Preface

Uncertainty is an integral part of business life. Any corporate evaluation and strategic decision is based on uncertain perspectives concerning the out-comes of business activity. The human anxiety of knowing, which is still unknown, creates the most challenging paradox of uncertainty: uncertainty is rational. The sources of uncertainty can be identified, at least vaguely; the consequences of uncertainty can be forecast, at least partially. Accordingly, to a certain degree, uncertainty in business life is controllable, i.e., definable ex ante, and measurable ex post.

This book studies how organizations can manage uncertainty and address it in a practical manner through systematic internal control, with the aim of measuring how risky the issues are facing these organizations and how con-trollable the outcomes could be in the aftermath of the occurrence of such issues.

The words ‘uncertainty’ and ‘risk’ are often colloquially used inter-changeably, although a thin red line should separate the scientific meaning of these words. Uncertainty derives from every unknown situation or condi-tion, which makes the outcome of a decision only roughly assessable. The word ‘risk’ is a sort of euphemism for uncertainty 1 because it relies on the idea that uncertainty can be measured, while a loss can be precisely identi-fied as the feasible outcome of that decision. Hence, when there is no way to measure the feasible outcome, the involved process is uncertain. When there is a possibility to individuate a range of outcomes, where the actual outcome will implicate a certain probability, the involved process is risky.

While business studies scholars prefer the opportunity to assess meas-urements, although imprecise, debatable and confutable, with a view to dis-cussing absolutely non-measurable facts and processes, the managerial and accounting literature prefers to discuss risk, rather than uncertainty.

1 FRENCH, N. 2005. Editorial: Risk and uncertainty. Journal of Property Investment and Finance. Vol. 23 Issue 3, p. 212.

Management accounting when an organization is facing default 2

This book examines an uncertain situation, whose features are feasibly measurable to a certain extent, i.e., the risky moment in the life of an organi-zation when financial distress occurs and the resolution of such a situation is urgent. The book analyses the process of dealing with the issues that may provoke a situation of financial distress and consequent default, and the role of the management accounting system in such a process. This study shows how organizations may benefit from management accountants’ measurement ability, i.e., the ability to rationalize uncertainty in risk, obtained from an in-structive and successful usage of management accounting instruments and professional knowledge.

From a philosophical perspective, discussions on the risky features of business are interesting: researchers discussing risky situations, like philoso-phers, “do not necessarily provide solutions – at least not solutions that eve-ryone will agree upon – their efforts are important and contribute greatly to the intellectual quality of the debate” 2. In line with this idea, the efforts made in this book to transform the reality of a polyhedric and turbulent business life, which characterizes organizations in financial distress, into a systematized list of elements and a simple model explaining their interrela-tions, constitute an imprecise representation. This approach is disputable and has no aim to offer a blameless solution to deal with issues management, but has the purpose of contributing to the debate on issues management, espe-cially in the case of issues management when the organization is endangered by financial distress and facing the eventuality of default.

The discussion of a similar topic has often interested management and accounting scholars, who, nevertheless, have rarely considered the oppor-tunity to analyse the peculiar function of internal auditors in the issues man-agement process, which is increasingly relevant when the issues appear throughout significant and material (although uncertain) unfavourable finan-cial outcomes, which require a systematic activity of control.

This book tries to partially fill a specific gap in the literature. The best way in which I can describe such a gap is to be anecdotal and refer to the difficulties I had in preparing an adequate syllabus when I was entrusted by the Department of Economics of the University of Foggia to deliver lectures on ‘Crisis Management’. This was when I was a young researcher, with not much teaching experience, but a great desire to do my best to accept my re-

2 PETERSON, M., SANDIN, P. 2010. Guest editors’ introduction: The philosophy of risk. Journal of Risk Research. Vol. 13 Issue 2, p. 136.

Preface 3

sponsibilities and be effective and purposeful in front of the students. I had to work hard to comply with that assignment for a list of reasons.

First, I could not benefit from the help of a textbook. Although I was (and still am) firmly convinced, for some very good reasons, that I should avoid textbook usage in postgraduate course teaching 3, a textbook would have helped me in the preparation of such a totally new teaching experience. Un-fortunately, to the best of my knowledge, at that time, there was no account-ing textbook available on crisis management.

Second, I tried to browse and search for a ready-made syllabus or materi-al on the Internet, but I was unable to find any similar course being delivered in any other business school in the world. I thought that this news should have been welcome because I was dealing with a rather unexplored teaching opportunity, as current today as it ever has been, considering the existing sentiment towards the recent financial crisis.

Third, I tried looking around in related subjects. It would have been easy to use material from finance studies on insolvency prediction models, or the flourishing material from management studies on corporate turnarounds and restructuring. Nevertheless, both of these solutions were outside the realm of accounting studies, which related to my assignment. A third possibility, and probably the easiest, was to offer a practical course on how to deal with liq-uidation procedures, which is typical for chartered accountancy profession-als. Some material from law schools on bankruptcy would have helped with such a solution. Nevertheless, the outcome would have been a course on regulations and standards, which would have been difficult to keep updated due to the continuously changing regulatory environment. Besides, it would also have been much more interesting to executives than to postgraduate ac-ademic students in accounting.

