A CONTINGENCY FRAMEWORK FOR THE DESIGN OF ACCOUNTING

INFORMATION SYSTEM

What is A.I.S?
An Accounting Information System is a unified structure that employs physical resources and
components to transform economic data into accounting information for external and internal
users.

Contingency Approach
A contingency approach takes into account:

 Environment

 Organizational attributes

 Managerial decision making styles

The characteristics of AIS to which the environmental, organizational and decision making
variables related are:

 Information load

 Centralization of reporting

 Cost allocation method (reference to amount and timing)

 Frequency of reporting

 Method of reporting (e.g. statement, raw data, charts )

 Time element of information (e.g. ex ante vs ex post data)

 Performance evaluation

 Measurement of events (e.g. financial vs non financial data and external vs internal data)

 Valuation methods (e.g. historical cost vs market value vs price level adjusted
information)
Links of the model

A. The environment of the firm and the requisites of the accounting information system

B. The organization and the requisites of the A.I.S

C. The decision making style of executives and the requisites of the A.I.S

A. The environment of the firm and the requisites of the accounting information system

The environment of the firm and the requisites of the accounting information system can be
characterized by at least the following three dimensions:

 Environmental dynamism

 Environmental heterogeneity

 Environmental hostility

Environmental dynamism

 Some organization sells their products in environments where consumer tastes are stable
and predictable.

 Other firms have dynamic environment in which consumer tastes shift rapidly and
unpredictably.

 AIS cannot serve the same needs of both these environments equally well.

Thus, we propose the following hypothesis: As environment dynamism increases, the

effective A.I.S:

 Incorporate more non financial data

 Increase the frequency of reporting

 Makes greater use of forecast information

 More conservative in the allocation of expenses

Environmental heterogeneity

The environment of an organization might be homogeneous in terms of:

 Product-market orientations

 Consumer characteristics

 Production technologies

 Raw material markets

We hypothesize that, as the level of environment heterogeneity increases, the effective AIS:

 Does more to tailor specific parts of the system to the sub segments of the environment

 Compartmentalize information

Environmental hostility

Hostility results from:

 Threatening action of competitors

 Threatening shortages of scarce resources due to strikes

 Government regulations

 Credit squeezes

We hypothesize that, as hostility increases, the effective AIS:

 Provide more frequent reports to inform managers of impending dangers

 Provide substantial non financial data to characterize the variables most sensitive to, and
indicative of, threats in the environment.

 Employs a fairly sophisticated cost accounting and control system

 B. The organization and the requisites of the A.I.S

Five organizational attributes which derive from increased environmental dynamism,

heterogeneity and hostility are:

 Decentralization

 Differentiation

 Integration

 Bureaucratization

 Resources

Decentralization
We hypothesize that under decentralization the effective A.I.S:

• Produces more explicit reports on the performance of organizational sub units

• Develops substantial supporting information to enable sub unit performance

evaluation

• Encompasses a sophisticated planning and control system

Differentiation
Some firms have sub units which are quite similar to one another in terms of their:

 Modus operandi

 Time horizons

 Goal orientations
 The interpersonal habits of their staff

Others contain sub unit which are very different in these respects, which are referred to
as being highly differentiated.

The effective AIS can help meet the challenge posed by these communication and control
problems by:

• Providing the different sub units with an AIS suited particularly to their needs.

• Gather data from sub units in a manner such that executives can access the
relative performance of each sub unit.
Integration

 There is a greater need for more integrative devices to assure a consistent and
coordinated strategic effort and avoid interdivisional conflict.

 Under these conditions effective A.I.S provides with:

• Incorporate plans and budget

• Present information to managers of sub units

Bureaucratization
Bureaucratization refers to the extent to which organizational activities are:

 Structured
 Programmed

 Specialized

 Narrowly prescribed

Some of the ill effects of bureaucratization can be countered by an effective A.I.S as

follows:

• The A.I.S can provide upper level managers with financial and non financial
information on the external environment.

b. The A.I.S can provide price level adjusted and or market value statements, as well as
forecast statements, to inform the managers of conditions which require the
departure from traditional modes of operation.

Resources:
Some firms have an abundance of slack resources such as

 Managerial expertise

 Technocratic skills

 Financial and material resources

Others may experience grave shortages.

The effective A.I.S can help managers to cope with these shortages as follows:
 • By providing data to expertise managers which may be deficient in any matter to
make better decision

b. If technocratic expertise is lacking, then A.I.S could more detailed costing information
such as quantity and cost variance, percentage of total cost due to scrap or poor quality, no
of units rejected because of production flaws.

c. Scarcities in material and financial resources.

