Using an Accounting-Based Management Control System for Cultural Change

Abstract

Despite the well documented advantages of Continuous Improvement (CI) management, implementation failures are discouragingly high (Jazayeri & Hopper 1999). The most significant reason for failure in becoming a CI organization is cultural resistance (Irani et al. 2003), due in part to insufficient trust (Chenhall and Langfield-Smith 2003). When employment contracts fail, employees will resist changes perceived to threaten their welfare. This paper uses an innovative action research approach (Kaplan, 1998) to design and implement a Management Control System (MCS) that will reduce this problem. Unfortunately, a single theoretical perspective (information economics, agency theory, or learning theory) will not provide sufficient insights for implementation, since each theory assumes away critical application issues covered by the other theories (Covaleski et al. 2003). Drawing from several theoretical sources for this research, an MCS designed to support both the implementation and management of CI cultures is developed and applied in an American factory. A Continuous Improvement Accounting Information System (CI-AIS) is merged with an MCS using suggestions from 1) information economics (adaptive feedback), 2) agency theory (to reduce agency risk and shirking through management of uncertainty, economic loss, and group participation), and 3) constructivist learning theory (incremental formative assessment, collaboration, and repetition to learn a new culture). The proposed MCS is composed of an in-process budgeting system that facilitates the following four actions leading to the successful management of Continuous Improvement initiatives: 1) prioritizing problems, 2) analyzing the root cause of problems, 3) strategically designing change activities for improvement, and 4) validating subsequent changes to align with accounting-based performance contracts.

Keywords: Management Accounting, Continuous improvement, cultural change

JEL Classification: M14, M41, M54