Finantin1 Accountability 63 Management, 12(3), August 1996,0267-4424
DECENTRALIZATION, ACCOUNTING CONTROLS AND PERFORMANCE OF GOVERNMENT ORGANIZATIONS: A
NEW ZEALAND EMPIRICAL STUDY
N.Z. MIAH AND L. MIA*
Both organization structure and accounting control systems have received considerable attention in the contemporary literature on organization theory and accounting systems. While organization theory researchers have been primarily concerned with identifying factors influencing the design of organization structure (see Pugh et al., 1969), accounting researchers have focused more on ascertaining the nature and extent of accounting-based controls in organizations that promote effective planning and decision making (see, for example, Bromwich, 1990; and Swieringa and Weick, 1987).
A review of the literature indicates that the findings of previous studies are inconsistent and thus it is difficult to integrate their results or to draw consistent conclusions about the issues. For example, while Gordon and Narayanan (1 984) found no relationship between the usefulness ofaccounting information and organization structure, this finding was inconsistent with the Chenhall and Morris (1986) study. A possible explanation for the inconsistency in the results is the level of managerial positions held by participants in these two studies. In the Gordon and Narayanan (GN) study, the participants were the Company President, Vice-president, or Controller of Finance, executives who would assume a high degree of authority and responsibility in their organizations formal hierarchy. Consequently, there might not have been enough variation in the participants perception of the organic/mechanistic character of their organizations structure which would explain the lack of a perceived association between structure and usefulness of accounting systems in the study. O n the other hand, the participants in Chenhall and Morris (CM) study held middle and upper level positions (i.e., relatively lower level positions in their organizations hierarchy
The authors are respectively, Lecturer at the University of Western Sydney; and Professor of Accounting at Grifith University. They acknowledge the helpful comments by A. Dunk, M. Aiken, R. Ma, R. Chenhall, L. Gordon and E. Iselin, on earlier drafts of this paper. Comments by the participants of the seminars on the paper at the 1994 British Accounting Association Conference, the 1994 European Accounting Association Conference, the University of Western Sydney, Grifith University and La Trobe University are acknowledged. They also acknowledge the helpful comments of the editor and two anonymous referees.
Address for correspoadene: Lokrnan Mia, Professor of Accounting, Faculty of Business and Hotel Management, Grifith University Gold Coast Campus, PMB 50, Cold Coast Mail Centre, Queensland 4217, Australia.
OBlackwell Publishers Ltd. 1996, 108 Cowley Road, Oxford OX4 IJF, UK and 238 Main Street, Cambridge, MA 02142, USA. 173
174 MIAH AND MIA
compared with those in GNs study). These participants were in charge of subunits within their organizations. Because of the relatively lower level positions held by these participants, their perception of the level of authority and responsibility delegated by top management to them (the managers) might have varied from one another. Possible reasons for this variation in the managers perception are characteristics of the local environment they face, the size of the departmentlsubunit they manage, or their personality characteristics. The expected variation in these managers perception of their organizations structure (centralization/decentralization) may explain why C M found the relationship between structure and usefulness of accounting systems in their study. Explanations for the association between structure and usefulness of accounting systems in organizations are provided in both GNs and CMs study.
Based on CMs results, we predict that there is a positive and significant association between organization structure and perceived usefulness of accounting systems in the case of managers holding relatively lower level positions in the organization hierarchy. One of the objectives of the current study was to empirically test this proposition using a sample of department managers. This was done by testing the association between decentralization (the delegation of authority and responsibility) by a government department head office to its district offices and the managerial use of accounting control systems (ACS) in those district offices (see hypothesis 1 in the next section). In the government departments examined, district offices are the lowest managerial level in the formal organization structure. We consider that managers use of the ACS indicates the usefulness ofsuch information to them.
Another indication from the literature review is that previous studies on organization theory and on the design and use of accounting systems have ignored the issue of organizational performance. Since improving organizational performance is one of the ultimate objectives of management controls, ignoring this outcome (dependent) variable in previous research is a grievous omission in the research. The three studies most relevant to the current study are GN, CM and Mia and Chenhall (1994). None of these studies has looked into organizational performance. The current study attempts to address this issue by incorporating organizational performance in the model (Figure 1 ) . This was done by investigating (a) the relationship between the use of ACS in district offices and district office performance, and (b) the relationship between decentralization and district office performance. For purposes of this study, district office performance was defined in terms of the extent to which the goals set for the offices were achieved. As indicated in the abstract, managers perception of their district offices (units) performance was used to assess the performance.
The study was conducted in five departments of the Central Government in New Zealand. These departments provide services like education, welfare, law and order, health, and transport. The extant literature suggests that
Q Blackwell Publishers Ltd 1996
DECENTRALIZATION & ACCOUNTING CONTROLS: NEW ZEALAND 175
relevant previous studies concerning design and use of accounting systems have been conducted in profit-oriented private manufacturing firms. Mia and Goyal (1991) argue that generalization of results reported in studies on private profit-oriented organizations to not-for-profit organizations such as government departments is problematic for a number of reasons. Three of these reasons relevant to the current study are given below.
First, government organizations aim to maximise benefits to the public and minimise costs while private commercial organizations aim to maximise profit which may or may not involve cost minimization. For example, Martin ( 1 994) argues that government or public sector organizations are owned by the taxpayers and unlike private sector organizations, which have in common the profit motive, the objectives of these enterprises are generally to efficiently and effectively provide services that, for a variety of reasons, would not be provided at an acceptable price, quantity or quality without government intervention. Examples of government organizations objectives include equity, growth, stability, social welfare, and educations. Martin defines efficiency as the ability to achieve a given output or objective with minimum input (cost). Following Martin, this study argues that government organizations are likely to emphasize cost control. For cost control, managers usually need information (such as comparison of actual costs with budgets or standards) which could be provided from sources mainly internal to the organization. O n the contrary, profit maximisation involves sales/revenue planning (with or without cost control) which requires information from sources mainly external to the organization (see also GN, and CM). Consequently, the usefulness of accounting information as perceived by managers in private commercial organizations may be different from the usefulness of such information as perceived by managers in government organizations.
Second, the relatively more extensive public scrutiny, which is generally imposed on government organizations, requires a greater compliance by these organizations of predetermined rules and regulations in record keeping for costs and expenses. This may encourage managers in government organizations to view internal and or historical information differently from managers in private organizations.
Third, government organizations generally operate in a monopolistic or quasi monopolistic market. Previous research (see Khandwalla, 1972) suggests that the level of market competition is a determining factor of managers use of information for decision making.
As mentioned earlier, this study was conducted in five New Zealand Central Government Departments which are large and complex organizations. These departments were created by the government primarily to facilitate public administration and to provide services to the public as defined in the Public Finance Act 1989 and the State Sector Act 1988. The underlying reason for choosing to conduct this study in the Government departments is that over
0 Blackwell Publishen Ltd 1996
176 MIAH AND MIA
recent years the New Zealand Government has taken several steps to improve performance in public sector entities. These steps include inter aha the reduction of centralized control through delegation of operational and financial responsibility to district office managers (The Treasury, 1982; and State Sector Act 1