Management Accounting in Less Developed Countries 9781846636196, 9781846636189

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14/09/2007

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ISSN 1832-5912

Volume 3 Number 3 2007

Journal of

Accounting & Organizational Change Management accounting in less developed countries Guest Editors: Chandana Alawattage, Trevor Hopper and Danture Wickramasinghe

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Journal of Accounting & Organizational Change

ISSN 1832-5912 Volume 3 Number 3 2007

Management accounting in less developed countries Guest Editors Chandana Alawattage, Trevor Hopper and Danture Wickramasinghe

Access this journal online _________________________

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Editorial advisory board __________________________

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Editor’s note _____________________________________

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GUEST EDITORIAL Introduction to management accounting in less developed countries Chandana Alawattage, Trevor Hopper and Danture Wickramasinghe ____

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Public sector performance measurement in developing countries: a literature review and research agenda Ni Putu S.H. Mimba, G. Jan van Helden and Sandra Tillema___________

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Community-led initiatives: reforms for better accountability? Godwin Awio, Stewart Lawrence and Deryl Northcott _________________

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Reliance on management accounting under environmental uncertainty: the case of Palestine Fadi Kattan, Richard Pike and Mike Tayles _________________________

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CONTENTS

CONTENTS continued

ERP customization failure: institutionalized accounting practices, power relations and market forces Ahmed O.R. Kholeif, Magdy Abdel-Kader and Michael Sherer __________

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An exploratory study of financial priorities, financial planning and control practices in voluntary organisations: perceptions of treasurers in a developing country Teerooven Soobaroyen and Raja Vinesh Sannassee ___________________

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Who is fooling who? New public managementoriented management accounting and political control in the Malawi’s local governance Richard I.C. Tambulasi__________________________________________

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The use of costing information in Egypt: a research note Sander van Triest and Mohamed Fathy Elshahat ____________________

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Calls for papers __________________________________

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Journal of Accounting & Organizational Change Vol. 3 No. 3, 2007 p. 180 # Emerald Group Publishing Limited 1832-5912

EDITORIAL ADVISORY BOARD Professor Kamran Ahmed La Trobe University, Australia

Professor Kim Langfield-Smith Monash University, Australia

Dr Mirghani N. Ahmed King Fahd University of Petroleum & Minerals, Saudi Arabia

Dr Carlos Larrinaga Universidad de Burgos, Spain

Dr Mohammad F. Al-Omiri Umm Al-Qura University, Makkah, Saudi Arabia

Professor Stewart Lawrence University of Waikato, New Zealand

Professor David Alexander University of Birmingham, UK

Associate Professor Theresa Libby Wilfrid Laurier University, Canada

Associate Professor Marcia Annisette York University, Canada

Professor Johnny Lind Stockholm School of Economics, Sweden

Professor Anthony Atkinson University of Waterloo, Canada

Professor Sue Llewellyn University of Manchester, UK

Professor Al Bhimani London School of Economics and Political Science, UK

Dr Maria Major ISCTE Business School, Portugal

Professor Michael Bromwich London School of Economics and Political Science, UK

Professor Jean-Francois Manzoni IMD International, Switzerland

Professor Judy A. Brown Victoria University of Wellington, New Zealand

Professor Howard Mellett Cardiff Business School, Cardiff University, UK

Professor John Burns University of Dundee, UK

Professor Kenneth A. Merchant University of Southern California, USA

Professor Roger L. Burritt University of South Australia, Australia

Professor Lokman Mia Griffith University, Australia

Associate Professor Cristiano Busco University of Siena, Italy

Professor Falconer Mitchell University of Edinburgh, UK

Professor Salvador Carmona Instituto de Empresa, Calle Maria de Molina, Spain

Professor Sven Modell Manchester Businesss School, University of Manchester, UK

Professor Robert Chenhall Monash University, Australia

Professor Jan Mouritsen Copenhagen Business School, Denmark

Professor Wai-Fong Chua University of New South Wales, Australia

Professor Deryl Northcott The Auckland University of Technology, New Zealand

Professor Martine Cools Lessius University College - Association KU Leuven, Belgium

Associate Professor Neale O’Connor University of Hong Kong, Hong Kong, PRC

Professor John Courtis City University of Hong Kong, Hong Kong, PRC

Professor Gary O’Donovan University of Tasmania, Australia

Professor Mark A. Covaleski University of Wisconsin, USA

Professor Stuart Ogden Sheffield University, UK

Professor John Cullen University of Sheffield, UK

Professor Lee D. Parker University of Adelaide, Australia

Associate Professor Suresh Cuganesan Macquarie Graduate School of Management, Australia

Professor Christine Ryan Queensland University of Technology, Australia

Professor Jesse Dillard Portland State University, USA

Professor Keith Robson Cardiff University, UK

Professor Robert Dixon University of Durham, UK

Professor Steven Salterio Queens University Business School, Canada

Dr Lyndal Drennan Queensland University of Technology, Australia

Michael Sherer University of Essex, UK

Professor Paul Dunmore Massey University, New Zealand

Professor Prem N. Sikka University of Essex, UK

Professor Clive Emmanuel University of Glasgow, UK

Professor Seleshi Sisaye Duquesne University, USA

Professor Mahmoud Ezzamel Cardiff University Business School, UK

Associate Professor Gary Spraakman York University, Canada

Professor Timothy J. Fogarty Case Western Reserve University, USA

Professor Wim A. Van der Stede London School of Economics and Political Science, UK

Professor Andrew Goddard Southampton University, UK

Professor Peter Taylor University of Liverpool, UK

Professor James Guthrie University of Sydney, Australia

Dr Matthew Tsamenyi University of Birmingham UK

Professor Christopher Humphrey Manchester Business School, UK

Professor Enrico Uliana University of Cape Town, South Africa

Professor Simon S.M. Ho Hong Kong Baptist University, Hong Kong, PRC

Professor Alfred Wagenhofer University of Graz, Austria

Professor Trevor Hopper Manchester Business School, University of Manchester, UK

Professor Richard Whitley Manchester Business School, University of Business, UK

Associate Professor Mahmud Hossain Nanyang Technological University, Singapore

Professor Roger Willett University of Wollongong in Dubai, Dubai, United Arab Emirates

Professor Christopher Humphrey Manchester Business School, University of Manchester, UK

Associate Professor Rachid Zeffane University of Sharjah, UAE

Professor Kerry Jacobs Australian National University, Australia

Professor Tony van Zijl Victoria University of Wellington, New Zealand

Professor Yukaka Kato Kobe University, Japan

Editor’s note With this special issue of 2007, the Journal of Accounting & Organizational Change completes its third year of journey. I wish to thank all who have been supporting this journal since its inception in 2005. I am very pleased to share with you the news that I have decided to include two new sections in the journal which will appear in 2008.

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Book review section The book review section will include independent reviews of research-based books and monographs, textbooks, methodological books, edited books, etc. Ms Carolyn Fowler at Victoria University of Wellington, New Zealand will serve as Book Review Editor. Authors and publishers need to submit two copies of each publication to the book review editor for consideration for possible review. Contact details of the Book Review Editor are as follows: Ms Carolyn Fowler, School of Accounting and Commercial Law, Victoria University of Wellington, PO Box 600, Wellington, New Zealand, Tel.: (64-4) 463 6506, E-mail: [email protected] Doctoral research abstract series The doctoral research section will publish materials from recently completed (not more than five-years old) doctoral research in an extended abstract form in the areas of organisational and accounting change in all branches of accounting: auditing, financial accounting, public sector accounting, social and environmental accounting, and management accounting. Authors need to submit their work using the journal’s structured abstract form, which can be downloaded from the journal’s web site. The abstract should not be more than 500 words. It should include the following: . the dissertation title; . the research purpose; . design/methodology/approach; . findings; . research limitations/implications; . practical implications; . originality/value; and . discipline area (auditing, financial accounting, management accounting, public sector accounting, social and environmental accounting; not-for-profit accounting, organizational studies/management, etc.). Each submitted work will be published subject to an independent review. Dr Cristiano Busco at the University of Siena, Italy has agreed to serve as the Doctoral Research Abstract Series Editor. Authors are requested to send their materials electronically via e-mail to: Associate Professor Cristiano Busco, Department of

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Business and Social Studies, University of Siena, Piazza S. Francesco, 8 53100, Siena, Italy, Tel.: (0039) 0577 235116; E-mail: [email protected] Special issues The current issue of the journal is our first special issue on management accounting in less developed countries. I would like to thank Dr Chandana Alawattage of Aberdeen University Business School, Professor Trevor Hopper and Dr Danture Wickramasinghe of Manchester Business School for guest editing this special issue. We have three more issues in the pipeline for 2008 and 2009. We welcome ideas for special issues in all branches of accounting. Please e-mail me your ideas to: [email protected] Thank you for supporting the Journal. Zahirul Hoque

The current issue and full text archive of this journal is available at www.emeraldinsight.com/1832-5912.htm

GUEST EDITORIAL

Introduction to management accounting in less developed countries

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Chandana Alawattage Aberdeen University Business School, University of Aberdeen, Aberdeen, UK, and

Trevor Hopper and Danture Wickramasinghe Manchester Business School, University of Manchester, Manchester, UK Abstract Purpose – This paper seeks to introduce, summarise, and reflect on the key themes and findings raised by the seven papers selected for this special issue devoted to management accounting in less developed countries (LDCs). Design/methodology/approach – The conclusions are drawn from desk research generally and the articles contained in this collection. Findings – This paper finds that accounting research in LDCs needs to address issues of poverty reduction, corruption, community involvement, history, culture, and politics, and examine a wider spectrum of organisations ranging from households to non-governmental organisations. Practical implications – Effective management accounting in LDCs may require broader, simpler, open and transparent, sometimes informal systems developed locally. Originality/value – This paper presents a collection of mainly empirical papers on an important but neglected topic, namely how management accounting might aid economic development in poor countries. Keywords Management accounting, Developing countries, Poverty, Corruption, Africa Paper type General review

The motivation for this special edition devoted to management accounting in less developed countries (LDCs), like previous such ventures (Hopper and Hoque, 2004), resided in the guest editors’ perceptions and experiences of presenting and submitting papers in this area to journals and conferences. Often it was suggested that they were more apt for specialist development or “international” sessions or journals. Inadvertently such suggestions lead to work on LDCs being marginalized from mainstream research and labelled as esoteric. Yet the bulk of the world’s population lives outside locations prominent in mainstream research, their accounting needs and concerns are as pressing – if not more, and with globalisation they form an essential part of the mosaic of world trade. Moreover, rich Western countries can learn much from practice and research in LDCs. Fortunately, journals like this and others such as the Accounting, Auditing, and Accountability Journal, and Critical Perspectives on Accounting, have given accounting research on LDCs a voice. “International” journals have also been an important outlet and will continue to be so but our desire is for them to publish more comparative and global accounting research studies rather than being

Journal of Accounting & Organizational Change Vol. 3 No. 3, 2007 pp. 183-191 q Emerald Group Publishing Limited 1832-5912 DOI 10.1108/18325910710820256

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a depository for the “alien”. Hence, this special edition gives “voice” to research on management accounting in LDCs and hopefully helps foster an academic climate where this receives equal due. Seven papers are offered for perusal: five from Africa, one from Palestine, and a literature review. Richard Tambulusi examines the introduction of accounting methods associated with new public sector management (NPM) in Malawi local government. Teerooven Soobaroyen and Raja Sannassee study financial priorities and planning and control practices in locally-established voluntary organisations in Mauritius seeking to improve the welfare of women and children. Godwin Awio, Stewart Lawrence and Deryl Northcott also examine NPM: after studying Uganda’s HIV/AIDS initiative they argue that community led responses may improve public sector accountability in LDCs better than NPM methods. Ni Mimba, Jan Helden and Sandra Tillema offer a literature review on public sector performance measurement in developing countries and its implications for future research. Ahmed Kholeif, Magdy Abdel-Kader and Michael Sherer investigate an enterprise resource planning (ERP) implementation in an Egyptian state-owned organisation. Sander Triest and Mohamed Alshahat provide a research note that reviews surveys of management accounting practices in LDCs and transitional economies, presents their results in this area in Egyptian countries, and reflects on their experience of conducting research in non-Western cultures with different norms of reciprocity and interaction. Fadi Kattan, Richard Pike and Mike Tayles examine how environmental uncertainty affects managers’ reliance upon management accounting information in an export-driven Palestine stone cutting firm. The methods adopted are diverse but oriented to the qualitative. Tambulusasi’s case study is based on interviews and documentary sources; Awio et al. do likewise drawing from theories of hermeneutics; Teerooven Soobaroyen and Raja Sannassee, and Ahmed Kholeif, Magdy Abdel-Kader and Michael Sherer use questionnaires supplemented by interviews; Fadi Kattan, Richard Pike and Mike Tayles’ contingency study uses interviews and archival data from the company. Ni Mimba, Jan Helden and Sandra Tillema undertook desk research. Reliance on qualitative methods is sensible in sites where it is difficult to get reliable data by surveys or official sources, issues are neither well understood nor articulated in prior literature, cultural and governance issues predominate, oral rather than written cultures preside, and there is a desire to identify problems bottom up paying respect to the meanings and understandings of local participants, and sometimes to be actively engaged and facilitate improvements. Moreover, as Teerooven Soobaroyen and Raja Sannassee, and Kattan et al. demonstrate, method and data triangulation provides greater reliability and validity of findings, which permits more confident generalizations. Sander Triest and Mohamed Alshahat thoughtfully reflect on conducting research in an LDC. Their initial postal survey on the usage of costing information and decision making in Egyptian countries yielded a virtually zero response. They had to change their research strategy dramatically and collect questionnaires personally to solicit responses and to supplement these with interviews. The latter revealed that often respondents were unfamiliar with terminology used in the questionnaires. They observe that research methods that are the norm in the West may need adaptation in studies in LDCs to incorporate personal contact and be administered by a native researcher familiar with the local language and culture.

Nevertheless, notwithstanding these caveats, we do not deny the potential of surveys or more quantitative methods where appropriate and effective. Most studies use qualitative, grounded theory, sometimes influenced by micro-finance work which despite its influence within development circles, has tended to be ignored by accounting researchers. The impact of politics and governance is a recurring theme, hence it is unsurprising that several papers take a political economy hue. For example, Awio et al. draw on Bourdieu’s delineation of forms of capital and their distribution within social networks. Teerooven Soobaroyen and Raja Sannassee use Gramscian insights into civil society and governance, and new institutional sociology (NIS) to analyse symbolism and legitimacy. Ahmed Kholeif, Magdy Abdel-Kader and Michael Sherer also use NIS updated to incorporate intra-organisational factors. However, mainstream research approaches can also be fruitful, for example Fattan et al. use contingency theory to examine the nature and impact of external uncertainties, especially political ones, upon managerial use of management accounting. The issues raised by these papers are wide-ranging. Fattan et al. classify political uncertainties and instabilities confronting their Palestinian firm into three periods. High uncertainty ceased with the Oslo accord in 1993 only to be resumed after the second Intifada uprising in 2000. Their review of contingency theory research suggests that accounting information is unreliable and accounting tools of little value under conditions of high uncertainty. However, consistent with the few contingency studies in LDCs available, uncertainty may stem more from political and cultural factors than technology and competition as emphasized elsewhere, hence many LDC firms use budgeting more for managing external relationships than internal management. Like other contingency studies in LDCs (but unlike accounting contingency theory research elsewhere), Fattan et al. derive their key contingent variables from field work rather than previous studies. They found the owner-manager emphasized product quality and customer satisfaction, made limited use of management accounting information, and accounting was mainly directed at satisfying tax authorities. As anticipated, in periods of high-uncertainty cash flows were emphasized more and budgets, decision making, and standards became more organic. At peaks of high-uncertainty accounting was used little, though in the second high uncertainty period when uncertainty fell, mechanistic and organic forms of management accounting were developed and used more, partly due to diversification overseas, ISO certification, firm growth, computerization, and increased professionalism of management. Contingency theory needs to conceptualise, measure, and assess political uncertainties identified in studies of organisations in LDCs. However, this should recognise that this is partly contingent on poverty, an as yet unstudied contingency factor. As Caiden and Wildavsky (1974) note, poverty means no slack resources, no functional redundancies (there is only one of everything – people and things cannot be replaced), and failures have acute effect, which fosters conservatism whereby people turn to kinship groups or tribes, stockpiling, political instability, and personalised politics. Poverty breeds its own uncertainty, e.g. greater exposure to natural disasters; lack of reliable information for planning; less skilled and predictable officials; government budgets dependant on external factors such as commodity markets, external aid/financial institutions, and multinationals. They argue that government budgeting in poor countries based on rational planning is platitudinous and impractical:

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it is the problem not the solution. Planning is expensive, idealistic, remote, ends up being all things to all people, and de-emphasises control. This produces ineffective budgeting, delays, inadequate operational control, and dysfunctional political behaviour due to over centralised power. They argue that budgeting is more important than state planning as budgets precede plans, are more short-term, and easier to change and enforce. They advocate simple, aggregated budgets with less data but more information; treating budgets as hypotheses; concentrating more on actual rather than future data; budgeting continuously; and reducing uncertainty by tying results to rewards, working only within existing resources, avoiding large projects, and spreading risk by favouring short-term projects and goals. The suggestions bear similarities to the “Beyond Budgeting” ideas of Hope and Fraser (2003), albeit in a different context. Over the past decade more donor agencies, particularly in Africa, have adopted such policies by shifting from single project funding to pooling resources when budget funding, particularly for health and education. The papers presented here reflect debates over accounting’s role in development since World War II. Throughout the World Bank and associated donor institutions have been important actors in the wings. In 1950s and 1960s, industrialisation through state-led central planning was in vogue but often failed: state-owned enterprises incurred large losses and engendered fiscal crises of the state partly because of political intervention and patronage. Research has revealed that formal rational management accounting systems (technically cornerstones of central planning and control) were largely ignored for operational and accountability purposes but were maintained as symbols of rationality to gain external legitimacy. Subsequently, especially after the cessation of the Cold War, policies of donor agencies – often proxies for policies of rich Western countries – incorporated market methods reflected in structural adjustment policies emanating from the World Bank that included privatisations and adoption of NPM techniques. The aim was to decrease the role of the state by seeking delivery and development through private firms in competition. Allied to this has been recourse to non-government organizations (NGOs) rather than government agencies for the delivery of many projects – hence the massive and significant growth of NGOs in LDCs. However, these policy changes have been controversial and not invariably effective. Evidence of accounting problems in state organizations and the difficulties of transition to more market-oriented regimes is supplied by Kholief et al. in their study of AML, an Egyptian company producing electrical fittings, especially light bulbs. The company was partly nationalised (half of the shares being held by the original Dutch owners) in the 1960s following Egypt’s socialist development plans. It became subject to the Egyptian uniform accounting system and central planning and budgeting. In the early 1990s, following a World Bank and IMF structural adjustment programme, development turned to market-led policies including entering the General Agreement on Tariffs and Trade (GATT) and privatisations of state enterprises. Government shares in AML were transferred to a state holding company in anticipation of their sale to the original Dutch company but this failed and, paradoxically, AMT ended up 100 per cent state owned. Partly to reduce costs and staff numbers in anticipation of privatisation, the holding company instructed AML’s managers, despite their advice to the contrary, to implement an ERP system (SAP). The implementation failed partly due to lack of staff commitment and their worries about job tenure. Managers were caught between the demands of the holding company and the central agency. Their attempt to customise

software designed to serve the uniform accounting system administered by the central agency of accounting failed. AML’s managers, like those elsewhere facing such conflicts, reverted to old habits and routines. The system never became institutionalised. Moreover, following entry to GATT, heightened competition wrought large losses, reduced market share, and changed policies of producing to inventory. The ERP system could not support the latter and it became perceived as just another burden adding to the company’s financial woes. The examination of effects of accounting associated with structural adjustment programmes is pursued further by Tambulisi and Awio et al. with respect to NPM. Tambulusi’s study in Malawi disputes, the effectiveness of public sector accounting currently promulgated by aid consortia and institutions like the World Bank that emphasises private sector methods and strengthening the role of managers. He argues that this ignores the contribution of politics and politicians despite the rhetoric of NPM’s advocates that it makes everyone more empowered. In Malawi the reforms increased managerial autonomy at the expense of political control, contrary to government policies seeking devolution of control to local communities. Managers did not behave bureaucratically as predicated but responded to politicians’ sabotage of systems and corruption by either colluding with the corruption or seeking central intervention. Rather than efficiency dysfunctional rivalries ensued. Awio et al. back calls for more local involvement and condemn blanket solutions whether state central planning or now fashionable market solutions. They too question the wisdom of wholesale adoption of NPM in LDCs and note its failings in several World Bank influenced reforms. Uganda’s Poverty Eradication Plan of 1997 not only sought economic growth and security but also incorporated bottom-up accountability and transparency to reduce corruption, empower the poor, and further human development. The HIV/AIDS project, part of the National Strategic Framework, incorporated national, district and community components. Awio et al. trace its processes and structures of decentralized governance, finding that the involvement of local community groups in the conception and approval of schemes, implementation, and accountability distinguished it from other methods of participation, and enabled social capital to be held and exploited within community groups. They argue that the communitarian approaches of the Ugandan HIV/AIDS initiative made public sector managers accountable to the communities they served and forged trust whereas the bureaucratic and political hierarchy of NPM is predicated on distrust. They argue that NPM without adaptation to local conditions and influence will fail. Mimba et al.’s literature review reinforces these observations. They identify an imbalance between the supply of performance information and demands for it in public sector organizations in developing countries. They attribute this to low institutional capacity, limited involvement of stakeholders in decision-making processes, high levels of corruption and informality, and reforms involving the marketisation of the public sector. The review recommends that future research on public sector performance measurement systems should incorporate historical, institutional and cultural ramifications; investigate the roles of NGOs and the reasons for their upsurge; and whether NGOs are helping close the gap between the “supply” and “demand” for performance information. The Mauritius research of Teerooven Soobaroyen and Raja Sannassee also raises issues of accounting, performance and governance in an important but neglected area, namely Voluntary Organisations, a form of NGO. Donor and aid agencies are

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increasingly funding NGOs to deliver projects in the belief that they more effectively deliver services than domestic government agencies prone to corruption and mismanagement. However, this is controversial – NGOs themselves can be corrupt, inefficient, and unaccountable. Teerooven Soobaroyen and Raja Sannassee found, like studies of management accounting in state organizations in LDCs, that many practices in Mauritian voluntary organisations represented symbolic attempts to demonstrate rationality to gain external legitimacy from funding bodies. Accounting was used, albeit simply, and there was a desire to control expenses and resources but this was done informally often without recourse to treasurers’ involvement or accounting data. This was attributed to accounting’s failure to reflect the social goals of either the organization or its external sponsors, norms of trust and emotion that permeated relationships, and the morality underlying the involvement of often voluntary participants. Management accounting cannot be divorced from issues of democracy, local control and commitment, and corruption. Corruption is a recurring issue yet surprisingly this has received little academic attention within accounting. Economists attribute low-economic development in Africa to corruption. University of Massachusetts researchers estimate that from 1970 to 1996, capital flight from 30 sub-Saharan countries totalled $187b, which exceeds their external debts. Corruption undermines democracy and values of trust and tolerance, erodes the institutional capacity of government and its legitimacy, impedes good governance, reduces accountability of legislative bodies, distorts representation in policymaking, compromises the rule of law; and brings unfair provision of services in public administration. In extremity corruption represents embezzlement of entrusted funds, and associated booty capitalism diverts domestic financial capital abroad (hence the stereotypical but sadly often accurate image of African dictators with Swiss bank accounts). Corruption flourishes when there is a lack of government transparency, freedom of information legislation; contempt for freedom of speech and the press; absent or dysfunctional democracy; poorly-paid government officials; and illiterate poorly educated populaces. Accountability requires public policies, practices and expenditures to be open to public and legislative scrutiny and for civil society to be involved throughout budget formulation, execution and reporting. Participatory budgeting enables more stakeholders to influence budget allocations, check that spending conforms to specified priorities, and monitor the quality of goods and services provided. Such reforms bring results, for example, the Indian Right to Information Act 2005 “engendered mass movements . . . bringing the lethargic, often corrupt bureaucracy to its knees and changing power equations completely” (Jakarta Post, 31 August, 2006). Publishing surveys and audit and accountability reports makes corrupt practices more visible and facilitates public monitoring to challenge abuses and cultures of impunity. For example, publishing monthly intergovernmental fund transfers in the local media in Uganda reduced fund losses by 78 per cent. Good, accessible financial information facilitates benchmarking within and across governments, for example the Peruvian newspaper, Ciudadanos al Dia, compares the transparency, costs, and efficiency of different government departments, and its annual awards for best practices gain widespread media attention, which encourages government agencies to compete. Decentralisation can improve resource allocation, increase public participation, improve local oversight, and make decision makers more accountable and agencies more responsive. For example, fiscal decentralisation of health resources in poor

countries is consistently associated with lower mortality rates and apparently improved health. However, decentralisation is risky. If there is inadequate institutional capacity to control locally then it may facilitate corruption, engender policies favouring elites, and increase regional disparities. Reconciling rule-bound and predictable behaviour with flexibility and adaptability is a constant dilemma. Emphasising rules and line-by-line expenditure authorisation may reduce corruption but the problems of poverty may call for simpler, delegated and adaptive budgeting based on output control or actual expenditures rather than long run plans. However, responsibility for reducing corruption does not lie merely within LDCs. Weak regulation and asymmetrical bargaining power raise major ethical issues for capitalist organisations operating overseas, managers, governments hosting multinational headquarters, and international capital markets and institutions. They bear a heavy responsibility for enforcing legislation, often emanating from the United Nations, concerning capital flows into bank accounts; reducing bank secrecy; applying transparent accounting and auditing to accurately assess profits, commissions and taxes due in particular locales; regulating on-shore and off-shore tax havens; sharing taxation returns with other countries; enforcing international transfer pricing regulations fairly; making corrupt business practices abroad illegal and subject to domestic audit with effective and meaningful sanctions for transgressions; disclosing and regulating tax calculations of companies and individuals; protecting “whistleblowers”; and helping LDC governments strike economically sound contracts, especially in extractive industries, that prevent environmental and social degradation. Caveat emptor cannot prevail in situations of inequitable resources and knowledge: poor countries often lack the resources and institutional infrastructure to effectively regulate financial transgressions. Without support LDCs cannot tax fairly, control the illicit flight of capital overseas, prevent environmental degradation, and avoid being pitched into an unequal battle to attract foreign capital through low tax regimes and weak regulation. As the Mauritius case of Soobaroyen and Sannassee points out, many treasurers were trained by Western accounting bodies. Accounting professional bodies, firms, and educational institutions in rich countries also have obligations that extend beyond credentialing and training. They need a strong involvement in developing indigenous accounting professional bodies, strengthening accounting practices and financial management in government and private firms, and acting on behalf of civic society in poor countries. Too often Western accounting, despite benefiting from members, students and clients overseas, promotes the corporate rather than the public interest, and the needs of advanced economies over poor ones. To their shame, institutions prominent in tracing, publicising and trying to remedy corruption have been non-governmental organizations like Transparency International. In 2002, the international “Publish What You Pay” campaign launched by a coalition of NGOs sought greater audited, transparent payments, receipts, and management of revenues from the extractive sector; for discrepancies to be reconciled and resources used more effectively within developing countries; and greater combating of corruption and improved corporate social responsibility to ensure a stable and secure supply of energy to world markets. The professional responsibility of accountants and businesses and associated researchers must transcend borders and incorporate an ethical and humanitarian dimension in the public interest. Past policies of pumping financial aid

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into many developing countries have often failed due to corruption, creation of aid dependence, and ineffective governance and infrastructure. Future policies and practices need to remedy these constraints and accounting is integral to this. However, the message of the papers is to exercise caution over solutions stemming from blanket “isms” and commercial practices of Western large businesses. Instead they indicate the need to think small and local, as well as macroscopic. In LDCs much of the economy may lie in small businesses, merchants and small shops, domestic and rural enterprises, family-owned firms, co-operatives, NGOs, and peasant agriculture. These are inadequately researched areas and it is an error to bracket out such sites as distinctive and unique and thus inappropriate for rich countries to learn from. The West does not invariably possess superior knowledge and practices, and many problems encountered by organizations in LDCs can be found in rich countries: LDCs can teach rich countries much on topics like micro-finance and poverty alleviation, and managing small, family-owned firms. For example, LDCs have found that information technology used imaginatively offers opportunities to reduce corruption when citizens file applications or tax returns online as it by-passes officials that prone to bribery. Moreover, as Awio et al. note, given the scarcity of resources in LDCs, there is a need to develop simple, cheap, sometimes informal, understandable systems capable of being institutionalised into the prevailing local culture and practices. These policies may be as apt for Western poor people as for those in LDCs. Also, as the Mauritius research indicates, financial criteria may not reflect development aims such as increasing employment, improving health and literacy, relieving suffering, poverty eradication, and improving the power of civil society especially the disadvantaged. More work is required in developing simple and cheap to use systems that are adequate proxies of broader development aims. Conversely, many conventional accounting practices can be robust and sought in LDCs. Much Western accounting is transferable, despite different circumstances. For example, in the Awio et al. study traditional auditing remained and was valued albeit strengthened by community-based verification mechanisms. Mimba et al. make a plea for a research agenda that gives a voice to civil society when establishing regimes of performance measurement in the public sector. Indeed, in LDCs there is frequently a thirst to incorporate “best” Western practices. Managers in LDCs seek accurate costings, improved controls, need accounting systems, and must act as commercially as their Western counterparts. However, as Triest and Alshahat’s review of costing practices in LDCs and transitional economies reveals, knowledge and practice of “modern” Western management accounting techniques can be low, especially for more “advanced” techniques like activity-based costing. Their research in Egypt suggests that insofar that management accounting was used it was for pricing, normally of the cost-plus variety. If Western techniques are apt and effective then there is scope for improving management accounting in countries like Egypt, which has a more sophisticated commercial, academic and professional infrastructure than many other LDCs. Knowledge transfers from the West to LDCs are becoming more prevalent and quicker due to the globalisation of academic, professional and business institutions, efforts of consultants, and the influence and power of transnational organizations such as the United Nations Development Programme and the World Bank. Their role in diffusing accounting knowledge to LDCs warrants greater scrutiny.

To conclude, we do not believe that the salvation of LDCs lies in accounting but it is a vital and neglected cog in the mechanism of development internationally. It is our hope that this collection will motivate others to enter this field which is not only fascinating but also is vital to mankind and is an area where researchers can make distinctive contributions with a practical impact.