I concluded that I had to explore some of the related fields and create a course that looked at the accounting side in all the discussions I came across. The result was an exciting syllabus, which was much appreciated by stu-dents, comprising three main parts:

1) The diagnosis of the crisis, using finance-based material, discussing a rather complete excursus from Altman’s Z-score to the most advanced in-solvency prediction models;

3 PALMER, M., SIMMONS, G., HALL, M. 2013. Textbook (non-)adoption motives, legiti-mizing strategies and academic field configuration. Studies in Higher Education. Vol. 38 Issue 4, pp. 485-505.

Management accounting when an organization is facing default 4

2) the turnaround and restructuring process and a digression on manage-ment mistakes, using the management literature, as well as compiling a list of case studies;

3) the regulations dealing with the crisis, divided between the fundamen-tals of bankruptcy regulations and the framework of enterprise risk man-agement standards, which was a rather novel topic that was in great demand at that time.

As my assignment was in accounting, I had to make a great effort in ex-tracting the substance from all that colourful material that could be relevant to my field. To be honest, none of the many papers I included in the reading list could be defined as an ‘accounting paper’, while it was difficult to show students which part of each of those papers was relevant to our course and which could be overlooked on account of being related to other sciences. I prepared some guidelines for the study pack and some slides to overcome this problem, but gained only a few results. Hence, I decided to write a text-book for my course, which had to be comprise only accounting-specific ma-terial. But, even though the life of a researcher is also risky, the final outcome of this book is much different from what I initially had in my mind when I first planned it. Probably due to my scepticism towards textbook usage in postgraduate teaching, the outcome from writing this book (it is no longer a textbook) is completely different from my original idea. In the end, I removed all the teaching material I described above and focused only on the central thread of accounting during the crisis, meaning that it is basically a manage-ment accounting book on how to deal with organizational uncertainty.

After this brief introduction, the book is made up of four main parts: Chapter 1 describes the role that management accounting can assume in

dealing with uncertainty, and how such a role has gained respect over recent decades due to an extremely dynamic business environment.

Chapter 2 studies the issues management process and proposes a specific model to be adopted by organizations in order to avoid or mitigate financial distress, and eventually cope with a serious crisis threatening default. Such a model supports the need for continuous monitoring and planning activity by the management accounting function.

Chapter 3 focuses on the function covered by management accountants (i.e., internal auditors) and the instruments adopted in their strategic and op-erative control activity to deal with uncontrollable situational factors, i.e., uncertainty.

Preface 5

Chapter 4 offers a digression on enterprise risk management and its criti-calities in times of crisis.

Finally, brief comments conclude the book. Some important acknowledgements are due. First, I wish to thank my students for their patience in studying a new

topic and suffering an ‘experimental’ teaching activity. I also wish to thank all the colleagues who helped with discussions and

exchanging ideas on various topics related to the general idea of the book, both in my university and in various other places where the book was devel-oped. Among them, I am grateful for the kind hospitality and intellectual contribution of colleagues at the Institute of Accounting and Logistics of the Linnæus University in Växjö and the Department of Accounting of the Lon-don School of Economics, where this book was partially written during my visiting periods.

I am especially grateful to my editor, Prof. Eugenio D’Amico, and the two anonymous referees for their useful insights, which improved the early draft of the book.

Finally, I wish to acknowledge the financial support of the University of Foggia for providing me with funding to meet the expenses related to publi-cation.

Conclusively, as both uncertainty and risk demonstrate a lack of knowledge and the persistence of poor or imperfect information on the out-comes for the involvement of well-defined inputs, the content of this book also suffers the uncertainty of being an outcome: it may contain omissions, imprecisions or mistakes, all of which are my own fault.

Management accounting when an organization is facing default 6

Chapter 1

Management accounting as a science: from cost-benefit analyses of productions to

strategic planning for uncertainty

SUMMARY: 1.1. Introduction. – 1.2. The relationship and roles of accounting and management accounting. – 1.2.1. The old and new management accounting. – 1.3. Theoretical frameworks in management accounting. – 1.4. The evolution of the postmodern period of management accounting. – 1.5. Concluding remarks.

1.1. Introduction

Management accounting has a peculiar function with the broader ac-counting discipline. “Management Accounting is concerned with the pro-vision of information to people within the organization to help them make better decisions and improve the efficiency and effectiveness of existing operations” 1. The peculiarity of management accounting is that it is a sci-ence dealing with decision-making, whereas the remaining part of account-ing is basically the science of reporting accounting information. Further-more, “decision making is important [...]. Decisions move things and set processes in motion that will lead to intended, unintended and surprising effects in the future” 2.

Accordingly, a relevant role should be reserved for the ‘science of doing’

1 DRURY, C. 2003. Cost and Management Accounting. An Introduction. Thompson Lear-ning: London – UK, pp. 4-5.

2 MOURITSEN, J., KREINER, K. 2016. Accounting, decisions and promises. Accounting, Organizations and Society. Vol. 49 Issue 1, p. 22.

