Management Accounting Research for the C-Suite

Consider findings from cutting-edge research to take your company to the next level.





This second installment in a series of columns on accounting research summarizes results from the field of management and cost accounting. The 2006 through June 2007 issues of five top-tier journals in management and cost accounting research were examined. Those publications included, alphabetically, Accounting, Organizations and Society; The Accounting Review; Contemporary Accounting Research; the Journal of Accounting Research; and Management Science.

These summaries explain the implications of a wide range of research and give CPAs the opportunity to apply the results in day-to-day activities. Readers interested in more detail should review the full text of each article to explore the hypothesis, research process, statistical analysis, supporting theories and conclusions.

Data show the voluntary adoption of International Accounting Standards (IAS) works as a magnet for foreign capital. Authors Vicentiu M. Covrig, Mark L. Defond and Mingyi Hung analyzed companies that voluntarily used IAS as opposed to their own country’s accounting standards. Their study calculated the percentage of foreign mutual fund ownership in these companies as compared to those that had not adopted IAS. Companies using IAS had predictably larger investments by foreign mutual funds. The attraction appeared greatest given two circumstances: companies located in countries that typically had poor or vague reporting standards and mutual fund investors with specific geographical regions as their investment objective.

The research, published in the March 2007 issue of the Journal of Accounting Research, is titled “Home Bias, Foreign Mutual Fund Holdings, and the Voluntary Adoption of International Accounting Standards.” According to the authors, capital allocation efficiency is improved through adopting IAS.

A study published in the Journal of Accounting Research suggests that investors overreact to high levels of coverage of earnings forecast revisions by celebrity media. The article by Sarah E. Bonner, Artur Hugon and Beverly R. Walther examined the amount of media coverage given to earnings forecast revisions and its effect on investors (“Investor Reaction to Celebrity Analysts: The Case of Earnings Forecast Revisions,” June 2007).

The authors predicted that well-publicized stock analysts, due to their celebrity (success, reputation and recognition) would have a greater effect on the markets than those with less celebrity. Media coverage was determined by measuring how frequently an analyst’s name appeared in the Dow Jones Interactive database (now known as Factiva), an online research database that consolidates information from thousands of business news publications and other sources.

The research confirms the media’s strong role in determining stock price, not only in coverage of the companies but also in the coverage of specific analysts. The authors also verify the relationship between the popularity of the analyst and stock prices. Finally, an analysis of the stock’s return on investment after an earnings forecast revision found a “substantial” effect on prices in relation to the volume of media coverage.

Researchers Raffi Indjejikian and Michal Matejka concluded that, in a decentralized company, performance will increase if the management accounting system focuses on corporate control rather than the information needs of the local business unit. Their work, “Organizational Slack in Decentralized Firms: The Role of Business Unit Controllers” (July 2006, The Accounting Review), studied 104 large decentralized business units and the controllers’ responsibility to serve both corporate headquarters and divisional management.

Prior research has determined that decentralized businesses use accounting systems either for divisional decision making or for the internal control needs of corporate headquarters. This study suggests that organizational slack, defined as the failure to achieve performance targets or inefficient use of corporate resources, was caused by focusing more on decision-making information requested by the business unit and less on information necessary for corporate control.

The authors found that this problem had a negative effect on business growth and tended to persist long term. Results indicate that in a decentralized company, performance will improve if the management accounting system focuses on corporate control rather than the information needs of the local business unit.

In a survey of 122 CFOs, author Sally K. Widener found that the costs associated with a management control system (MCS), separate from its financial reporting system, generally outweigh the benefits to the company. Her study examined control systems, their costs and benefits, and their relationship to strategic risk (“An Empirical Analysis of the Levers of Control Framework,” Accounting, Organizations and Society, February 2007).