Introduction to management accounting

References Caiden, N. and Wildavsky, A. (1974), Planning and Budgeting in Poor Countries, Wiley, New York, NY. Hope, J. and Fraser, R. (2003), “Who needs budgets?”, Harvard Business Review, February, pp. 108-15. Hopper, T. and Hoque, Z. (2004), Accounting and Accountability in Emerging and Transition Economies, Research in Accounting in Emerging Economies – Special Supplement 2, JAI Press, Greenwich, CT, pp. 1-18.

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Corresponding author Danture Wickramasinghe can be contacted at: [email protected]

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A literature review and research agenda Ni Putu S.H. Mimba, G. Jan van Helden and Sandra Tillema Faculty of Economics, University of Groningen, Groningen, The Netherlands Abstract Purpose – This paper aims to explore the influence of specific characteristics of the public sector in developing countries (i.e. a low-institutional capacity, a limited involvement of stakeholders, and high levels of corruption and informality), and of reforms of this sector, on public sector performance measurement (PSPM). Design/methodology/approach – Based on a review of prior literature, the paper develops understanding of the demand for and supply of performance information in developing countries, and of changes in this area. Findings – The paper argues that public sector organisations in developing countries are likely to face an unbalanced position, i.e. disequilibrium between the demand for and supply of performance information. More precisely, the public sector reforms – which are partly stimulated by a growing involvement of some stakeholders – lead to an increasing demand for performance information but, because of the low-institutional capacity and the high level of corruption, this increasing demand is not always followed by a sufficient supply of performance information. This leads to an “unsatisfied demand” position. Research limitations/implications – The paper concludes with an overview of issues related to PSPM in a developing country context that require further investigation. Practical implications – The arguments presented in this paper are summarised in an overview of factors that influence the demand for and supply of performance information in the public sector in developing countries. This overview might be helpful to those who are involved in the design of performance measurement systems in these countries. Originality/value – So far, relatively little is known about PSPM in a developing country context. This paper is an attempt to fill this gap. Keywords Performance measurement (quality), Public sector reform, Government, Developing countries, Decentralized control Paper type Literature review

Journal of Accounting & Organizational Change Vol. 3 No. 3, 2007 pp. 192-208 q Emerald Group Publishing Limited 1832-5912 DOI 10.1108/18325910710820265

1. Introduction In recent years, public sector performance measurement (PSPM) has attracted much attention in the literature. However, almost all papers that have been published in academic journals focus on the public sector in European or North-American countries, Australia or New Zealand (van Helden et al., 2006). As a consequence, relatively little is known about PSPM in a developing country context. It is, for example, not clear which types of performance indicators are selected in developing countries, to what extent, in The authors would like to thank the JAOC reviewers for their comments on and useful suggestions for revising earlier versions of this paper.

what manner and for what reasons performance information is used, and which changes are taking place in this area. Our paper is an attempt to fill this gap. It aims to explore the influence of specific characteristics of the public sector in developing countries, and of reforms of this sector, on the demand for and supply of performance information. Although this paper focuses on the public sector in general, many of the issues discussed are of particular importance to the governmental sector. The structure of the paper is as follows. Firstly, we discuss PSPM in general, and the approach we use to study this area in particular. Next, we discuss specific characteristics of the public sector in developing countries; namely, a limited institutional capacity, a low involvement of stakeholders, and high levels of corruption and informality. In addition, we discuss the recent public sector reforms in developing countries. Subsequently, we examine the implications of these characteristics and reforms for PSPM in developing countries. We argue that there is a growing demand for PSPM, while at the same time the supply of PSPM is still rather limited. This discussion leads to an interesting research agenda for PSPM research in developing countries. 2. Public sector performance measurement The area of PSPM is important because of its potential impact on organisational performance. Good organisational performance implies that a public sector organisation is effective (in terms of volume and quality) and efficient in supplying public goods and services. PSPM can contribute to attaining such a performance level because it may be an input for achieving good governance. There are many different definitions of good governance. The funding agencies that are active in developing countries, for example, all seem to use their own definition. For the purpose of our paper, we prefer to make a clear distinction between good governance and good organisational performance. More precisely, we consider the following characteristics to be the main characteristics of good governance: responsiveness, accountability, transparency, combating corruption, a predictable legal framework, and participatory governance (Agere, 2000; United Nations Development Program, 1997; World Bank, 1992). Described in this way, good governance can be seen as an important, though insufficient, condition for achieving good organisational performance. There is a growing interest in investigating PSPM, including its relationships with good governance and good organisational performance. The topics that have been examined recently include the development, adoption, implementation and use of performance measures in the public sector (Cavalluzzo and Ittner, 2004; van Dooren, 2005). In order to avoid confusion about the exact meaning of these terms, this paper uses the supply/demand approach to study PSPM (van Dooren, 2005). More precisely, it makes a distinction between the supply of performance information and the demand for this information. The supply of performance information is defined as the production of performance information by a public sector organisation. It includes selecting the performance areas that will be measured, developing performance indicators, collecting and analysing data, and reporting performance information. The demand for performance information is defined as the actual or desired use of performance information by the organisation’s internal and external stakeholders (Mayston, 1985, pp. 51-3; Ospina et al., 2004, p. 231). Some of these stakeholders (e.g. managers, policy makers, and their advisors) may want to use this performance information for internal management; namely, decision making

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Table I. Supply/demand approach

and control. Others (e.g. customers, tax payers, citizens, elected and appointed officials, and managers at higher levels within the public sector hierarchy) may want to use it to assess whether delegated responsibilities are exercised as expected, and to hold organisations or managers accountable for their performance. Important aspects of stakeholders’ use of performance information are the extent to which, the manner in which, and the reasons why, they use this information. This paper examines whether in a developing country context a balance between the supply of and demand for performance information is likely to occur. It uses the terms “equilibrium” and “disequilibrium” to refer to, respectively, balanced and unbalanced positions (Barzelay, 2001; Baumgartner and Jones, 1993). The ideal position is one of equilibrium. Here, the following two conditions are met. First, the aggregate of the demands for certain types of performance information of all (groups of) internal and external stakeholders is followed by a supply of this information by the organisation. Second, all performance information that is supplied by the organisation is demanded by at least one (group of) internal or external stakeholder(s). Also, a position of disequilibrium may occur. We distinguish two types of situations that lead to a disequilibrium position: unsatisfied demand and excess production. The “unsatisfied demand” situation occurs when a demand for particular types of performance information from certain stakeholders is not followed by a supply of this information by the organisation; the “excess production” situation happens when there is a supply of particular types of performance information by the organisation without a demand for this information from any stakeholder. In practice, it seems likely that a public sector organisation is, at the same time, faced with partial equilibrium (i.e. a balance between the supply of particular types of performance information by the organisation and the demand for this information by some of its stakeholders) and partial disequilibria (i.e. an unsatisfied demand for other types of performance information from some stakeholders and/or an excess production of other types of performance information by the organisation). Our supply/demand approach is summarised in Table I. From the literature, it is clear that public sector organisations have specific characteristics which may influence the demand for and supply of performance information (Brignall and Modell, 2000; Cavalluzzo and Ittner, 2004; Rainey et al., 1976). One of these characteristics concerns the nature of their objectives. Public sector organisations usually have multiple and conflicting objectives. As a result, stakeholders who demand performance information for internal management may have difficulty in deciding how to use the information that is produced to attain “good” organisational performance (demand side). In order to decide which actions should be taken, they must balance the different objectives by establishing trade-offs between them. Furthermore, some objectives of public sector organisations can also be rather vague. Consequently, in certain performance areas, it may be quite difficult to develop Demand

Supply

Situation

Position

Yes No Yes No

Yes No No Yes

Satisfied demand Demand nor supply Unsatisfied demand Excess Production

Equilibrium Disequilibrium

performance indicators and to quantify performance (supply side). Assuming that only imperfect indicators can be developed, this further complicates the use of performance information, not only for internal management but also for holding organisations and managers responsible for their performance (demand side). A second characteristic of public sector organisations that may influence the demand for and supply of performance information is related to the role of stakeholders. Public sector organisations are often confronted with a wide set of stakeholders, each with their own interests, who have a relatively strong influence on the organisation. Each of these stakeholders may demand particular types of performance information, either to hold the organisation accountable for its performance or to inform internal management (demand side). The question of whether an organisation satisfies a particular demand for performance information depends on the power and pressures exerted by the (group of) stakeholder(s) that make(s) this demand (supply side). In other words, power relationships and political bargaining processes will affect the supply of performance information in public sector organisations. The above discussion shows that PSPM is characterised by a demand from various stakeholders for diverse types of performance information, and by complications in the supply of this information as well as in the manner in which it is used. This discussion is, however, based on research in developed countries. Since, there are important differences between the public sectors of developed and developing countries, the demand for and supply of performance information in developing countries might be quite different (Wickramasinghe and Hopper, 2005). As a starting point for finding some of these differences, Section 3 discusses four distinguishing characteristics of the public sector in developing countries. 3. Characteristics of the public sector in developing countries The United Nations (2001, p. 3) divide countries into two groups: developed and developing countries. Countries in North America, Europe and the former USSR, Japan, Australia and New Zealand, are all categorized as developed countries, whereas all others are regarded as developing countries. Compared with developed countries, developing countries have, in general, a lower human development index (which measures a country’s performance in three areas: education, health and society purchasing power), a lower level of industrialization, a lower level of average income per inhabitant, and a higher level of population growth (Caiden and Wildavsky, 1980, pp. 46-8). These features, together with the local circumstances of each country, can be expected to influence the characteristics of the public sector in developing countries. This section examines some of these characteristics; namely, those that may influence public sector decision-making, control and accountability. More precisely, it discusses four characteristics: (1) a low institutional capacity; (2) a limited involvement of stakeholders; (3) a high level of corruption; and (4) a high level of informality. In addition, this section discusses the reforms that are currently taking place in the public sector in many developing countries.

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3.1 Low institutional capacity The World Bank (2004) defines institutional capacity as the ability of an institution to decide on and pursue its goals, to perform tasks, and to improve performance constantly. In a governmental organisation, institutional capacity can be defined as the organisation’s ability to identify problems, to develop and evaluate policy alternatives, and to operate the government’s programmes (Howitt, 1977). It is commonly believed that public sector organisations in developing countries still have a limited institutional capacity (Cassel and Janovsky, 1998; Frischtak, 1994; Graham, 2002; IMF, 2002). Characteristics of public sector organisations with a limited institutional capacity are weaknesses in regulatory practice, a low level of public accountability, administrative inefficiencies, limited human resources, a lack of facilities, and insufficient funding (IMF, 2002; Nsouli, 2000; Van Crowder, 1996). These characteristics lead to situations in which it takes long bureaucratic procedures, with a lack of transparency, to deliver goods and services to the citizens (Henderson, 2001), in which the volume and quality of these goods and services is inadequate (Devas, 2002; Haque, 2003), and in which stakeholders have little information about the extent to which a public sector organisation has achieved its objectives. 3.2 Limited involvement of stakeholders Compared to developed countries, the involvement of stakeholders – such as citizens – in public sector organisations is rather limited in many developing countries (Graves et al., 2002; Splettstoesser, 1998). Both public sector organisations and their stakeholders may have their own reasons for not changing this situation. On the one hand, public sector organisations may fear the consequences of more stakeholder involvement. Conflicts of interests among the various stakeholders and stakeholders’ resistance to the organisation’s decisions may take time and may cause difficulties in making decisions. On the other hand, stakeholders may feel that organisations do not give access to sufficient information, which makes it difficult for them to get involved in decision-making processes. Moreover, stakeholders might feel that their involvement is only a formality rather than a substantial input for decisions, because most of their interests are not included in the final decisions made. It seems that public sector organisations pay attention only to the more powerful stakeholders. Batley (1999) indicates that especially internal stakeholders such as public sector officials and civil servants are powerful groups. External stakeholders whose involvement is high in many developing countries are (international) donors, such as funding agencies and non-governmental organisations (NGOs). Their power in decision making is, generally speaking, high and increasing (Haque, 2002). The reasons why donors have been able to attain such an influential position is related not only to the funding that they can provide to public sector organisations in developing countries, but also to their well developed human resources (Lux and Straussman, 2004). 3.3 High levels of corruption Corruption can be defined as the abuse of public power for private gain (Johnston, 1996; World Bank, 1997). This paper focuses on corruption that is related to decision-making processes in the public sector. In this context, we define corruption as all behaviours of public sector officials and civil servants to misuse their power in decision-making processes for their personal gain that hamper the public interest. A distinction can be

made between high-level (grand) corruption and low-level (bureaucratic) corruption (Nabli and Humphreys, 2003). High-level corruption implies that top-level policy-makers destabilise the government process for their own financial gain; low-level corruption implies that public sector officials and civil servants call for payments from citizens who expect to receive normal public goods and services. This section focuses on low-level corruption. In general, developing countries have a relatively high degree of low-level corruption. According to the United Nations (2003), this type of corruption has become one of the acute problems facing the delivery of public goods and services in developing countries. It increases the costs of the public goods and services delivered to the citizens. The high level of poverty in these countries might be the main reason for their public sector officials and civil servants to be susceptible to corruption. Countries that pay inadequate salaries to their public sector officials and civil servants seem to have a higher level of corruption (Van Rijckeghem and Weder, 1997). In the case of Indonesia, for example, low salaries were shown to be an important reason for public sector officials to engage in corruption (Booth, 2005, p. 213; McLeod, 2005, p. 379). Similarly, Hope (2002) finds that the major contributors to corruption in Africa are an erosion and compression of the salary scales of civil servants. These findings suggest that corruption can be caused by a large gap between needs and income. Furthermore, the weak control system in most developing countries may also provide an opportunity to become corrupt. Without this opportunity, it seems that the chances for public sector officials and civil servants to engage in corruption are limited. Currently, most developing countries are still faced with the problems of a weak control system and a low-income level for most of their citizens in general, and for their public sector officials and civil servants in particular. Therefore, corruption is likely to be a common phenomenon in these countries (Michael, 2004, p. 1071). 3.4 High level of informality Informality can be found in all countries, but in developing countries it is often a main tenet of the economic system, including the private as well as the public sector (Schick, 1998, pp. 127-8). That is, although there are formal rules, informality may be more important in practice (Hoque and Hopper, 1997, p. 131). Schick (1998, p. 127) suggests that the high level of informality in many developing countries is related to the often relatively weak specification of property rights and other formal processes to regulate economic activity. Under these circumstances, it is probable that rules and regulations are routinely breached. In the public sector, this could, for instance, lead to situations in which a civil servant is hired not because he was the winning candidate in the formal hiring process but because he knows the right person, or to situations in which a governmental organisation has not only a public budget that is presented to the parliament but also a real one that determines how much is actually spend (Schick, 1998, pp. 127-8). Schick (1998, pp. 127-8) argues that informality can be seen as a mixed blessing. It makes things happen, but it also causes corruption, a neglect of outputs, and distrust in government. So, in general terms, informality can be described as the mechanism of not following formal rules and regulations. In the context of PSPM research, however, a narrower conceptualisation of informality seems more useful. Using insights into informal

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authority structures of organisations (Abernethy and Vagnoni, 2004, p. 210; Meyer and Rowan, 1977, pp. 341-2), we define informality as the mechanism through which individuals or groups influence organisational decisions and activities without having a formal authority to exert that influence, and/or without aligning the content of their influence with the goals and policies that are laid down in official documents. Defined in this way, informality results in a gap between the formal goals, policies and authority structure of an organisation, which are laid down in official documents, and its actual day-to-day decisions and activities. In other words, it is related to the difference between what an organisation officially says it does, and what it is actually doing. 3.5 Reforms In order to change the above-described characteristics, many developing countries are now in the process of reforming their public sector. In general, such reforms aim at improving organisational performance through improvements in governance. This is, for instance, the case in most African countries (United Nations, 2003). An important motivation for the current public sector reforms is that good governance is often a prerequisite for receiving funds from funding agencies and NGOs (ADB, 1997; Batley, 1999; IMF, 2003; World Bank, 1992). These donors recognise that financial aid alone is not sufficient to improve organisational performance. It seems that the new public management (NPM) paradigm is applied extensively to the public sector reforms in developing countries (Larbi, 1999; Litvack et al., 1998). One of the principal themes of NPM is decentralisation (Hood, 1991, 1995; Hope and Chikulo, 2000; Lister and Betley, 1999). Since, the 1980s, developing countries have increasingly adopted decentralised forms of governance (Betts, 2003; DFID, 2002; Hope and Chikulo, 2000). It was approximated that 63 of the 75 developing countries with a population of more than five million are actively employing decentralisation (Helmsing, 2002, p. 317). As decentralisation has become a trend in most developing countries, this paper regards decentralisation as a crucial element of the public sector reforms in developing countries. Decentralisation implies the transfer of public authority from central to intermediate and local governments, which is followed by a similar transfer of public responsibilities (e.g. planning, resource allocation and decision making). Especially, in countries with a large population and/or land area, decentralisation is a key to improve public sector performance, particularly the delivery of basic public goods and services (Heady, 2001). Moreover, it can also result in an increase in society participation in government. In some African countries, decentralisation allowed a better mobilization and use of resources, and it encouraged the market-like responsiveness of the public sector (Hope and Chikulo, 2000, p. 38). Also Zimbabwe, Sri Lanka, Ghana and India implemented programmes that have increased organisational autonomy through decentralisation in order to improve the efficiency and effectiveness of government (Nickson, 1999, p. 780). Another aspect of the reforms that are taking place in developing countries is marketisation. This aspect includes such changes as the introduction of contract management, public-private partnerships, privatisation, benchmarking or other types of performance comparisons, internal markets for administrative services, and contract competition (Eikenberry and Kluver, 2004; Hoggett, 1996; Olson and Sahlin-Andersson, 1998; Reichard, 2002; Sanderson, 2001). These changes aim at better governance and performance improvement. Moreover, marketisation is sometimes motivated by a

desire to reduce corruption. It is expected that through marketisation, the number of arbitrary state interventions and monopolies – which both may lead to conspiracy and corruption – can be reduced (ADB, 1997). On the other hand, Schick (1998) argues that in a context of high-informality marketisation can be quite risky, because it gives managers much more discretion to hire employees and spend money as they wish, which provides them with more opportunities for corruption. Often the public sector reforms also include the implementation of an anti-corruption programme. Such programmes may be needed for a better control of government. Most of the anti-corruption programmes that have been implemented in developing countries over the past decade are supported by international agencies, such as the UNDP, World Bank, IMF, USAID and Asian Development Bank (Haque, 2001; Klein Haarhuis and Leeuw, 2004). Furthermore, in several developing countries, including Indonesia, the reforms include the introduction of direct elections, not only for choosing the President, but also for choosing, for instance, the heads of local governments (Indonesian ¨ zbudun, 1987). Government, 2004; Weiner and O 4. Implications for PSPM in developing countries PSPM can be viewed as an instrument for public sector organisations to make better decisions, to improve control and to enhance accountability. In this way, the introduction of PSPM can be expected to assist public sector organisations in realizing their objectives. However, its introduction may not automatically lead to an improvement of decision making, control and accountability. Important conditions are that the suppliers of performance information adapt the information they produce to the demand for performance information, and that the demanders use the information they receive correctly. Section 2 argued that in practice it might be quite difficult to meet these conditions, even in a developed country context. The specific characteristics of the public sector in developing countries that were discussed in Section 3 may make it even more difficult to attain such an equilibrium between the demand for and supply of performance information. As will be set out below, the recent public sector reforms are expected to lead to an increasing demand for performance information that is not always followed by an increased supply of performance information. 4.1 Demand for performance information Given that historically the involvement of stakeholders in the public sector of developing countries was low, it can be expected that in the past the demand for performance information in these countries was rather limited. Moreover, also the high levels of corruption and informality may have restricted the demand for performance information. Corruption hinders the demand for performance information, because public sector officials and civil servants tend to make decisions mainly based on an assessment of their personal gains, rather than on an assessment of the influence on organisational performance. Furthermore, as performance measurement systems are formal systems, in a context of high informality, they can be expected to have a predominantly ceremonial role. This would imply that there is a formal demand to produce performance information, but the actual use of this information is limited. The performance measurement systems are then decoupled from everyday practice, or there is a loose coupling between these systems and the organisations’ decisions and activities (Uddin and Hopper, 2003, p. 744).

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In recent years, however, the demand for performance information seems to be increasing. This increasing demand is related to external pressures on public sector organisations that encourage them to focus more on performance. These pressures may come from parties outside the public sector (e.g. donors; see for instance: Hoque and Hopper, 1997, p. 131) as well as parties within the public sector (e.g. central government). The external pressures can have both a direct and an indirect effect on the demand for performance information. The direct effect implies that external stakeholders demand performance information to assess an organisation’s performance and to hold it accountable for this performance; the indirect effect implies that external stakeholders require the organisation to improve its performance, which may motivate internal stakeholders to demand performance information for internal management. The influence of funding agencies, for example, may operate through both mechanisms, as these agencies encourage the recipient countries both to account for and to improve their performance (Smoke, 2001). Both, the direct effect and the indirect effect can be linked to the public sector reforms that were discussed in Section 3. For a number a reasons, these reforms can be expected to give rise to an increasing demand for performance information. First of all, after the implementation of a decentralisation programme, central government may require lower-level governmental organisations to have a good performance (indirect effect) and to report on their performance (direct effect). Lower level governments that do not meet these requirements face the risk of losing their authority. Another characteristic of the reforms which induces a demand for performance information is marketisation. One aspect of marketisation – namely benchmarking – leads by definition to a demand for performance information (direct effect). But also other aspects, such as contract management and public-private partnerships, are likely to lead to such a demand; namely, a demand for performance information that can be used to assess whether the parties involved have lived up to the agreements that were made (direct effect). Moreover, marketisation also decreases the power positions of a public sector organisation’s bureaucrats and increases the power position of its clients (Sanderson, 2001). This, together with the introduction of general elections, implies that public sector organisations must pay more attention to their clients’ and voters’ satisfaction. This can be achieved by improving performance, for example through the use of performance information for internal management (indirect effect). Moreover, also clients and voters may demand information about organisations’ performance achievement in order to make more informed decisions about which service provider to select and what to vote (direct effect). A final aspect of the public sector reforms that explains the increasing demand for performance information is the anti-corruption programs. The donors that support such programs have several requirements to combat corruption, such as transparency and accountability (Leeuw et al., 1998). To meet these requirements, performance information seems to be an important instrument (direct effect). 4.2 Supply of performance information It can be expected that the supply of performance information by public sector organisations in developing countries was, and probably is, rather limited. Given the low level of stakeholder involvement, there was not much pressure from stakeholders to provide adequate performance information. Most likely, public sector organisations provided performance information only to a restricted number of powerful stakeholders, such as the

House of Representatives. Nowadays, however, the involvement of some stakeholders, including central government and certain donors, is increasing. As we have seen in Section 4.1, this gives rise to an increasing demand for performance information. In most developing countries, however, it seems quite difficult to satisfy this increasing demand for performance information. Apart from the more general complications in PSPM that were discussed in Section 2, also the specific characteristics of the public sector in developing countries are important here. More precisely, both the low-institutional capacity and the high level of corruption can be expected to keep the quantity and the quality of the performance information that is supplied at a low level. The low-institutional capacity affects the supply of performance information in two manners. On the one hand, it implies that organisations lack the human resources and facilities that are needed to produce (high quality) performance information. On the other hand, the low-institutional capacity may provide some stakeholders with incentives to hide the organisation’s failures by deliberately limiting the supply of performance information. In other words, public sector organisations may be reluctant to share performance information, because they are afraid that their internal failures will become public knowledge (Bell, 1996, p. 94). For the same reason, corruption may restrict the supply of performance information. That is, public sector officials and civil servants who are involved in corruption do not have a strong interest in being accountable to other parties (Caiden and Sundaram, 2004). We can therefore conclude that specific characteristics of the public sector in developing countries, and recent reforms of this sector, can be expected to have contradictory implications for PSPM in these countries. More precisely, it is likely that nowadays there is a mismatch between the supply of and demand for public sector performance information in many developing countries. Recent public sector reforms give rise to an increasing demand for performance information, but it is quite difficult to have this increasing demand followed by a sufficient supply of performance information. The unbalanced position between the demand for and supply of performance information will put public sector organisations in a disequilibrium position; namely, a situation of unsatisfied demand. Despite the difficulties in supplying performance information, several developing countries have tried to improve the supply of performance information. Some countries have focused their attention on the quantity of performance information. In Bangladesh, India, Nepal, Pakistan and Sri Lanka, for example, governmental organisations have tried to enlarge the scope of their performance measurement system by introducing indicators on growth, efficiency, competition, entrepreneurship, value-for-money and customer orientation (Haque, 2001, pp. 1419-20). These South Asian countries have used these performance indicators to justify recent changes in their governance structure. Other countries have focused their attention on improving the quality of their performance indicators; for example, by replacing rather vague indicators with more specific ones. Singapore, for instance, tried to achieve improvements by identifying more specific output quality indicators and by reducing the number of inappropriate indicators (Jones, 2000, p. 131). 5. Conclusions and research agenda This paper examined whether in a developing country context a balance between the supply of and demand for performance information is likely to occur. The paper argues

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that public sector organisations in developing countries are likely to face an unbalanced position; that is, disequilibrium between the demand for and supply of performance information. Public sector reforms are expected to lead to an increasing demand for performance information, which is not always followed by a sufficient supply of performance information. This leads to – what we have called – a situation of “unsatisfied demand.” This final section of the paper concludes with an overview of our arguments, for which Figure 1 is shown. It also emphasises the need to deepen the insights provided in this paper, which leads to a challenging agenda for future research. Next to other features, developing countries are characterized by a low level of average income per inhabitant. This characteristic has at least the following implications for the public sector in these countries. Because of the low-income level, the public sector cannot raise sufficient resources for an institutional capacity that can contribute to good governance and a reasonable level of organisational performance. Moreover, related to the absence of good governance, the control system of public sector organisations in developing countries is, generally speaking, rather weak. This aspect, combined with a large gap between the needs and incomes of public sector officials and civil servants, is regarded as an important source for both corruption and informality. These implications of a low-income level are obstacles for the supply of performance information. As Figure 1 shows, insufficient resources will limit the institutional capacity for providing adequate performance information. Similar effects will come from the high levels of corruption and informality. Historically, the involvement of stakeholders in the public sector of developing countries was low. As a result, the demand for performance information in these countries used to be rather limited. Also the high levels of corruption and informality contributed to this situation. However, Figure 1 shows factors that have recently stimulated the demand for performance information. An important factor is the financial support provided by funding agencies and NGOs. This financial support often goes alongside with requirements for reform, including a decentralisation of responsibilities to lower governmental layers, a marketisation of the public sector, the implementation of anti-corruption programmes, and the introduction of general elections. Next to the impacts of donors, public sector organisations in developing countries can relatively autonomously start such reforms, also because of their wish to improve the current state of poverty. The public sector reforms, which are aimed at good governance and improved organisational performance, are likely to stimulate the demand for performance information. However, we expect that the increased demand for performance information will not always be followed by an according rise in the supply of this information. This expectation is based on our observation that the main factors that limit this supply will not change significantly. At this point, it should be noted that the above line of reasoning does not capture various aspects and relationships that can be observed in practice. Consequently, some of our assertions could be violated by contrasting impacts. Moreover, our assertions are formulated in very general terms, which ask for more nuance and elaboration. Therefore, an interesting research agenda emerges from our literature review.

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Figure 1. Overview of factors influencing the demand for and supply of performance information in developing countries

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First, in which circumstances will the influence of the factors that stimulate the demand for performance information be followed by factors that stimulate the supply of performance information? The support of funding agencies and NGOs might, for instance, improve the income level of the inhabitants in developing countries directly, which could mitigate the influences of the above-indicated factors that hinder the supply of performance information. That is, a higher income level will probably decrease the levels of corruption and informality, and it will also increase the resources that are available for improving the institutional capacity. Whether these impacts are strong enough to attain an equilibrium position is an interesting research issue. Another example concerns the possible effects of marketisation on the supply of performance information. Marketisation strengthens the power positions of public sector organisations’ clients (as a specific form of stakeholder involvement). More powerful clients are expected to put more pressure on public sector organisations’ accountability, and this could increase the supply of client-oriented performance information. Second, which circumstances explain why there are partial equilibrium positions for some types of performance information, which are demanded by certain stakeholders and supplied by the organisation, while at the same time and within the same organisation other areas are characterized by a situation of unsatisfied demand for or excess production of performance information? Until now we only very roughly classified an organisation’s position as either equilibrium or a disequilibrium position, but an organisation’s position might differ across relationships between the organisation and its stakeholders and across performance areas. Such differences might be due to differences in the power positions of stakeholders. Another explanation might be that in some performance areas it is easier to develop performance indicators and quantify performance than in other areas. Third, under which circumstances will external pressures lead to a demand for performance information for internal management (i.e. for decision making and control)? It can be expected that the incentives to use performance information for internal management are not very strong if external stakeholders’ demand for information on certain performance indicators is not supplemented with pressures to establish and attain ambitious target levels for these indicators. Fourth, how do historical and cultural circumstances influence the supply of and demand for performance information in a particular country or region? If a developing country has, for example, a long history of producing and using certain types of performance information because of traditions that date from earlier periods of colonization, this can explain higher levels of demand and supply than the levels observed in other countries. Also, cultural aspects such as religion may influence the demand for and supply of specific types of performance information. Finally, also more pragmatic questions are interesting. For instance, which sets of performance indicators are simple but effective? Here, simplicity refers to both the content of the indicators (straightforwardly related to important organisational objectives) and the opportunities to measure them relatively easily. Generally speaking, there is a need for simplicity because of the low-institutional capacity. Figure 1 shows several links between various variables, but this does not imply that other links do not exist or cannot be activated by public sector organisations or their stakeholders. Despite this limitation, our paper captures several impacts of important

characteristics of public sector organisations in developing countries on the demand for and supply of performance information. But, our research agenda shows that much work has to be done in this largely uncovered field of academic research. We hope that our paper will be a valuable starting point for that type of research.

Public sector performance measurement

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Community-led initiatives: reforms for better accountability?