Management accounting when an organization is facing default 8

in accounting; nevertheless, it has long been regarded as a secondary disci-pline compared to the ‘science of reporting’. The reasons for such a paradox can be found in the history of the corporation and on how the rules for gov-erning it have changed over time in Western society.

This chapter shows the growth of academic and professional interest in management accounting and how the main features of this phenomenon have developed over the last century. After this short introduction, in the next paragraph, the role of management accounting is described, showing its evolution as a discipline and its relationships with financial accounting. Sub-sequently, the third paragraph briefly discusses the objective of management accounting and its main features, as they are generally described in the early literature. The fourth paragraph focuses on the history of management ac-counting as an academic discipline, while, lastly, in the fifth paragraph, the evolution of the theoretical background that shaped the science of manage-ment accounting to date is outlined in order to explain the characteristic of the postmodern era of management accounting, and the uncertainty and tur-bulence it should deal with, along with the renovated role of management accountants supporting the top management team when a firm is facing un-expected events, which could deteriorate the financial conditions of the or-ganization, threaten its survival and cause it to face default.

1.2. The relationship and roles of accounting and management accounting

Most academic textbooks on management accounting explain in their first chapter the differences and similarities between financial accounting and management accounting, often synthesized in a table and revealed to fu-ture professional and management accountants through such a simplistic dif-ferential approach. Consequently, most management accounting courses at universities all over the world will feasibly explain the role and peculiarities of management accounting as a discipline with a mere comparison with the financial accounting discipline. Management accounting has long suffered from the dominance of financial accounting 3.

3 RICHARDSON, A.J. 2002. Professional dominance: The relationship between financial

Management accounting as a science 9

For a long time, management accounting has been accused of fostering productivity at the expense of creativity and innovation 4.

The main tasks of management accounting are the development and maintenance of adequate and updated management control systems, but the term ‘control’ seems narrow, as it underlines a measurement activity and its consequent corrective actions. Too often such a measurement has been based on slow and aggregate information provided by the financial accounting sys-tem, with little attention devoted to the strategic aims of controls and the pro-active and preventive scopes of management accounting. That said, the soul of management accounting is in its usefulness to managerial decision makers; hence, the management accounting discipline should be elevated to a higher rank and constitute material support for managerial decision-making 5, alt-hough “obviously, the benefit derived from using an information system for decision-making must be greater than the cost of operating the system” 6.

1.2.1. The old and new management accounting

Although accounting practices have been traced back to ancient Mesopo-tamia between 8000 and 3000 BCE 7, modern management accounting evolved alongside the birth of the textile industries in England and US dur-ing the 19th century 8; unfortunately, however, it did not result in an increas-

accounting and managerial accounting, 1926-1986. The Accounting Historians Journal. Vol. 29 Issue 2, pp. 91-121.

4 “Most organisations maintain a paradoxical balance between creativity and productivi-ty. Management accounting is often accused of fostering the latter at the expense of the for-mer. For example, knowledge intensive research and development firms targeting fast growth were found to prefer forms of planning which conflicted with shorter term profits, rather than the more traditional accounting metrics which venture capitalists and the stock markets used to evaluate them.” HOPPER, T., BUI, B. 2016. Has Management Accounting Research been critical? Management Accounting Research. Vol. 31 Issue 1, p. 23.

5 An interesting analysis of how “interventionist” is management accounting literature is offered in: MALMI, T. 2016. Managerialist studies in management accounting: 1990-2014. Management Accounting Research. Vol. 31 Issue 1, pp. 31-44.

6 DRURY, C. op. cit., p. 4. 7 HAKA, S.F. 2016. Looking back at accounting’s genesis and looking forward at our

challenges. Journal of Management Accounting Research. Vol. 28 Issue 3, pp. 55-61. 8 A traditional vision supported that cost accounting was “one of the many consequences

of the industrial revolution” basically due to the need of accounting large amounts of materi-

Management accounting when an organization is facing default 10

ingly complex system of the corporation over subsequent decades. The his-tory of industry shaped the history of accounting, but not the history of man-agement accounting as a professional and academic discipline. According to Johnson and Kaplan 9, most of the practices that were in use in management accounting in the late 1980s dated back to 1925, given that, as firms were forced into financial accounting practices for external usage, they focused on them and started generating information that was relevant for that purpose. Management accounting practices were relegated to a secondary discipline, suffering the “dominance” of financial accounting 10. As an example, man-agement accounting courses were taught at universities by financial account-ing researchers 11. Management accounting divisions used the data gathered for financial accounting purposes and elaborated them using simple and out-dated procedures, which were not sufficiently accurate for decision-making purposes and evaluating the profitability of different productions 12. As stat-ed by Prof. Trevor Hopper, in 1978, management accounting research was dominated by academicians dealing with “accounting and industrial rela-

als and fixed assets. LITTELTON, A.C. 1966 [1933]. Accounting Evolution To 1900. Russell & Russell; New York, New Jersey – US, p. 321. Under more evolutionary vision, not only the need to account and control produced the development of cost accounting, but cost ac-counting was the basilar form of management accounting, because it represented an early attempt to introduce a professional management of the internal processes of the corporation. “Although these firms often invested in fixed plant and equipment, their concern for internal cost accounting information was dictated not only by the need to account for fixed costs, but also by the need to evaluate and control internally-administered production processes”. JOHNSON, H.T. 1981. Toward a new understanding of nineteenth-century cost accounting. The Accounting Review. Vol. 56 Issue 3, p. 511.

