Management Accounting Research in the Wake of the Crisis: Some Reflections

Abstract

This article offers some reflections on opportunities and challenges for management accounting research in the wake of the recent financial crisis, and especially the regulatory reforms and augmented disclosures the crisis has spawned. While challenging for the organizations facing them, I argue that especially the enhanced disclosures are likely to turn management accounting ‘inside out’ to a greater extent than has been the case before, which could be a boon for researchers studying hitherto mostly internal management accounting practices. As an undercurrent to the opportunities for research, however, I emphasize the importance of considering organizational design, comprised of both structure and culture, in understanding the inevitably intertwined effects of distorted incentives and information failings, among other problems that seem to all have contributed in some way to the crisis. In respect of the opportunities for management accounting research, I mainly discuss a continuing need to study incentives; a motivation to study risk management; an opportunity to reinvigorate budgeting research; and an invitation to study financial companies and the challenges of disclosures.

Acknowledgements

This paper has benefited from comments by Salvador Carmona and an anonymous reviewer, and from the able research assistance of Clarissa Diedrichs.

Notes

In this article, I will consistently refer to the financial crisis, or crisis for short, meaning quite broadly the 2008–2009 financial crisis and the global economic recession that followed, as well as the period up to this time when organizational responses and regulatory reforms are being contemplated or implemented. Moreover, my arguments in this article with respect to the implications of the crisis for management accounting are not limited to financial companies, where many place the trigger for the financial crisis.

A large number of articles have discussed or opined about the role of incentives in the financial crisis, as well as the implications of the financial crisis on the regulation, reform and design of incentives, such as Bebchuk and Fried (2010) and Faulkender et al. (2010), among many others.

This is not to suggest that certain management accounting practices, such as the design and use of performance measurement and incentive systems, say, are to be held blameless; rather, a detailed analysis of this issue is not the focus of this article.

The argument about crises leading to the intensification of information flows and/or the adoption of more controls also has been made more recently by Simons (1995) and been documented by Davila et al. (2009).

Curiously, even Alan Greenspan, former Chairman of the US Federal Reserve, a once-staunch defender of laissez-faire, had to admit that ‘those who have looked to the self-interest of [markets] to protect shareholder's equity are in a state of shocked disbelief’ (Hearing before the US House Committee on Oversight and Government Reform, 23 October 2008). Further, and ironically perhaps, regulation can sometimes have ‘accidental’ benefits – that is, ‘unintended consequences’ that are not negative (see Murphy, 2010, p. 19), which I hasten to add hardly inspires much confidence in the regulators.

Note that one could argue that there is always regulation coming up, even in the ‘normal’ course of events. This is true. That said, I believe that the magnitude of the crisis and of its consequences is likely to spawn more (disclosure) regulation either in areas already regulated (e.g., compensation and governance) or in new areas, of which calls for more disclosures on risk management are an example. As I alluded to at the outset, many of these areas (compensation, corporate governance, and risk management) are of interest to, and at the heart of, management accounting research. In addition, even where mandatory regulation may (not yet) have been enacted, increased scrutiny by a number of stakeholder groups is likely to lead to increased pressures for voluntary disclosures. To support this conjecture, I quote the following from a call for papers by Harvard Business School on ‘Research in Corporate Accountability Reporting’ (www.ssrn.com/update/arn/arnann/ann11038.html) (emphasis added): ‘As of April 2011, there are over 32,000 [corporate responsibility] reports on the Corporate Register, a database archiving [such] reports. Relatedly, a number of private organizations have emerged that bundle the standard setting and assurance/auditing activities for corporate accountability reporting, including the Global Reporting Initiative, B Lab, and AccountAbility. The financial crisis of 2008–2009 has generated additional momentum for corporate accountability reporting.’ The large number of reports already available should perhaps not be surprising, as research suggests that disclosures are subject to an ‘unraveling’ effect (e.g., Ross, 1979; Grossman, 1981; Milgrom, 1981), meaning that a lack of disclosures are often taken as bad news, thus putting pressure on firms to also disclosure even if otherwise they might not have been inclined to. In addition, recent research (e.g., Dhaliwal et al., 2011) indicates that firms may derive several benefits from voluntary disclosures beyond their traditionally narrow financial reporting.

A recent and pertinent example here to illustrate my point is the eagerly-awaited final report from the UK's Independent Commission on Banking (ICB), due in September 2011, spelling out reform options of the banking sector in the United Kingdom. Whichever reform options eventually come to pass, the point is that they will affect all UK banks in the same way, although the ways in which various banks respond to the required reforms may, and likely will, differ. I also note that in the lengthy interim report (ICB, 2011a), there are several aspects of interest to management accounting, not in the least any of a number of issues related to the design of incentive systems. For example, the report states that, ‘weaknesses in the capital and accounting frameworks prior to the crisis enabled some bank employees to be remunerated on the basis of reported profits that were neither time-adjusted nor risk-adjusted and led to employee incentives that were not always aligned with the long-term interests of the bank’ (ICB, 2011a, p. 178). My earlier reference to Kerr (1975) comes to mind, but as I mentioned there, and importantly, subject to a specific context in the current time where ‘the Financial Services Authority first introduced its Remuneration Code in August 2009 to address these issues. A revised Code came into effect in January 2011 […] requir[ing] remuneration policies and practices to be consistent with, and promote, effective risk management [including] restrictions on the mix (e.g., salary vs. bonus), form (e.g., cash vs. shares) and timing of [the] remuneration [of employees] whose professional activities have a material impact on the firm's risk profile’ (ICB, 2011a, p. 178). And, on p. 181, the (ICB, 2011a) report states that ‘there have also been proposals to pay some elements of employee remuneration in contingent capital [which] may have the additional benefit of better aligning incentives for risk taking across a bank's staff and shareholders.’

Note that some of these proposed incentive system features are hardly new. The idea of a bonus bank, for example, has been a key feature of EVA-trademarked bonus plans (e.g., see Simons and Reinbergs, 2001).

A remarkable publication in this regard is the UK Financial Reporting Council's (2011) report on Cutting Clutter, which observes, for example, that firms tend to provide extensive lists of risks even though the standards require them to report principal risks only. To cut clutter and to promote high(er) quality reporting on corporate governance and other matters in narrative form, the FRC therefore advises to provide ‘a description of principal risks that focuses on those that are specific to an entity, rather than a generic list of risks that are common to all businesses or to an industry’ (Financial Reporting Council, 2011, p. 43). (I surmise that if firms indeed were to do so, then that might, as I argued above, provide an interesting source of data for researchers, too.) This report is also interesting for its conjectures about why firms report the way they do, and which (legal, behavioural) barriers might stand in the way to change this.

For example, the ‘biggest banking reforms for decades in the United Kingdom’ allow a period of seven years (by 2019) for the new measures to be put in place (see ICB, 2011b).