Community-led initiatives

Godwin Awio Uganda Ministry of Health/AIDS Commission, Kampala, Uganda and Auckland University of Technology, Auckland, New Zealand

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Stewart Lawrence Waikato Management School, University of Waikato, Hamilton, New Zealand, and

Deryl Northcott Faculty of Business, Auckland University of Technology, Auckland, New Zealand Abstract Purpose – This paper sets out to contrast the ubiquitous, globalizing influence of new public management (NPM) with an alternative approach more attuned to the local needs of communities, especially those with health and economic problems in less-developed countries. The Ugandan Community-led HIV/AIDS Initiative is drawn on to contrast the operation of “bottom-up” accountability – whereby the deliverers of public services are accountable primarily to the communities they serve – with the usual expectations of an NPM model, which instead focuses on holding public sector managers accountable to their political masters. Design/methodology/approach – A hermeneutics approach is adopted to interpret evidence from: government policy documents; interactions and interviews with public sector actors at national, district and community levels; and one author’s own pre-understanding from his role with the Uganda AIDS Commission. Findings – This Ugandan illustration suggests potential benefits from importing workable aspects of NPM reforms while at the same time exploring other service delivery and accountability options that fit the needs of target communities in less-developed countries. Research limitations/implications – Uganda’s adoption of the outlined community-led approach has important implications for the (ir)relevance debate around NPM reforms in developing countries. However, as this paper is based on a single initiative in one country, it represents only a first step towards understanding the potential for innovative public sector models to add value in developing countries. Practical implications – The findings point to community-led approaches, such as those adopted in Uganda, as a promising alternative to NPM models for improving public service delivery and financial accountability in less-developed countries. Originality/value – Communitarian and social capital theoretical perspectives are drawn on to analyse novel public sector management and accountability mechanisms and compare the findings with dominant NPM perspectives. The research context contributes new understanding of how NPM reforms might be adapted and supplemented to benefit developing nations. Keywords Public sector reform, Public administration, Social policy, Uganda, Health services Paper type Research paper

1. Introduction New public management (NPM) reforms have come to enjoy a ubiquitous, globalizing influence on national public sectors around the world (Guthrie et al., 2005). As less-developed nations search for ways to improve the effectiveness, efficiency and

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accountability of their public sectors, the set of doctrines and financial management techniques encapsulated in developed nations’ NPM reforms has appeared as a promising and attractive solution to emulate. However, the relevance and usefulness of NPM-style reforms for less-developed countries remains a point of debate (Bale and Dale, 1998; Schick, 1998; Batley and Larbi, 2004). This paper contrasts NPM with an alternative approach that is more attuned to the local needs of communities, especially those with health and economic problems in less-developed countries. It describes how an alternative approach to NPM, one based on community response, has emerged in Uganda. The Ugandan Community-led HIV/AIDS Initiative, or “CHAI” (outlined later), is drawn on to examine the potential for communitarian, social capital-driven approaches to supplement or replace NPM-style reforms in improving public sector management and accountability in less-developed countries. In particular, the paper examines how the Ugandan CHAI approach relies on a very different mechanism to achieve accountability for expenditure on health-related public services. As will be outlined, the CHAI system aims to promote “bottom-up” accountability, whereby the deliverers of public services are accountable primarily to the communities they serve. The argument is that service-receiving citizens, rather than any overseeing government authority, are best placed to observe and monitor the day-to-day performance of service providers. This notion of “bottom-up” accountability stands in contrast to the usual expectations of an NPM public sector management model, which instead focuses on holding the managers of public sector service delivery accountable to their higher political masters. The remainder of this paper is structured as follows. The next section briefly describes the research method. This is followed by an outline of the benefits and changes expected under NPM reforms. An outline of Uganda’s public sector reform experience is then presented, followed by a description of Uganda’s community HIV/AIDS response – a spin-off from NPM that is grounded in the same intentions. Then, the literature on communitarian approaches is drawn on to locate Uganda’s community HIV/AIDS initiative in the social capital driven, “bottom-up” accountability paradigm. The conclusions reflect on NPM approaches and suggest a community-led response as a potential alternative for developing countries. 2. Research methodology The research method adopted in this study is informed by the theory of hermeneutics. Hermeneutics is often described as a “theory of interpretation” (Llewellyn, 1993, p. 235). It is an approach that aims to infer the meaning of events or phenomena occurring in the social world, in order to understand them. There are many hermeneutics approaches and the choice of any particular approach must depend on the field of study and the research objective. Fundamental to hermeneutic theory is the conception of the hermeneutic circle, which describes a connection between the whole and parts of the social phenomenon being researched. For example, the meaning of a social practice in a community is influenced by the researcher’s definitions of the community (whole) and stakeholder groups (parts) which the researcher assumes to represent the community. The researcher is not separate from the interpretation, but a part of it. In this research, the articulated beliefs and values of a stakeholder group (such as a community group involved in an HIV/AIDS initiative)

can be understood with reference to the historical, socioeconomic background of the broader community and its values. Interpretation involves pre-understanding. The outcome of the interpretive process is regarded by Llewellyn (1993) as being mediated by the researcher who is trying to make sense of the situation. The fact that one of the authors is employed by the Uganda AIDS Commission (UAC), the entity that coordinates Uganda community-led initiatives, enhanced pre-understanding and enriched the interpretive endeavor[1]. It also facilitated the location and retrieval of relevant Ugandan documents[2], and the identification of local community groups and hierarchical levels within relevant organisations. Archival evidence and interactions between one of the authors and the identified relevant organizations were the principal data sources. Interactions with key actors at national, district and community levels of the Uganda public sector took place over a period of five months from November 2005 to March 2006. A total of 67 interviews were conducted with seven respondents at national health ministry level, 30 at district level and another 30 at community level. The documents and oral accounts obtained were reviewed by the authors within the hermeneutic lens. While the focus of this paper lies at the level of policy rather than the detailed practices and experiences of project participants, the interview findings were drawn on to inform the authors’ understanding of how the Ugandan CHAI initiative operates. Before presenting the key interpretations, the next section presents some necessary, general background to public sector reforms that is essential to the purpose of this paper. 3. New public management reforms Many states, including developing countries, have looked to NPM reforms as solution to the endemic problems that confront their public sectors. Whereas universally the reforms have been driven by a number of generic economic and political factors (Broadbent and Guthrie, 1992; Hood, 1995; Pollit and Bouckaert, 2000; Nolan, 2001), international creditor institutions and donor agencies have also promoted and directed NPM reforms in developing countries (Ayeni, 2002). NPM reforms have appealed to governments because of their many acclaimed benefits, including improvements in efficiency, effectiveness and accountability in the public sector. The reforms were also expected to engender greater public service responsiveness and increased choice of providers (both public and private) of public services (Olson et al., 1998). The central features of NPM have been said to include: a shift in emphasis from process accountability (input controls, bureaucratic procedures, rules and standards) to accountability for results (quantifiable outcomes, measures and performance targets); devolution of management control; the development of improved reporting, monitoring and accountability mechanisms; and increased emphasis on cost-cutting and efficiency (Hood, 1995; Boston et al., 1996; Hoque and Moll, 2001; Batley and Larbi, 2004). In order to achieve the above expectations, wide-ranging structural, functional and process changes had to be made in the public sectors of NPM-adopting nations. The case of New Zealand, a country often held up as an NPM reform leader and role model (Humphrey et al., 2005), is drawn on here to illustrate a typical NPM reform approach. In New Zealand, the nature of these changes depended on whether a departmental function was deemed core. Most public sector trading enterprises were restructured into entities run along commercial lines (i.e. corporatised)

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and were subsequently privatized (Boston et al., 1996). The remaining core government departments were restructured around the distinction of government as purchaser and owner. For example, in the hospital system a functional duality was introduced – Regional Health Authorities were designated to receive funds and “purchase” health services from the public provider, crown health enterprises, and each regional health authority had the option to buy services from the private sector (Jacobs, 1997). Associated with this restructuring was an increased emphasis on accounting procedures drawn from the private sector, the intrusion of which has been likened to an introduced illness in the New Zealand health sector (Lawrence, 2005). In addition to health reforms, another important structural change resulting from New Zealand NPM reforms was decentralization to local authorities of some public sector functions (e.g. the management of natural resources) and specified regulatory functions (e.g. crime prevention) (Boston et al., 1996). Human resource management and financial management have been the key public sector functional areas to be impacted by NPM reforms. In the New Zealand case, the organization of performance incentives was comprehensively repackaged. This involved the design of multi-level contracts between government ministers and departments and with departmental chief executives. The contracts established clear lines of accountability, and explicitly defined performance targets and how they were to be measured and monitored. The chief executives were greatly empowered with increased delegated authority, ranging from taking decisions on service delivery input mixes (capital and operating resources) to the engagement and termination of subordinate staff contracts (Bale and Dale, 1998). The quest for improved financial management has been an important driver of public management reforms (Olson et al., 1998). Internationally, several key aspects of public sector financial management reforms have emerged. First, changes in reporting systems have led to the adoption of accrual-based reporting and increased compliance with professionally set accounting standards. Adoption of accrual accounting was expected to raise the financial awareness and accountability of public sector managers. For example, under accrual management systems and accrual financial reporting, recognition of the periodic consumption of capital assets such as vehicles and buildings was expected to stimulate managers to make more efficient use of these resources (Guthrie, 1998). Budgeting has been another area of fundamental change under financial management reforms. The budgeting function moved to the forefront of financial management and linked closely with other processes such as planning, operational management and performance measurement. NPM-driven budgeting had two aims – to restrain growth in public expenditure and to secure greater efficiency and effectiveness of resource use (Pollit and Bouckaert, 2000). Although budgeting had traditionally contributed to these aims, the new regime expanded the scope and purpose of budgeting. These new roles of budgeting have been realized through deliberate, selective budget cuts (usually by Finance Ministries) and via the use of “block budgeting”. Under block budgeting, the prioritization of expenditure and budget allocations is the direct responsibility of local managers and is clearly linked to the reporting of results. A shift towards market-oriented systems and structures is another area of NPM reforms that has impacted the financial management function. The main changes include new contractual relationships and performance measurement systems.

The new performance metrics focus on: inputs – the resources used to produce goods and services by departments; outputs – the goods and services so produced; and outcomes – the impacts or consequences for society of activities of government. In order to secure effective accountability, departmental executives have been made responsible for outputs, whose result they can control, while ministers are accountable for outcomes since it is their job to determine and procure an appropriate mix of outputs (Bale and Dale, 1998). Another notable change has been an expansion in the scope of audits to encompass monitoring of service delivery functionality, including value-for-money assessments (Boston et al., 1996). All of these NPM-driven reforms to public sector financial management practices have been expected to enhance, amongst other things, the accountability of public sector managers to their political masters and, ultimately, to the public. In developing countries, where a lack of financial accountability is often seen as a barrier to effective public sector management (Batley and Larbi, 2004; Deininger and Mpuga, 2005), the expectation of improved accountability is particularly attractive. Consequently, NPM-style reforms have been attempted in several developing countries, including Uganda (Ayeni, 2002). The next section outlines the public sector reforms that took place in Uganda, as a background for examining the Community-led HIV/AIDS Programme that forms the focus of this paper. 4. Reforms in Uganda Uganda’s NPM-inspired public sector reforms started in the 1980s. The main reform agenda areas comprised macroeconomic stabilisation, growth of the private sector, and poverty eradication (Ministry of Public Service (MPS, 1997)). The mainstay of the public sector reforms was the Public Service Review Programme (PSRP) that commenced in 1988. The PSRP was activated through the establishment of a legally empowered body, the Public Service Review and Re-organization Commission (PSRRC). The PSRRC was charged with identifying the key reform issues that underpinned the above reform agenda areas. Its terms of reference included reviews of personnel management issues, accountability and financial management issues, and structures of government (MPS, 1997). The PSRRC made wide-ranging recommendations on governance structures and management processes. The structural changes proposed included decentralization, rationalization of government structures, and “rightsizing” the public service. On the premise that effective and efficient public services were the cornerstone of overall development and poverty eradication, many process and procedural changes were born of the reforms – including in the areas of planning, accountability and reporting. Improvements in resources management and expenditure control were expected to flow from improved procedures, greater use of information technology and improvements in audit practices. In the human resource function a so-called “results-oriented management system” which assesses the performance of civil servants based on the delivery of outputs specified in budgets, was introduced in 1998 and was expected to improve accountability, transparency and service provision. The planning function was re-directed by the 1997 introduction of a policy instrument, the Poverty Eradication Action Plan (PEAP), an overarching national planning framework that placed poverty eradication as the central goal of government. The PEAP evolved from a comprehensive consultative process with stakeholders and aimed to improve the coordination and efficacy of national planning. It recognized that

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program outcomes for all key sectors had implications for reducing poverty. For example, it argued that “health and education contribute not only to increasing quality of life but also to raising incomes” (Ministry of Finance and Economic Planning (MOFP, 2001, p. 5)). The Uganda PEAP has, since its adoption, provided the framework of policy and program designs for key public sector areas such as health. The first PEAP was rolled out in 1997 and revised in 2001 and 2004. The most recent PEAP has five inter-related goals: (1) to achieve rapid and sustainable economic growth; (2) to improve on security and conflict resolution; (3) to achieve good governance in terms of enhanced accountability, transparency of public actions and the fight against corruption; (4) to increase the ability of the poor to raise income; and (5) human development (MOFP, 2001, pp. 4-5; MOFP, 2004, p. xv-xxvi). The third PEAP goal acknowledges “bottom-up” accountability as one of the ways of improving public services. It notes: The failures of service delivery which most directly affect the poor are on the ground – the incompetence or corruption of a particular health worker or police officer, for instance. These issues can only be addressed by bottom-up accountability, since only the users of the service can observe how a particular official is performing on a daily basis. Mechanisms are therefore needed to make deliverers of public services accountable to the people they serve (MOFP, 2001, p. 91).

This notion of “bottom-up” accountability by service providers to their constituent populations stands in contrast to the usual expectations of an NPM public sector management model, which instead focuses on holding the managers of public sector service delivery accountable to their higher political masters. Such a reorientation of accountability notions underpins the development of a community-led initiative that was born of the PEAP framework as a response to problems created by Uganda’s devastating AIDS epidemic. The next section describes the development, implementation and accountability implications of this initiative. 5. The community-led HIV/AIDS initiative (CHAI) The Uganda CHAI was developed in line with the National Strategic Framework on HIV/AIDS, a PEAP-consistent sectoral policy and planning instrument. The CHAI approach is therefore a derivative of Uganda’s broader NPM-oriented public sector reforms. 5.1 Background A structured public sector response to HIV/AIDS commenced 1986 under the direction of the Ministry of Health. As it became starkly apparent the government and other stakeholders that HIV/AIDS had causes and consequences beyond the health sector, the UAC was established in 1992 with responsibilities, among others, to coordinate and mobilize project implementers (including government sectors, districts, communities and non-government organizations (NGOs)) and other stakeholders in the fight against

the pandemic (UAC, 2004a, b). The UAC has advocated a multi-sectoral approach[3] to program designs and implementation, guided by the National Strategic Framework for HIV/AIDS activities in Uganda. In 2001 the Uganda Government, with funding from the World Bank, started a multi-sectoral public sector program of intervention, called the Uganda HIV/AIDS Control Project (UACP), with an implementation timeframe of five years. In line with the National Strategic Framework, the project has three objectives: preventing the further spread of HIV/AIDs; mitigation of health and socio-economic impacts of HIV/AIDS; and strengthening the national capacity to respond to the epidemic (UACP, 2001b). The project has three component levels of implementation: (1) A national component – interventions implemented by line ministries, national level Civil Society Organizations[4] (CSOs) and the private sector. (2) A district component – activities implemented at the district level by district level sectors (e.g. education, health, agriculture), district level CSOs and the private sector. (3) A community component – programmes directly planned, implemented and reported on by organized community groups. This component is the focus of this paper. 5.2 The case for community-led HIV/AIDS initiatives The CHAI was designed to empower communities to directly manage HIV/AIDS programmes that fell within their competencies. The rationale for this initiative was stated as follows: Most of the current or ongoing HIV/AIDS interventions in Uganda were designed without total regard for community needs and priorities, hence compelling many of them to perceive the fight against the AIDS epidemic as a responsibility of health and community workers. As a result, a significant portion of the resources is being spent on services which communities consider inappropriate for addressing their AIDS problems. The CHAI sub-component aims at enabling rural communities to better appreciate and tackle the HIV/AIDS problem, and access socioeconomic services that are demand-driven or relevant to their needs through training and funding initiatives originated and implemented by themselves (UACP, 2001b, p. 1).

Under the CHAI programme, a community is defined as “a group of persons having ongoing interaction and a common or similar interest related to HIV/AIDS, which they wish to undertake on their own” (UACP, 2001b, p. 1). It is noteworthy that this definition emphasizes community interest rather than geographical boundaries. Whereas a community subproject typically has a membership of 10-40 people, the number of beneficiaries can run to hundreds (e.g. if the core activity is orphan support) or thousands (e.g. if the core activity is AIDS awareness) (UACP, 2001b). 5.3 Institutional structure Figure 1 shows the structure of the CHAI framework and process relationships with other governance organs. The institutions represented in the left and right columns of the diagram play facilitative, support and oversight roles. At levels (1) and (2) the parish and sub-county technical planning committees receive copies of approved community sub-projects for

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Implementation and Technical Support

Parish Council

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LC III /Sub-county Council

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Planning and Appraisal Processes

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Uganda AIDS Commission / National Programme Office

Figure 1. Institutional structure for implementing and supervising the Uganda CHAI

Consultation and information flow including linkages at each level Hierarchical linkages by functions at each level Source: UACP, 2001b, p.6

information and subsequent monitoring. These two levels have no direct role in approval processes for community projects, however. The UAC, in line with government’s decentralization policy, provides policy and technical support to district and community subprojects. The districts are responsible for routine direction and supervision of the CHAI programmes. The District HIV/AIDS Committee (DAC), a subcommittee of the district technical committee, is the responsible district level authority; it also carries out the key tasks of field and desk appraisal of community sub-projects and has the authority to approve subprojects that meet established criteria (UACP, 2001b, p. 8). The routine management functions of a community group are delegated to the Community Project Committee (CPC), an elected body of seven members. Three of these members constitute the executive committee – the chairperson, secretary and treasurer. 5.4 Conception and approval A community sub-project goes through several initiation phases (UACP, 2001b). The first stage is “mobilization” which involves creating awareness of the community programme objectives and processes. Mobilization includes the use of radio and other

advertisements as well as targeted approaches to politicians, opinion leaders, district level departments and CSOs. As part of the mobilization phase, trained community facilitators are at hand to help communities get organized, define and prioritize their needs in a participatory way, and apply for funding. The next initiation phase is “desk appraisal” by a committee of DAC. This process involves assessment of the eligibility and feasibility of sub-project proposals against pre-set criteria, the most important being: expected benefit to the community; evidence of community contribution; evidence of participation in identification of the problems and prioritization of solutions by the community members, and; indicators of sustainability of the proposed programme. Each criterion carries points, so that an application scoring more than a specific minimum pass mark will qualify for the next stage, field appraisal. “Field appraisal” is also performed by members of DAC and aims at verifying information in the applications that pass desk review. Corroborative information is generated through discussion and interviews with potential beneficiary community members and other stakeholders in the sub-project locality. The appraisers evaluate issues that include: whether stated beneficiaries are the true target groups of the CHAI; whether a sub-project is a priority need of the community, and; confirming that the beneficiaries did undertake a participative planning process to identify respective sub-projects and activities and to elect the CPC. Community proposals that pass field appraisal are subsequently approved by the DAC. Administrative processes, including signing an agreement between the district and CHAI groups, precede the funding and direct implementation of the community programs. 5.5 Implementation processes Prior to the implementation of a community-led project, the CPC members are trained in simple management skills including participatory planning processes, administration, bookkeeping and financial management. Community group members contribute to the management of all the key processes of service delivery, participating in: planning and budgeting for activities, cash flow management, implementation of approved activities, monitoring and reporting. Supporting supervision is provided by DAC and district level NGOs. The design of the community projects criteria anticipated the limitations that exist in community skills and capabilities. Therefore, certain activities are ineligible for financing because they require expertise beyond that present in the community. On the other hand communities have, out of participatory planning processes, come up with many activities that lie outside the predetermined set of eligible projects. These are approved provided they are consistent with the overall national programme objectives and lie within the competence of the relevant community groups. Examples of eligible activities include: community mobilization, advocacy and sensitizations on various HIV/AIDS issues; the education of orphans, including payments for school fees, food, uniforms and scholastic materials; and small-scale civil works such as construction or renovation of day care centres. Ineligible activities deemed to be outside the competence of communities include: HIV diagnosis and screening; the construction or renovation of medical service facilities; and clinical management of sexually transmitted diseases, AIDS and associated infections.

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5.6 Accountability relationships The CPC is accountable to sub-project members, usually via reporting to regular group meetings, which are usually held monthly (UACP, 2001b). A key role of the CPC is to coordinate, plan and manage the implementation of community sub-projects. Other roles include providing information to members on implementation progress; preparing and submitting progress reports, and the overall management of sub-project funds. The community groups account to stakeholders in multiple ways, including written reports, oral briefs during local council and church meetings, and informal information sharing during the course of executing planned activities. Institutions reported to include parish councils, sub-counties and district local governments. These institutions form the focus of formal accountability, requiring from community groups the regular submission of written financial and progress reports. However, in practice less formal, mainly oral, mechanisms of reporting to community members and service stakeholders are an equally important part of the accountability mechanisms implicit in these community-led projects. As is appropriate in a nation where many communities have low-literacy rates, individuals and committees responsible for implementing CHAI activities are expected to render oral reports at local forums such as council and church meetings. These reporting occasions allow community members to exact direct public accountability from CPC representatives by questioning them on their decisions and actions. In this way, strong and transparent accountability is achieved via an informal, but highly interactive, two-way process. This tangible and immediate “bottom-up” accountability is reinforced by the trust relations and expectations (social capital) that bind the CPC representatives within their communities. As a result, oral reporting presents CHAI project leaders with as potent an incentive for good performance as any formal, accountability requirements imposed by government funding authorities. 6. CHAI: an example of a communitarian paradigm? Many avenues of community involvement exist for the delivery of health-related services in developing countries. These include participation through decentralized governance structures (World Bank, 2000; Craig, 2001), non-governmental organizations (NGOs) (Najam, 1996; Narayan et al., 2000; Haque, 2004), social funds (White, 2002), associations and voluntary organizations (Putnam, 1993; Wallis et al., 2004) and community-based organizations (CBOs) (Edwards and Hulme, 1992). Uganda’s community-led HIV/AIDS approach, a comprehensive community involvement initiative, represents a new chapter of community involvement. The extent and methods of community involvement in service delivery are the significant differentiating factors between alternative modes of participation. These criteria set Uganda’s CHAI initiatives apart from other approaches. The CHAI initiatives comprehensively involve community groups in the management of service delivery. As described in the preceding section, community group members directly participate in the conception and identification of programme activities, planning, implementation, accountability and reporting. Social capital is held to drive such communitarian groups and engenders achievement of service delivery outcomes like accountability, efficiency and effectiveness (Paldam, 2000; Woolcock and Narayan, 2000; Fukuyama, 2001; Wallis and Dollery, 2001; Ackerman, 2004; Wallis et al., 2004). Social capital has been defined

in many ways. According to Portes (1998, p. 3), the first systematic contemporary analysis of social capital was produced by Bourdieu (1986 p. 248), who defined the concept as “the aggregate of the actual or potential resources which are linked to possession of a durable network of more or less institutionalized relationships of mutual acquaintance or recognition”. It involves a network of relationships and the identification an individual has within the network. In this paper, it is understood as a resource that arises through the existence of a set of informal values or norms shared among members of a group that permits active cooperation among them. Social capital is both the medium and the outcome of communicative activities associated with communitarian forms of accountability. It is also suggested that communitarian constructs may better enforce the delivery of social and environmental accountability by economic entities. This superior outcome is attributed to the pursuit of common interests by communitarian groups, in contrast to the characteristic pursuit of self-interest by corporate citizens (Lehman, 1999). Elsewhere, many instances demonstrate that communitarian groups, enabled by social capital, deliver superior outcomes in terms of public sector goods and services. For example, a study of 60 Indian villages found a positive relationship between social capital and public sector program performance (Krishna, 2001). Also, Coleman (1988) attributed a substantial reduction in school drop out rates to the building of stocks of social capital within and between communities. Social capital was also found to drive successful irrigation governance and management in Taiwan through enabling a synergistic relationship between farmers’ groups and government officials (Lam, 1996) and to improve access to health care services by poor communities on the Ivory Coast (Aye et al., 2002). Social capital has similarly propelled the evolution and operation of Uganda’s community-led HIV/AIDs programmes. The direct involvement of communities in CHAI sub-projects clearly signals the relevance of SC in binding together community groups in the pursuit of shared social goals. It is reasonable to hypothesize that the deeper and more comprehensive extent and methods of involvement of communities under the CHAI Programme will help to build social capital and, therefore, lead to improved accountability and other resources management outcomes. A rich domain for future research lies in examining the progress and outcomes of CHAI sub-projects, to determine whether the promise offered by communitarian modes of service delivery and accountability is, in fact, realized. 7. The community-led approach and new public management As argued above, the CHAI represents a communitarian archetype for building accountability and other resources management outcomes. Whereas communitarian and NPM approaches share some commonalities, fundamental contrasts do exist. This section examines those features that define and shape service delivery outcomes under the two structural arrangements. The objectives of improving accountability, efficiency and effectiveness in the public sector are key areas of commonality of communitarian and NPM approaches. This convergence suggests that the two approaches should share some design features aimed at accomplishing these improvements. In some regards, this is indeed the case. For example, output accounting, rather than traditional, public sector input accounting, has been adopted under both NPM reforms (Hood, 1995; Pollit and Bouckaert, 2000; Nolan, 2001), and the communitarian CHAI approach.

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However, fundamental contrasts exist in the two service delivery approaches; the significant ones are discussed in this section. The over-arching difference lies in the accountability relationships. The CHAI delivery mechanism is a “bottom-up” accountability arrangement powered by social capital, whereas NPM reforms favour “top-down” arrangements, founded on a mix of market and government failure principles. Implicit in the communitarian service-delivery approach is the expectation that the pursuit of common interest (based on trust – a key element of social capital), drives the community groups. Conversely, NPM approaches are based on an assumption of mistrust, and incorporate agency theory principles (Newberry and Pallot, 2004) to enforce goal congruent behaviour and achieve service delivery. It has been argued that social accountability is better delivered with the engagement of communitarian efforts, rather than by relying on self-policing by corporate citizens which, in the face of self-interested behaviour, is ineffective in achieving accountability (Lehman, 1999). The status of accounting techniques and tools under the two service delivery paradigms exhibits marked variation. In an NPM regime, modern accounting techniques, enhanced by developments in computer technologies, are central to service costing and the evaluation of programme outcomes delivered by public sector managers (Hood, 1995). These modern accounting techniques include the use of complex and demanding reporting systems, devolved financial responsibility and budgeting, and innovative, multi-dimensional performance measures. While developing countries’ engagements with NPM reforms have tended to involve relatively less complex arrangements owing to structural limitations in such countries (Schick, 1998), it is clear that Uganda’s 1993 NPM-style restructuring of many core public services, including healthcare, was expected to entail substantial modernization of accounting and accountability practices. In a move towards “ideal” NPM prescriptions, Uganda’s public financial management regulations were revised to require ministries, agencies and government departments to employ a more sophisticated combination of cash and accrual accounting for recording government transactions (MOFP, 2003, p. 79). This modernization of accounting practices was coupled with a progressive computerization of accounts at both central and local government levels. Further, financial management processes, such as budgeting, were decentralized and reformulated with the aim of improving transparency and accountability, and quarterly performance reporting was now required of district health authorities (Awio and Northcott, 2001). In contrast to the broader NPM-driven governmental reforms, Uganda’s CHAI approach uses basic and simple accounting techniques and procedures (UACP, 2001b). For example, cash accounting regime remains in operation, with manually maintained cash books and other memoranda drawn on as key accounting records. Budgeting entails only simple, static cost projections at the outset of a project, and formal performance reporting comprises only simple monthly expenditure reports and a brief final report submitted to the DAC at the completion of a CHAI programme (UACP, 2001a). The rationale for this is that simplicity enhances understanding for a broader community constituency and, therefore, improves engagement with basic but necessary reporting and accountability activities. Contracting arrangements are another differentiating feature of the two institutional approaches. The market principles that characterize NPM reforms entail the use of

multi-level contractual relationships. In a typical scenario, a contractual relationship exists between government (represented by relevant ministers) and its departments, and a further contract exists with departmental chief executives. Contractually specified costs, quantities and qualities of output, and delivery schedules are aimed at achieving accountability and efficiency (Olson et al., 1998). Under a communitarian approach, though contractual relationships exist between community groups and respective district governments, service delivery outcomes are assured by social capital attributes like trust and participatory networks, rather than by extensive contracts. The differences in the level and detail of contracts under the two structures also have implications for monitoring and transaction costs. The monitoring and contracting costs of “top-down” NPM accountability structures are inherently higher, and so transaction costs can reduce the efficiency[5] of service delivery (Mayston, 1993). Under the Ugandan CHAI approach, contract costs are limited and monitoring is largely voluntary with negligible direct financial costs. This suggests that, where public sector resources are scarce as in less-developed countries, the reduction of transaction costs may be an attractive feature of the communitarian approach. Perhaps, more surprisingly, the verification function (audit) differs under NPM and communitarian-style management systems. In addition to traditional financial and compliance auditing functions, NPM reforms have introduced performance auditing, which focuses on the economy, efficiency and effectiveness of resource utilization. The increased scope of auditing and sanctions embedded in performance contracts is intended to enhance accountability (Burritt and Welch, 1977). While traditional audit[6] remains important under communitarian approaches like the Ugandan CHAI, community-generated verification mechanisms are reliable complements to more formal audit mechanisms, and offer an effective alternative to the rigorous performance auditing required under an NPM regime. Such community-generated verification is made possible by the high level of participation of group members in key programme management processes, as is characteristic of Uganda’s CHAI approach. The social capital mechanism of embeddedness – i.e. the ties that connect citizens and public officials (Woolcock and Narayan, 2000) – is pronounced in the operation of Uganda CHAIs. Community mobilization and appraisal, together with supporting supervision by members of the District AIDS Committee, are key CHAI activities where embededdness is manifest. These interactions, together with community participation, enable reciprocal sharing of accurate and timely information that improves the verification of resource use and overall program outcomes. Reliability of information is assured via the trust operating in community networks, since government officials are sensitive to the opinions and sanctions of community members (Craig, 2001). Notwithstanding the above potentials of Uganda’s communitarian approach, some challenges and weaknesses are identifiable. First, the reality is that community groups have limited capacity in terms of what services they can satisfactorily perform. Such limitations were envisaged by the designers of the CHAI initiative, who identified indicative areas of service delivery appropriate for community groups: . . . the CHAI component will support HIV/AIDS activities identified and directly carried out by the community and/or contracted out by the community. The activities include those within the capacity of communities to handle. Therefore, the following interventions may qualify for CHAI funding . . . (UACP, 2001b, p. 4)

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The groups are therefore confined to those program interventions for which they have appropriate skills. This limits the potential of this community-led approach to provide a comprehensive alternative to other approaches, such as NPM, since the latter can encompass a much broader range of specialist skills and contributions. Second, the Uganda PEAP upon which the CHAI approach was founded anticipates that such bottom-up accountability structures will address the problem of corrupt practices. However, since CHAI project groups are overseen by government bodies such as the DAC, they retain a close interface with the very government structures in which corruption is thought to exist. As Llewellyn (1993) notes, the actions of agents may be shaped by the social conditions and power hierarchies within which they operate, and so the possibility that corrupt practices may filter down to influence actions and decision-making at community group level cannot be discounted. Also, while the less formal control strategies that characterize a communitarian approach are effective where social capital is strong, the comparative absence of formal control mechanisms introduces the potential for corruption when social norms and networks break down (Batley and Larbi, 2004, p. 104). Therefore, the ability of community-led initiatives to counter problems of corruption relies on the combination of strong norms and networks at community level, coupled with an appropriate distancing from the perhaps perverse norms and influences of formal, bureaucratic structures. In acknowledging the challenges facing this communitarian approach, it should be noted that respondents’ opinions on weaknesses of the CHAI groups were not explicitly solicited; the above shortcomings are inferred from “reading” the documentary evidence outlined above. Further, investigation would illuminate the issues and perhaps identify other challenges. 8. Conclusion The community-led approach illustrated in the case of the Uganda CHAI has some important implications for the (ir)relevance debate about NPM reforms in developing countries. This debate comprises three strands of opinion: (1) that NPM is irrelevant and unhelpful in the context of developing countries; (2) that NPM has great promise as a solution to public sector reform in developing countries; and (3) that some middle ground position exists, whereby elements of NPM may be usefully applied (Bale and Dale, 1998). Those opposed to the transfer of NPM doctrines argue that many conditions for NPM success are lacking in developing countries. A common view is that: . . . an important precondition for initiating reform measures, which will contribute to improved service delivery, is to ground them on a realistic assessment of present and foreseeable political and economic realities. An uncritical import or adaptation of NPM concepts, and attempts to implement them on a large-scale without trial, are very risky (Therkildsen, 2000, p. 69).