9 JOHNSON, H.T., KAPLAN, R.S. 1987. Relevance Lost: The Rise and Fall of Management Accounting. Harvard Business School Press: Boston, Massachusetts – US.

10 “There is consistent evidence that management accountants felt constrained in the de-velopment of their techniques and unable to implement their preferred procedures. The evi-dence presented below suggests that this relationship was perceived in the linkages between the techniques of financial and management accounting, in the organizational roles that the two groups filled and in the relationship between their professional societies. In each of these areas management accountants recognized and thereby reaffirmed the dominance of finan-cial accountants.” RICHARDSON, A.J. op. cit., pp. 100-101.

11 HOPPER, T., BUI, B. op. cit., p. 13. 12 “Driven by the procedures and cycle of the organization’s financial reporting system,

management accounting information is produced too late, too aggregated, and too distorted to be relevant for managers’ planning and control decisions. […] Many firms seem to be falling victim to this trap”. JOHNSON, H.T., KAPLAN, R.S. 1987. The rise and fall of man-agement accounting [2]. Management Accounting. Vol. 68 Issue 7, p. 22.

Management accounting as a science 11

tions”, whereas others (including himself) were pursuing the newly born “behavioural accounting” 13.

In the late 1980s, a wave of criticism about the pertinence of management accounting forced those practices into a crisis and a fundamental change to-wards more appropriate solutions 14, which led to the rise of management ac-counting as a discipline grounded on behavioural theory. Reviews of the lit-erature support the young age of management accounting as a discipline, as research in this area cover no more than four decades 15, dating back to the beginning of 1980s at best. Today, management accounting is finally at a mature stage and trying to overcome the criticisms about its topical and methodological narrowness 16.

The wave of change registered in the 1980s brought about the growth of management science and the development of organization theory in the management accounting discipline and practice in order to make them more anticipatory by monitoring key environmental variables, adopting feed-forward controls, and looking for long-term survival and growth, rather than profits maximization, as well as focusing on both formal and informal in-formation flows and controls 17. The cost function was then assumed to be

13 “In 1978 Trevor’s research dissertation was examined by Anthony Hopwood. It was his first meeting with a ‘behavioural accountant’ except when presenting a paper to a region-al meeting of the British Accounting Association. It had an audience of two. The parallel session on accounting and industrial relations was crowded out. Labour militancy and ram-pant inflation were central accounting topics that have disappeared from research agendas.” HOPPER, T., BUI, B. op. cit., p. 11.

14 DRURY, C. op. cit., p. 21. 15 SCAPENS, R.W., BROMWICH, M. 2001. Management accounting research: The first dec-

ade. Management Accounting Research. Vol. 12 Issue 2, pp. 245-254; SCAPENS, R.W., BROMWICH, M. 2010. Management accounting research: 20 years on. Management Account-ing Research. Vol. 21 Issue 4, pp. 278-284; SCAPENS, R.W., BROMWICH, M., 2016. Man-agement accounting research: 25 years on. Management Accounting Research. Vol. 31 Issue 1, pp. 1-9; MALMI, T. OP. CIT.; VAN DER STEDE, W.A. 2015. Management accounting: Where from, where now, where to? Journal of Management Accounting Research. Vol. 27 Issue 1, pp. 171-176.

16 LACHMANN, M., TRAPP, I., TRAPP, R. 2017. Diversity and validity in positivist man-agement accounting research – A longitudinal perspective over four decades. Management Accounting Research. Vol. 34 Issue 1, pp. 42-58.

17 When describing the early Eighties dominant discussion in management accounting, and the interdisciplinary influences on the discipline, Hopper and Bui, e.g., remind the re-course to cybernetics: “The primary research emphasis lay on how cybernetics, management science and organisation theory could render management accounting more anticipatory by:

Management accounting when an organization is facing default 12

less linear and predictable than previously expected, as the mainstream view of riskiness in decision-making became dominant. Incorporating risk, uncer-tainty and forward-looking strategic factors into the management accounting system has recently became the priority in management accounting re-search 18.

Management accounting today is a behaviour-focused discipline, where the control activity is aimed at redirecting behaviours and achieving targeted (and re-targeted) strategically rooted objectives. The management account-ing system should be considered holistically, as a comprehensive package, given that separately studying its parts is ineffective and results in little managerial validation 19. It took a long process for management accounting to enjoy the respect it does today, while the managerial relevance of the disci-pline is essential in understanding the need for such evolutionary processes.

