The control of acquired companies : a study of the role of management accounting systems following acquisition
The literature of accounting contains very few references pertaining to the design of, and approach to introducing changes in, accounting-type controls following acquisition. Furthermore, these references reveal conflicts concerning both the extent and speed of desirable changes. The predominant view reflects the underlying premise of many control systems, that individuals are not to be trusted and need to be policed. This study seeks to improve understanding of the control systems adopted in practice and to assess whether these are in accordance with theoretical expectations and finally, to suggest ways of improving existing practices. The main objectives are: To consider the nature and context of management accounting systems (MAS) and the possible influences of broader management studies upon the design of post-acquisition MAS. To identify how acquiring companies, making acquisitions which were similar to, or perhaps very different from, the parent company, modified and used MAS in order to establish control. To draw implications for the design of MAS and for the introduction of changes to MAS following acquisition. The study comprises three parts, corresponding with each of the main objectives. Part 1 has three chapters and reviews relevant literature from the disciplines of accounting, organisational theory, and organisational behaviour. A highly selective approach is adopted, particularly to the latter two disciplines, because the literature is so extensive. In some instances the relationships between the theories - for example of motivation - whether empirically supported or not, and accounting control systems are tenuous or disputed; in others, such as the contingency theory of MAS, they are at a very early stage of development. This thesis endeavours, for the first time to the author's knowledge, to draw together these strands of evidence to provide theoretical expectations for' the design of post-acquisition MAS. Chapter one considers the context of MAS and how they form part of the administrative controls which, in combination with social and self-controls, provide overall organisational control. Chapter two describes the importance of MAS as devices which are capable of facilitating organisational integration, motivating individuals and groups, and assisting in decision-making and in the measurement of performance - activities which assume enhanced importance following acquisition. Chapter three seeks to identify and to briefly describe the variables, both within and outside an organisation, which may influence MAS and therefore may need to be considered when designing MAS. The contingency theory of MAS is seen as having particular relevance in this context with important implications for the design of post-acquisition MAS. Part II consists of five chapters describing the findings of an empirical study of the management control relationships established between thirty acquiring and acquired companies during the first two post-acquisition years. Ordinal measurements are introduced as a means of identifying changes in the importance of MAS, their conformity with parent company controls, and the resistance and technical difficulty experienced during the change process. Chapter four provides some background information on the circumstances of, and the depth of planning for, these acquisitions. The next chapter describes the changes in importance, following acquisition, of thirteen management accounting techniques (MATs). It shows that the importance of all techniques increased significantly and those capable of facilitating organisational integration became most important. They were also most highly exploited in terms of the potential for change and were introduced most rapidly. This resulted in fundamental changes in management style characterised by increases in both formality and the delegation of authority. Chapter six considers the conformity, with the practices of the acquiring company, introduced into MAS in acquired companies. With the exception of some operational controls conformity was of a high degree although high conformity in individual MATs was not necessarily accompanied by high importance. Chapter seven acknowledges that the manner in which changes in MAS are introduced can influence their effectiveness. It describes how changes were introduced, the attempts made to minimise resistance, the problems that were encountered, and the level of satisfaction felt by those responsible for changes. In so doing, it serves two purposes; firstly, it provides some indication of acquisition success or failure - for example, there is evidence of association between 'success' and the adoption of consultative approaches to change. Secondly, by implication, it suggests ways in which practice may be improved. Chapter eight draws together many of the theoretical ideas explored in section I and relates them to the· evidence from the empirical study. It considers evidence that changes in MAS might be explained in terms of, or be consistent with, the contingency theory view of MAS. It provides some evidence that companies responded to environmental and technological changes by placing greater emphasis upon predictive MATs and strong evidence of increased sophistication in the MATs used in acquired companies; partly explicable in terms of turbulence associated with environmental factors and acquisition itself. However, direct evidence that contingent influences were recognised in the determination of post- acquisition MAS was strong in only a small minority of cases. A rigorous statistical study provided only limited support for the hypothesis that greater divergence between organisational characteristics of acquisition partners would be accompanied by reduced conformity in MAS. However, the results of a weaker test revealed some association between style of acquisition and the level of conformity introduced. Part III comprises two chapters. Chapter nine introduces measures of the success or failure of the acquisitions studied followed by reflections upon the changes that were observed. The changes, even those which enhanced the responsibility and freedom of individuals, are seen as consistent with the process of bureaucratisation characteristic of large organisations. The importance of MAS relative to inter-personal means of control and as bases for modifying the distribution of power and authority is considered. It is suggested that power moves away from senior executives in acquired companies as group procedures and rules are introduced, and also because the initiative to introduce change is in the hands of acquirers. In contrast, the power of lower participants may be enhanced by greater delegation of authority and the scope that is created for the circumvention of higher authority which is regarded as illegitimate. Finally, this chapter considers some of the deeper meanings that may attach to changes in MAS, including the rationalisation of prior actions, retrospective goal discovery, and the conveyance of revised management philosophies to individuals in acquired companies. Chapter ten proposes the need for greater flexibility, in contrast to the rigidity observed in so many instances, and also as being more consistent with the contingency theory of MAS. It suggests that various MATs cause different behavioural sensitivity at different organisational levels and recognition of this could guide changers in the selective introduction of change. A model is presented which proposes that the organisational characteristics of acquirer and acquired companies should be compared and, dependent upon the degree of matching, so different approaches should be adopted to the modification of MAS. Finally, this procedure is applied to the companies studied to provide theoretical bases for change. This is related to the approaches actually adopted and consistencies and inconsistencies are compared with success or failure, revealing an encouraging degree of support for the model.