It is therefore argued that, despite the latent promise of improved financial management and accountability from NPM-style reforms, certain characteristics of less-developed countries – such as poor functioning of markets, resource scarcity and

external dependence – impede the operation of NPM reforms in this context (Therkildsen, 2000; Batley and Larbi, 2004). The “middle ground” argument, to which the authors subscribe, takes the position that many aspects of NPM can be effective in delivering benefits to less-developed countries (Schick, 1998; Bale and Dale, 1998), though they must be adapted to fit the needs and context of the target communities. The advent of the communitarian approach in Uganda, a developing country that has embraced many elements of NPM reforms, is instructive. Uganda’s adoption of the community-led approach outlined here suggests that NPM is not thought to address all the requirements necessary to support public services provision, at least for HIV/AIDS-related services, even though it may have been effective in other areas of Uganda’s public sector. This is a Gray area requiring further investigation. As is revealed by Uganda’s experiences, it appears the way forward for developing countries is to import relevant and workable aspects of NPM reforms, while at the same time exploring other options for service/programme areas that have unique circumstances. As this paper is based on a single community-led initiative (the CHAI) in one developing country and draws primarily on policy documents, it represents only a first step towards understanding the potential for innovative public sector models to add value in developing countries. It does, however, point to community-led approaches, such as those adopted in Uganda, as a promising alternative to NPM models of service delivery and financial accountability. It will be important to observe over time what these Ugandan initiatives achieve in terms of improving performance and accountability in public services, as an indication of the potential for communitarian/social capital approaches to supersede the current reliance on adopting (perhaps inappropriate) NPM approaches in developing countries. Notes 1. Godwin Awio has been Financial Controller for the Uganda Ministry of Health/AIDS Commission for the past 12 years. 2. Documents were obtained from the following Ugandan sources: Uganda Aids Commission; The Ministries of Health, Finance and Economic Planning, Gender, and Social Welfare; local government bodies; the World Bank Uganda Office; and Makerere University, Uganda. 3. This multi-sectoral approach is defined as “a policy programming strategy, which involves all sectors and sections of society in a holistic response to the HIV/AIDS epidemic” (UAC, 2004a, p. ix). 4. CSOs is a generic term that includes NGOs, faith-based organizations, and CBOs. 5. As measured by the ratio of outputs to inputs. 6. Annual audits are carried by an independent auditor general. References Ackerman, J. (2004), “Co-governance for accountability: beyond ‘exit’ and ‘voice’”, World Development, Vol. 8 No. 3, pp. 47-463. Awio, G. and Northcott, D. (2001), “Decentralization and budgeting: the Uganda health sector experience”, The International Journal of Public Sector Management, Vol. 14 No. 1, pp. 75-88.

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Jacobs, K. (1997), “The decentralization debate and accounting controls in the New Zealand public sector”, Financial Accountability & Management, Vol. 13 No. 4, pp. 331-43. Krishna, A. (2001), “Moving from the stock of social capital to the flow of benefits: the role of agency”, World Development, Vol. 29 No. 6, pp. 925-43. Lam, W.F. (1996), “Institutional design of public agencies and co-production: a study of irrigation associations in Taiwan”, World Development, Vol. 24 No. 6, pp. 1039-54. Lawrence, S.R. (2005), “Performance measures and cost containment in the New Zealand health sector: a case of iatrogenic disorder”, Australian Accounting Review, Vol. 15 No. 3, pp. 4-14. Lehman, G. (1999), “Disclosing new worlds: a role for social and environmental accounting and auditing”, Accounting, Organizations and Society, Vol. 24 No. 3, pp. 217-41. Llewellyn, S. (1993), “Working in hermeneutic circles in management accounting research: some implications and applications”, Management Accounting Research, Vol. 4 No. 3, pp. 231-49. Mayston, D. (1993), “Principals, agents and the economics of accountability in the new public sector accounting”, Auditing and Accountability Journal, Vol. 6 No. 3, pp. 68-96. MOFP (2001), Poverty Eradication Action Plan, 2001-2003,Vol. 1, Ministry of Finance and Economic Planning, Government Printers, Entebbe. MOFP (2003), Treasury Accounting Instructions, Ministry of Finance and Economic Planning, Government Printers, Entebbe. MOFP (2004), Poverty Eradication Action Plan, 2004/2005 – 2007/2008,Vol. 1, Ministry of Finance and Economic Planning, Government Printers, Entebbe. MPS (1997), Public Service Reform Program, 1997-2002, Ministry of Public Service, Government Printers, Entebbe. Najam, A. (1996), “NGO accountability: a conceptual framework”, Development Policy Review, Vol. 14 No. 1, pp. 339-53. Narayan, D., Patel, R., Schafft, K., Rademacher, A. and Koch-Schulte, S. (2000), Voices of the Poor: Can Anyone Hear Us?, Published for the World Bank, Oxford University Press, New York, NY. Newberry, S. and Pallot, J. (2004), “Freedom or coercion? NPM incentives in New Zealand central government departments”, Management Accounting Research, Vol. 15 No. 3, pp. 247-66. Nolan, B.C. (Ed.) (2001), Public Sector Reform: An International Perspective, Palgrave, Basingstoke. Olson, O., Guthrie, J. and Humphrey, C. (Eds) (1998), Global Warning: Debating International Developments in New Public Financial Management, Cappel Akademisk Forlag AS, Oslo. Paldam, M. (2000), “Social capital: one or many? Definition and measurement”, Journal of Economic Surveys, Vol. 14 No. 5, pp. 629-53. Pollit, C. and Bouckaert, G. (2000), Public Management Reform: A Comparative Analysis, Oxford University Press, Oxford. Portes, A. (1998), “Social capital: it’s origins and application in modern sociology”, Annual Review of Sociology, Vol. 24 No. 1, pp. 1-24. Putnam, R. (1993), Making Democracy Work: Civic Traditions in Modern Italy, Princeton University Press, Chichester. Schick, A. (1998), “Why most developing countries should not try New Zealand’s reforms”, The World Bank Research Observer, Vol. 13 No. 1, pp. 103-21. Therkildsen, O. (2000), “Public sector reform in a poor aid dependent country”, Tanzania. Public Administration and Development, Vol. 20 No. 1, pp. 61-71.

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UAC (2004a), The Revised National Strategic Framework for HIV/AIDS Activities in Uganda, 2003/04 – 2005/06, Uganda AIDS Commission, Kampala. UAC (2004b), Report of Mid-term Review of Uganda HIV/AIDS Control Project, May 2004, Uganda AIDS Commission, Kampala. UACP (2001a), Project Appraisal Document, Uganda HIV/AIDS Control Project, Kampala. UACP (2001b), Operational Manual: Community-led HIV/AIDS Initiative, Uganda HIV/AIDS Control Project, Kampala. Wallis, J. and Dollery, B. (2001), “Government failure, social capital and the appropriateness of the New Zealand model for public sector reform in developing countries”, World Development, Vol. 29 No. 2, pp. 245-63. Wallis, J., Killerby, P. and Dollery, B. (2004), “Social capital and social economics”, International Journal of Social Economics, Vol. 31 No. 3, pp. 239-58. White, H. (2002), “Social funds: a review of the issues”, Journal of International Development, Vol. 14 No. 5, pp. 605-10. Woolcock, M. and Narayan, D. (2000), “Social capital: implications for development theory, research and policy”, The World Bank Research Observer, Vol. 15 No. 2, pp. 225-49. World Bank (2000), World Development Report 2000/01: Attacking Poverty, Oxford University Press, Oxford. Further reading Edwards, M. and Hulme, D. (Eds) (1996), Beyond the Magic Bullet: NGO Performance and Accountability in the Post-cold War World, Kumarian Press, West Hartford, CT. Pollit, C. (1993), Managerialism and the Public Services: Cuts or Cultural Changes in the 1990s, 2nd ed., Blackwell, Oxford. Staveren, I.V. (2003), “Beyond social capital in poverty research”, Journal of Economic Issues, Vol. 37 No. 2, pp. 415-23. Corresponding author Deryl Northcott can be contacted at: [email protected]

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Reliance on management accounting under environmental uncertainty The case of Palestine

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Fadi Kattan Business School, University of Bethlehem, Bethlehem, Palestine

Richard Pike Bradford University School of Management, University of Bradford, Bradford, UK, and

Mike Tayles Hull University Business School, University of Hull, Hull, UK Abstract Purpose – This paper seeks to concern itself with the determination of the effect that external factors have on the design and implementation of management accounting systems in a developing economy which has in the last decade experienced fluctuating levels of environmental uncertainty. Design/methodology/approach – This is explained through the use of a case study involving interviews and archival data in a company over a ten-year period, a period involving considerable environmental change. It explores, how the organisation responded to the changes experienced over that time and the extent to which this impacted management accounting. Findings – The study finds that the management accounting and control systems used are more mechanistic in times of environmental and political stability, but become more organic in periods of greater uncertainty. Research limitations/implications – The challenge of relying for this research on respondents’ recall of events occurring some years previously is acknowledged and steps taken to minimise this are identified. The results of any case study research are not widely generalisable beyond the context in which it is studied. Practical implications – This study offers insights into management accounting and control systems as they are implemented in an underdeveloped country where uncertainty stems from political fluctuations. Originality/value – This research sees environmental uncertainty stemming from changes in the political structure and this precipitates changes in markets and their structures. Companies operating in those markets are influenced by and need to react to such changes. Keywords Management accounting, Environmental management, Politics, Palestine Paper type Research paper

1. Introduction This research extends the contingency theory framework to management accounting practices in less-developed economies, specifically the context of Palestine. The literature on the adaptation of management accounting to volatile, uncertain and unstable environments, such as Palestine, is very limited. Palestine is an interesting context for study because:

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it offers a research territory for studying management control in which little prior research has occurred; the political environment and the level of uncertainty characterising this environment is, arguably, as extreme as can be found anywhere in the world; and it has experienced significant shifts in levels of political and environmental uncertainty over the last decade.

The objectives of this research is to understand the changes in management accounting and control systems[1] (MACS) employed over a period of time and identify changes in these systems as a result of political changes in the surrounding environment. It is not anticipated, however, that new calculative practices will be observed, indeed as Hopper (2008, p. 1) observed “my efforts to find exotic non-western techniques have been to no avail”. The structure of this paper is as follows. In the remainder of this section, we discuss the Palestinian context before considering the relevant contingency-based literature relating to developing countries experiencing high-levels of environmental uncertainty. The research method, mainly a case study, is then described, leading to its findings, discussion and conclusions. 2. Environmental uncertainty in Palestine’s recent history Palestine’s recent history has been characterised by high levels of environmental and political uncertainty. For over 20 years, these events have attracted media attention. Some of the major events include the Palestinian Intifada (Uprising) of 1987-1993; the subsequent Arab-Israeli peace negotiations; the establishment of the Palestinian National Authority (PNA) over several areas during the interim period; and the second Intifada (Uprising) in year 2000 which is still in progress. The Palestinian politico-economic environment, for the purposes of this research, can be shown as in the time line in Figure 1. Few would question that the political shift, which ended the first Intifada and led to the Oslo Peace Accord in 1993, followed seven years later by the second Intifada, had significant impact on levels of economic uncertainty which, in turn, impacted on business conditions and performance. Less clear, however, is whether such shifts in politico-economic uncertainty led to observable changes in management accounting practice, and, if so, the nature of such change.

The Oslo Accords 1993

Figure 1. Environmental and political changes in the Palestinian history

Relatively High Political Environmental Uncertainty and Instability

The Beginning of the 2nd Uprising Sept. 2000

Lower Environmental Uncertainty and Instability. The Period is Characterised by Economic Growth and Relative Political Stability

Relatively High Political Environmental Uncertainty and Instability

The time frame of this study has three distinct phases. The first was influenced by the period of occupation – that is, pre-1993 Oslo accords. The major feature of that period was the restrictions imposed by the Israeli authorities on all the economic aspects of the Palestinian life and the uncertainty which it created. The first stage ended when the Palestinian Authority took over as a result of the Oslo Accords. After the establishment of the PNA in 1993, the open door policy was declared resulting in a relatively more stable and more competitive environment. In 2000, the Arab Israeli conflict erupted again in the form of a second uprising, giving rise to economic instability, decline in economic growth, political uncertainty and environmental turbulence that negatively affected the performance of the various economic sectors in the country. 3. Literature review Prior studies suggest that changes in the environment and its associated information needs have considerable effect on the role of management accountants in organisations (Anastas, 1997; Cooper, 1996; Granlund and Lukka, 1998; Smith and Briggs, 1999). Environments are viewed as a complex system of interrelated economic, market, technological, social and political variables. These variables may be placed on a continuum ranging from low to high uncertainty. Under conditions of low-environmental uncertainty, the variables and rules that make up the environment are generally understood. In contrast, high-environmental uncertainty, characterised by dynamic environments that manifest themselves in highly unpredictable changes, variables and rules are frequently misunderstood or poorly understood (Preston, 1991). Considerable effort has been directed towards improving quantitative accounting techniques for managing under conditions of uncertainty, based on the relevant environmental variables and how they interact. As uncertainty of outcomes and goals increases, decision analysis becomes more complex and accounting information becomes less reliable and, frequently, more sophisticated. Environmental uncertainty may become so great that accounting information becomes unreliable and accounting tools of little value (Chapman, 1997). Several researchers (Amigoni, 1978; Gordon and Miller, 1976; Gordon and Narayanan, 1984; Gul and Chia, 1994), have indicated that dealing with high uncertainty may not be restricted to the application of quantitative techniques. Rather, an organisation’s survival relies on its ability to respond creatively to the threats and opportunities that characterize a highly uncertain environment. The creativity of an organisation refers to the adaptability and flexibility of its systems in responding to the various variables that influence an organisation’s performance. The greater, the ability to match the correct combination of external variables and internal organisational characteristics such as the organisational structure, leadership style, size, age, type of information systems used, and planning and control processes, the better the outcome is expected to be. This assumes that there is no one particular combination that fits all organisations, but particular combinations are appropriate for different environmental conditions. Prior studies (Otley, 1980; Briers and Hirst, 1990) argue that management accounting systems differ from one setting to the other. Since, there is enormous diversity among organisations, the variation in their management accounting systems is contingent upon a firm’s external and internal characteristics. Thus, the best way to implement a management accounting technique is dependent upon the contingencies of the organisation in which the implementation has to take place. As suggested by

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Otley (1980), contingency theory must identify specific aspects of an accounting system which are associated with certain defined circumstances and demonstrate an appropriate matching. Contingency theory has been established for some time and been a dominant research paradigm on management control design (Dent, 1990). Chapman (1997) argues that contingency frameworks should focus on uncertainty as the central concept. This is supported by the findings of Hirst (1983) where reliance on accounting measures were less appropriate under high levels of uncertainty, and Govinderajan and Gupta (1985) where non-accounting information was used more where high-uncertainty strategies were adopted. This study is concerned with the determination of the effect that certain external factors have on the design and implementation of management accounting systems in Palestinian entities, based on the measurement of the degree of perception and understanding of Palestinian managers of these factors and their successful implementation of appropriate management accounting systems. Chenhall (2003) suggests that the way of addressing these concerns is through identifying a variety of control taxonomies and considering how they relate to various aspects of management control systems. One such taxonomy involves classifying controls as ranging from mechanistic to organic. This categorization is useful for addressing concerns of how management accounting and control systems relate to the broader control system. This research measures whether there have been changes in management accounting and control systems used by Palestinian organisations over time. The expectations are that management accounting and control systems used are more mechanistic in periods of relative environmental stability, but become more organic in periods of uncertainty. Such systems need to be designed with an awareness of a series of relevant contingent variables, such as the competitive environment, the organisation’s mission and strategy and its service process type (Otley, 1980; Briers and Hirst, 1990). Contingency theory is therefore a situational organisation theory, developed for the designing and structuring of organisations. Contingency theory has received considerable empirical study. Even prior to the extension of contingency theory to accounting, a number of authors observed the variety of management accounting and control systems. For example, Anthony et al. (1972) advocated that effective control systems were highly situational and systems should be tailored to the business, objectives and managers of each company. The central premise of contingency theory, according to Fisher (1995, p. 24), is that “there is no universally appropriate control system that applies in all circumstances. The applicability of control mechanisms is contingent on the circumstances faced by the organisation”. The development of a contingency theory of management accounting systems has proceeded in a largely piecemeal fashion by the identification of variables that appear to explain the variety of management accounting systems observed in organisations. Contributions have been made by organisational theorists who have referred to accounting control as part of the overall organisational control (Child, 1972) and also by those who have realized that the organisational context of an accounting system is of fundamental importance to its effectiveness (Waterhouse and Tiessen, 1978). Khandwalla (1977) argued that the so-called contingency theorists, like systems theorists, give a great deal of weight to the interface between the organisation and its environment. Organisational effectiveness is, therefore, dependent on a matching between the type of technology, environmental volatility, the size of the organisation and the features of the organisational structure and its information system.

Numerous prior studies in management accounting and control systems are contingency theory based. Few of such studies, however, have been conducted in underdeveloped countries, and none in Palestine. The following is a review of research studies conducted in the context of underdeveloped countries. Luther and Longden (2001) researched management accounting techniques in South Africa and changes in those techniques. Based on responses to questionnaires administered in both South Africa and the UK, their findings suggest that benefits derived from management accounting techniques in South Africa have increased over the period 1996-2002 and, secondly, the forces of change and the benefits derived from management accounting systems differ between the two countries. Their findings lend support to Hopper (2000) that management accounting cannot be understood without reference to political, cultural and economic factors important in countries with less homogenous cultures, weaker capital markets and less-effective bureaucracies and regulation. Waweru et al. (2004) conducted a similar research study in South Africa based on case study findings. Their research used a contingency theory framework within four retail companies to understand the process of management accounting change and to explore rationale for change within those companies. The findings indicated considerable change in MACS within four case studies. Their research suggested that recent environmental changes in the South African economy arising from reform policy and global competition largely facilitated the management accounting change processes within the four participating organisations. Other research was conducted in Bangladesh by Alam (1997) who described the overall socio-economic situation in Bangladesh as characterized by uncertainty, resource scarcity, political instability and some tendency towards disorder. The research was conducted in two commercially oriented state-owned enterprises. The findings of the research suggested that in conditions of high uncertainty, budgeting is more oriented towards the management of external relationships with significant institutional actors than with the management of the organisation itself. Anderson and Lanen (1999), in the context of India, investigated the relationship between the firm’s management accounting systems and its competitive environment. Their study extended the empirical literature on the contingent relationship between external competition and management accounting practices and explored the potentially mediating effects of firms’ competitive strategies on this relation. The findings of the study provided evidence that the planning process has become more decentralized, that strategic objectives are more widely understood, and that the critical information inputs for strategy formulation have changed with the reforms. The results of this study were remarkably consistent with the basic premise of contingency theory that changes in the external environment prompt changes in organisational strategy and structure, including those elements of structure represented by management accounting practices. Collins et al. (1997) investigated the relationship between business strategy and budgetary usage, given the perceived crisis in Latin America. Latin America is characterized by a high level of environmental turbulence. The question of the research was very specific to the crisis situation where the authors tried to investigate the effect of the crisis on strategy and on the budgetary process. Haldma and Laats (2002) conducted contingency theory research in Estonia. Estonia regained independence in 1991 and has since undergone fundamental political

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and structural changes. These changes were found by the researchers to have influenced the operations of the companies there. The authors found some evidence that changes in cost and management accounting practices are associated with shifts in the business and accounting environment as external contingencies, and with those of technology and organisational aspects as internal contingencies. In the above-mentioned studies conducted in both developed countries and underdeveloped countries, changes in external environment lead to changes in the internal characteristics of the company, one of which is the management accounting and control system. However, there is one important difference: in developed countries, the external variables were business and market related. Most of the previous research conducted in developed countries define environmental uncertainty in an economic industrial perspective. This is exemplified by the research of Gordon and Miller (1976) and Khandwalla (1972) who considered environmental uncertainty as resulting from tighter competition; Rockness and Shields (1988) and Geiger (1995) referred to funding opportunities as creating environmental uncertainty; Jones (1985) referred to uncertainty as resulting from competition and technological changes. In general, most of the studies conducted in the developed world referred to items such as competitors’ actions, manufacturing technology, market demand, raw material availability, raw material prices, government regulations and labour union actions as variables influencing change. On the other hand, looking at the few research studies conducted in less-developed countries, uncertainty is viewed as resulting from political reform and changes in the prevailing political structure in the country in which the research is conducted. In this research, we believe that environmental uncertainty stemming from changes in the political structure in Palestine precipitate changes in markets and their structures. As a result, companies operating in those markets are influenced and need to react to those changes. While the current research, like most previous studies, uses a contingency framework, it differs in that it deals with political uncertainty as a major driver for changes in MACS or in companies’ strategies. This research considers changes in the market structure a symptom of political change not the real cause of uncertainty. 4. Research method The impact of shifts in political uncertainty on management accounting practice was observed primarily through a longitudinal case study. Chenhall (2003) has observed the paucity of case study research using a contingency framework. In addition, it is apparent that the literature did not specifically define political uncertainty. This makes the case study approach appropriate in exploring the issue and in projecting the effect of political turbulence on MACS and on other variables within the company. Construct validity in this study is evident through data triangulation. Multiple sources of evidence provide multiple measures of the same phenomenon (Yin, 2003). Typically case study research uses a variety of evidence from different sources, such as documents, artifacts, interviews and observation, and this goes beyond the range of sources of evidence that might be available in historical study (Rowley, 2002). Case study data was collected from documents, archival records, open-ended interviews, structured interviews and surveys. The case study was identified as a potential research site since it is known as the largest stonecutter in the country that has undergone extensive innovative management practices and many strategic changes during the last ten years. The initial

area of interest was to study how management accounting was involved in the process of change whether resulting from internal changes or the effect of the changes in the external environment over the last ten years on management accounting and control systems used within the company. Data for this case study were collected by interviewing key managers and inspecting the company’s documentation and archival records. Interviews were taped, transcribed and analysed. It was believed that the advantages of tape recording – increased accuracy of data, and allowing the interviewers to give their full attention to the interview – far outweighed the potential problems (Lofland and Lofland, 1984). The in-depth case study was based on detailed and comprehensive interviews with the major players in the company. People interviewed in this case study were proud of their company and very eager to share their knowledge. Interviews were conducted with ten individuals including the owner manager, managers others than accountants and accounting personnel. Collected data were then categorised based on the major functions of management accounting; that is budgeting, planning and strategic decision making and use of non-financial measures. 5. Case study StoneCo was established in 1984 in Bethlehem, Palestine prior to the first Intifada in 1987. Recently, it owns and operates 12 quarries and two state-of-the-art stone cutting and polishing plants in Palestine and operates a third plant in Amman, Jordan. The two plants in Bethlehem warrant premium-finishing standards, and yield more than one million square meters of processed marble and stone every year. The production facility is equipped with the most advanced machinery and technology currently available that permit the production of high quality products suitable for the international markets. This represents, a major change to the early years when StoneCo. was operating on a much lower scale for the local market, production was based on customers’ job orders in the Bethlehem plant, and work was customised with little standardisation. International markets were not considered until the early 1990s. StoneCo now uses modern equipment to produce large amounts of standard polished stone tiles and slabs used for all purposes, including interior walls and floor tiles. This represents a major change from producing unique jobs to producing homogeneous units in a mass production system. Its processes include the quarries, fabricating plants, and ending with the marketing and sales of stone and marble in local and foreign markets. Products are distributed in 26 countries including the USA, Canada, Italy, UK, France, Belgium, Korea, and Japan. In addition, the company’s plant in Jordan supplies the regional markets with stone products. Exports account for over 90 per cent of the company’s total turnover and the company is the largest in its sector in Palestine in terms of production volume and market coverage. Key to the company’s success is it capacity to sell high-quality products at competitive prices, and deliver them to specification and on time. The efficient production process, reliable shipping methods, and follow up services help it achieve generally high levels of customer satisfaction. This point was emphasised by various employees interviewed at the site during the data collection stage of this case study. While, this would not be particularly surprising in a relatively stable economy, it is a considerable achievement for the company to be able to create the internal stability

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necessary for such quality in product, service and delivery terms within the turbulent and uncertain external environment within which it operates. The stone cutting industry is considered significant for the Palestinian economy in many respects. Palestine is not blessed with oil, but is rich in high-grade limestone and other stone. Limestone has been quarried for thousands of years and its reputation for quality dates back to Roman times. Building with local stone is an old and respected tradition that makes this industry one of the main contributors to the construction sector. The construction boom that Palestine witnessed after 1994, with the expectations created by the peace process, fuelled the growth of stone cutting activity. The owner manager receives reports from various departments within the company. His major concern is the advice he receives from the production and quality control manager. He believes that success depends on quality and customer satisfaction. In the context of accounting information, healthy cash flows are vital for him, but budgets, standard and actual costs are of little concern. The company generates healthy operating cash flow, and has a good reputation in the global market place. For the owner manager, excess cash is invested and used to grasp opportunities available in the market. The bottom line of the income statement is also vital. The owner manager made it clear during the interview that he wants accountants to be highly qualified in order to keep proper records that are acceptable by the tax authorities. This keeps the company out of trouble because transactions are captured and recorded in a timely manner and reporting to the tax authorities is done promptly. Proper accounting also keeps customer records up to date with minimal errors, and helps maintain customer satisfaction. In short, accountants are seen by the owner manager as record keepers not as participants in the decision-making process. Interviews and archival records confirmed that the management team used the finance department for financial issues rather than managerial issues. There was no clear written policy about the role that the finance department can play either in the decision making or performance measurement processes. Interviewees highlighted the role that accountants play in financial accounting but saw the management accounting role as minimal. One of the reasons offered for not involving finance staff in decision analysis and control was that while accountants had a good technical background, they lacked experience in the business sector, production and marketing processes. 6. The various stages that Palestine faced and MACS at StoneCo The time frame of this study, described in an earlier section, is divided into three distinct phases. The first phase is the period of occupation – that is; the pre-1993 Oslo accords or the period of the first Palestinian uprising (1987-1993). The major feature of that period was the restrictions imposed by the Israeli authorities on all the economic aspects of the Palestinian life. The Israeli occupation (1967-1993) of the West Bank and Gaza Strip, and in particular the first Intifada (1987-1993) created major political uncertainty leading to serious disruption and decline in the Palestinian economy (Sabri, 1999; Nasr, 1997; Efttami, 1993; Haifa, 1989; Saadler et al., 1983). Over this period the Palestinian industrial sector was primitive and lacked differentiation in the type of products. Handcrafts composed 86 per cent of that sector; 56 per cent of industrial companies employed a maximum of seven individuals (Hazboun et al., 1995). The lack of economic

growth and exports contributed to low levels of return on investment and new investment in the Palestinian industrial sector, and a high rate of business failure. (World Bank, 1993). The first stage ended in 1993 when the Palestinian Authority took over as a result of the Oslo Accords. After the establishment of the PNA in 1993, the open door policy was declared resulting in a more competitive environment. Business organisations faced high value-added competitors from Israel, neighbouring countries and other western countries. These changes in the economic climate added new forces, including global competition, not previously part of the environment. This period therefore sees a transition from political to competitive uncertainty. The establishment of the PNA in the West Bank and Gaza Strip allowed important changes in the economic environment. Positive changes contributing to an improvement in the economic environment include a reduction in the number of impediments to domestic and foreign investment through new laws and regulations which encourage investment and provide special tax treatment; a new regulatory environment for private enterprise, stimulating private investment; improved financial intermediation through the new stock exchange which began trading in late 1996; removal of pre-1994 restrictions on Palestinian and Arab banks and the establishment of the Palestinian Monetary Authority (PMA); regulations to encourage foreign investment, including fiscal incentives and less strict foreign exchange controls, were introduced; relaxation of restrictions on the transfer of funds to the territory; and less punitive taxation policies. The World Bank (2002b) observed: In the initial years following the Oslo Accords, the economy experienced rapid growth as a result of the return of the Palestinian nationals and large inflows of public and private capital . . . On the eve of the Intifida, economic growth was projected at 5 per cent in real terms for 2000.

The relative political stability in Palestine during this stage raised expectations with regard to the economic future of the region giving rise to a sharp rise in the number of company formations, mostly involving partners from outside the Palestinian territory. Some major steps were taken to reduce the trade barriers between neighbouring countries (Abdel-Karim and Alkukhn, 1996). The above-mentioned changes that affected the Palestinian economy as a result of political change led to an increased competition, the need for better technology, and exposure to export markets. One example of the economic change resulting from the new stage is seen in accounting and auditing services. The economic developments in the West Bank and Gaza Strip have prompted international accounting firms to enter the local market, and attracted more effort by Palestinian Authority officials, academics and practitioners to regulate and modernize the accounting profession. To face this new competitive environment, we would expect, compared to pre-1993, there to be more pressure on local firms to adopt management techniques and accounting control systems that might help them compete more effectively. These entities would need to increase their dependence on new technology, diversify their production and as a result create changes in their management accounting and control systems in a way that provides them with better decision making tools. One recommendation of Abdel-Karim and Alkukhn (1996) is to adapt cost accounting systems as a response to the changing environment.