Today’s management accounting should be aimed at obtaining results in terms of an impact on humans’ behaviours, and primarily on employees’ be-haviours, which could increase the probability that the goals of the organiza-tion can be achieved on account of employees’ appropriate behaviour 20.

monitoring key environmental variables and employing feed-forward controls; emphasising long-run organisational survival and growth rather than profit maximisation; applying Ash-by’s ‘Law of Requisite Variety’ (1956) to build organisational controls that matched envi-ronmental complexity and incorporate informal not just formal information flows and con-trols”. HOPPER, T., BUI, B. op. cit., p. 12. See also, cited Ibidem: ASHBY, W.R. 1956. An In-troduction to Cybernetics. Chapman & Hall: London – UK.

18 E.g., testing the adoption of Real Option Reasoning and Game Theory in capital budg-eting procedures, Verbeeten found that: “An increase in financial uncertainty (rather than uncertainty in general) is associated with the importance and use of SCBP [sophysticated capital budgeting procedure]. In addition, an increase in size is related to the importance and use of SCBP. Finally, particular industries (the financial services industry and the building, construction and utilities industries) appear to find SCBP more important and useful than other industries”. VERBEETEN, F.H.M. 2006. Do organizations adopt sophisticated capital budgeting practices to deal with uncertainty in the investment decision? A research note. Management Accounting Research. Vol. 17 Issue 1, pp. 106-120.

19 “When these new management techniques are added to a package of controls, how do they impact on the package as a whole, and does the configuration of the control package impact the development, adoption, effectiveness and use of new techniques?”. MALMI, T., BROWN, D.A. 2008. Management control systems as a package-Opportunities, challenges and research directions. Management Accounting Research. Vol. 19 Issue 4, p. 298.

20 Management control, that is the portion of management accounting expecting results, and a consequent feedback activity, studies “all the devices or systems managers use to en-sure that behaviors and decisions of their employees are consistent with the organization’s objectives and strategies. […] Thus, primary function of management control is to influence

Management accounting as a science 13

Conclusively, an impactful management accounting system could improve the performance of the firm when facing issues, e.g., through the use of an appropriate issues management process.

1.3. Theoretical frameworks in management accounting

Management accounting as an academic discipline can be theoretically grounded in two main settings: either in the theories of organization and management, or in the theories of motivations and incentives 21.

The early theories of organization and management date back to the begin-ning of the 19th century, when Frederick Taylor proposed the “scientific man-agement” of work, looking at the organization of work as the perfect engine of a machine, where each employee is supposed to have a simple and specific duty. His perspective was enforced by Henri Fayol’s approach to the man-agement of organizations, based on some specific principles, which were sup-posed to drive the manager in their decision-making under strict rationality. Furthermore, this way of thinking was corroborated by Max Weber’s descrip-tion of the bureaucratic organization, where the administrative process is made up of due steps and follows specific predefined hierarchical rules.

Management accounting has long been associated with the mechanical school of organization theory, where activities are predictable, repetitive and structured 22. Nevertheless, in a changing environment, such as that experi-enced by the Western economies in the 1980s, predictable actions could fail to occur. This laid the ground for the recent development of management accounting into a sociological discipline. The scientific way of thinking about organizations (and their management) was suddenly complemented by theorists advocating the relevance of social and psychological factors, which appear when people live or work together, given that “any concrete organi-

behaviors in desirable ways. The benefit of management control is the increased probability that the organization’s objectives will be achieved. […] Management control is the back end of the management process”. MERCHANT, K.A., VAN DER STEDE, W.A. 2012. Management Control Systems. Performance Measurement, Evaluation and Incentives. Third Edition. Prentice Hall: Harlow – UK, p. 6.

21 GOWTHORPE, C. 2010. Management Accounting. South-Western Cengage Learning EMEA: Andover – UK, p. 20.

22 Ibidem, p. 25.

Management accounting when an organization is facing default 14

zational system is an economy; at the same time, it is an adaptive social structure” 23, while the organization is a biological system, rather than an engineering system 24.

During the crisis of the 1980s, competitors from overseas were offering products at impossibly low costs in the manufacturing industry. In less than one decade, this caused a radical revolution in the global industrial and fi-nancial geography. China was admitted into the World Trade Organization in 2001, after almost a decade of rising GDP and fruitful multilateral politi-cal relations in the Pacific Basin 25. Manufacturing capacity then moved from the West to the East, where wages and raw materials were cheaper. Productivity in Western economies was subsequently based on service in-dustries, which were still developing, often state-controlled and protected by monopolist entrance barriers, but not yet focused on profits maximization. Most OECD countries started a privatization and deregulation process in the 1990s 26, which changed all the rules of competition.

In a similar context, management accounting, which had been developed for large-scale productions, revealed its weakness, requiring innovative changes and the adaptation of its features to help managerial decision-making in that historical moment. Flexibility was now entering production. Very of-ten, managerial decisions had to consider not only the conditions of in-house production but also the opportunity of contracting-out. Organizations were no longer hierarchically driven; rather, flat or matrix decisional structures emerged. Management accounting thus consisted “of juggling competing in-terests rather than of exerting control over people and processes” 27.

The theories of motivation and incentives supported the development of

23 SELZNICK, P. 1948. Foundations of the theory of organisation. American Sociological Review. Vol. 13 Issue 1, pp. 25-26.