The study further investigated the established definition of an MCS as a system of controls working together to mitigate strategic uncertainty and strategic risk. Widener found that these systems were both interdependent and complementary. She determined that the cost of a MCS (defined as management’s time and attention) generally outweighs the benefits to the company through organizational learning, an improved learning culture, and an appropriate system to manage corporate strategy. This research provides management with the knowledge that, overall, the cost of a control system outweighs the many benefits that enhance corporate strategy and organizational learning.

A recent study suggests that the Balanced Scorecard (BSC) can fail as a performance measure because top management does not look at the quality or effectiveness of a strategy unless specifically instructed, whereas middle management does so automatically. This creates potential bias in evaluations and tends to support ineffective corporate strategies. The research by Bernard Wong-on-Wing, Lan Guo, Wei Li and Dan Yang appears in the July 2007 issue of Accounting, Organizations and Society.

The BSC, conceived in 1992 by academic researchers Robert E. Kaplan and David P. Norton, was designed to link performance to corporate strategy rather than the achievement of measures such as earnings targets. Previous studies indicate that when a company uses the BSC to measure performance, the focus tends to be on the accomplishment of goals rather than the effectiveness of the strategy used by the employee, causing problems between upper-level management and those they evaluate.

The authors’ work, titled “Reducing Conflict in Balanced Scorecard Evaluations,” suggests that if management perceives bias in evaluations, the implementation of the BSC will be unsuccessful. Flawed corporate strategic goals are likely to remain unchanged.

The authors also propose that this problem not only occurs in BSC-based systems but potentially in most evaluation structures. The research stresses the need for top management to include an assessment of the implications of corporate strategy when evaluating divisional-level management and not just look at the achievement of targets and measurable results.

The summation of a nine-year study, published in the January 2007 edition of Accounting, Organizations and Society, determined the importance of accounting in organizational change and provided evidence that responsibility accounting, the process of measuring and reporting operating data by areas of responsibility, is necessary to achieve corporate goals. In their paper, “Effects of Organizational Process Change on Responsibility Accounting and Managers’ Revelations of Private Knowledge,” authors Casey Rowe, Jacob Birnberg and Michael Shields examined the relationship between organizational process change and responsibility accounting within teams.

The authors studied responsibility centers and responsibility accounting within a large U.S. aerospace contractor. Their work analyzed company documents and direct observations of one author who was an employee of the company. This provided a broad range of information for analysis. Activity-based costing (ABC) was found to be an important part of the company’s strategy. The study suggests that the responsibility center manager’s behavior and communication are positively influenced if the accounting practices are properly designed when the organization is undergoing change.

Many companies base compensation bonuses on whether earnings targets or return on investment (ROI) benchmarks are achieved. Sudhakar V. Balachandran examined companies that changed to residual income as a basis for compensation in his March 2006 Management Science article, “How Does Residual Income Affect Investment? The Role of Prior Performance Measures.”

Research suggests that companies opting to base compensation on residual income (RI), the excess of controllable operating income over a “minimum” amount of desired controllable operating income, modified their investment patterns and achieved weaker yields on their investments compared to companies that used ROI.

The author advises practitioners and researchers not to view this data as being for or against the use of RI as a performance measure but rather as a guideline. Companies should be aware of the investment modifications that may occur to achieve the desired target and the influence this performance measure has on management’s investment decisions when compensation is based on residual income.

Frank Moers, in his July 2006 article in The Accounting Review, concluded that performance measures are more useful in employee evaluations if they are more precise and objective, easily verified and more sensitive to management’s actions. This, in turn, potentially results in added authority delegated to the employee under evaluation.

His article, “Performance Measure Properties and Delegation,” examined evaluation measures and their use in determining employee “delegation.” According to Moers, delegation occurs when a lower-level manager’s decision-making authority is increased in the following areas: pricing, personnel, product development, investments and budgets. His work analyzed how financial performance measures are used during an employee evaluation to determine increases in decision-making responsibility. Such performance measures are also used to establish salary increases, bonuses and promotions. Application for the practitioner reveals the need for objective financial and nonfinancial measures to be used in employee evaluations.