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During this period (1993-1999) some changes took place that encouraged investment in Palestine. A major external environmental change that was a direct outcome of this new political era was in tax regulations. Another was in the markets that Palestinian companies became exposed to. As mentioned by the owner manager of the case study company: . . . The major environmental changes that we faced in the last few years include changes in governmental policies especially those related to taxes and to exporting our products to foreign countries. The tax law changes made our lives easier. We are receiving tax breaks and investment tax credits. Therefore, a capital investment decision is easier to make because we do not have to think of its tax implications.

The owner manager was referring to the period after the Oslo accord when the PNA took over and revised tax laws. These new enacted laws were directed towards encouraging investments in production facilities especially those that employ larger number of workers and employees. It is apparent that governmental policies in effect since the year 1994 are in favour of the company, and are geared towards encouraging investment. There is some evidence that the environment, as perceived by the owner of StoneCo, is not as hostile as might be thought by outsiders. It is less hostile from the point of view of the owner compared to how others in Palestine perceive it. StoneCo is a large-scale producer, with healthy cash flows. This, combined with the tax breaks permitted by law, made management of the company perceive the environment as less hostile since the PNA took over in 1994. In 2000, the Arab Israeli conflict erupted again in the form of a second uprising. The result of which was the economic instability and the decline in the growth rates in addition to the political uncertainty and overall environmental turbulence that is negatively affecting the performance of the various economic sectors in the country. In a report published by the World Bank (2002a), the Palestinian economy after the beginning of the second Intifada on 28 September 2000 is characterised by internal closures where pedestrian and vehicle mobility on main roads was reserved for non-Palestinians; border closure with Israel where movement of goods across the borders was subject to severe and unpredictable interruptions; and border closure with neighbouring countries where both passenger and commercial traffic through international crossings was heavily restricted. Armed confrontations that are frequent have also disrupted economic activity. The crisis in Israeli-Palestinian relations since September 2000 has drained the economy of the PNA territories of its resources and rendered it increasingly weak in the face of new pressures. Through losses to national income and the degradation of physical and institutional infrastructure, the economy has suffered severe setbacks that pose major challenges in the face of all of the companies in the various sectors of the economy. In the 18 months since October 2000, the Palestinian economy lost the equivalent of over half of its annual gross domestic product, unemployment increased threefold, and poverty rose substantially, with more than two-thirds of Palestinian households living below the poverty line (UNCTAD, 2002). To maintain their continued operation in crisis conditions, Palestinian enterprises resorted to scaling down production and laying off employees, while some suspended their activities until stability could be attained. Others were forced to shut down completely, having been increasingly isolated from their target markets by the closures. The adverse economic environment posed high risks for both public and

private investment further heightened by the unpredictability of production and trade under closure and the high transaction costs generated by the complex procedures governing the transport of Palestinian trade across the main borders with Jordan, Egypt and Israel (UNCTAD, 2002). The result was an aggravation of structural weaknesses in the economy, as reflected for example in: . the stagnant level of private investment and its concentration in construction activities; . the continued dominance of micro-enterprises with fewer than five employees which account for 90 per cent of total establishments; . the range of problems affecting small and medium-size enterprises, including a lack of managerial skills and of the experience needed to participate in trade; . the composition of exports, whereby labour-intensive manufactured goods accounted for 42 per cent of merchandise exports in 1998; . the inability of the domestic economy to absorb more than 60 per cent of new entrants to the labour force (Makhool, 2002); and . a fledgling financial system, with a thin capital market, a banking sector that is mainly engaged in short-term lending, and limited insurance services (UNSCO, 2001). The combination of political insecurity and closure continues to choke the economy, and each passing month makes ultimate recovery more difficult. Industrial and human capital continue to erode, impairing Palestinian longer-term competitive prospects. In 2006, closures, including the separation barrier, still prevented the free flow of Palestinian economic transactions; raising the cost of doing business and disrupting the predictability needed for orderly economic life. Without major changes in the closure regime and significant progress in the Palestinian reform program to improve the climate for private investors, there is little prospect of a sustained recovery of the Palestinian economy (World Bank, 2004). These obstacles that were imposed after the eruption of the second uprising in 2000 are major changes in the political environment that forced the owner manager to think of opening subsidiaries in other countries. Difficulties in mobility and the high cost of transportation during this stage were major drivers to start subsidiaries in other countries. The owner manager stated that: . . . Changes in the political environment made us think seriously of opening new subsidiaries such as the factories in Jordan and Oman and the transportation company to help deliver the goods on time to our customers. Customer satisfaction is our major concern. We are profitable and our margins are high, therefore cost is not an issue. As I mentioned earlier, taxes are not a concern either.

This is an important point. The owner manager explained how he decided to manage the political uncertainty his company faces in Palestine. The decision to operate other plants overseas, with high-quality products and customer service, was a success. The other plants were used to provide the product to neighbouring countries, thus minimising the effect of the political uncertainty in Palestine. The environments in the neighbouring countries are less restrictive. Taking these two points into consideration, that is, tax breaks that enhance cash flows of the company and the decisions that

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manage uncertainty, explains the perception of management regarding the external environment. Major decisions such as large new investments are made to either grasp the opportunities provided by the new tax laws, or in other cases, to avoid certain restrictions imposed by the political situation. This is how management managed uncertainty. One other important factor in this company was a change in the goals of the company, with product quality taking on greater importance. Although standardisation is expected to increase dependence on standardised administrative controls such as traditional and formal MACS (Chenhall, 2003), this is not quite the case at StoneCo. Although overheads are high relative to other local companies, there was no desire to use management accounting methods to control them. This is because competition is not particularly price sensitive and therefore, there is less need to focus on cost reduction. The chief accountant could not provide any example of how costs could be reduced if they were subject to in-depth analysis. The accounting personnel were not requested to work on costing production. Krishnan (2005) found that there is no association between the intensity of competition and demand for accounting information in the presence of quality competition. However, when firms compete on price, the need to control costs leads to a positive association between them. This would explain why increased competition did not result in a simultaneous increase in the need for accounting information in this company. The type of competition is very important. For the company, a strategic priority is the enhancement of customer satisfaction. Internal changes include changes in policies, structure, operations and performance. As described by many officials in the company, the major change was in the mission of the company. The owner manager stated: . . . Our slogan is to satisfy our customers by delivering goods on time and delivering the highest and consistent quality.

This concentration on quality motivated management to employ a total quality manager and to earn the ISO certification. The employment of a highly qualified production manager, coupled with spinning off the company into sub-companies, was also aimed at reducing cost, providing higher quality products to customers and assuring on time delivery to the customers. While, the production manager and the quality control manager were both involved in strategic and operating decisions, little reliance was placed on information from the finance department. For example, the decision to establish a new company for the purpose of purchasing the raw materials and selling it to the manufacturing company was based on analysis done by the production and the quality control managers. The evaluation resulted in convincing the owner manager that if each production line received its inputs only when the materials were needed to start processing, accumulation of materials would be reduced and better mobility of workers between the machines achieved. It is clear from the above that decisions to start new subsidiaries were not derived from financial analysis but rather by strategic analysis of the market and the political environment. Product development, market development, logistical support, product diversification and vertical integration were among the strategies implemented directly into the establishment of the subsidiaries. For example, establishing a

transportation company in Israel resulted from the need to overcome political restrictions, to enhance logistical support and create some kind of vertical integration. Starting a company in Jordan was a gateway to trade with Arab countries which could not be easily done through Israeli ports. The new factory used some different types of raw materials that helped introduce product differentiation, in addition to the fact that it formed an important part of the supply chain.

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7. Findings – management accounting control systems This section summarises the MACS implemented at StoneCo in light of the previous discussion. It considers the budgeting systems, the strategic decision making, the use of non-financial measures and reporting systems used within StoneCo. 7.1 Budgeting at StoneCo While financial budgets at StoneCo are prepared at the beginning of the year, they are not used for control purposes. Two departments are involved in the preparation of budgets; the marketing department provides information to production about the ordered quantities and the times of delivery. Based on that information, the production manager then schedules production to meet customers’ needs. Based on both interviews, sight of documents and memoranda the following conclusions were drawn: . In the early years pre-1993 (that is before the Oslo Accords), when the external environment was characterized by higher political and environmental uncertainty, the budgeting systems were closer to being organic than mechanistic in nature. Budgeting was given less emphasis and no clear procedures or manuals were available for the preparation of budgets. In the preparation of the annual budget external environmental factors were emphasized such as the political and legal environment, the economic trends in general and in the industry, with less emphasis placed on past sales trends and past performance. . In the second period of the study (after the Oslo accords but before the second uprising), when the environment was perceived by management to be relatively less uncertain; that is lower perceived turbulence and hostility as a result of changes in laws and openness to foreign markets, the budgeting systems moved towards a more mechanistic style. Budgets started to be prepared on the basis of prescribed procedures, became more formally communicated, more time was spent on the preparation of static rather than flexible budgets, higher emphasis on meeting sales volume budgets, budgets became the tool used by the production department to plan the day-to-day operations. . Although the third period covered by the study (after the year 2000) is characterised by political unrest, it has been perceived by management of StoneCo as less turbulent and less hostile. StoneCo management has been able to reduce the effects of the turbulent external political environment by making some strategic decisions, including the investments in other countries in the region and spinning off its operations into a number of local companies operating in either Palestine or Israel. This has helped them benefit from the positive aspects of each jurisdiction, for example the easier mobility for employees of

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Israeli companies and favourable tax laws in the Palestinian areas. StoneCo therefore, continued to use the same MACS as introduced in the second period. A possible explanation of this movement is that in times of relative certainty, companies start to develop their systems resulting in greater formalisation and clarity. Then if the company’s external environment becomes less certain, it tends to continues using the systems in place because they have became part of management practice and the benefits are known. Therefore, relative certainty in the external environment is a fertile environment for initiating change (Luther and Longden, 2001; Waweru et al., 2004). Whilst there is no direct correspondence, these findings resonate with the findings of Hoque and Hopper (1997) based on their research into political and industrial relations turbulence in Bangladeshi Jute Mills. 7.2 Planning and strategic decision making at StoneCo The owner-manager is the major player in the strategic decision-making process. This was reinforced by the owner-manager: . . . All strategic decisions are made in my office. I determine the information that is relevant to making each decision. Making decisions needs guts, courage and the ability to feel and sense what goes on around you.

In year 2000, the accounting department started collecting cost data and allocating it to cost centres. The major cost centres were the machinery and the delivery trucks. The report provided by the accounting department to senior management demonstrated that transportation cost is very high and increasing due to the Palestinian uprising (post September 2000), and the resulting closure of the Palestinian territories. Their report supported the reports of many other agencies that mobility and other restrictions had raised the already high transaction costs to prohibitive levels. Transport prices within the West Bank increased by around 15 per cent between September 2000 and December 2001 and continued to grow with every tightening of the closures (Palestinian Central Bureau of Statistics (PCBS, 2001)). Based on this information, management decided to operate a separate delivery company registered in Israel that helped reduce the transportation cost per transaction to almost half the already existing one. While the owner-manager receives some decision support information from the finance department, he argues that he cannot rely on that type of information because “the accountants do not have any feel or intuition for the products we sell or the markets we operate in”. After 1994, when the company decided to operate more extensively in the international market, accountants were asked to help in the process of evaluating the entry to the international market by means of making a few calculations that they regarded relevant to such a decision. The accounting department, as explained by the chief accountant, confirmed by the other accountants in the company and evidenced by the documents inspected during the visits, implemented some formal approaches to strategic investment appraisal such as the payback period, the accounting rate of return, the residual income, and the discounted cash flows. The measures were used to evaluate some investment decisions, for example, the opening of the new local subsidiary. The information provided was criticised by the owner manager on the basis of not including the non-financial

benefits, overemphasis on the short run, and the inability of the accountants to consistently treat inflation. The production manager argued there are other benefits that are not included in the models used by accountants in evaluating the decision to operate a new subsidiary that deals with raw materials. He said that establishing this local subsidiary helped in boosting the learning process. Employees were exposed to such a relationship that then became the basis for further expansion. The production process became more flexible with a better set-up at the parent company measured by the minimal quantity of raw materials and stone blocks scattered in the work area. According to him, this type of benefit was not quantifiable by accountants. When the accountants realised that their input was not highly appreciated and was not given enough weight, they reduced the amount of information they provided to decision makers. In addition, it was quite clear that in some periods of high uncertainty and political turbulence, during times of strict closures and curfews, the accounting department was required to concentrate on its traditional financial information presentation. Instead of spending the scarce working hours analysing and estimating the future, they concentrated on the day-to-day paperwork preparation. Looking at the strategic decision-making process in StoneCo, it was noticeable that the company rarely followed a rational and comprehensive decision-making process but usually depended on the intuition of the owner manager and advice from production, marketing and quality control. Findings in the literature are contradictory. For example, Fredrickson and Iaquinto (1989) argued that companies operating in unstable environments follow rational-comprehensive strategic decision-making processes, while Stein (1980) argued that companies operating in highly dynamic environments tend to employ less extensive search for and less explicit analysis of alternatives. The main reasons for this in StoneCo were: . the unavailability of accounting personnel who are powerful enough to influence the decision and to forecast the future; . the previous positive performance of the company; and . the unavailability of a formal planning system. Formal planning systems are expected to not only exert significant influence on the flow of information between the layers of hierarchy, but also to determine the nature and context of human interactions, and to influence strategic decision processes (Miller, 1987; Armstrong, 1982). However, these systems are not in evidence in StoneCo. This is not completely foreign to the literature since some studies have convincingly argued that much of the actual decision making may take place outside the formal planning systems (Sinha, 1990; King, 1983). Van Cauwenbergh et al. (1996) referred to several studies (such as: Butler et al., 1993; Donaldson and Lorsch, 1983; Mares, 1991) that found that important decisions are rarely simply taken on the basis of detailed studies and careful analysis, but are often matters of judgement based on past experience and shared assumptions about likely future events. 7.3 Use of non-financial measures at StoneCo Some non-financial measures are used in StoneCo to replace traditional financial measures that are typically used elsewhere (Chenhall and Langfield-Smith, 1998). The findings in StoneCo indicate that measures such as number of defects,

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items reworked and quantity of scrap are well established means of controlling manufacturing operations. These measures are also used to reward workers for superior performance. Using these measures to evaluate the performance of workers creates a positive subsequent reaction on the part of workers. It seems likely that members of organisations will be encouraged to react more responsively to feedback from performance measures if they are evaluated on these measures (Chenhall, 1997). Financial measures alone would not come on a timely basis as do the other production measures. Variance analysis is mainly measuring the past actual performance and only comes after the fact. At StoneCo, production measures and the quality of the product are measured on a continuous basis which makes these measures of greater value, as seen by the production manager who says: . . . We can immediately detect problems in manufacturing as soon as they occur.

The focus of these manufacturing performance measures include customer satisfaction measured by the quality of the final product, on-time delivery, responsiveness to customer needs, defect free production and minimum inventories (Chenhall, 1997). It is important to reiterate that the output of StoneCo is characterised by a high degree of measurability therefore output controls are in place. Rockness and Shields (1984) argue that output controls are less costly than behaviour controls. Chenhall (1997) notes that manufacturing performance measures focus on delivering quality products such as: customer satisfaction measured by quality of final products, on-time delivery, responsiveness to customer needs, and various aspects of the value chain associated with quality production such as materials throughput time, defect free production, minimum inventories, vendor quality and reliability, high productivity and low cost. A distinctive characteristic of today’s markets is the increased demand for high quality products without the corresponding increase in prices (Drucker, 1990; De Meyer et al., 1989; Chenhall, 1997). This awareness drove the company into the strategic plan that has as a major objective the satisfaction of its customers. Although the company is not heavily investing in cost and management accounting, it is still concentrating on other non-financial quantitative measures that the production manager along with the owner believe will help reduce the cost of production. Although not verified by the accounts of the company, it is evident in the literature that this belief is empirically supported. Chenhall (1997) notes that companies can provide customers with highly valued products through improvements in efficiency, by way of eliminating waste, reducing lead time and continuous improvement. In StoneCo, although the overall objectives are stated as customer satisfaction, goals are not clearly measurable by employees and are qualitative in nature. This vagueness in stating the objectives of the company makes it quite difficult for each individual to know his part and it also makes it difficult for each department to determine the role its employees and workers should play in achieving the required level of customer satisfaction. Therefore, it is observed that the informal communication network is a vital control tool. Each individual is required to cooperate with his colleagues because his performance affects the performance of others and vice versa. Ouchi (1980) stated that: . . . Industrial organisations can, in some instances, rely to a great extent on socialization as the principal mechanism of mediation or control, and this “clan” form can be very efficient in mediating transactions between interdependent individuals.

Although marketing and quality control departments at StoneCo are major players in many decisions made by the company, and that the efforts of both the marketing and the quality control personnel are much appreciated by the founder manager, it is noticeable that neither the cost of marketing nor quality control was measured by the company. Based on the above analysis, Table I summarises the operational characteristics of StoneCo and the characteristics of its MACS over the time period covered by the study. 8. Conclusion The main aim of this paper has been to better understand the impact of external environmental uncertainty on changes in management accounting and control systems (MACS) employed over a ten-year period. The paper involves a case study of the largest stone cutting and finishing company in Palestine and its management accounting control system over approximately a ten-year period during major fluctuations in environmental uncertainty. The company maintains high profitability, selling a unique product with special reference to product quality and customer satisfaction. The owner-manager believes that management accounting does not support the above and his strategic leadership of the company, there was limited use made of management accounting information. Accounting is perceived as “bean-counting” and meeting the needs of tax reporting, rather than for management information. Non-financial information has been developed but initiated by non-accounting functions. Emphasis is placed upon management of cash-flows particularly in periods of high uncertainty, the system is observed to be highly organic with little reference to budgets and standards that a more mechanistic system would display. Although, decision making is more organic in nature, it has some features of a mechanistic system, and continues to depend heavily on the intuition and judgement of the owner manager without reference to the reports of the accounting department. Dependence on formal forecasting is almost non-existent although the use of non-financial data has recently increased. During periods of particularly high-political turbulence the accounting department spent most of its time concentrating on traditional financial accounting and transaction recording activities rather than producing any management information. Some evolution towards a more mechanistic style is observed during times of relatively low uncertainty and this appears to endure when periods on higher uncertainty return. This finding is worthy of further investigation. It is clear from the data presented in this paper that the finance team of StoneCo were not normally involved in decision support or planning and control activities. Reliance on accounting performance measures is minimal. Some managerial accounting activities were performed elsewhere in the organisation. The company by-passed the accounting department and undertook some strategic changes in its structure to deal with the uncertain political environment. When they faced difficulties in mobility and when the political environment within the borders of Palestine became more hostile during the second uprising, the company established foreign entities to enable it to operate in a safer less uncertain environment. Management accounting practices in StoneCo. have changed over the last ten years. Changes in MACS are attributable to various reasons. Changes in management perception of the level of uncertainty in the external environment, changes in

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Up to 1994 Operational characteristics of StoneCo 1. Local markets were emphasized where price competition is intensive 2. Production based on customers’ specification with little standardisation 3. No real access to the international markets 4. Harsh tax laws with no incentives 5. Punitive governmental actions

MACS in use in StoneCo Organic MACS characterized by low emphasis on budgets, lack of clear procedures or manuals to prepare budgets and to make decisions, political uncertainty was considered in making decisions, financial issues were ignored in making decisions and the intuition of the owner was the main input for decision making, no emphasis on costing or cost budgets.

Table I. Operational characteristics of StoneCo and its MACS

After 1994 1. New tax laws encouraging investment 2. Less legal restrictions imposed on exporting 3. Penetration of the international markets 4. Establishment of international subsidiaries 5. Over 90 per cent of the sales are to foreign markets 6. Vertical integration, logistical support and managing political uncertainty through the establishment of a transportation company as a subsidiary 7. Managing restrictions in exporting to other countries through opening a new subsidiary in Amman 8. Enhanced ability to access raw materials through opening a factory in Oman 9. Reduce product diversity through standardization 10. Concentration on quality 11. Enhancing the availability of trading facilities Organic MACS with new features of a mechanistic system Some mechanistic features include. Financial budgets are now prepared for planning purposes but not used for control, prescribed procedures are used to prepare budgets, operating budgets are prepared by other than the accounting personnel, static rather than flexible budgets are prepared, higher emphasis on meeting sales targets, allocating costs to cost centres, some sophisticated controls such as inventory controls are implemented by the production department, some financial inputs in making few decisions, more formal means of evaluating investments, and more formal communication that strictly follows the lines of authority Some organic features include. Non-financial measures are becoming important, production data and customer satisfaction are becoming more important, very centralised operations, management intuition is still used in making decisions, emphasis on the quality of employees and their education, production data is vital, customer satisfaction data is collected, excess resources are used to accomplish customer satisfaction, no emphasis on costing or cost budgets, no reliance on accounting controls.

management’s response to environmental uncertainty, growth in sales and profits, the experience of the owner manager and the level of education of both the manager and employees of the accounting department are all probable factors that have influenced MACS in the last ten years. Documentation requirements of the ISO certification are also to be considered. In StoneCo, some changes in MACS were recognised over the last few years. It was apparent that these changes were not much influenced by external environmental uncertainty. On the contrary, management of this company perceived the environment as less restrictive and less uncertain, because of some of the steps they took to manage this through a form of international diversification. Some important factors that led to change in MACS include the ISO certification, the expansion of operations and the availability of computers. In this case study, it is acknowledged that there was a tendency for respondents to rate their recent experiences more highly and to be challenged in their recall of events occurring in earlier years. Every effort was made to assist respondents in their recall of more distant events and to minimise this impact, and it is argued that some of the turbulence was so marked that recall of experiences should not be difficult, never the less the results should be read with this in mind. The content of a single case study is not generalisable to a wider environment but it is helpful in observing external and internal environmental influences on the MACS employed. Although this is a limitation of the case study approach, this study provided evidence that MACS are not the only way managers use to deal with uncertainty. This case study adds to the literature of management accounting in less developed countries where political changes are behind the economic and market fluctuations. All reports referred to in this research indicated the effect of political turbulence on the Palestinian economy. To conclude, this paper makes a contribution by extending our understanding of contingency theory research to a setting in which there is limited insight, the less developed country in general and Palestine in particular. This environment and the period over which the case study applies is characterised by significant levels of politico-economic uncertainty. Much of the previous contingency research has defined environmental uncertainty in an economic industrial perspective. In this research, we see environmental uncertainty stemming from changes in the political structure and this precipitates changes in markets and their structures. Changes in the MACS employed are observed along the mechanistic/organic continuum, though it is apparent from the case study company that success is not dependent upon the use of formalized management accounting controls and techniques alone. This reminds us that management accounting in developing economies cannot be understood without reference to the wider political, cultural and economic factors of the countries concerned and in less developed economies this embraces cultures, capital markets, bureaucracies and regulation. Companies operating in those markets are influenced by and need to react to such changes. Note 1. We generally use the term management accounting control system (MACS) but occasionally management accounting, management accounting system or management control system depending on the term used by our information source. On this point see Chenhall (2003, p. 129).

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Waterhouse, J.H. and Tiessen, P. (1978), “A contingency framework for management accounting systems research”, Accounting, Organizations and Society, Vol. 3 No. 1, pp. 65-76. Waweru, N.M., Hoque, Z. and Uliana, E. (2004), “Management accounting change in South Africa: case studies from retail services”, Accounting, Auditing & Accountability Journal, Vol. 17 No. 5, pp. 675-704. World Bank (1993), Developing the Occupied Territories: An Investment in Peace, World Bank, Washington, DC. World Bank (2002a), Fifteen Months – Intifada, Closure and Palestinian Economic Crisis: An Assessment, World Bank, Washington, DC. World Bank (2002b), West Bank and Gaza Update, World Bank, Washington, DC. World Bank (2004), West Bank and Gaza Update, World Bank, Washington, DC. Yin, R.K. (2003), Case Study Research: Design and Methods, 3rd ed., Sage, London. Further reading Rogers, E.W. (2001), “A theoretical look at firm performance in high-tech organizations: what does existing theory tell us?”, The Journal of High Technology Management Research, Vol. 12 No. 1, pp. 39-61. UNCTAD (2000), Cooperation between the Palestinian Authority, Egypt and Jordan to Entrance Subregional Trade-Related Services, UNCTAD, Geneva. Corresponding author Fadi Kattan can be contacted at: [email protected]

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Ahmed O.R. Kholeif Department of Accounting, Faculty of Commerce, University of Alexandria, Alexandria, Egypt

Magdy Abdel-Kader Brunel Business School, Brunel University, Uxbridge, UK, and

Michael Sherer Department of Accounting, Finance and Management, University of Essex, Colchester, UK Abstract Purpose – The paper aims to examine a detailed case study of enterprise resource planning (ERP) customization failure in an Egyptian state-owned company (AML) by drawing on new institutional sociology (NIS) and its extensions. It explains how ERP customization failure is shaped by the interplay between institutionalised accounting practices, conflicting institutions, power relations and market forces. Design/methodology/approach – The research methodology is based on using an intensive case study informed by NIS, especially the interplay between conflicting institutions, power relations and market forces. Data were collected from multiple sources, including interviews, observations, discussions and documentary analysis. Findings – The findings revealed that the inability of the ERP system to meet the core accounting requirements of the control authorities (the central agency for accountability) was the explicit reason cited for the ERP failure. The externally imposed requirements of the uniform accounting system and planning budgets were used to resist both other institutional pressures (from the holding company for engineering industries) and market and competitive pressures. Research limitations/implications – There are some limitations associated with the use of the case study method, including the inability to generalize from the findings of a single case study, some selectivity in the individuals interviewed, and the subjective interpretation by the researchers of the empirical data. Practical implications – The paper identifies that the interplay between institutional pressures, institutionalised accounting practices, intra-organizational power relations, and market forces contributed to the failure to embed ERP in a major company. Understanding such relationships can help other organisations to become more aware of the factors affecting successful implementation of new ERP systems and provide a better basis for planning the introduction of new technologies. Originality/value – This paper draws on recent research and thinking in sociology, especially the development and application of NIS. In addition, the paper is concerned with ERP implementation and use and management accounting in a transitional economy, Egypt, and hence contributes to debate about exporting Western accounting practices and other technologies to countries with different cultures and different stages of economic and political development. Keywords Resource management, Accounting procedures, Egypt, Sociology Journal of Accounting & Organizational Change Vol. 3 No. 3, 2007 pp. 250-269 q Emerald Group Publishing Limited 1832-5912 DOI 10.1108/18325910710820292

Paper type Research paper

The authors would like to thank the two anonymous reviewers for their valuable comments on earlier drafts of this paper.

1. Introduction It is often observed that accounting systems and practices are difficult or slow to change (Scapens and Roberts, 1993; Burns, 2000; Granlund, 2001; Burns et al., 2003; Lukka, 2007). It was expected that the introduction of enterprise resource planning (ERP) systems in 1990s would radically change accounting systems and practices (Chapman and Chua, 2000; Sutton, 1999). However, the available evidence is disappointing. It was found that ERP systems reinforce rather than change existing accounting systems and practices (Granlund and Malmi, 2002; Scapens and Jazayeri, 2003; Quattrone and Hopper, 2005). Then, what is the problem with ERP systems? ERP systems have been criticised for being inflexible and not meeting specific organization and industry requirements (Davenport, 1998; Scapens et al., 1998; Booth et al., 2000). For instance, Scapens et al. (1998, p. 48) observed that: . . . the British subsidiary of a US multinational, which was implementing SAP world-wide, found considerable difficulty in adapting SAP to its operating needs . . . SAP was configured for the US operations and this led to inflexibility for the British subsidiary.

Unlike in-house developed legacy systems, ERP systems require the organization to adapt to the software rather than modify the software to fit the organization’s established practices (Granlund and Malmi, 2002). Davenport (1998, p. 122), for example, argues that “an enterprise system, by its very nature, imposes its own logic on a company’s strategy, organization and culture”. Thus, it is expected that the implementation and use of ERP systems are associated with a problem of misfit, i.e. the gaps between the functionality offered by the package and that required by the adopting organization (Soh et al., 2000). As packaged software, ERP is designed by vendor organizations but used by customer organizations, two sets of players who are independent of each other (Soh and Sia, 2004). ERP creators inscribe their view of the world in the technology that they create (Latour, 1992; Orlikowski, 1992). For instance, Hedberg and Jonsson (1978, p. 56) argue that “[t]he way in which organizations’ information (and accounting) systems reflect the world depends on the designers’ assumptions about important characteristics of organizations and their environments”. The institutional conditions and human actors involved in technology design are different from those involved in technology use. As a consequence, ERP embodies at least some of the institutional properties of vendor organizations, which could be from a different country with different meanings, norms and powers to the customer organization. When there are major misfits between the assumptions and rules embedded in the ERP and the actual usage, organizations can respond through package customization or organizational adaptation. In some cases, both solutions might be difficult to implement which then results in the failure of the ERP project (Figure 1). The failure of ERP customization or organizational adaptation means that customer organizations continue following their existing (old) systems and practices, where stability in organizational systems and practices refers to “continuity over time” (Giddens, 1979, p. 199). Our case organization (AML) is an Egyptian state-owned company that demonstrates a failed attempt to customize an ERP system. In Egypt, a comprehensive economic and structural adjustment programme, including a privatisation programme, was started by the Egyptian Government in the early 1990s. This programme resulted in changes in the

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regulatory environment and created market pressures on our case organization. The company was confronted with an organizational change as a result of institutional change and market competition that contributed to the ERP customization failure. Given the role of the regulatory environment and market competition in driving the organizational change in our case organization, new institutional sociology (NIS) theory and its extensions (DiMaggio and Powell, 1983; Modell, 2002) are adopted in this paper to explain and understand the ERP customization failure in AML. The NIS perspective explores the role of macro economic, political and social institutions in shaping organizational structures, policies and procedures (Scott, 2001). Organizations respond to such external, macro pressures in order to receive support and legitimacy (Modell, 2002). NIS has been adopted to explain homogeneity and persistence (Granlund and Lukka, 1998; Dacin et al., 2002), ERP package-organization misalignments (Soh and Sia, 2004), conflicting institutional pressures (Meyer and Rowan, 1977; D’Aunno et al., 1991), the interplay between institutional and market forces (Gupta et al., 1994; Modell, 2002), and the interplay between institutional pressures and intra-organizational power relations (Burns and Scapens, 2000; Modell, 2002; Tsamenyi et al., 2006). This paper draws on these recent developments in NIS in the accounting and information systems literatures to address the following research question: how is the ERP customization failure shaped by the interplay between institutionalized accounting practices, conflicting institutions, power relations and market forces? The remainder of this paper is organised in five sections. In the next section, we articulate the theoretical framework based on NIS and its extensions. This is followed by details of the research method employed in this study. The paper then discusses how ERP customization failure is shaped by the interplay between, institutionalised accounting practices, conflicting institutions, power relations and market forces. The final section provides a summary of the paper and some conclusions.