24 PERROW, C. 1973. The short and glorious history of organizational theory. Organiza-tional Dynamics. Vol. 2 Issue 1, pp. 2-15.

25 For an overview of the early accession process, its economic and political determinants and consequences, among others, see: HO, L.S., WONG, J. (Eds.) 2007. APEC and the Rise of China. World Scientific Publishing: London – UK. For a critical analysis of the Chinese im-pact on the financial crisis and its relevance in Western economies, see also: NOLAN, P. 2014. Re-balancing China. Essays on the Global Financial Crisis, Industrial Policy and In-ternational Relations. Anthem Press: London – UK.

26 For an overview of the privatization flow in OECD countries, see: BORTOLOTTI, B., FACCIO, M. 2009. Government control of privatized firms. Review of Financial Studies. Vol. 22 Issue 8, pp. 2907-2939.

27 GOWTHORPE, C. op. cit., p. 27.

Management accounting as a science 15

management accounting, producing managerially relevant insights that could further improve it as a discipline 28.

The better-known motivation and incentives-focused theory dealing with managerial behaviour is agency theory, which discusses the relationships be-tween two actors: a principal and an agent. In managerial disciplines, the principal is the owner of the firm, who delegates the decisional process to an agent, who belongs to the management of the firm. Both the principal and the agent will behave in order to maximize their utility, which, in the case of the management, is generally in terms of pay or promotion, or other eco-nomic rewards. As long as utility maximization for the management is dif-ferent from utility maximization for the owner (and the firm), a series of mechanisms is enacted in order to align the preferences of the agent to the ones of the principal. These mechanisms are generally called “incentives” and considered as “agency costs”, i.e., the costs of managing a firm through an agent. The main implication of this theoretical approach for management accounting is that the decisional process is located in such a context, where incentives for the management need to be defined in order to maximize utili-ty for the owner and the firm.

Another relevant theoretical background was presented by McGregor 29, who hypothesized two feasible human behaviours at workplace. Under so-called Theory X, the average human being dislikes work and avoids respon-sibilities, meaning that control and punishment are required to achieve ob-jectives 30. Hence, in order to ensure profits maximization, management ac-

28 “[…] many streams of management accounting literature have the intention of produc-ing managerially-relevant insights. Experimental studies compare, for example, various in-centive schemes and presentation formats in order to provide managerially-relevant insights […]. Contingency research aims to understand which accounting and control systems pro-duce good outcomes in given circumstances. Ultimately such understanding would be mana-gerially useful. Similarly, analytic research addresses managerially-relevant questions. […] I will define managerialist studies in management accounting […] as studies in which at least one of the aims is to directly support or help, in one way or another, organizational decision-making and control.” MALMI, T. op. cit., p. 31.

29 MC GREGOR, D. 2000 [1957]. The human side of enterprise. Reflections. Vol. 2 Issue 1, pp. 6-15.

30 “Theory X”: 1. Management is responsible for organizing the elements of productive enterprise –

money, materials, equipment, people – in the interest of economic ends. 2. With respect to people, this is a process of directing their efforts, motivating them,

controlling their actions, modifying their behavior to fit the needs of the organization.

Management accounting when an organization is facing default 16

counting must provide a scientific organization of the workplace, with a Tayloristic organization and a mechanical control of results. Besides, McGregor discussed Theory Y, under which people like to use their imagi-nation and creativity, love their work and are willing to do it, while feeling responsible and self-imposing objectives 31. In this regard, management ac-counting is based on managerial incentives, which are both economic and non-economic, as workers are willing to do their job, while acknowledging non-monetary incentives that make their work more pleasant 32.

Finally, a relevant step in motivation theories was taken by Herzberg 33, who divided human needs between basic and fundamental needs (so-called hygiene factors) and second-order needs (growth and motivational factors), which include recognition, responsibility and advancement. Hygiene factors are addressed in order to prevent dissatisfaction, but they cannot lead to sat-isfaction. The achievement of satisfaction depends upon growth and motiva-tional factors. Management accounting as a discipline should separate me-chanical control activities for the achievement of first-order requirements from the deconstructed and self-motivated system of managerial incentives to pursue second-order goals.

Conclusively, at the beginning of the second millennium, it seemed that much of the behavioural materials, characterizing the modern approach to management accounting, were dealing with the “responsibility accounting

3. Without this active intervention by management, people would be passive – even re-sistant – to organizational needs. They must therefore be persuaded, rewarded, punished, controlled – their activities must be directed.” Ibidem, p. 7.

31 “‘Theory Y’ […]. 1. Management is responsible for organizing the elements of productive enterprise –

money, materials, equipment, people – in the interest of economic ends. 2. People are not by nature passive or resistant to organizational needs. They have be-

come so as a result of experience in organizations. 3. The motivation, the potential for development, the capacity for assuming responsibil-

ity, the readiness to direct behavior toward organizational goals are all present in people. Management does not put them there. It is a responsibility of management to make it possi-ble for people to recognize and develop these human characteristics for themselves.

4. The essential task of management is to arrange organizational conditions and methods of operation so that people can achieve their own goals best by directing their own efforts toward organizational objectives.” Ibidem, pp. 11-12.

