect materiality judgments in nonfinancial assurance engagements is reflected in the fact that accounting firms view such assurance as mainstream. Our findings not only have implications for standard setters developing further guidance for determining audit materiality under Integrated Reporting, but also more generally for auditors who are providing assurance services for NFPI.

CEOs of retirement age are likely to exhibit a “horizon problem,” whereby they are reluctant to make decisions that are beneficial to the firm in the long term but potentially costly to the CEOs' personal wealth in the short term. We predict that a CEO with strong organizational identification (OI) will be less likely to behave opportunistically. Our results are consistent with our expectation when we examine three types of decisions that reflect the CEO horizon problem. Specifically, we find that retiring CEOs with strong OI are less likely to reduce research and development investments or decrease the firm's commitment to corporate social responsibility. Retiring CEOs with strong OI also behave less opportunistically when making voluntary disclosures; namely, they issue fewer management earnings forecasts in their last year of employment. Our findings indicate that cultivating a CEO's OI can be an effective way to mitigate her horizon problem.

This historically informed field study examines a period of budget process change at the University of Wisconsin-Madison. In so doing, it provides an in-depth examination of the ability of budget process to serve as a forum for debate and compromise between disparate logics for action, and to manage periods of change within institutionally complex environments. Our analysis addresses two primary concerns: 1) the nature of divergent institutional logics and resulting pressure for heterogeneous institutional change; and 2) formal and informal budget process change as a tool to successfully manage institutional complexity through time. This study echoes those of hybrid organizations generally, where the ability to selectively draw upon multiple logics for action is a significant asset in managing the coexistence of competing logics through time. Our focus on budget processes builds upon these results by emphasizing the distinction between formal and informal logics and highlighting the gradual nature of institutional change.

Audit practitioners, standards, and regulators continually emphasize the importance of professional judgment in the audit of complex processes and financial estimates. Despite this increasing call for more thoughtful analysis, research and inspection reports seem to suggest that auditors tend to make mechanistic audit decisions in such situations. This experiment evaluates auditor participants' improved application of professional judgment in the audit of complex estimates when taught a specific critical thinking methodology from system dynamics. Results indicate that emphasizing the use of professional judgment is not sufficient to decrease auditors' mechanistic mentality. As expected, however, auditors primed to take a systems-thinking perspective are better able to evaluate the complexity of the situation and to more effectively apply professional judgment. These results suggest that the goal of improving professional judgment can be achieved with an underlying change to the way auditors think.

This study examines the joint effect of investor sophistication and the prospect of critical audit matter (CAM) disclosure on experienced audit committee members' propensity to ask challenging questions about management's significant accounting estimates. Using the theory of helping behavior and social responsibility norm, I predict that audit committee members will ask more challenging questions given a more unsophisticated investor base, particularly when there is a prospect of additional CAM disclosures in the audit report. I test my hypotheses using highly experienced audit committee members in an experimental setting. The results are supportive of my hypotheses. Additional analysis indicates the results are driven by audit committee members perceiving greater oversight duty in the presence of a more unsophisticated investor base and when there is the prospect of additional CAM disclosures. Overall, my findings shed light on factors that affect audit committee members' questioning behavior in the oversight process and are likely of interest to regulators and standard setters given their traditional emphasis on protecting unsophisticated investors as well as the current move towards expanding the audit report to include CAMs.

Tacit coordination is a pervasive aspect of accounting practice. This paper teases out insights on tacit coordination from existing scholarship, starting with studies of everyday life accounting, then turning to professional practice. It develops an understanding that, in the application of rules and accounting standards, in producing, framing, auditing and using statements, records, apologies or excuses, accounting practitioners tacitly coordinate towards the passing of accounts. This passing can be articulated in terms of structures, agencies and processes of tacit coordination involved in making accounting happen. The implications of this understanding of accounting practice and the importance of the wider domain of enquiry it is indicating are discussed with respect to the stewardship position of accounting professionals and the further development of accounting theory. The passing of accounts charges accounting practitioners with the stewardship of silence and indicates a broader case for accounting theory to address the full continuum of accounting practices. One vital role of such theory is to offer antidotes against the idea that any account, any slice of information, or any amount of ‘big data’, could speak for itself – or that it should.