C. The decision making style of executives and the requisites of the A.I.S

The decision making style which an executive employs to adjust his organization’s
orientation to the needs of the environment is critical to the well being of the enterprise.

We shall focus on the ability of A.I.S to influence the following six dimensions of decision
making styles:

• Analysis

• Time horizons

• Multiplexity

• Adaptiveness

• Proactivity

• Consciousness
Analysis of decision:
We hypothesize that the effective A.I.S:

• Provides a substantial non financial data on key operating trends

 • Provides a graphical presentation of information in the past and compares it
with present

• Stores adequately detailed financial information

Decision time horizons(futurity)
To provoke executives to look into future the effective A.I.S :

• Presents trends, as well as data points

• Provides forecasts of expected events and financial variables which are critical to
the operating performance of the firm.

Multiplex decision making

The effective A.I.S may be able to foster multiplexity by:

• Providing financial and non financial data

• Giving information which pertains to a number of functions

• Allowing only crucial facts to appear on centralized reports

• Providing information on activities of sub units

Adaptiveness
In promoting adaptiveness, an effective A.I.S will:
 • Supply information on what is going on external environment

• Increase the frequency of reporting

• Highlight cost and budget variances

Proactivity
To promote a proactive decision style, effective A.I.S :

• Includes information on the activities of competing firms

• Reports product demand forecast and the long run prospects for the cost of
production
Consciousness of strategies

The effective A.I.S :

• Incorporates a system of targets and objectives which must be sent to each

department.

• Compares actual results with budgeted or targeted objectives.

ARCHETYPAL ORGANIZATIONS AND REQUISITE QUALITIES OF A.I.S

 Accounting system should be designed in the light of the contextual variables

surrounding the organization.

 Our research anchors around some contextual anchor points & related hypothesis,
which might provide basis for further research. (Panacea system)
 Miller’s assumptions not evenly distributed but cluster together to form commonly
occurring configurations.

There are three archetypal firms which represent typical agglomerations of

environmental, organizational and decision style traits which are:

• The adaptive firm

• The running blind firm

• The stagnant bureaucracy firm

The adaptive firm

The main features of adaptive firms are:

 Environment is quite dynamic

 Heterogeneity is only moderate

 Decentralization is substantial

 Differentiation is moderate to low

 Integration is adequate
 Managerial, technocratic and financial resources are abundant

 Multiplexity is great in decision making style

 Adaptive and responsive orientation

 Strategy is explicit and well defined

 Innovative and proactive executives

 Performance level is high

 Good information and intelligence system

The main IS characteristics

 External environment dynamism

 Collection of non-financial, as well as financial data information (inflationary

trends, new product ideas, consumer taste, technological trends)

 Centralized Accounting system

 Internal flow of information across departments (laterally) & levels of authority
(vertically) should take place.

 Data presented to top management should be of minimal detail.

The running blind firm

The main features of running blind firm are:

 Heterogeneous markets

 Environment change markedly

 Dynamism is tremendous

 Organizational structure is peculiar

 Centralization is high

 Differentiation is extremely high

 Orientations are not easily reconciled

 Multiplexity is low in decision making style

 Proactive managers who take risk

 Performance level is low

 Intelligence system is inadequate

The stagnant bureaucracy

The main features of the stagnant bureaucracy firms are:

 Environment is homogeneous and stable

 Heterogeneity is increasing

 Dynamism is increasing

 Structure and decision making style is outdated

 Differentiation is low

 Integration is achieved by rigid rules and programs

 Managerial and technocratic expertise is lacking

 Centralization is high

 Multiplexity is low in decision making

 Performance level is low

 Intelligence system is inadequate

Conclusion

 Most research already conducted, provided narrow, inflexible view. However, the
paper has provided a broader and more adaptive framework for designing A.I.S.

 A contingency approach, which takes into account the environment, organizational

attributes, and managerial decision making styles were advocated. Several hypothesis
were offered.

 This is done by integrating the a small portion of the existing accounting framework
to related literature. (Hofstedt & Kinard).

 This paper has provided the ways a custom designed A.I.S can improve poorly
functioning organization by providing relevant information.
 Customization is the key for better implementation of A.I.S

 Several hypothesis (conditions) were offered concerning the requisites of A.I.S.

 Further research and testing of the hypothesis is still required.

 Based on the 3 archetypal firms discussed, contingency plan must be enforced.