32 ARGYRIS, C. 1952. The Impact of Budgets on People. Cornell University Press: New York, New Jersey – US.

33 HERZBERG, F. 1968. One more time: How do you motivate employees? Harvard Busi-ness Review. Vol. 46 Issue 1, pp. 53-62.

Management accounting as a science 17

ghetto”, but a further change was moving the discipline into the postmod-ern era 34.

1.4. The evolution of the postmodern period of management ac-counting

The postmodern period of management accounting was encouraged by the development of information technology and the view of the organization as a complex set of interdependencies and relationships 35. Management ac-counting was finally recognized as an instrument for improving strategic management, while management accounting textbooks started dealing with strategic issues 36. Within a dynamic and competitive environment, in a business world of fast and cheap information flows, management accounting had to solve the problem involving the flexibility and competitiveness of production, while the academic discussion moved onto the question of how to implement management accounting systems in a such a complex and un-certain environment.

A very recent turning point in management accounting theory and prac-tice was additionally prompted by the financial crisis of 2008, bringing about consequences for economic and financial systems worldwide. Theo-rists are still facing the consequences of that critical point in the history of accounting, as well as still trying to figure out what exactly has changed since then.

As an expected response to economic crisis, the 2008 crisis caused the

34 BIRNBERG, J.G. 2000. The role of behavioural research in management accounting ed-ucation in the 21st century. Issues in Accounting Education. Vol. 15 Issue 4, p. 715.

35 Dekker offers a recent overview of management accounting research studying inter-firm and intra-firm internal accounting and control systems, and concluding that the topic is still understudied, especially as an integrated approach of inter- and intra-firm analysis. DEKKER, H.C. 2016. On the boundaries between intrafirm and interfirm management ac-counting research. Management Accounting Research. Vol. 31 Issue 1, pp. 86-99.

36 In the modern management accounting period “Those instructors who did include be-havioral issues in their management accounting course to any degree did so by supplement-ing the textbook materials. The most common method was the use of photocopies of journal articles or […] by adopting a readings book […] [that] collected both BAR [behavioral ac-counting research] papers in the area and relevant papers from the behavioral sciences.” BIRNBERG, J.G. op. cit., p. 717.

Management accounting when an organization is facing default 18

extraordinary flourishing of information flows in the direction of outsiders, partially volunteered (but under implicit pressures) by and partially imposed on firms 37. Demands for more disclosure mainly addressed the corporate governance mechanisms inside the firm, but these often inevitably involved the disclosure of internal management accounting practices, showing to out-siders the managerial incentives and the performance metrics of the firm, and, in some cases, its business process model, in the same way that risk management increased disclosure. The opportunity to access such additional research material makes it feasible to speculate on the possibilities afforded by future research 38.

Management accounting is nowadays at a turning point, as pressures from outside call for increased disclosure of information, which “before was mainly relegated to internal decision making” 39. Moreover, when the crisis happened, due to constrained finance, firms faced the issue of rethinking their decisions, sometimes including their strategic decisions, and “had to set their budgets aside at worst, or revise them at best” 40. The way of doing management accounting had to change in order to adapt to the changing en-vironment, using more flexible approaches to decision-making and planning.

37 “[…] it is undeniable that the crisis has had, and continues to have, implications for management accounting. It is these implications that offer pertinent, even unique, oppor-tunities for research that do not otherwise arise during times of ‘normal’ change. [….] many internal organizational matters that firms were before free to adopt and to keep for themselves are now either being regulated, or if not that, being subjected to increased scrutiny following more detailed disclosures.” VAN DER STEDE, W.A. 2011. Management accounting research in the wake of the crisis: Some reflections. European Accounting Re-view. Vol. 20 Issue 4, p. 606.

38 “The good news, however, is that there are so many contexts where performance is be-ing measured, and more than just in terms of accounting and business, but instead where per-formance measurement is seen as the way to bring about accountability. And perhaps study-ing these diverse settings or application areas may lead to innovation at the theoretical level as a bonus […], 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 in-ternal management accounting practices.[…] As recently as ten years ago, at events such the AAA Management Accounting Section Midyear Conference, it was not uncommon to hear frustrations voiced that there were no readily available data for management accounting (which was seen as a handicap relative to our financial accounting colleagues). The chal-lenge now, I think, is to ensure that we make good use of these data to address relevant re-search questions”. VAN DER STEDE, W.A. 2015. op. cit., p. 175.

39 VAN DER STEDE, W.A. 2011. op. cit., p. 612. 40 Ibidem, p. 616.

Management accounting as a science 19

Dealing with uncertainty represents a great challenge for business practi-tioners and academic researchers 41.

Today, management accounting should address the aims of control activi-ties and the behavioural purpose of the discipline. Researchers and practi-tioners should acknowledge the need to mitigate organizational risks and fruitfully deal with a dynamic and turbulent environment, preventing, more than circumventing, situations of financial distress, and using the risk of de-fault as a trigger for the development of the discipline in times of crisis.

1.5. Concluding remarks

When the risk of failure approaches the role of internal auditing, and con-trol systems in general, it becomes more and more evident and serious.