2. Theoretical framework: new institutional sociology and its extensions In this section, we propose NIS and its extensions as the theoretical framework informing our analysis of the case study. Initially, the concept of institutional isomorphism and its relationship with the misfit problem is discussed. Then we examine the implications of the interplay between conflicting institutions and intra-organizational power relations on the one hand, and institutional and market pressures on the other hand, for ERP customization failure. As mentioned in the previous section, this examination is necessary because ERP customization failure was shaped by the institutional forces (institutionalized accounting practices), conflicting institutions, intra-organizational power relations and market forces. 2.1 Institutional pressures, the problem of misfit and institutionalised accounting practices DiMaggio and Powell (1983) introduce the concept of organizational fields and define it as the organizations that constitute a recognized area of institutional life such as suppliers, customers and regulatory agencies. They argue that the organizations within the field tend to make organizational changes that make them very similar to each other. There are three mechanisms through which institutional isomorphic change occurs: coercive, normative and mimetic isomorphisms. Coercive isomorphism is primarily related to the political influence exerted by institutions on which organizations depend for critical resources and long-term survival, such as the state’s laws and regulations. Normative isomorphism is the institutionalisation of social practices as a result of professionalisation by means of professional groups. Mimetic isomorphism stems from the tendency of organizations to imitate each other in response to symbolic uncertainty. As stated earlier, ERP is packaged software that is designed by vendor organizations and is used by customer organizations, two sets of players independently of each other (Soh and Sia, 2004). The institutional conditions and human actors involved in technology design are different from those involved in technology use. As a consequence, ERP, as a semi-finished product[1], tends to embody the institutional properties of vendor organizations, which might be from a different country with different meanings, norms and powers. However, ERP can be configured during implementation to match the wishes of the customer organizations. This adaptation process encodes the institutional properties of the customer organizations into the software. After the configuration process, if there is still a gap between the business processes embedded in the software and the existing organizational processes, a decision could be made to change the organizational processes to handle certain processes outside the software or to change the base code of the software. Drawing on the work of DiMaggio and Powell (1983), Soh and Sia (2004) identify two potential institutional sources of misalignments: externally imposed organizational structures and voluntarily acquired organizational structures. Imposed organizational structures are institutional structures dictated by authoritative sources in the organization’s environment, especially the coercive authority of nation-states such as laws and regulations and the more normative authority of professions such as professional and industry institutions. Voluntarily acquired organizational structures are adopted because of reasons such as the organization’s particular experience and history, as well as management preferences. Soh and Sia (2004) argue

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that organizations operating in different countries face different institutional pressures, and will evolve different structures. So, if the customer organization of the ERP package is from a different country than that of the ERP package’s main markets, there are potential misalignments that should be considered. When misalignments exist, organizations can respond through package customization or organizational adaptation. The organizational responses to these misalignments are the result of a process of interaction and negotiation among various parties, including management, users, IS personnel, and consultants. Soh and Sia’s (2004) framework relates ERP packages to (extra-organizational) macro institutional pressures to explain differences in embedded structures in ERP packages and organizations. However, the organizational responses to the potential misalignments refer to intra-organizational dynamics and processes of change and stability. Burns and Scapens’ (2000) institutional framework is primarily concerned with such dynamics and processes. This framework overcomes a major limitation of NIS, i.e. the minimal attention paid to the role of interest and agency in shaping human action. In addition, it explains the institutionalization processes of accounting practices. Our case company, AML, is an Egyptian state-owned enterprise that has adopted imposed organizational structures (the uniform accounting system and planning budgets) in response to the coercive authority of the Egyptian laws and regulations and control authorities, since 1966 to present. These structures have been institutionalized and became potential sources of ERP package – organization misalignments. These misalignments contributed to the failure of the ERP project introduced by the company in response to the privatization programme in Egypt in the 1990s. 2.2 Institutional pressures, conflicting institutions and intra-organizational power relations A major criticism of NIS is related to its relative inattention to the role of pro-active agency in constructing institutions (Carruthers, 1995). For example, Barley and Tolbert (1997) argue that NIS has largely focused on the role of institutions in shaping and constraining the actions of actors. This criticism has been addressed in recent institutional studies that focus on the ability of actors to respond to institutional pressures (Oliver, 1991; Greenwood and Hinings, 1996; Barley and Tolbert, 1997; Burns and Scapens, 2000; Collier, 2001; Modell, 2002; Tsamenyi et al., 2006). These studies have broadened NIS to include power relations. In this paper, we draw on the work of Burns and Scapens (2000) to study how institutions interact with the actions of organizational actors and the role of power relations in their interaction. Based on Giddens’ (1984) structuration theory, Burns and Scapens (2000) describe the relationship between actions and institutions as the agency-structure relationship. They argue that although institutions constrain and shape action at a specific point in time, actions produce and reproduce institutions through their cumulative influence over time. Burns and Scapens (2000) adopted the concept of power as articulated by Giddens (1984). In this regard, there are two main perspectives of power (Macintosh and Scapens, 1990). The first perspective is that power is best conceptualised as the transformative capacity of an actor to achieve his or her will, even at the expense of others who might resist him or her (power in the broad sense). It can be used to introduce new organizational rules or may be mobilised to resist such new rules.

The second perspective is that power should be seen as a property of the society or social institutions or the medium for domination (power in the narrow sense). It is the power embedded in the institutionalised routines, which shape the actions and thoughts of organizational members. In Burns and Scapens’ framework, the two perspectives of power are connected together as features of the duality of structure. Both perspectives of power are of particular interest to this paper. In our case organization the decision to adopt an ERP system was mainly taken by the holding company for engineering industries, which has been established according to the Public Enterprise Law No. 203 of 1991. Organizational members of AML, especially accountants, resisted this order through mobilizing another power. This refers to the first perspective of power. Accountants draw on the power embedded in institutionalized accounting practices (the uniform accounting systems and planning budgets). This refers to the second perspective of power. This use of power in our case organization is related to the issue of conflicting institutions. When organizations face conflicting extra-organizational institutional demands, how they should respond? Meyer and Rowan (1977) argue that organizations adopt inconsistent, even conflicting, practice to gain legitimacy. However, D’Aunno et al. (1991) argue that organizations have limited ability to respond to conflicting institutional demands and thus will confirm to them only partially. Our case company faced such conflicting institutional demands from the holding company to implement the ERP system and the central agency for accountability to use the uniform accounting system and planning budgets. As will be explained later, the company used the requirements of one institution to resist the requirement of the other. 2.3 Institutional pressures and market and competitive pressures The early work of DiMaggio and Powell (1983) de-emphasized the role of market and competitive pressures in influencing organizations and explaining organizational activities and practices. However, recent institutional studies have recognized this role (Greenwood and Hinings, 1996; Oliver, 1992; Powell, 1991; Scott, 1991) but have not agreed on the relation between institutional and market pressures. Some institutional studies argue that institutional and market pressures may be in opposition (Oliver, 1992). So, gaining legitimacy is in conflict with achieving efficiency. This view is adopted by a few accounting scholars (Hoque and Hopper, 1997; Modell, 2002). Other institutional studies argue that both institutional and market pressures are exerted on organizations, which must respond to both pressures (Powell, 1991). This means that organizations can simultaneously demonstrate both institutional conformity and technical efficiency. There are a few examples of accounting studies adopting this view (Gupta et al., 1994; Hussain and Hoque, 2002; Tsamenyi et al., 2006). In this paper, we adopt the view that both institutional and market pressures may have negative effects on adopting efficient accounting systems when there is coercive isomorphism. This means that market pressures lose their positive role under greater levels of coercive pressures. In terms of the interplay between the institutional and market forces in Egypt, a comprehensive economic and structural adjustment programme funded by the World Bank and IMF was adopted in 1990s. This programme aimed to move the Egyptian economy from a state-controlled economy to a free market-oriented economy. As a result of this programme, a number of laws were enacted to establish competitive

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markets with freedom of entry and free market prices. For example, Egypt started to implement GATT agreement. This resulted in removing the protection policy for local products by reducing or eliminating custom duties imposed on imported foreign products. In addition, the general sales tax and the global income tax were enacted to replace tax laws that discriminated against foreign competition. Also, most of state-owned enterprises (SOEs) were privatised according to Law No. 203 of 1991. This law was designed to eliminate the difference in treatment between public and private enterprises. In this paper, we examine how the interplay between institutional and market forces negatively affects the adoption of the ERP system in AML, our case organization. 3. Research method The case study method was used to obtain a rich set of data surrounding the specific research issues and to capture the contextual complexity (Yin, 1994). Case study materials were gathered during 2003-2004, and included semi-structured interviews carried out by one of the authors, site visits and the collection of documentary evidence spanning the life of the ERP project. To facilitate access to some confidential information, a formal written permission was obtained from the central agency for public mobilization and statistics, the official source of providing and authorizing the collection of data from SOEs in Egypt. Semi-structured interviews were the main data collection method to find out what participants do, think or feel. The interviews were conducted with some members of the ERP project team (ERP sponsor, some key users and end-users). These members included cost and financial accountants, IT staff and line-managers. Eight face-to-face interviews[2] were conducted. They lasted up to two hours. The ERP sponsor (the ex-CEO of the company) was interviewed twice to overcome the absence of the ERP project manager, who retired before conducting the interviews. Also, the extensive interviews carried out with other project team and documentary evidence were valuable in identifying the role of the ERP project manager in the ERP implementation process. In addition to the interviews, other data collection methods were used. These methods include background questionnaires, documentary evidence, direct observations, published accounts and budgets. These multiple methods are deliberately selected as one method can complement others. This triangulation tends to improve the validity of evidence (Scapens, 1990). In interpretive research the validity of evidence can be assessed only in the context of the particular case, what Scapens (1990) calls “contextual validity”. In this regard, Scapens (1990) suggests the triangulation of evidence by collecting different pieces of evidence on the same research issue, collecting other evidence from the same source and working in teams in order to reach an agreed interpretation of a particular case. As a consequence, the use of multiple sources of evidence in this case study is justifiable on the grounds of increasing the contextual validity of research evidence. The case study materials were collected from AML company, previously known as NOUR company, a state-owned company. AML company was chosen because it demonstrates a failed attempt to customize an ERP system in a highly institutionalized environment (a state-owned company) in a developing country (Egypt). There is a lack of research on the impact of highly institutionalized environments on ERP implementations and the possible failure of ERP projects as a result of these circumstances. In addition, by

comparison with previous research in developed countries research on ERP in developing countries can aid our understanding of the contextual and national differences on ERP implementations and their impact on adopting or rejecting accounting systems and practices built into the software (Huang and Palvia, 2001; El Sayed and Westrup, 2003). There were some limitations associated with the case study reported in this paper. One limitation of this case study was the fact that the ERP project manager was not interviewed because she retired before conducting the interviews. Another limitation was that the case expressed the views of customer organization personnel not vendor organization staff. Also, there are some other limitations associated with the use of case study method in general such as the limited generalization of the findings of a single case study and the possibility of the researchers’ bias. 4. Institutional interpretation of ERP customisation failure In this section we analyse the failure of ERP customization in AML. Based on the theoretical framework, we identify three separate, but related, reasons for this failure, knitting them together through the new institutional perspective of the paper. We first focus on coercive pressures exerted on AML from the regulatory environment and the holding company, as well as the intra-organizational power relations. Then, we address the impact of the interplay between institutional and market forces on AML. 4.1 Institutionalised accounting practices as sources of ERP package-organization misalignments in AML The defining period of modern Egypt is still the revolutionary socialist regime under President Nasser (1952-1970). After the revolution of 1952, the Egyptian Government made a break with the past and moved the Egyptian economy from a free market-oriented economy to a massively state-controlled economy in few years. The nationalisation laws and expropriation of various private enterprises became the expression of change in Egypt after the July Revolution in 1952. A series of nationalisation decrees was issued in 1956, 1961, and 1963 to eliminate the dominant role of both foreign and large-scale, local private capital. In 1952, the private sector made about 76 per cent of the total investment in the economy. The public sector very quickly established its dominance in the economy and for the next three decades was making between 80 and 90 per cent of the investment in the economy and constituted around 37 per cent of GDP annually (PCSU, 2002). In view of the state’s dependence on accounting information to prepare the national plan, the uniform accounting system was introduced by the Central Agency for Accountancy[3] in 1966. It was compulsory for all SOEs in the public sector, with the exception of banks and insurance companies. In such accounting system, accounts are classified in homogeneous classes in a manner that assists in preparing national accounts, as well as satisfying the needs of the traditional financial and cost accounting[4]. NOUR company, currently known as AML, is one of the companies that were subject to partial nationalization. NOUR company[5], a leading international company in the electronics industry based in The Netherlands, established its branch in Egypt under the name of “NOUR-orient” in 1930. Initially, the activities of the NOUR branch in Egypt were just importing and marketing some electrical finished products such as televisions, refrigerators and light bulbs. In 1944, the local production of these electrical products was launched for the first time. In the 1960s, the Egyptian branch of NOUR

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was 50 per cent nationalised by the Egyptian Government and by Law No. 118 of 1961, it became a 50 per cent public sector company. However, its products continued to have the brand name of “NOUR”. As a state-owned enterprise, the company has applied the uniform accounting system to serve both financial accounting and cost accounting since 1966. It also prepares traditional planning budgets such as a sales budget, a production budget and a commodity and service requirements budget. The Dutch partner had not affected the accounting system used. However, reports prepared were affected. Certain reports were requested to be prepared by the Finance Department. These reports were specially designed to satisfy the Dutch partner’s needs. The use of the uniform accounting system and planning budgets in AML has been routinized and institutionalised. They became part of day-to-day life and the way of doing things (Burns and Scapens, 2000). Accountants use the account codes as a way of communication with other organizational members in day-to-day interactions. In Soh and Sia’s (2004) terms, the uniform accounting system and planning budgets are imposed organisational structures. They are imposed and monitored by the coercive authority of the state agencies (the Central Agency for Accountancy). Soh and Sia (2004) argue that where the misalignment between embedded structures in ERP packages and organizations arises from an imposed structure, the decision will usually be to modify the ERP packages to support the existing institutional structure. This is because the organization is usually unable to change government regulations. Modifying the ERP package was the action taken by AML. However, ERP customization failed to solve the misfit problem and led to the failure of the ERP project in AML. The Financial Accounts Department and the Budgeting and Costing Department insisted that the uniform accounting system had to be built into the ERP software and the reports must be prepared in the same normal format. MIS General Manager explained: Customisation was the main reason for ERP failure. Finance Department is required to apply the Uniform Accounting System. This system is like the constitution. It has to be followed. Accountants have certain reports that have to be prepared . . . We were extremely inflexible and we have not had an ability to change business processes.

The General Manager of Planning gave an example of the inflexibility of accountants: If we used the software as it is, we would complete the project. This would solve a lot of problems. A lot of modifications and customisations were done. There was no flexibility on the part of accountants at all. They even insisted on using four decimal numbers as they did manually . . . They wanted the ERP to be customised to reflect the Uniform Accounting System. It took a lot of efforts to customise the ERP to be in conformity with the Uniform Accounting System . . . The same document should be prepared by the ERP system as the manual document. Otherwise, the software was not suitable.

For example, the uniform accounting system dictates the account chart in terms of eight digit numbers. It took two months to customize the ERP system to accept the account chart. However, the ERP system required changing the documents, procedures and documentary cycles between the company’s departments. Accountants rejected this type of change as it contradicted existing routines and institutions. The General Manager of Financial Accounts gave the following reason:

We found that we should prepare and change the documentary cycles to fit the ERP system before starting to implement it. There are control authorities that accepted and recognised the procedures a lot of years ago. So it was difficult to replace and change these procedures.

He added: I cannot violate the rules of the Uniform Accounting System. The Central Agency for Accountability audits our compliance with these rules and disagrees with any differences. I cannot violate the rules in order to adopt the ERP system. There will be legal responsibility. If the ERP Company were able to customise the ERP system to be in conformity with the Uniform Accounting System the ERP system would operate.

Furthermore, the division of one invoice into a number of screens led to difficulty in using the ERP system in AML. There were a lot of documents that were difficult to be entered into the ERP system using the screens designed in the system. The division of a single document into a lot of screens was seen by accountants as impossible. For instance, there were six screens to record the fixed assets’ depreciation. The General Manager for Financial Accounts explained: Any system opens a single screen that leads to other screens. However, in BAAN, if I have not entered a screen, the system would not accept the others . . . We prepare depreciation reserve for fully depreciated assets in books. This reserve requires re-evaluation of assets. For two years, we were unable to customise the ERP system to record this reserve. To prepare a compound entry (from two or more accounts to two or more accounts), the system required using intermediate accounts. The system consumed our time in preparing intermediate accounts and entries without any necessity.

Accordingly, there were tensions in the process of customizing the ERP package to be in conformity with existing institutions, rules and routines. According to Burns and Scapens (2000, p. 16-17), it is likely to be much easier to introduce changes that do not challenge existing ways of thinking and norms of behaviour. However, a change that conflicts with existing routines and institutions is likely to be much difficult to implement. In AML, the embedded structures in the ERP system were incompatible with the established ways of thinking and norms of behaviour embedded in the existing routines and institutions, especially the uniform accounting system. The General Manager of Financial Accounts pointed out: The BAAN system was not suitable for the nature of our business and our work systems. Would we change the state systems such . . . the Uniform Accounting System in order to implement the BAAN system?

He added: The ERP offered solutions but they were not suitable for us. The software is not suitable for the Egyptian environment. It might be useful for Europe. There was a will to make the ERP system succeeds; however, the system was not in conformity with our systems. The problem was that it was non-customisable software. It was inflexible software like a train has to be pulled alone a railway line. Tailored (custom-developed) systems would satisfy our needs.

A cost accountant agreed with the above comment: The user needs for financial data . . . should be determined and satisfied. The computerised system should be tailored rather than imposed as a software package.

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He continued: There were a lot of difficulties in implementing BAAN software. This system is not suitable for our reality, our life and our systems that we are used to use. The software does not satisfy our needs. I personally prefer custom software to packaged software.

In sum, ERP consultants tried to customize the software. However, the software has challenged established accounting rules and routines. It contradicted the uniform accounting system, which has been used by public sector enterprises since 1966 and continually monitored by the central agency for accountability during the customization process. This conclusion is consistent with Soh and Sia (2004) that when there is a misalignment between imposed organizational structures and embedded structures in ERP packages, it is difficult to change the government regulations and the ERP packages have to be modified to support the existing institutional structures. Sometimes, the customization process is difficult to implement and the ERP project will fail. This was what happened in the AML case. 4.2 The holding company as a conflicting institution and intra-organizational power relations In the early 1990s, a privatisation programme was undertaken because of the Government of Egypt’s (GOE) dissatisfaction with the failure and loses of public sector enterprises and the external pressures from international donors (World Bank and IMF) in favour of privatisation. The GOE launched the privatisation programme with the Public Enterprise Law No. 203 of 1991 and its regulations, establishing the legal framework for sale of 314 public enterprises that earmarked for privatisation. This law marked the start of public enterprise reform. It was designed to eliminate the difference in treatment between public and private enterprises. Public holding companies were established in 1991. The ownership and management of 314 public enterprises, subjected to Law 203 of 1991, were transferred from the various ministries to 17 holding companies, which are held accountable to the Ministry of Public Enterprises. Holding companies are primarily responsible for organising the sale of their constituent SOEs known as affiliated companies, with a mandate to maximise the present value of their affiliated companies on behalf of the state. According to Law No. 203 of 1991, the ownership and management of the government’s share in NOUR company were transferred to the holding company for engineering industries to organise its sale. In December 1997, the Egyptian Government tried to privatise the company by selling it to the Dutch company, NOUR. However, negotiations failed and the Egyptian Government decided to buy the share of the Dutch partner. The company’s name was changed to AML, which became a 100 per cent public sector company. Furthermore, AML company reduced its activities to the manufacturing and marketing of lamps. The General Manager for Budgeting and Costing described this situation as follows: During the negotiations on selling the company at the end of 1997, it was re-evaluated. NOUR Company assessed that its brand name was worth 60 per cent of the company’s value and was willing to pay the Government the remaining value. However, the Egyptian side rejected this deal and bought the Dutch partner’s share. A new brand name, “AML” was introduced.

As a result of the privatization, there was some change in the institutions governing the public sector such as the introduction of Law No. 203 of 1991 and the

holding companies. However, the old institutions such as the central agency for accountability continued to govern the public sector as well. Following the failure of privatisation process of AML company, the company is still applying the uniform accounting system and planning budgets that are monitored by the Central Agency for Accountancy. Also, the company has to obey the orders of the holding company for engineering industries. This situation created conflicting institutions. Organizational members in AML used one institution (the requirements of the central agency for accountability) to resist the other (the requirements of the holding company). The decision to implement an ERP system at AML was related to its privatization attempt at the end of 1997. Following the withdrawal of NOUR company, a decision to adopt an ERP system in AML was mainly taken by the Egyptian holding company for engineering industries, which started implementing an ERP system at the same time. The General Manager of the MIS Department described this decision as follows: The ERP project came as a compulsory order from the holding company. It has not expressed our needs. We have not initiated this project. As a decision-maker, you are not able to make a decision . . . People, I mean financial accountants and cost accountants, rejected the project. They have not co-operated with the top management in implementing the project as they felt that it was imposed on them and they were not in need for it . . . The holding company itself failed to implement the ERP software.

The General Manager of Planning emphasized this fact by saying: The ERP project was a recommendation from the holding company to implement a good information system. The objective was the existence of a common integrated database for the whole company to facilitate communications and the availability of information to decision-makers in real time. However, I think that because there was a complete collapse in the company, the ERP project failed . . . The holding company wanted to modernise information systems. It implemented the same system and failed.

The General Manager of Planning described the feelings of employees towards the ERP by saying “people (accountants) resisted the ERP system and implemented it against their will. It was like doing your job without liking it”. So, ERP was perceived as a major threat to the survival of the organization as a whole and its constituent organizational members. The General Manager of Planning commented that “there was a fear from privatization. Would we stay working in the company or would we leave the company?” Thus, AML’s organizational members challenged the holding company’s decision to implement BAAN software. They resisted ERP implementation as they felt that this software was a threat to the existence of the company as a whole and to their secured jobs. The General Manager of Financial Accounts added “the number of employees has been reduced because of early retirement”[6]. The use of the ERP system would accelerate the retirement process as it would require skills that are not available in the existing employees. Furthermore, the failure of ERP implementation in the holding company legitimized the failure of the same ERP package in AML. The ERP failure in AML became a logical outcome and self-explained result as a result of its failure in the holding company. According to Burns and Scapens (2000), if those responsible for implementing the new system possess sufficient power, they may be able to impose change, albeit with some difficulty. However, if other key individuals or groups have sufficient power, they may be able to resist or subvert the change process. That was what happened in AML.

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The holding company and top management wanted to make AML attractive to investors by imposing the ERP project. For that reason, the ERP caused a lot of anxiety as it was seen as a necessary step towards privatization and, subsequently, early retirement. To prevent this from happening, other organizational members, especially accountants, resisted the ERP project through their control of resources[7] required in the implementation process. Accountants used their knowledge with the requirements of the uniform accounting system as a way to resist the ERP implementation. Burns and Scapens (2000, p. 10) state that “. . .[institutionalized] routines may become somewhat resistant to change”. And in another instance, they state “. . . the power embedded in the institutionalized routines, which shape the actions and thoughts of members of the organizations . . . ” (p. 23). Institutionalized routines such as the requirements of the uniform accounting system provide accountants with sufficient power to resist the implementation of the ERP project. These findings provide a possible answer to the question of “how organizations respond to new extra-organizational institutional demands that conflict with their traditional practices?” Our case company used one institutional demand to resist the other because both the holding company and AML have to comply with the requirements of the central agency for accountability. They cannot violate these requirements. These findings differ from other observed responses in previous studies (Meyer and Rowan, 1977; D’Aunno et al., 1991). 4.3 Market and competitive pressures In the 1990s, the changes in the regulatory environment in Egypt created market and competitive pressures on AML. The privatization programme launched by Law No. 203 of 1991 and the implementation of the GATT Agreement opened up the Egyptian market and created fierce competition. This competition adversely affected AML. As a result of competition, AML suffered severe successive losses from 1997 to present. For example, reported losses in 1996 and 1997 were £Egyptian 5,563,000. On the one hand, according to the Public Enterprise Law No. 203 of 1991 and its regulations, there was a failed attempt to privatise AML in 1997. This attempt led to the withdrawal of the Dutch company, NOUR. The withdrawal of NOUR led to changing the company’s brand name from “NOUR” to “AML”. Customers did not know the new brand name and they did not differentiate it from other available brands in the Egyptian market. Furthermore, some of the company’s machines left by NOUR were outdated and in bad condition. This means that the use of these old machines increased the occurrence of defective products and hence “quality costs” such as the costs of scrap, spoilage and negative goodwill. On the other hand, as a direct impact of the implementation of the GATT agreement in Egypt in the 1990s[8], a lot of rival light bulbs have been imported and sold in the Egyptian market at a much lower price, normally less than the product costs. A cost accountant said: The GATT agreement has led to the entrance of a lot of imported products, including light bulbs, to the Egyptian market, especially from China. This resulted in fierce competition and difficulties in competing with these products. For example, there is currently a dumping process, where products are sold with prices less than their costs. As a result, the local product cannot be sold.

The General Manager of Budgeting and Cost Accounting Department confirmed this fact when saying: The company won a legal case against a company to stop cheap imported light bulbs being dumped in the Egyptian market.

In addition, the collapse of the Soviet Union in the early 1990s facilitated importing complete light bulbs factories on a large-scale from former Soviet Union countries. The phenomenon known as “downstairs factories” started to emerge. These factories, managed by unknown producers, started to compete with AML by manufacturing and selling a diversity of cheap untested rival light bulbs. A cost accountant explained: The Soviet Union Collapse was a major source of the emergence of unknown small producers. AML was unable to compete with those producers because they have small factories and few staff and produce their products with low costs.

Owing to all the above unfavourable competitive circumstances, AML has lost most of its market share. Because of the marketing problems of AML’s products, the company started producing and inventorying lamps in order to continue running and to find work for the company’s workers. However, the ERP system did not support the policy of production for inventory and would increase the visibility of this policy. The General Manager of Financial Accounts Department described this problem as follows: At the end of each year, we need to increase production either to reduce losses or to make use of available materials and workforce. Therefore, we produce to put our production in warehouses until we can find an opportunity for sale. But that was not available in the BAAN system. The BAAN system did not recognise the production for inventory purpose but only production without inventory. This was an obstacle to implementing the ERP system in the Production Planning Department.

So the ERP system was perceived as not supporting the only available policy for the company’s survival, which is the production for inventory purpose. Furthermore, the ERP project increased the degree of financial crisis in AML. The cost of BAAN software was very high. So it was difficult for the company to recover the cost of this software, taking into account the previously mentioned circumstances[9]. However, AML was not been declared insolvent because there is no notion of bankruptcy in the public sector. To avoid the legal liability of cancelling the ERP purchase contract and to regain control over this crisis situation, the company transferred the reason for ERP failure to the ERP vendor. The argument was that the ERP vendor failed to customize the software to satisfy the company’s needs. The General Manager for Planning Department explained this fact as follows: There was a fear of legal responsibility from control agencies such as the Central Agency for Accountability. I rejected responsibility for the ERP project. After three years, it was found that the sound solution was to stop the project . . . It was decided to stop the project at this point . . . We stopped and liquidated the guarantee letter. For three years the Central Agency for Accountability was asking us. We stopped it (the ERP project). It was a fear rather than anything else. The ERP vendor in Saudi Arabia has been charged all costs. It was a high cost.

The competitive market forces interacted with the institutional environment to shape the failure of the ERP project. The introduction of the ERP was a coercive pressure exerted by the holding company. However, the holding company did not support AML

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financially to purchase and implement the ERP project. To fund the ERP project AML had to use its own resources. But the market pressures led to continuous losses. So AML could not afford the cost of the ERP software. The organizational members resisted the pressure of the holding company and unfavourable market conditions by citing the uniform accounting practices imposed by the regulatory authority for accounting, the central agency for accountability. The inability of the ERP system to meet the requirements of these authorities was the explicit reason citied for the failure to embed ERP in the organisation. On this way, the externally imposed institutional requirements were used to resist both other institutional pressures and market and competitive pressures. These findings support the view that under conditions of heightened coercive pressures, accounting systems can become decoupled from day-to-day operations (Modell, 2002). In addition the paper has demonstrated that in this highly regulated economic and political environment, market and competitive pressures also inhibited the adoption of new, supposedly efficient, accounting systems. These findings contradict those of Hoque and Hopper (1997), who found that when managers face both high market competition and strong political and industrial relations turbulence, the market competition tend to have positive effects on their use of accounting information and strong political and industrial relations turbulence tend to have negative effects. 5. Summary and conclusions The aim of this paper was to interpret and understand the failure to embed the technology of ERP in an Egyptian state-owned company (AML). The paper draws on NIS and its extensions as the theoretical framework for interpreting this failure. It explains ERP customization failure in terms of the interplay between institutional pressures, institutionalised accounting practices, conflicting institutions, intra-organizational power relations, and market forces. The findings revealed that the inability of the ERP system to meet the core accounting requirements of the control authorities (the central agency for accountability) was the explicit reason cited by organizational actors for the failure to embed ERP in the company. In addition, the externally imposed requirements for a uniform accounting system and planning budgets were used to resist both other institutional pressures (the holding company for engineering industries) and market and competitive pressures. The findings of the case study presented in this paper contribute to the literature addressing ERP and accounting stability (Granlund, 2001, Granlund and Malmi, 2002; Spathis and Constantinides, 2002; Scapens and Jazayeri, 2003; Quattrone and Hopper, 2005). The accounting stability in this paper was an outcome and a reason for the ERP customization failure. The results of the case study are consistent with Granlund (2001) who described the introduction of an ERP system and the resistance that followed its implementation. He explained this resistance as adherence to earlier procedures, i.e. routines. This research also supports the findings of Burns (2000) that the existing institutional context acted as a barrier against change. Similarly, Scapens and Jazayeri (2003) found that companies tended to replace existing accounting systems with other very similar systems. Also, in one of two organizations studied, Quattrone and Hopper (2005) found that the ERP reproduced existing structures and distance which permitted conventional accounting controls to be maintained. This paper extends this literature

by studying the introduction of ERP in a company in Egypt (a less developed country), focusing on the problem of misfits, and identifying additional factors, specifically the impact of regulatory agencies and competitive market forces, that contribute to the failure of ERP. Furthermore, the paper also makes a contribution to the accounting literature on developing and transitional economies by specifically confronting the question of whether uniform systems of accounting technology, such as ERP or activity-based costing, can be successfully introduced in countries with very different cultures and economic and political structures. Finally, there are several implications for future accounting research. The institutional framework can be applied to other problems in management accounting, for example the introduction of new budgetary control systems. This framework is based on analysing the interplay between institutional pressures, institutionalised accounting practices, conflicting institutions, intra-organizational power relations, and market forces. The use of such extended institutional analysis contributes to recent calls to broaden NIS (Oliver, 1992; Modell, 2002; Dillard et al., 2004; Tsamenyi et al., 2006). The proposed framework is valuable in explaining the origins of the problem of misfits and how to solve or exaggerate this problem. This problem has been observed in both developed (Scapens et al., 1998, p. 48) and developing countries (Soh et al., 2000, p. 48). Additional case studies of ERP and accounting in other developing and transitional economies, perhaps with very different cultures and political structures, would test the reliability of the conclusions of this study. Imported information (and accounting) systems face a lot of difficulties in developing countries (Mensah, 1981; Ndubizu, 1984; Hove, 1989; Wallace, 1993; Larson and Kenny, 1995; Longden et al., 2001). It is assumed that organisations in different countries introducing ERP systems face similar difficulties and challenges as a consequence of the ERP package-organization misalignments identified in this paper. However, new case studies should explore similar or other difficulties and challenges facing companies working in developing countries when trying to implement imported advanced information technologies such as ERP systems. Notes 1. ERP is a semi-finished product with tables and parameters that user organizations and their implementation partners configure to their business needs. 2. Interviews were not tape-recorded because the interviewees preferred to talk in a more confidential way. However, extensive notes were taken during the interviews. 3. The Central Agency for Accountability is a control authority that reports to the Egyptian People’s Assembly on the performance of all state-owned enterprises and government ministries and agencies. 4. For more details about the Uniform Accounting System, see, for example, Briston and El-Ashker (1984). 5. The real name is disguised. 6. In the planning budgets for 1998/1999, the number of employees was 3,630 on 31 December 1997. This number was planned to be reduced to 3,360 employees due to the use of early retirement policy.

