Effective accounting processes: the role of formal and informal controls

Abstract

Optimization efforts are increasingly applied to finance departments in organizations, particularly to routinized accounting processes. Mixed satisfaction levels related to performance outcomes hint at control issues in finance departments. Accounting activities are characterized by well understood task environments that are addressed by formal controls. Yet, these activities are also interrelated and people-intensive, which might require other controls complementing formal ones. While current evidence considers merely the role of formal controls, we examine the effect of formal and informal controls as well as their combined effects in accounting processes. Regarding formal controls, results from a cross-sectional survey indicate that process controls have a positive direct effect on information quality while we cannot show any effect for output controls. Among the informal controls, peer pressure accentuates the effect of process controls if the controls are combined. Third, an identification-inducing working environment has a positive impact on information quality. Yet, the positive effect of process controls deteriorates when applied in combination with a positive working environment. This contributes to the literature on at least two dimensions: First, we underline the role of informal controls in accounting processes; second, our data hints at complementary and substitutive effects of formal and informal controls in the accounting function.

Quality of performance metrics, informal peer monitoring and goal commitment

“…Second, we explicitly recognise the potential role of formal accounting control systems on informal control and how their motivational implications extend existing frameworks and contribute to an enhanced understanding of the control systems from a broader perspective (Bedford and Malmi, 2015). In doing so, we respond to recent calls for a better understanding of the interrelationships between formal and informal controls (Cardinal et al ., 2017; Gackstatter et al ., 2019). Specifically, results explain alternative control patterns between performance management and peer monitoring, which have scarcely been captured by existing research findings.…”

“…Prior empirical evidence suggests that firms try to integrate both formal and informal management controls to increase employees’ motivation for the attainment of strategic targets (e.g., Frow et al ., 2010; Gackstatter et al ., 2019; Kennedy and Widener, 2019). This prior work shows that the motivational effects resulting from the combination of formal and informal mechanisms of control shape the effects of managers’ perception of goals on their commitment (Cardinal et al ., 2004; Kreutzer et al ., 2016).…”

“…Organisations attempt to integrate formal controls, such as performance metrics, with other informal controls in order to improve employees’ motivation towards the achievement of strategic objectives (e.g., Jørgensen and Messner, 2009; Frow et al ., 2010; Kennedy and Widener, 2019). Since informal control can also influence performance, acting as effective control tools, management (principals) can purposefully shape it (De Jong et al ., 2014; Cardinal et al ., 2017; Gackstatter et al ., 2019).…”

“…Specifically, results explain alternative control patterns scarcely captured by existing research findings. In this regard, we provide evidence that the design of horizontal controls cannot be separated from the horizontal surveillance of peer monitoring, thereby responding to recent calls to increase our understanding of the interrelationships between formal and informal controls (Cardinal et al ., 2017; Gackstatter et al ., 2019). Third, peer monitoring is an informal horizontal type of control that has been treated mainly as a single undifferentiated phenomenon in the accounting literature (e.g., Widener et al ., 2008; Kennedy and Widener, 2019).…”

The global management accounting principles (GMAP) and the relationship between organizational design elements

“…While traditional MAP involves supplying information to management for planning, control and decision making (Gackstatter et al, 2019), modern MAP extends beyond these narrowly-defined functions to include strategy formulation and implementation (Al-Mawali, 2015). Implementing modern MAP, therefore, requires adeptness in integrating accounting, business management and marketing knowledge.…”