New deals for management accounting, as an academic discipline and as a professional tool, recently overcame the traditional vision of internal audit-ing activity, which today is also accountable to third parties 42.

The traditional accounting discipline was settled with the aims of disclos-ing information on the organization, moving certainty and reliability about business contracts towards the business community. The postmodern view of the management accounting discipline clarifies that the certainty of con-tracts in the business community is hardly believable. The best way to main-tain environmental uncertainty is to smooth over the information and the requisites for the accounting of failure. Accordingly, discussions on the or-ganizational performance should move from statements of what happened towards projections on what will happen, supporting the reliability of tradi-tional management accounting systems with a forward-looking strategy of ‘as-if’ planning, thus evolving risks into opportunities.

41 “I argue that this process of re-envisioning organizations in terms of risk results from a number of different but related pressures for change which emerged in the mid-1990s and which continue to develop as I write this preface. This different pressures have elevated risk management from the technical, analytical roots established in the 1960s to the relatively new stage of organizational governance”. POWER, M. (2007) Organized Uncertainty: De-signing a World of Risk Management. Oxford University Press: Oxford – UK, p. VIII.

42 Ibidem, pp. 34 et seq.

Management accounting when an organization is facing default 20

Chapter 2

Issues management process and model

SUMMARY: 2.1. Introduction. – 2.2. The decisional process and the role of feed-back control activity. – 2.3. The sources of emerging issues. – 2.4. Different types of issues leading to different types of crisis. – 2.5. A theoretical approach: the issues management model. – 2.6. The financial pressure issues management model. – 2.6.1. Distress-induced decision-making in financial pressure issues management. – 2.6.2. The continuous scrutiny of events: a supervisory control theory approach. – 2.7. Concluding remarks.

2.1. Introduction

“Business is rife with uncontrollable” 1. Apparently, issues unpredictably originate and evolve, making corporate life turbulent and unsafe. Neverthe-less, reacting to uncontrollable events mitigates their impact on corporate re-sults and enhances the probability of survival for the business in an uncer-tain and dynamic environment 2. According to a more thorough analysis, un-fortunate events originate from partially uncontrollable issues, while all dangerous issues, including uncontrollable ones, may be scientifically exam-

1 MERCHANT, K.A., VAN DER STEDE, W.A. 2012. Management Control Systems. Perfor-mance Measurement, Evaluation and Incentives. Third Edition. Prentice Hall: Harlow – UK, p. 503.

2 “Uncertainty is therefore transformed into risk when it becomes an object of manage-ment, regardless of the extent of information about probability. Indeed, as we shall see, soci-ety can demand the construction of management for issues at the limits of knowledge, mak-ing most recalcitrant objects into risks. When uncertainty is organized it becomes a ‘risk’ to be managed”. POWER, M. 2007. Organized Uncertainty: Designing a World of Risk Man-agement. Oxford University Press: Oxford – UK, p. 6.

Management accounting when an organization is facing default 22

ined, as they follow a predictable life cycle 3. Conclusively, it is useful for the organization to determine both whether and how the management should adjust expectations due to uncontrollable factors. In this chapter, we exam-ine, both theoretically and empirically, how unfortunate financial issues may be discovered early on and safely managed, and how management account-ing systems may contribute to facilitating (or influencing?) 4 strategic deci-sion-making during unfortunate financial issue management.

This chapter studies how to deal with the seeds of economic and financial distress and how the decisional process may be designed to resolve unex-pected events, which would otherwise cause a crisis and result in the organi-zation defaulting. In the following paragraphs, the characteristics of the de-cisional process are envisaged in order to figure out how it can be adjusted to an ‘issues management’ situation. This work draws on the studies found in the public affairs literature and adapts the models therein to reflect the is-sues related to organizational performance deterioration. Conclusively, a life cycle process is designed in order to deal with financial distress in an uncer-tain business environment.

2.2. The decisional process and the role of feedback control ac-tivity

Management accounting is aimed at supporting the top management team in its decisional process. A managerial decisional process is required to deal with any business issues, either expected or unexpected, either favourable or dangerous. As depicted in Figure 2.1, the decisional process is based upon

3 HAINSWORTH, B.E. 1990. The distribution of advantages and disadvantages. Public Re-lations Review. Vol. 16 Issue 1, pp. 33-39.

4 “The information produced by a managerial accounting system serves two important roles in an organization: (1) to provide some of the necessary information for planning and decision-making, and (2) to motivate individuals (Zimmerman, 2000, p. 3). Respectively, these two roles for managerial accounting information have been referred to as the decision facilitating role and the decision-influencing role (Demski & Feltham, 1976)”. SPRINKLE, G.B. 2003. Perspectives on experimental research in managerial accounting. Accounting Or-ganizations and Society. Vol. 28 Issue 2-3, p. 288. See also: DEMSKI, J.S., FELTHAM, G.A. 1976. Cost Determination: A Conceptual Approach. Ames. Iowa State University Press: Io-wa City, Iowa – US; ZIMMERMAN, J.L. 2000. Accounting for Decision Making and Control. McGraw-Hill: New York, New Jersey – US.