Organisational Context of Management Accounting Essay - 1

Organisational Context of Management Accounting - Essay Example Agency theory has been considered as one of the significant theoretical paradigms in management accounting for the last 25 years. This theory is developed with the notion of conflicting aims between two groups, primarily agents and principals. One of the significant features of the agency theory is that it allows accounting researchers to unambiguously integrate ‘conflicts of interest, incentive problems and mechanism to control incentive problems’ (Lambert, 2007). The objective of this theory is to structure the contractual connection between the two groups: the agents take actions to exploit the welfare and benefits of principals. At the fundamental level, agency theory is utilised in accounting research in order to address two issues. The important issues involve accounting, information and compensation structure that affects incentive problems and the other significant issue is the presence of incentive problems that influence the structure and design of information, compensation systems and accounting (Lambert, 2007). On the other hand, agency theory fails to explain that the agreement between the agent and the principal is flexible in nature. This is a well known fact that principals used to possess shortage of information and are restricted in their sense of rationality; however, they are conscious that incentive related problems exist, when the contract takes place (Hauswirth, 2006). This theory can be applied in this case to understand the impact of budget cuts on the universities. The level of autonomy, as well as academic liberty in universities and colleges vary; thus it has been considered that universities act as agents, while the government acts as the principal (Auld, 2010). The contingency theory develops an expressive theory of management accounting systems (MAS). It implies that the effectiveness of a management accounting system is based on the structure of the organisation. According to this theory, the organisational structure is based on the environment and technology of the organisation. The existence of MAS enhances the effectiveness of managerial process which is dependant on the structure of an organisation. Along with the environmental and technological factor the structure of the organisation is also controlled by the situational attributes (location of information). In a ‘certain’ environment where technology is ‘routine’, there is an influence of external information. In an ‘uncertain’ environment with ‘non-routine’ technology, the information is considered to be internal. The decentralised authority is suitable for the contingency model where the environment is uncertain or technology is non-routine. When environments are certain or technology is routine, centralised authority is suitable (Martin, 1983). The contingency theory fails to explain the resemblance in the systems of management accounting across organisations. Furthermore, this provi des little assistance in designing an organisational structure (Graubner, 2006). Various aspects of this theory can be applied to the case. The structural alteration in universities is dependant upon the situational factor and based on the situational factor the decision making process of the boards can be changed. Hence, it can be concluded that the structural alte