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7. The exercise of power in social relations depends on both formal sources (hierarchy of authority and responsibility) and informal sources (knowledge, mobilization of authority, experience, significance of the institution, personal relations or connections with power holders). 8. In the planning budgets for 1998/1999, the custom duties on imported light bulbs were reduced from 70 to 45 per cent. In addition, the company continued the production reduction policy followed in 1996/1997 and in 1997/1998 as a result of the fierce competition caused by removing protection policy for local products and dumping processes. 9. The company expanded the use of overdraft loans from local and international banks to finance its operations. In the planning budgets for 1998/1999, local overdraft loans on 30 June 1997 were L.E. 27,793,000 (total assets were L.E. 249,327,000). These loans were expected to become L.E. 40,000,000 in 1998/1999 (total assets were L.E. 269,027,000).

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An exploratory study of financial priorities, financial planning and control practices in voluntary organisations Perceptions of treasurers in a developing country Teerooven Soobaroyen School of Management and Business, University of Wales, Aberystwyth, UK, and

Raja Vinesh Sannassee Faculty of Law and Management, University of Mauritius, Mauritius Abstract Purpose – This study seeks to explore the financial priorities, financial planning and control practices in locally-established voluntary organisations (LVOs) in a developing country context. Design/methodology/approach – Two data collection methods are used to gather views from the LVO treasurers: a questionnaire survey and face-to-face interviews. Findings – Treasurers are less focused on priorities involving internal planning and control and are found to be using financial planning and control practices to a limited and seemingly unsophisticated extent. In consideration of the theoretical implications of organizational legitimacy, overall findings suggest that internal practices are: extensively used to convey a symbolic message of rationality, in the pursuit of a pragmatic or a moral form of legitimacy towards a defined funding body or towards a perceived internal target audience, respectively; used in a limited and informal way due to their perceived inappropriateness in legitimating organizations, in “deference” to the voluntary organizations’ (VO) primary social objectives; or are virtually inexistent, due to the strong influence of trust embedded in an “emotional-led” context, thereby explaining the irrelevance of financial/control practices – even for symbolic reasons. Research limitations/implications – The questionnaire response rate has been relatively low but the findings are enhanced by the diversity of organizations which participated in the questionnaire and interview stages. Originality/value – This study focuses on locally established organizations in a developing country context, which are typically less subjected to VO regulation and are “managed” by (unpaid) volunteers. The interviews involved a cross-section of LVOs, which has been instrumental in contemplating the potential relevance of the legitimacy perspective.

Journal of Accounting & Organizational Change Vol. 3 No. 3, 2007 pp. 270-301 q Emerald Group Publishing Limited 1832-5912 DOI 10.1108/18325910710820300

Keywords Voluntary organizations, Financial management, Financial control, Laws and legislation, Mauritius Paper type Research paper

The authors are grateful to the Guest Editors and two anonymous reviewers for their valuable inputs and suggestions. The authors also thank Kelum Jayasinghe for his helpful comments.

1. Introduction Over the last two decades, there has been a growing interest on how voluntary organizations (VOs) manage their activities and financial resources. This increased attention is related to the fact that some VOs receive significant financial resources from donors (Gray et al., 2006, p. 326; Goddard and Assad, 2006, p. 377) and also on the premise that they are viewed as more credible in addressing particular societal and developmental needs. In addition, an active “home-grown” VO sector in developing nations is associated to a stronger civil society and an increased democratic development (Mercer, 2002; Chandhoke, 2002). VOs – especially smaller ones established at local levels – are highly dependent on the “free” involvement of individuals (volunteering, donating cash or goods), with little or no reliance on professional paid staff. This is reflective of Jegers and Lapsley’s (2001, p. 1) words that “. . . at the heart of the non-profit domain is the gift relationship”. As such, it is the interplay between the altruistic, “emotionally-led” nature of VO activity and the wealth-maximising, “objective calculative” nature of accounting/financial practices that have given rise to a sustained academic interest as to how and why VOs use such practices (Forbes, 1998; Jegers and Lapsley, 2001). A related point is that it may be too simplistic to characterize a VO’s financial objective as being “not for profit” and to argue that all other financial priorities are of no relevance/interest to such organizations. As such, our research questions centre on the following: RQ1. What are the financial priorities of smaller, local VOs? RQ2. Do treasurers rely on traditional financial planning/control systems and compile performance measures? RQ3. And how are such practices interpreted, used or socially constructed by people in a developing country context? Previous research – which has focused on VOs in developed countries (e.g. UK or USA) – has reported on an increasing adoption of business-oriented practices such as marketing, strategic planning, budgeting, accrual-based accounting/reporting and management accounting (MA)/control techniques (Myers and Sacks, 2003; Billis and Harris, 1996). This is particularly influenced by the rational/technical view that financial practices are “objective” and “context-free” tools for VO managers. The adoption of such practices is seen as a pre-requisite for making VOs and their managers more accountable in the use of funds (Gray et al., 2006; Torres and Pina, 2003), and is aimed at providing more information to their decision-makers. To a large extent, this is echoed in studies of VO financial practices in the USA and UK (Connolly and Hyndman, 2004; Paige, 1992; Ashford, 1989; Zietlow, 1989) and in related textbooks (Anthony and Young, 2003), leading to an increasing and universalistic support for the use of financial and control practices in VOs. Alternatively, one may question the extent to which financial planning and control practices are substantively related to a “rational information need” and/or to “assist decision-making” in a VO context. In other words, can there be other reasons for the state and use (be it at an extensive, limited or minimal level) of such practices in VOs? It is thus argued that the above-described functional perspective of analyzing financial practices may be insufficient, particularly in light of the burgeoning literature which relies on the interpretive, “naturalistic” and/or “symbolic” views on the role of

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accounting and control systems in organizations – advocated by authors such as Hopper and Powell (1985), Tomkins and Grove (1983), Hopper et al. (1987), Gambling (1987, 1977), Scapens (1994), Carruthers (1995), Laughlin (1995), Baxter and Chua (2003) and Dillard et al. (2004). The interpretive tradition focuses on understanding the current state of accounting/financial practices in VOs, the way these are perceived by VO actors, the influence of the social, economic and political context in which these organizations/practices operate and the influence of the “dominant” affiliations or values “championed” by the organization (Goddard and Assad, 2006; Dixon et al., 2006; Parker, 2003; Johansson, 2003; Jacobs and Walker, 2004; Westerdahl, 2001; Irvine, 2001, Booth, 1995; Laughlin, 1990). Overall, however, there has been little “international” published evidence – particularly beyond the sphere of developed countries such as UK, USA and Australia – on how VOs and their actors use (or not) internal financial practices (Parker, 2003), the more so within smaller, locally-established and “less professionally managed” VOs (Dixon et al., 2006). There are even fewer studies documenting VOs’ internal financial/control practices and the interpretive perspectives in developing and/or non-Western countries, with some notable exceptions, namely Goddard and Assad (2006) and Abdul-Rahman and Goddard (1998). In this light, we seek to contribute to the literature by providing additional evidence on the state of these practices in a different context and by adopting an interpretive perspective/approach to explain the financial priorities, planning and control practices in the so-called locally-created voluntary organisations in Mauritius. Mauritius, a small developing island nation, has provided the socio-economic and political background in which to consider VOs and their financial/control practices. The environment is characterized by little to inexistent VO regulation, low and restricted access to funding sources, a relatively low involvement of professional paid staff in VOs, and some level of government/political influence in VO activities, According to the United Nations Development Programme (UNDP, 2005)[1], there are about 300 associations in Mauritius which met its definition of an non-governmental organisation (NGO) but little more is known about these organizations, especially as to their internal accounting and control systems. In this respect, a first step has involved the use of a questionnaire survey to determine the extent and range of internal financial priorities/practices used in such organizations, which is then followed by interviews with selected locally-established voluntary organisations (LVO) treasurers[2] to assess in greater detail the motivations and implications of these practices within their respective organizational context. The remainder of the paper is structured as follows: the next section reviews the relevant literature, following which, the specific context of VOs in Mauritius is presented. The research methods and findings are explained and discussed. Finally, the conclusions and implications/relevance of this study for academics and practitioners are provided. 2. Literature review 2.1 Focusing on local voluntary organizations Whilst a number of labels are used to describe non-profit organizations[3], the term “voluntary organisation” (VO) is selected in this study to imply a more neutral and broader set of characteristics, namely:

organisations made up of individuals who have freely associated themselves towards achieving a common objective; individuals collectively deciding on the VOs actions, directions and agenda; and individuals not seeking remuneration or monetary returns for their time spent or resources invested in pursuance of the VO’s objectives[4].

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Current published research appears to have focused principally on large and medium “professionally run” organizations and those operating within the new public management (sub-contractors for public services) and corporatisation (working with companies) sectors (as classified by Kaldor et al., 2003), whilst there has been less research on social capital/self (civil society building trust and networking) and activism (monitoring and challenging authority) organizations, set up within the local civil society (Gray et al., 2006; Harrow et al., 1999) – except for a few studies examining the broader managerial/organizational aspects of small, grassroots organizations (Toepler, 2003; King, 2004). As such, it is the focus on the people and their “emotionally-driven” efforts at community level, which is reflected in our understanding of a locally-created voluntary organization. We view the latter as a critical “subset” of civil society, in which “people come together to advance the interests they hold in common, not for profit or political power, but because they care enough about something to take collective action” (Edwards, 2000, p. 7). In our opinion, the above provides the requisite impetus to focus the present study on LVOs – including those involved in social capital/self and activism organizations activities, whilst excluding the direct “trans-national” effects of international VO activity operating in the selected developing country[5].

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2.2 Previous studies on financial and control practices in VOs In considering the role of financial practices in VOs, Anthony and Young (2003, p. 3) argue that the basic concepts of management control – such as budgeting, control, performance evaluation – are the same in both for-profit and non-profit organisations but “. . . because of the special characteristics of non-profit organisations, the way managers apply these concepts could differ in some important respects”. These features are not clearly spelt out by the authors and the use of the word “managers” in this statement suggests a bias towards large VOs, primarily staffed with remunerated professionals. Ashford (1989) and Paige (1992) are cited as two early studies on MA practices in VOs within the UK and USA context, respectively. Using questionnaire-based surveys, Ashford (1989) finds widespread application of basic MA practices such as budgets, regular management reports and variances whilst only a minority of organizations estimates unit costs or collates performance measures. The involvement of non-accounting staff in the use of MA information (including budget participation) are viewed to be very low and there are indications that informal measures of performance (e.g. public comments) are more preferred. Paige (1992, p. 58) finds that managers of his surveyed organizations display a “strong” need for specific MA techniques/aspects (e.g. setting up of cost centres, provision of regular variance reports, and identification of project direct/indirect costs), which turn out to be the least adopted ones across the sample, spurring him to conclude that some MA practices are being “underused” and urging managers to ensure these techniques are used “correctly and effectively”. More recently, Connolly and Hyndman (2004) examine the voluntary disclosures relating to MA practices in published annual reports of UK charities.

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Insofar as budget information is concerned, 24 per cent of large UK charities disclose budget-related data whilst only 3 per cent of small charities have done so (Connolly and Hyndman, 2004, p. 139) Table II. However, the voluntary nature of the disclosures makes it difficult to conclude on the actual scale of practices in such organizations. However, these studies (Zietlow, 1989) tend to be more descriptive and policy oriented with little attempt to explain the diversity in practices. In effect, these studies merely recommend that “more sophisticated” accounting practices need to be established to make VOs more efficient and effective. Based on a study of a small group of UK charities, Harrow et al. (1999, p. 165) report that their trustees attach more importance to internal aspects (planning, budgets, financial management) than to accounting/external reporting information. Similar findings emerge from case-based research (Wise, 1995) but these have been carried out in relatively large VOs. Nevertheless, these results provide evidence of some awareness of, and perhaps more importantly, some indication of a rich interaction with, the financial planning and control practices in charities. More recently, Gray et al. (2006, p. 334) argue that, in contrast to commercial enterprises, the absence of an acknowledged financial bottom-line in VOs has created less of an interest in accounting numbers amongst such organizations. As such, it is perhaps expected that VOs use financial techniques/practices and reporting methods in a more limited, selective and/or informal way, particularly in the context of developing countries and smaller organizations. In addition, the extent to which these practices are adopted may be related to the stated financial priorities of the VO and the treasurer. Finally, as mentioned earlier, the reasons for the state/use of financial practices may be linked to reasons beyond the rational/technical realm and are thus subject to issues relating to the wider socio-economic context and the way accounting meanings are socially generated. 2.3 The legitimating nature of financial and control practices in VOs We initiate this discussion by arguing that the existence and/or use of internal financial planning and control practices by VO treasurers may be viewed as symbolic representations – rather than actual instruments – of rationality. In turn, this message of “rationality” contributes to the maintaining and/or enhancing of the VO’s legitimacy. Setting aside the “popularity” of the legitimacy argument in management and administrative research (Suchman, 1995), it is contended that the pursuit of credibility social acceptance are viewed as critical aspects for VOs, particularly for their continued survival and influence in society (Gray et al., 2006; Taylor and Warburton, 2003). At the same time, Jang (2005, p. 301) asserts that accounting – as a practice – has become a powerful mode of thought and code of conduct in the modern world, closely associated with a natural extension of rational management. The links between accounting – as a symbolic representation of rationality – and legitimacy have been diversely addressed in the literature, such as Burchell et al. (1980), Richardson (1987), Gambling (1987) and Carruthers and Espeland (1991). For example, in the latter case, and based on a historical analysis of the use of double-entry recording, the authors argue that the practice of double-entry book-keeping is an embodiment of rationality and can be used to legitimate decisions and transactions without reference to other systems of meanings (1991, p. 60). Within the domain of institutional theory, Carruthers (1995, p. 315) argues that accounting practices are

merely rationalised elements that are incorporated to help maintain appearances, rather than been implemented and used as part of a technical and rational process. Hence, the symbolic use/existence of internal accounting/financial practices in VOs has legitimacy-seeking properties, in: . . . creating a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs and definitions (Suchman, 1995, p. 574).

In other words, if a VO adopts financial planning tool (a budget), the organization may be viewed by society or by a social group (the public, members, government, donors, etc.) as a “professional” and “efficient” one, although the actual benefits of having a budget system may be inexistent or insignificant within the organization. There are numerous studies arguing that internal financial and control practices display symbolic properties within organizations, on the premise that they help maintain and/or enhance the legitimacy towards one (or more) particular social group rather than serve a technical or functional purpose (Berry et al., 1985; Covaleski and Dirsmith, 1988; Ansari and Bell, 1991; Goddard and Assad, 2006). In addition, Suchman (1995) seeks to clarify the meanings of legitimacy and suggest three types of organizational legitimacy, namely: (1) pragmatic legitimacy, which rests on the self-interested calculations of an organization’s most immediate audiences, often involving a critical resource (financial) dependence between the organization and audience; (2) moral legitimacy, which rests not on judgements about whether a given activity (e.g. financial planning) benefits the evaluator, but rather on judgements about whether the activity is “the right thing to do” whilst focusing on the existence “sound” practices as evidence of doing “good”; and (3) cognitive legitimacy, which goes beyond evaluation and self-interest, and involves an affirmative backing, or a mere acceptance, of the organization based on some taken-for-granted cultural account (1995, pp. 578-82). The links between achieving organizational legitimacy and accounting practices are at the centre of a recent study of three NGOs in Tanzania, by Goddard and Assad (2006). The central concept they identified from the field research is the process of navigating legitimacy, whereby the NGOs adopt accounting and reporting practices (internal or external-led) to fit the specific demands and requirements of the donors and stakeholders and this will occur at various stages of a project’s or of an NGO’s development. As a result, “donor-led” accounting practices and systems have become prominent in the studied NGOs to re-assert and enhance the organization’s credibility vis-a`-vis the donors. However, such “ascendancy of accounting” has not penetrated and influenced the operational aspects and the authors observe that there is little relevance associated to internal accounting information needs (2006, p. 395). In other words, internal accounting practices – although “physically” present – are deemed “functionally inexistent” and seemingly almost out of place. The above study provides a vivid picture of how accounting fits within the social and institutional realm of NGOs and how it develops in relation to changes in conditions. However, and understandably so, the study’s research field is limited to one category of NGO (women/children’s welfare), which appear to rely extensively on donor

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agencies/institutions and whose funding are typically subject to an extensive set of funding criteria and rules. Other smaller local NGOs in the same context or in different countries might rely on a set of “softer” funds, i.e. membership dues, public donations, and occasional private sponsorships from companies or government agencies. Generally, it can be argued that such funds may have a lower set of pre-requirements and continuing conditions attached to them and will thus attract a different level and type of “legitimating motivations” amongst VOs, towards adopting or “displaying” the use of internal financial practices. As stated by Suchman (1995), and observed in Goddard and Assad ’s (2006) case studies, the symbolic use of accounting practices for legitimating purposes may not only arise due to the need to conform to externally-imposed rules but also because of deeper moral and cognitive-cultural motivations. One key aspect of the legitimacy argument is its focus on the organization as a “monolithic” entity that seeks legitimacy from some social group, which is typically situated at a distance and “beyond” the structural boundaries of the organization: inherently a description that again appears suited to case studies of large organizations. Whilst the focus of the literature seems to be more towards external constituencies (e.g. government, professional associations), there are also internal participants who make legitimacy evaluations that can affect their own levels of involvement (Ruef and Scott, 1998). Interestingly, Ruef and Scott (1998) discuss on the “location” of the legitimation processes in the context of an organization’ divisions/hierarchy, i.e. at what level or unit. They identify three units/levels, namely: (1) entire organizational population; (2) individual organizations; and (3) subunits and specialized aspects of organizations (1998, p. 880). Within the VO context, one such “specialized aspect” can be the financial function, whose operation is typically shouldered by the treasurer and whose activities can normatively be viewed as ideologically “mismatched” to organizational values geared towards “charitable” and “altruistic” motives[6]. In this case, the legitimating nature of internal financial and control practices may not be necessarily aimed at external stakeholders but also (or alternatively) aimed at internal “non-financial-oriented” participants/stakeholders (e.g. executive members). On a more critical note, other interpretive studies have adopted a nuanced stance on the “omni-dominance” of the legitimating argument and its applicability to all categories of organizations. For instance, in a study of a university budget system and a financial analysis exercise in a school district, Boland and Pondy (1983) advocate that accounting practices may have a dual role, in serving both a rational and legitimising purpose. Within the context of cost accounting practices in military repairs facilities, Ansari and Euske (1987) contend that, over time, technical-rational reasons can pre(or post-) dominate social-institutional ones. Also, in studying accounting in a community co-op, Westerdahl (2001) reports that the expected adoption of specific accounting practices/policies for legitimating purposes (towards external stakeholders) is partly “mitigated” because of the other symbolical effect these practices have on organizational identity, i.e. towards re-defining the co-op as a business rather than a community-led organization. Finally, a more recent finding is that in very peculiar contexts – e.g. a highly “party-politicized” national health service – accounting practices are not viewed as important sources of organizational legitimacy and as such

remain “minimal practices” with little legitimating as well as rational purposes (Ballas and Tsoukas, 2004). This last point is reminiscent of Choudhury’s (1988) comments relating to the symbolic absence of accounting systems in certain organizations and the possibility that such absence (or its limited presence) may also have a legitimating purpose (1988, pp. 554-5). This section has provided a brief review of the various characteristics and roles of VOs, the published literature on the state of internal financial practices in such organizations, and an assessment of the literature relating to the symbolic role of those practices in maintaining or enhancing legitimacy. In particular, the evidence on less professionally managed and less structured VOs appears to be very limited and the views/perceptions of treasurers operating in such organizations can be useful starting points to assess the rational as well as the legitimating nature of those practices. Initially, however, a more detailed picture of Mauritius, its VO context and its implications for accounting/control practices, need to be presented. 3. The context of the study Mauritius, a former French and British colony, has a population of 1.2 million people with a per capita income of US$ 5,260 (World Bank Country Brief) (available at: www.worldbank. org/mauritius). This period of dual colonization has created a relatively rare cohabitation of French- and British-based perspectives which are still visible in the political, press, language, and legal arena. In addition, the ethnic origins and religious faiths of the current population are quite diverse. In comparison to its African counterparts[7], Mauritius has performed generally well in terms of economic growth and standards of living. However, a slowdown has recently been observed, due in part to the dismantlement of various preferential trade agreements (mainly in sugar and textile export) and declining foreign direct investment, leaving tourism as the only expanding sector in the economy. The prevalence of a few influential groups is predominant in the ownership structure of the private-sector companies in Mauritius and a largely family-driven management leads to a perceived high level of opacity in the running of private-sector companies. The so-called prevalence of “petty” and “grand” corruption is also an area of concern in Mauritius[8]. Except for the mandatory publication of financial statements, companies are generally reluctant to disclose any financial-related information and government financial reporting remains at an infancy stage. This has had the effect of slowing the adoption of disclosure and transparency mechanisms (e.g. such as corporate governance, accounting standards) in every sphere of society, including in VOs. There is a wide diversity of voluntary organisations created and operating in Mauritius. Apart from the “socio-cultural” organizations that seek to represent or reflect particular religious/ethnic denominations, there are the more mainstream associations, e.g. health, human rights, social welfare, special needs, sports/leisure, community development, and local neighbourhood, etc. Such mainstream associations are known to receive less regular government funding/support than the socio-cultural ones, and thus rely more on members’ subscriptions, public donations and private sector sponsorships. However, the government departments and agencies are constantly approached for logistical support and funding from the different VOs and historically, this has widely contributed to the perception that the government has to assist in almost every voluntary venture. Furthermore, government permission (or at least a notification) is

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often needed for VOs to operate in activities involving health and education. Also, local registration is perceived as a critical aspect for anyone wanting to carry out voluntary activities and sponsors (private donors, members of the public and government agencies) are suspicious of, and refrain from supporting, “un-registered” associations. The statutory framework for VOs in Mauritius is primarily embodied in the Registration of Associations[9] Act 1978. The accounting/reporting requirements are very limited and focus on the maintenance of financial records and submission of audited financial accounts. The treasurer/auditor need not be a qualified person (except for very large associations) and it is worth noting that most VO treasurers/auditors in Mauritius are not remunerated. There is no public access to the annual reports of associations in Mauritius and although associations are technically subject to income tax on their surpluses, there has been very little enforcement and monitoring from the tax authorities. Currently, there are no rules, guidelines or best practice statements regarding accounting practices for Mauritian VOs. Hence, the adoption of financial practices remains a voluntary one in such organizations and this can be viewed in the context of the origins and broader use of accounting practices in Mauritius. Firstly, a sizable number of accountants initially work and train with the Big Four firms and are regularly exposed to accounting practices from their developed countries’ counterparts. Secondly, a significant number of local accountants have qualified as members of UK accountancy bodies and have obtained qualifying experience in the UK. Hence, one can therefore expect some degree of “practice spill-over” of private sector-based accounting practices from companies to local VOs but not significantly so due to the few opportunities for formal relationships between the accounting practitioners and VOs (e.g. for tax advice, accounts preparation or during audits). 4. Research methods 4.1 Data considerations The registrar of associations and the UNDP in Mauritius contend that there are about 6,000 registered associations in Mauritius. In view of the very broad legal definition of an association, only a small proportion of these associations (300) focus on “charitable” activities (UNDP, 2005). However, no detailed list of these associations is publicly available. We have obtained an up-to-date list from the Mauritius Council for Social Service (MACOSS), which is an umbrella body representing the activities of entities involved in charitable, welfare and community development activities in Mauritius. MACOSS maintains a relatively strict affiliation policy and provides an annual directory of all its member associations[10]. The lack of evidence on VOs’ practices in Mauritius has been one of the main reasons for relying on two data collection methods, namely the use of a questionnaire survey to assess the extent/scale of financial priorities, planning and control practices in VOs and the use of face-to-face interviews to explore the factors that contribute to the use of such practices in selected VOs. In addition, previous authors have been critical of accounting and control research that relied on a single method principally when it involves the use of questionnaire survey, e.g. Birnberg et al. (1990) and Abernethy et al. (1999). The latter (1999, p. 24) particularly argue for the use of multiple research methods to enable some degree of triangulation of the findings results. Such an approach is observed in some of the relevant VO literature (Harrow et al., 1999; Dixon et al., 2006; Goddard and Assad, 2006).

4.2 Questionnaire-related procedures As of July 2005, the MACOSS directory displayed 205 registered associations but the latter has included a sizeable number of national branches of international organisations (e.g. Save the Children, Rotary Club, Lions Club, etc.) and some government-created bodies – which have been removed. Associations bearing slightly different names, but which are essentially the same ones (e.g. same address or contact name), have also been identified. This has resulted in a final list of 106 organisations. The questionnaire has been developed from other instruments and findings reported in similar studies, namely Ashford (1989), Wise (1995) and Harrow et al. (1999), as relevant to the Mauritian context. In addition, some of the questions are inspired from a “Financial Management Health Check” designed by a charity – known as Management Accounting for NGO (MANGO) – which supports NGOs’ accounting practices. The key headings for the questionnaire are “Your Views as a Treasurer” “Planning and Budgeting Practices” “Reporting System” and “Background Information”[11]. The questionnaire has been pilot tested amongst five local accounting academics, practitioners and VO treasurers, and has been amended accordingly to address concerns relating to ambiguity/language and the supply of sensitive information. The questionnaire was mailed to each LVO’s registered office and addressed to the treasurer, with a reminder message (e-mail/phone) sent by the deadline return date. 4.3 Interview-related procedures Whilst the findings of the mail survey are expected to provide some evidence on the scale and use (or not) of financial practices, the second stage has involved delineating more in-depth views on the role and meanings associated to such practices in VOs. As observed within the recently published literature (Myers and Sacks, 2003; Goddard and Assad, 2006; Dixon et al., 2006), there has recently been a greater recent emphasis on using more qualitative methods based on interviews and direct observations, i.e. generally summarised as being the result of more interest in the actors themselves rather than merely in the formal structures. The semi-structured interview is based on seven open-ended questions[12]. The questions are sufficiently broad to encourage discussions on the context, basis and extent to which such practices are being used (or not). The key elements of interest sought from the respondents have been on the role of treasurers, identification of stakeholders, accountability and communication, the role of treasury as perceived by other members and measures of performance, as well as some background questions relating to the profile of the respondents and the financial planning and control practices in their respective organizations. In most cases, the interviews have been carried out in French and/or Creole to facilitate interaction, and thereafter these have been translated to English. 5. Findings 5.1 Survey and interviews responses About 34 completed questionnaires have been received, representing a response rate of approximately 32 per cent. Arguably, this is relatively a low-response rate in comparison with other similar studies but this can be attributed to a general reluctance amongst local people to discuss financial aspects/issues. There are no indications of a response bias in terms of the types of organizations that did reply to the survey and no significant differences have been noted insofar as early vs late respondents are concerned.

