We study the determinants of organizational slack in large decentralized firms and focus in particular on how management accounting systems (represented by business unit controllers) affect slack. We rely on an adverse selection model to derive several predictions and to motivate our tests. Consistent with this framework, we find that organizational slack (measured by achievability of business unit managers' performance targets) is higher in settings where business unit controllers focus relatively more on providing decision-making information to business unit managers than on providing information for corporate control. We also find that organizational slack is persistent over time and positively associated with business unit growth, our proxy for the extent of information asymmetry between corporate headquarters and local business unit management.

We examine how business unit (BU) controllers balance their dual roles of providing information for both local decision-making (local responsibility) and corporate control (functional responsibility). The existing literature suggests that organizations can improve the quality of financial reporting and internal controls by increasing the emphasis on the functional responsibility of BU controllers. In this study, we rely on prior literature and insights from field interviews to argue that such an increase also leads to role ambiguity and conflict, which in turn can lead to an increased tolerance of data misreporting. We test our predictions using survey responses of 134 BU controllers. As predicted, we find that the emphasis on the functional responsibility of BU controllers is positively associated with role conflict and role ambiguity, both of which are related to data misreporting at the BU level.