Explaining the Non-Adoption of Post-Completion Auditing

ABSTRACT

This field study examines reasons for the non-adoption of post-completion auditing (PCA) of capital investments. The empirical evidence is based primarily on interviews conducted in the 30 largest Finnish manufacturing companies. PCA can be briefly described as a formal process that checks the outcomes of individual investment projects after the initial investment is completed and the project is operational. Management Control Systems and PCA literatures suggest that different control systems can act as alternatives for each other. This paper specifically analyzes and maps alternate capital investment controls (ACICs) that enable the achievement of benefits suggested for PCA and draws upon the equifinality concept to discuss the role of ACICs in discouraging PCA adoption. The findings suggest that ACICs do exist, and, therefore, PCA non-adopters do not necessarily jeopardize successful capital investments. The ACICs identified in this study included formal and informal systems and procedures for performance measurement (e.g. following up production key figures, sales and profit centers) and organizational learning (e.g. utilizing central expertise and experienced internal resources). Furthermore, the empirical evidence from this study suggests that smaller companies with fewer major strategic, complex and repetitive capital investments can perceive ACICs to be sufficient, and discourage the adoption of formal PCA.

Acknowledgements

I would like to express my particular thanks to Seppo Ikäheimo, Teemu Malmi and Kalervo Virtanen. I am also grateful for the constructive feedback received from the Editor and two anonymous reviewers. Furthermore, the paper benefited in its earlier stages from discussions with and comments by David Bedford, Ossi Lindström, Kari Lukka, Salme Näsi, Hannu Ojala, Vesa Partanen, Mikko Sandelin, Risto Tainio and Juhani Vaivio. Moreover, the feedback received in several academic settings, such as the EAA's 28th Annual Congress in Göteborg, is appreciated. The financial support granted for this study by the HSE Foundation is gratefully acknowledged.

Notes

1. Adoption rates reported in different studies: (1) in UK, 98% (Arnold and Hatzopoulos, 2000) and 79% (Neale, 1991b); (2) in USA, 76% (Gordon and Myers, 1991) and 90% (Klammer and Walker, 1984); (3) in Norway, 41% (Neale, 1994); and (4) in Italy, 71% (Azzone and Maccarrone, 2001).

2. This definition is in line with the PCA definition suggested by Gadella (1986), Pierce and Tsay (1992), Chenhall and Morris (1993), and CIMA (2000, p. 7), but is more explicit with regard to criterion (3). Nevertheless, we recognize the difficulty of providing a catch-all definition of PCA including more detailed requirements such as the type of projects selected, the format, who does it, who is responsible for it, when and how frequently it is conducted, and how the results are communicated.

3. During the implementation phase, it is typical to follow up on the cost budget, scheduling and technical specifications, to see that they are progressing according to plan. In practice, monitoring of the implementation phase and PCA are overlapping concepts, because monitoring is, to some extent, a prerequisite for PCA. However, monitoring alone cannot be considered as fulfilling the criteria for PCA. In the monitoring phase, it is typically too early to estimate whether or not an investment project will achieve its targets.

4. Internal and external routine reporting (monthly, trimestral, annually, etc.) do not usually fulfill all the criteria required for PCA. For example, routine reporting is typically: (1) not project-focused, but profit-center or cost-center focused, and (2) does not compare the pre-investment objectives of an investment project with the actual achievements.

5. In some PCA benefit studies, evaluating the success of an investment has been explicitly mentioned as a distinct benefit (Neale, 1994; see also Pierce and Tsay, 1992), but Neale (1989), for example, has not included it.

6. Organizational learning has also been found to be the major aim (objective, goal) for PCA adoption (Neale and Holmes, 1990; Neale, 1994; Azzone and Maccarrone, 2001).

7. Furthermore, Argyris (1977, 1990) distinguishes between two types of organizational learning: single-loop and double-loop learning. Single-loop learning focuses on problem solving and does not address the reasons for the problems arising in the first place. In double-loop learning, organizations do not only detect and correct the errors, but also question the underlying policies and goals. In a similar vein, Senge (1990) suggests that adaptive learning (Argyris' single-loop) must be joined by generative learning (Argyris' double-loop) to expand the organization's capacity to create its future.

8. Similarly, Neale (1989, 1991a) and Mills and Kennedy (1990, 1993) suggest that PCA would encourage greater realism in project appraisals. Both researchers use the words ‘realistic’ and/or ‘realism’ in this connection. Nevertheless, because of the potentially overlapping meaning of these words, they are not used here (e.g. it can be unclear whether ‘realism’ improvement is related only to enhancing the integrity of project appraisals or if it is also related to organizational learning).

9. Because of asymmetric information distribution, managers may be in a position to play games in the capital investing process. They may use their information advantage to enhance their self-interest objectives – by focusing on certain aspects of information, filtering information or manipulating information, for example.

10. In addition, there are some studies about the adoption of management accounting innovations, such as Activity-Based Costing (ABC) and Balanced Scorecard (BSC) with minor discussions on reasons for non-adoption (for ABC studies, see Innes and Mitchell, 1995; Bjornenak, 1997; Clarke et al., 1999; Innes et al., 2000; for a study on BSC, see Speckbacher et al., 2003). Nevertheless, the adoption of these innovations may not be a perfect reference for PCA, because, unlike PCA, both ABC and BSC can be regarded as consulting innovations surrounded by elements of fads and fashion (see, e.g. Malmi, 1999, 2001).

11. However, Neale and Holmes (1991) conducted a few follow-up interviews among the PCA non-adopters after their survey was completed.

12. The significance of these reasons was further confirmed by a separate question in which the companies discussed the influence of 14 potential difficulties on PCA non-adoption (see Appendix E). The difficulties were compiled from earlier studies (Neale, 1989; Holmes et al., 1991; Pierce and Tsay, 1992; Mills and Kennedy, 1993; Huikku, 2001).

13. However, Brown et al. (2004) suggest that top management support (and the support of an internal champion) is associated with ABC adoption.

14. There are many different views about which baseline capacity estimates (e.g. theoretical, practical, normal or budgeted capacity) would be the most appropriate for capacity utilization measures, and consequently for ex ante product cost calculations (see, e.g. McNair and Vangermeersch, 1998).