This study investigates how accountability type (process or outcome) and causal chain framing influence information search processes and decision-making quality. Drawing on the accountability literature and causal reasoning theory, we predict that process accountability stimulates information search effort and enhances decision quality. Additionally, we posit that causal chain usage enhances focus on relevant cues, and increases search effort and decision quality under outcome accountability. In contrast, we argue that employing a causal chain under process accountability decreases search efforts and does not spur a similar increase in decision quality. We conduct an eye-tracking experiment in which participants decide on the amount of funding for a value-creating project after observing prior balanced scorecard performance data. Our results are consistent with our expectations and reveal that accountability type and causal chain framing interact. Under outcome accountability, providing a causal chain is paramount to achieve high decision quality. When process accountability is employed, however, providing a causal chain reduces information search effort and does not improve decision-making. We discuss important implications of our findings for management accounting research and practice.

Mobilising the literature on global governance, governmentality and accounting regulation, we trace the historical deployment of transparency and the associated assemblages of actors and technologies in transnational economic and market governance. Starting with the first uses of the term “transparency” in the European Common Market (ECM) after World War II, we show how transparency came to inform and frame the imagined rational individual as the central economic (customer, central to price discovery) and later political (citizen, central to the market's public accountability) participant. We then show how in the 1990s, with the rise of the New Financial Architecture (NFA), the role of transparency in economic/market governance was fundamentally transformed. Beginning with their good governance programs, the International Monetary Fund (IMF) and the World Bank gradually adopted “standardised transparency” (in the form of financial accounting, as well as standardised statistics, state budgets, corporate governance, etc.) to govern market participants through financial market discipline. This disciplining program worked in concert with a program of moral persuasion enacted through an intensifying performance measurement apparatus. We elaborate on the implications of this transformation for the political economy of accounting, by reflecting on how the reliance on standardised transparency in neoliberal governmentality has been about: a reconfiguration of the sites of problems (focused on the national level) and solutions (focalised at the global), a liquidation of transnational market governance (that is increased reach, flexiblisation and self-organisation of both the disciplining and moralising/subjectivising governance processes), and a reconfiguration of the topology of actorhood (away from states and individuals both as enablers and beneficiaries, and towards financial investors and private standard bodies).

This paper seeks to (re)theorise the interpenetration of accounting and emotionality. Whilst researchers have devoted increasing attention to the effects of emotions, we argue that extant research is problematic in two ways. First, emotions have been treated as an intrapsychological phenomenon rather than an inter- or relational phenomenon. Second, current work focusses on how accounting produces emotions, failing to consider how emotions inform accounting. To address these two shortcomings, we mobilise the economic anthropology of Tarde (1902), and the subsequent work by Latour and Lepinay (2009) and Latour (2010; 2013), to argue that all interests are inherently 'passionate interests'; they are matters that 'hook' actors emotionally. This theoretical lens is used to narrate a field study considering the (changing) passionate interests and their connections to accounting in an elite Swedish football club. Specifically, we analyse a nexus of four passionate interests that 'hook' many (in different ways and with different degrees of intensity) – violent behaviour, winning the league, preserving the club family, and derbies. More generally, this paper argues that: first, organisations are a nexus of passionate interests; second, such interests recursively inform the doing of accounting; third, passionate interests are quantifiable via a range of financial and non-financial performance measures, enabling the construction and coordination of collectives; and, fourth, some performance measures matter more than others when (a) they are simple and unambiguous, (b) grounded in enduring passionate interests with deep historical roots that tie together members of proximate communities, and (c) travel beyond organisations and penetrate diverse arenas of everyday life, reproducing the emotive intensity of passionate interests.