Researchers found that external suppliers set a lower price when they were aware that transfer pricing existed within a decentralized company. This was the conclusion of Anil Arya and Brian Mittendorf after they examined transfer pricing when a company uses both internal and external suppliers. Their work, “Interacting Supply Chain Distortions: The Pricing of Internal Transfers and External Procurement,” was published in the May 2007 issue of The Accounting Review .

The authors found that, although internal transfers cause management and accounting difficulties between divisions, they create a more competitive environment for businesses. To offset decreasing demand brought on by higher input costs, suppliers tend to reduce prices when dealing with divisions that handle intracompany transactions at a price above cost.

Supply alliances are defined as long-term relationships between corporate buyers and sellers. These alliances influence the accounting controls set up so they are both “social” (influenced by corporate behavior and culture) and “technical” (related to the creation, storage and output of information). Research suggests both social and technical controls are necessary for successful operation in today’s business world. However, studies also indicate that the success rate for supply alliances is low—likely due to the difficulty in trying to control all parties involved and the power struggles that occur among participants.

Wai Fong Chua and Habib Mahama, in their Spring 2007 Contemporary Accounting Research article, “The Effect of Network Ties on Accounting Controls in a Supply Alliance: Field Study Evidence,” examined companies defined as being involved in a supply alliance. The authors suggest that each company’s accounting controls become a form of corporate identity and that accounting control breakdowns are comparable to the failure of the corporate cultures to mesh in an alliance.

The research found that pricing research found that pricing involves unspoken behavior and that the operation of accounting controls is affected by this type of informal relationship. For example, the authors found that a telecommunications service provider and its allied suppliers defined value differently, which was reflected in disputes over how costs and pricing would be measured and controlled. The suppliers defined value in terms of technological superiority. The telecommunications service provider defined value first in terms of fastest delivery and later in terms of cost. Accounting controls often focus just on technical control; the authors argue that accounting control should include both technical and social controls. Management awareness of the way supply alliances affect controls and pricing will allow managers to better understand the strong connection between accounting and corporate culture.

When a supply disruption occurs, companies may be forced to choose between reliable but more expensive suppliers and those that are less reliable but less expensive. Brian Tomlin studied strategies to alleviate the risk associated with supplier disruptions such as employee strikes and acts of nature. In his May 2006 Management Science article, “On the Value of Mitigation and Contingency Strategies for Managing Supply Chain Disruption Risks,” he uses a complex model to examine long-term supply chain disruption in a single-product situation to determine the most effective strategy to ease costly supplier problems. When a disruption occurs, companies must determine the best tactic to meet their goals.

Choices include carrying excess inventory, using a reliable but more costly supplier, or accepting the possibility of financial loss associated with lack of needed supplies. The optimal choice depends on whether the disruption is short or extended. For short-term disruptions, according to his research, excess inventory provides appropriate supplies. For longer disruptions, Tomlin’s research concluded that selecting a new, reliable supply source provided favorable results over carrying extra inventory.

Additionally, his work determined that a combination of excess inventory and use of the more reliable supplier may be appropriate. Tomlin began his article with examples of actual companies losing hundreds of millions of dollars due to supply disruptions caused by acts of nature such as fires, earthquakes and hurricanes, revealing the need for contingency strategies within all business supply chains.

Cynthia Bolt-Lee, CPA, is an associate professor at The Citadel School of Business Administration in Charleston, S.C., where she teaches auditing, taxation and introductory accounting. Her career includes eight years in audit and tax practice for local and international firms. Bolt-Lee’s research interests include tax ethics, accounting education, practitioner use of research and innovative instructional strategies. Her e-mail address is


Although the research summarized in this article was not sponsored by the AICPA, the AICPA supports practice-based research in management accounting topics and develops Management Accounting Guidelines in collaboration with the Society of Management Accountants of Canada (CMAC) and the Chartered Institute of Management Accountants (CIMA), based in the U.K. To download Management Accounting Guidelines and learn more about the AICPA-funded research, visit The AICPA’s Financial Management Center at


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