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There is, however, sufficient information to allow for an exploration of the internal practices. Cross-tabulations, mean comparisons and one-way ANOVAs have been carried out – where statistically possible – across various categories of respondents across categories (type of LVO, size, source of funding, experience level). No significant differences in the type of responses have been found. Nevertheless, there is internal consistency in the individual responses and this suggests that the questionnaire can be useful as a data collection instrument in other contexts. Table I provides a profile of the organisations that have replied to the current study, in terms of activities, income level[13], sources of funds and the average experience of the respondent. There is a relatively even mix of organisations in the sample in terms of activities and income level. The results show that 32 per cent of the respondents consider members’ subscriptions to be their main source of income. About 44 per cent of the VOs rely primarily on public donations and corporate/private sponsorships and the remaining 24 per cent depend on some form of government funding/support. The socio-cultural organizations and the LVOs operating in health promotion/awareness appear more dependent on government funding compared to other organisations. It is known that such organizations receive government grants/subsidies – for meeting their regular operational costs – and logistical support. After contacting ten organizations (within the categories described in Table I), eight of their treasurers agreed to in-depth interviews. For confidentiality reasons, the names of the LVOs are not provided but a description of their activities and a measure of the interviewee’s experience in treasury or other executive duties are detailed in Table II. It is noted that a diverse set of organisations/interviewees participated in the interview stage. Whilst the majority of the treasurers do not have any formal accountancy qualifications or training, they nevertheless had learned the accounting “trade” from their past experience in the LVO or have gathered techniques/practices from the private sector companies or government departments. All interviews have lasted between 30 and 45 minutes. Additional information on the activities of each LVO has also been collected. 5.2 Financial objectives/priorities The first aspect is the range of potential treasury objectives and their relative importance amongst the respondents. Table III displays the percentage of respondents who have replied “very important” to each objective and the mean scores for each statement (range of responses in brackets – from 1 not important to 5 very important)[14]. Although there is a fairly narrow range of high-mean scores (4.03-4.79) for all objectives (i.e. high importance, except for maximising “surplus over expenditure”), the frequency distribution shows some notable points of difference. Based on Table III, treasurers appear to give more weight towards satisfying the basic book-keeping duties (79 per cent), to meeting the statutory-led information requirements (to regulators and the executive committee, 77 and 68 per cent, respectively, and to a lesser extent donors, 62 per cent) and to ensuring the payment commitments (74 per cent). This relatively “narrower” and “book-keeping oriented” understanding of the treasurer’s role in Mauritian LVOs is partially reflected in the interview responses. For instance, five of the treasurers focus on the financial accounting roles and duties:

Women and/or children’s charity Local development and environment protection Socio-cultural organizations Health promotion and awareness Senior citizens associations Associations supporting special needs

LVO category 5 8 4 6 4 7

2 7 1 2 3 3

3 1 3 4 1 3

Members’ subscriptions Members’ subscriptions Government grants and subsidies Government grants and subsidies Members’ subscriptions Public fund raising events

Count (N ¼ 34) Less Rs 500,000 More Most important sources of funds

Income Level (count)

2-42 4-38 1-37 8-15 3-23 4-18

Experience of respondent (range of years)

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Table I. Profile of responding LVOs and treasurers (questionnaire survey stage)

LVO7 LVO8

LVO6

To assist children with special needs Environmental protection and conservation To support and treat people with substance and alcohol abuse To support and provide educative services to the disabled To regroup senior citizens in the region and to organise activities for them To promote family planning and reproductive health in the region “Socio-cultural” welfare organisation Motherhood support movement (helping/educating young mothers and “pro-life” advocate VO)

LVO1 LVO2 LVO3 LVO4 LVO5

Table II. Profile of responding LVOs and treasurers (interview stage)

Objectives/activities

7

5 6

4

10 25 6 10

Interviewee’s experience in LVO (years)

No formal training Formal accountancy training

Formal accountancy training

No formal training Formal training received as government employee Formal training No formal training No formal training

Interviewee’s level of accounting training

282

Name

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Statement (N ¼ 34) To ensure all financial transactions are properly accounted for To ensure that regulatory bodies (such as the registrar) are fully informed of the financial situation of the association To ensure that the association has enough cash to settle its payments To ensure that the executive committee is fully informed of the financial situation of the association To ensure that major donors are fully informed of the financial situation of the association To ensure financial stability for the association To ensure all spending made does not exceed what was initially planned To ensure that members are fully informed of the financial situation of the association To ensure that all members pay their dues To have a positive cash balance in the association’s bank account To make the maximum surplus of income over expenditure

Percentage who responded “very important” (rating 5)

Mean score (actual range min-max)

79

4.79 (4-5)

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283 77

4.62 (2-5)

74

4.71 (3-5)

68

4.65 (3-5)

62 56

4.41 (2-5) 4.53 (3-5)

56

4.26 (2-5)

56 44

4.38 (2-5) 4.03 (2-5)

41

4.12 (2-5)

21

3.36 (1-5)

I handle and control the financial matters. I record in the cash book, payment vouchers and ledger accounts. I am also responsible for dealing with requisitions and purchase orders (LVO6, similar comments from LVO2). I need to be transparent, to act in conformity with rules and regulations and submit the report at the end of the financial year to the Registrar of Associations. I also have to make the routine payments and sign the cheques (LVO3). I have to be careful with entering the financial transactions. I need to prepare cheque payments, compute salaries and keep up with the pending bills (LVO5).

In contrast to the above, the internal financial management and control priorities appear to be secondary, e.g. financial stability (56 per cent), control of spending (56 per cent), and recovering dues from members (44 per cent). The latter is even observed amongst organisations which have stated that subscriptions are their main source of income. In fact, no conclusive or discernable patterns can be observed from cross-tabulations (and ANOVA tests, where appropriate) comparing the different priorities attached to specific treasury objectives and the: . category of organization; . its source of revenue; and . the treasurer’s experience. Nonetheless, interviewees from other organizations identify a broader set of accounting, planning, and control aims. For instance, two respondents have remarked:

Table III. Statements of treasury objectives (financial priorities)

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I manage the income and expenditure of organization. To work for the interest of the organization, I must see to it that there are not too many expenses. For example, we had some major developments last year and expanded the building and we now need to pay for the salaries of two employees. So, I end up being more economical and always on the look out for discounts, making sure the money is spent for the purposes decided by committee (LVO4). I look after the expenses, to see if these are in tune with what has been voted at the meeting and I proceed in accordance with the budget. I want to make the organization become more financially self-sufficient by organizing fund-raising events, renting the building and selling magazines. But, I cannot by myself take a decision without the consent of the financial committee (LVO7).

In these two cases, the treasurers allude to a broader use of accounting for planning, control as well as authorisation purposes. Both make substantial reference to technical rationales and concepts in their discussions. This can be contrasted to the “informality” of the financial aims in relation to the non-financial ones, which are emphasized in some of the following statements: My role is to keep track of expenses for the association. I am myself a parent benefiting from the services of this association and I work towards the welfare of children who are not being taken care of in the mainstream. Some of my tasks are to manage the grants of the handicapped children and to help the slow learners [i.e. children with learning difficulties] (LVO1). We are accountable to our primary motive in this organization, to our principles of helping young and new mothers, to welcome them and keep in contact. As such, the commitment and dedication in this action encourage all of us to make the organization more productive and more stable financially. So, I make sure we consume the minimum and produce the maximum for our beneficiaries and for our cause (LVO8).

From the survey responses, it can be argued that most treasurers assign relatively a lesser importance to the internal planning and control objectives within the organizations in comparison to the basic accounting/book-keeping duties. From the interviews however, there are cases where the treasurers emphasise the need to better control expenses and maximise the use of resources, even if this does not necessarily mean that they formally use the relevant techniques/tools. Given the absence of published evidence on the relative importance of various treasury objectives within the voluntary sector, these initial findings can only be partially compared to Harrow et al.’s (1999) survey of information needs (by charity trustees) and clearly VO treasurers in the present study do not rate internal information needs as highly as compared to those in Harrow et al. (1999). 5.3 Financial planning (or budgeting) practices The use of financial planning practices, as gathered from the survey, is detailed in Table IV. As mentioned previously, budgets are voluntary practices and so are the associated procedures, e.g. participation/dissemination, approval, and authority to change the budget. Whilst there is a relatively significant percentage of LVOs consistently using some form of planning or budgeting system (59 per cent) – principally for planning costs than revenues – and some form of approval (whether by the executive committee or members’ assembly), there are lower and diverse levels of adoption for other detailed

Planning and budgeting practices (N ¼ 34) A plan is prepared for all the expenditures needed to run the association for the coming year A plan is prepared for all the income revenues expected to be received during the coming year The plan includes enough income to pay for all the expected expenditure, i.e. no planned surplus or deficit The budget is circulated and approved amongst the members of the executive (managing) committee A plan is made of when the receipts and payments will be actually received or paid during the year The plan is circulated amongst all the members of the association, for information The plan is circulated amongst all the members of the association and formally approved by the members (e.g. during a general meeting) The executive (managing) committee has the flexibility to change (increase or decrease) money allocations The executive (managing) committee needs the approval of the members to change (increase or decrease) money allocations during the year Payments cannot be made unless the item was included (originally or amended after) in the plan All project proposals for organizing a specific activity/event must include a plan of expenditure and income

Percentage Percentage responding responding “always” “rarely or never” 59

3

50

9

32

15

68

6

35

12

32

15

64

8

35

15

32

29

41

21

41

12

practices and related procedures. For example, only 32 per cent circulate their financial plan (budget) to members and only 35 per cent prepare a receipt and payments plan (cash budget). Yet, this is considerably higher that the disclosed rates of adoption in most British charities (Connolly and Hyndman, 2004, p. 139). On the other hand, there is a high level of flexibility granted to the executive committee once the budget is approved, as depicted by the low use of procedures to restrain changes to approved budget items. The cross-tabulations indicate a higher degree of relationship between those treasurers who prioritised the control of spending (compared to other objectives) and the use of a higher number of financial planning practices/procedures. However, there is little or no link between comparing the different treasury objectives and the: . category of organization; . its source of revenue; and . the treasurer’s experience. As regards the interviewed organizations, five treasurers have posited that they consistently and formally prepare a financial plan; either budgeting for costs only or estimating revenues/expenditure as well for the upcoming financial year. However, the extent to which budgets are used and acted upon varies considerably. The various comments below from the treasurers indicate a range of use and implications that arose from the preparation of a financial plan. For instance, one treasurer stated:

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285

Table IV. Use of planning and budgeting practices

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I prepare a budget for our expenses at the beginning of the year to know how much money we need to ask from private donations and sponsors. Very often, it is not enough and then the committee is asked to approve that I take some money from our savings account. This has been happening in the last few years and the other members do not question the numbers too much. I am trusted and viewed as an advisor on financial matters. So, they do trust the information that I calculate and provide. This is the only time in the year the budget is discussed with the committee members (LVO8).

A similar scenario emerges from the treasurer below, who comments on the use of a fairly detailed financial planning system in response to external requirements: We prepare a very detailed budget of our spending needs as we depend on the Government Agency [coordinating substance abuse treatment and support] to pay for about 70% of the association’s expenditure. It has happened that we had to amend our budget because the accountants there were not happy with our propositions. We are then required to send monthly returns of our financial situation to the Agency. It is very difficult to ask for additional money from the Agency and so we depend on the other private sponsors to help us. They are less demanding and trust the organization. The members of the management committee do not look so interested with the financial information but they are keen to see me give regular feedback on my dealings with our donors (LVO3).

Both above-mentioned treasurers make very limited use of the budget for internal purposes with little interaction with other non-executive members. The treasurer of LVO6 describes a similar situation of financial planning and monitoring to that of LVO3, vis-a`-vis its main funding body (an international agency). Also, a more limited use is also applicable in LVO2, where the treasurer prepares a budget to support his claims to various sponsors but does not share the information with anyone internally, save for the organization’s President. In contrast, a higher degree of internal involvement with the financial plan is perceived in the case below: The treasurer is not a person who can do anything he wants to do with the money of the association. There’s a system, decided by religious custom, of collecting money from the members to re-distribute to the poor. The plan is presented to a Financial and Management Committee meetings and also given to members at the first monthly meeting. There are always discussions because of sensible cases (how much money to donate to individuals in need) in the past and sometimes because they don’t read the numbers before. A report of how we used the money is communicated twice during the year to members – after being read and approved by the Committees – but very often a member would informally ask me about an item of spending (LVO7).

In spite of the absence of a statistical link between the source of primary funding and the organization’s use of financial planning procedures, the interviews indicate the use of the financial plan to support claims vis-a`-vis external financial providers – whether these are clearly identified ones (i.e. LVO3, LVO6) or vaguer at the time of planning (LVO8 and LVO2). The exception to this case is LVO7, whose constituency involves members of a specific religious community and from whom the LVO’s financing is sought in terms of cash donations. The nature of the organization’s activities (collecting cash donations to help the poor members of the community) certainly plays a role in the structure and use of financial planning practices, coupled with evidence of political wrangling and suspicion as to who has the final say on any spending/assistance decision. A structured set of controls, procedures and committees has been established to retain control of the cash (treasury function), and the elected treasurer appears to

continuously justify his actions in the overall financial decision-making process. Unethical behaviours/practices (e.g. corruption, frauds, and embezzlements) are a constant concern in the Mauritian environment and the use of such a “structured” system may aim at avoiding any perception of wrongdoing. The other three treasurers (from LVO1, LVO4 and LVO5) have stated that they do not have any regular or formal financial planning mechanism but were aware of the techniques. For instance, the treasurers from LVO1 to LVO4 see no particular use in drafting a budget since they believe the small size and rather simple structure of the associations has made it easy to control and manage the expenses on an informal basis. They have both been the treasurers for a relatively long period of time and as such, they feel fully conversant with the financial aspects of their respective organization. Furthermore, the treasurer from LVO5 argues it can be more useful to provide regular reports during the course of the year rather than getting involved in what he perceives to be essentially a time-consuming process.

Voluntary organisations

287

5.4 Reporting, control and performance evaluation The final part of the questionnaire has been to assess the reporting and control mechanisms, which is considered in the literature as being a means through which VOs may evaluate their performance (Connolly and Hyndman, 2004). Table V provides the responses as to the extent of control/feedback practices vis-a`-vis executive committee and “ordinary” members. The last two practices that are included are part of the statutory reporting requirements and this has influenced a high level of reported use. Comparatively,

Reporting practice/technique (N ¼ 34) An income and expenditure report is circulated in every normally convened executive committee meeting (e.g. monthly or bi-monthly or every three months) A receipts and payments account is circulated for every normally convened executive committee meeting (e.g. monthly or bi-monthly or every three months) A report, comparing the budgeted and actual figures, is provided to executive committee members Suggestions, decisions or action points are minuted, in response to the report stated in above Financial reports for specific projects (activities or events) are submitted to, and formally considered by, the executive committee An interim (e.g. half-yearly) income and expenditure account, and receipts and payment account is circulated amongst all the members of the association. (by mail or during a general meeting) The members have the possibility to query (by mail or during the general meeting) on the interim report The association’s annual audited accounts are approved during the annual general meeting During the annual general meeting, the members have the possibility to query on the items in the annual audited accounts

Percentage responding “always”

Percentage responding “rarely or never”

50

9

50

9

21

27

12

47

56

9

32

35

32

24

100

–

100

–

Table V. Use of control and reporting practices

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however, the basic financial control and feedback mechanisms are not widely used by the associations in this sample. The relatively low use of interim reports is noted (32 per cent). Finally, there is little follow-up from the financial planning, e.g. in terms of variance reporting/analysis. Hence, even if the information on budget performance is provided, the committee members do not appear to act upon it, which suggests that such control practices do not assist organizations in improving their activities or finances. However, the interviews provide a more detailed perspective on the control practices and on the issues in evaluating an LVO’s performance. Firstly, on the financial control aspect, the treasurers from LVO3 and LVO6 are subject to a regular and formal reporting regimen in light of their financial dependence on government agencies/departments. One treasurer emphasises the need to meet deadlines for their reports: A monthly return of funds used, an income & expenditure account and the number of clients helped are provided to the Agency. These reports are sometimes discussed in the management committee before being sent but it is rarely the case. The main reason is we do not want to miss the submission deadlines. They occasionally come back to us with some questions on the nature of some of the spending. Recently, it has been agreed that a nominated employee of the agency is allowed to attend our management meetings. Also, if a sponsor has given us an important sum of money for a project, we do send some statistics and reports. So far, we have not received any questions from these donors (LVO3).

The treasurer from LVO6 provides a similar description of his reporting arrangements, although the frequency (e.g. monthly, quarterly, six-monthly) is noticeably higher due to its reliance on funds from one international development agency supporting planned parenthood. Regarding the “socio-cultural” welfare organization (LVO7), the treasurer has to provide a detailed monthly report on income and expenditure to the financial committee and to the management committee. He states: Any application for financial support, e.g. someone asking money for overseas medical treatment has to be vetted and ratified by each of these committees. I have to back up all my existing expenses with supporting documentation as well as planned expenses (copies of quotes, etc.). Any cash support must be transferred via a bank account or directly paid to the clinic or school. In the past, I have had to produce the supporting documentation to the committee members, as they felt that they needed to investigate particular cases brought to their attention (LVO7).

For two other interviewed treasurers (LVO2 and LVO8), there are no formal reporting processes originating from donors. In contrast to the previously mentioned LVOs, LVO2 and LVO8 are not overtly dependent on a fixed source of funding (from government or private bodies). As such, their extent of reporting can best be described as being on an ad hoc basis. Similarly, there are no rules imposed on the treasurer as to when a report should be presented to the executive committee or members. It is left to the treasurers to decide on the timing and breadth of such reporting. They state: Whenever suitable, I provide feedback during meetings with sponsors and I directly communicate with the members. They are all invited when we have events and so they can see for themselves. Having worked on the association’s finances for some time, I feel able to reply to any questions more or less on the spot. I believe this is viewed as being

more transparent. Committee members trust me a lot, as I provide and receive much confidential information. Some of the past presidents and committee members have specifically asked for a financial report but this has not been the case recently (LVO2).

Voluntary organisations

I am fairly familiar with the actual amounts we receive and spend and I usually limit my monthly [verbal] report on how much money we have at the bank. Everyone seems satisfied with this. I sometimes provide feedback to the sponsors and they have not yet asked me for written financial reports or receipts (LVO8).

289

A higher degree of informality is perceived – with regards to the LVO’s reporting – in the following statement, with similar comments from the treasurers of LVO1 and LVO4: About every 3 months or so, I give a summary report on how much we have spent and received. The only times in the year I get questions are during the annual general meeting, just after having done our main fund-raising event or if there have been rumours about an increase in member’s fees. Otherwise, both committee members and other members generally seem to prefer to ask me questions on finances in private. They perceive a lot of honesty and transparency in my work (LVO5).

The final element investigated relates to the indicators the treasurers perceive as measures of success for the LVO (financial and non-financial). The measures put forward by the treasurers are displayed in Table VI. The respondents mention very few financial measures and even in such cases, the focus are on reducing costs and achieving a good fund raising performance. Also, a “clean” audit report or “up to date accounts” are perceived as financial success “measures” (LVO2, LVO3 and LVO6) and only one organization refers to the achieving of budget targets (LVO6) as an indicator of financial success. On the other hand, VO treasurers provide a detailed list of non-financial measures but when queried on the collection/dissemination of these, only two (LVO6 and LVO3) systematically collect such information to meet the reporting requirements of their sponsors. Hence, there appears to be a “disconnect” in terms of a rather detailed understanding of key measures of VO performance (particularly non-financial ones) but yet little impetus for action in collecting/circulating these performance measures. At the same time, however, it is noted that some of these measures are very much about ensuring the LVO retains or improves its reputation, relations and “importance” vis-a`-vis different constituencies (public, media, members, beneficiaries, government, and sponsors). For example, LVO7, as one of the socio-cultural organizations seeking (and competing) to represent a religious community, considers that it needs to maintain good relations with government and political parties to be viewed as a credible “representative” of this community. Similarly, LVO8 – a relatively new organization supporting teenage mothers – has quickly established itself in the media and in the public eye as an advocacy group supporting the “pro-life” agenda in Mauritius.

6. Discussion of findings 6.1 Statements of financial priorities The information gathered from the survey and the interviews suggests that the financial priorities of LVO treasurers are strongly geared towards meeting their

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Name

Objectives/activities

Non-financial

Financial

LVO1

To assist children with special needs

Reduction in costs

LVO2

Environmental protection and conservation

LVO3

To support and treat people with substance abuse

LVO4

To support and provide educative services to the disabled To regroup senior citizens in the region and to organise activities for them To promote family planning and reproductive health

Number of projects achieved Number of children helped Feedback from parents Achieving a particular project Feedback from members National recognition Number of clients who quit drugs and smoking Number of persons applying for support Feedback from volunteers Feedback from beneficiaries

LVO5

LVO6

Table VI. Measures of performance and success

LVO7

Socio-cultural organisation

LVO8

Motherhood support movement

Feedback from members Good communication with members “Compliments” from public Satisfaction on services offered Number of persons seeking assistance Increase in membership participation Feedback from members and public Good relations with government and political parties Feedback from beneficiaries Active members Media coverage and public recognition

Accounts up do date

“Clear” report from auditors

Successful fund raising Control of costs

Audit Report Budget/targets achieved

More donations from members, and other sponsors

Keeping costs down

Note: The italics measures are those that were actually collected and disseminated to other stakeholders, within, and/or external to, the VO

statutorily-defined responsibilities: keeping proper records, filing accounts with the regulatory authorities and donors (where appropriate) and ensuring the organisation’s solvency. This can be interpreted as a commitment by treasurers towards their legal responsibility and accountability vis-a`-vis the association and its members, akin to the “stewardship” role of company directors towards the shareholders. But, as mentioned in Gray et al. (2006, p. 333), the actual financial accounting outputs and economic performance identified from such a process may be of little relevance to the LVO, its members or other stakeholders.

Although this paper focuses on internal accounting practices, such an emphasis on the financial accounting aspects can be viewed as an opening part of a symbolic expression of rationality, aimed at maintaining the LVO’s legitimacy. One can postulate that the legislator had required the recording of transactions, the approval and filing of annual accounts as a means to “promote” the use and development of formal accounting and accountability in LVOs, i.e. using accounting records as “source of data” the approval of accounts as an “example of an accountability and discussion forum” and the filing of accounts as the “logical consequence” of such processes. However, from the evidence gathered, one can conclude that all VOs and their treasurers appear to treat these three processes as “disconnected” elements, which are “ticked off” to communicate a sense of normality and rationality about the organization, and with little consideration of the functional use of the outputs generated from such processes. In addition, most of the other respondents express their role as one being primarily involved with controlling expenses for the benefit of the LVO’s charitable activities. There are several statements supporting an overall focus on “efficiency” and/or “economy” in the use of funds (e.g. LVO1, LVO4, LVO8), which do not appear to be driven or conveyed by external stakeholders (donors or members). Within the non-profit realm, these priorities are possibly some of the only “acceptable” ones that a treasurer can publicly put forward, without them being seen as contradictory ones to the social objectives of the LVO. Such priorities yet convey a sense of seriousness (Westerdahl, 2001, p. 70) and commitment from the treasurer’s point of view. In these cases, this message does not seem to be directed to external stakeholders but rather to the closer constituents of the LVO. In other words, the treasurer’s adherence to certain financial priorities may be viewed as an attempt to legitimise his/her position vis-a`-vis other internal actors, reflective of a moral legitimacy, i.e. a judgement that such priorities are the “right thing to do” in these circumstances (Suchman, 1995, p. 5) 6.2 Financial planning and control practices The survey responses have provided evidence as to the use of financial planning and control techniques by the LVOs, with particular emphasis on the initial stages of a budget process, i.e. the forecasting of operational costs, the communication of the plan and its adoption/approval by managing committee/members. Other application of the plan at a later stage – for co-ordination, motivation and evaluation purposes – are not noted as being relevant, thereby limiting the technical usefulness of the whole process. For instance, although 68 per cent of treasurers circulate a budget amongst committee members for approval, only 21 per cent eventually provide a variance report and 12 per cent act upon the information. Also, only 32 per cent support the circulation of the budget to the members, even for information only. In effect, as in Paige (1992), these findings initially point to a rather un-sophisticated use of financial practices. The ensuing interviews have provided additional insights in linking the use of financial planning and control practices and the context in which these are “operated”. In two cases (LVO6, LVO3), the maintaining of legitimacy clearly appears to be a core reason for adopting a relatively sophisticated financial planning and control mechanism. Although Goddard and Assad’s (2006, p. 388) study focused more extensively on the concept of navigating legitimacy, there has

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been a similar observation that LVO6/LVO3 have sought a “. . . judicious conformity with accounting requirements . . . ” imposed by their sponsors. Also, there is evidence of strong “resource dependence” (high per cent of funding dependence) and a “closeness” (member of the funding agency co-opted to the LVO’s management meetings) between these two LVOs and a specific funding body. In such cases, the use of financial and control practices contribute to the maintaining and enhancing of a pragmatic form of legitimacy. As stated by one of the treasurers, other executive members see little relevance in the outputs of the financial planning and control system for their decision-making. There is thus little interaction between the VO actors and the accounting outputs. In this respect, as argued in Goddard and Assad (2006), the financial practices symbolically provide a sense of sound financial stewardship and the treasurers’ steadfast adherence to these requirements can best be construed as a strategy to maintain/enhance the VO’s legitimacy towards its main sponsor. This rather direct and rather unambiguous form of legitimacy appears to be the exception than the rule compared to the other six LVOs. Firstly, LVO7 also has a financial dependence on one source of funding (members/donors) and it has over time created a layer of structures (financial committees, management committees) and processes (approval by committees, members meetings), in addition to financial/control practices to convey the image that decisions are not taken “lightly” and not by a selected few. The main objective of this socio-cultural organization is to disburse money – from members/donors from the community – to support needy people in the same community. As such, its credibility rests on the “proper” sharing of these donations and the perception that this is done objectively. Otherwise, people may join similar organizations, thereby reducing the LVO’s legitimacy. In such cases, and in the absence of a defined interlocutor to which the LVO can navigate to (as in LVO3 and LVO6), we contend that such an organization seeks to maintain and enhance a moral form of legitimacy through the symbolic use of its financial/control practices. In effect, this reliance on “sound” practices serves to demonstrate a good-faith effort to achieve valued, albeit invisible, ends (Suchman, 1995, p. 580), as it is indeed difficult to determine clear outcome measures when one is involved in donating cash to individuals for a variety of non-comparable reasons. In addition, the continuous oversight and involvement in the financial procedures and in the treasurers’ affairs is reflective of the constant need by LVO7’s executive members to demonstrate that procedures are being adhered to. The treasurer’s comments are also suggestive of a situation where he is expected to justify his actions and his use of financial planning/control practices is aimed at conveying his own ethos of professionalism, efficiency and rationality, i.e. legitimating his actions/decisions to an “internal” audience. In contrast to the above, a different phenomenon is at work when considering the evidence from two other LVOs (LVO2 and LVO8). Although the treasurers are both knowledgeable in accounting matters, they report a very limited use and circulation of the budget, whilst favouring a more ad hoc approach to the reporting of financial aspects. The two LVOs do not depend on one main source of funding and their internal financial practices are not driven by the need to satisfy a particular funding agency. In fact, the treasurers’ statements suggest a tendency to discretion, when it comes to the use of financial practices and/or outputs and a tendency to use informal means to

report to members and sponsors. This may indicate that the use of formal financial practices may not be perceived as a “positive” symbol in legitimating the organization, and perhaps even contravening the social-led identity of the associations. At the same time, this low reliance on formal practices may be reflective of a functional and practical approach, adopted by fairly qualified treasurers who do not find it necessary to establish these practices in such small organizations. One can thus consider that this low use of internal practices in these cases may both be explained by a symbolic as well as a functional purpose. In the last three LVOs (LVO1, LVO4 and LVO5), formal financial practices are virtually inexistent. Again, their sources of funding are quite diverse, with some displaying higher reliance on members’ money. The treasurers report that the approval of annual accounts is a mere formality, with most of the communication/reporting done occasionally on an informal basis (i.e. after meetings and individual discussions). The treasurers see little need to engage in formal practices (e.g. budgets) and they perceive that the key reason relates to the trust placed upon them. For example: They trust me so much they do not want change treasurer and they accept all the information being given (LVO4). They perceive a lot of honesty and transparency in my work. They trust all my information and do not argue (LVO5).

The constituencies of these LVOs (families of disabled/special needs individuals and senior citizens) are driven by a strong emotionality, possibly leading to a high level of trust in the LVO and their executive members. In these cases, the use of accounting practices, as a symbol of rationality and seriousness, appears irrelevant in serving a legitimating purpose. This is consistent with some of Choudhury’s (1988) early comments that the absence of accounting may have a symbolic purpose for certain organizations. This does not rule out possibility that other (non-financial) practices serve a legitimising purpose in such organizations but the trust perceived by the main audience precludes the need for displaying “financial-led” symbols of rationality and seriousness. Ballas and Tsoukas (2004) consider that a minimal or non-existent level of accounting have a low symbolic significance in the enhancing of legitimacy, in the context of a fairly unique and “extreme” environment (i.e. Greek National Health Service). However, the evidence from these LVOs points to a more general finding that a perceived high level of trust in the treasurer in an informal- and emotional-led context, appears to mitigate any symbolic value that accounting practices seek to bring[15]. “Trust” is certainly not a novel variable in the accounting literature (Seal and Vincent-Jones, 1997; Seal et al., 1999; Baldvinsdottir et al., 2003). For instance, there have been suggestions that accounting practices help in building trust, specifically in business relationships (Seal et al., 1999). At the same time, various authors point to the disconcerting fact that “trust” is usually vaguely defined or is taken as “obvious” in the literature (Seal and Vincent-Jones, 1997). Based on the data gathered from these three LVOs, there are indications of a perceived relational trust between the LVO treasurer and the other members (executive or non-executive), arising from:

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.

294

“a continual interaction over time between trustor and trustee” (Badlvinsdottir et al., 2003, p. 17) and involving; “. . . a leap of faith beyond the cognitive level of experience and action, as though the action of others is certain and the violation of expectations would lead to harm” (Lewis and Weigert, 1985; Seal and Vincent-Jones, 1997).

In this respect, we consider this absence (and irrelevance) of internal financial practices principally as a result of this relational trust amongst the LVO actors. 6.3 The credibility “aspiration” and measures of performance There are two subsidiary findings from the interviews. Despite the fact most organisations state they are financially more dependent on non-government sources), the interviewees listed government departments or public-sector agencies as their main stakeholders. This can be explained by the LVOs’ long-term aspiration to be “recognised” by the government departments as a “worthy” organisation, eventually attracting patronage. In testimony, one treasurer states, “We never received help from the government although it is aware of what we are doing.” There is considerable consensus amongst the interviewees as to the benefits for in maintaining or developing credibility, i.e. to be viewed as a “serious” LVO by the government. This is not necessarily seen as a conscious strategy to obtain more benefits (e.g. funds, logistical support). However, the smallness of the country and the relative degree of control that government still exercises formally (via its departments/agencies) and informally (via its political appointees) in Mauritius is viewed as having a significant influence on the LVO’s future success. The second subsidiary finding relates to the observations that treasurers, to their own admission, do not feel compelled to collate or communicate performance measures to their executive committee/members. There appears to be little incentive for the VOs to engage in a more systematic reporting of both financial and non-financial measures. Although previous references are set in the broader context of VO accountability and performance reporting, respectively, Gray et al. (2006, p. 334) and Connolly and Hyndman (2004) both argue that the increased public scrutiny and the competitive pressures faced by VOs in developed countries have led to increased use of performance indicators. However, such increased levels of scrutiny are yet to be displayed within the Mauritian context In addition, as earlier described, there is a relatively low extent of professional interaction between LVOs and accounting specialists in Mauritius. Consequently, one might argue that this low extent of performance reporting may be explained by these two factors. 7. Conclusion The current study has sought to explore the financial priorities, the financial planning and control practices of locally established voluntary organisations – including those involved in civil society, activism, and welfare, and as perceived by their treasurers. Our concluding remarks adopt a rational-led as well as an interpretive stance. In an environment characterised by little accounting regulation/guidance and a relatively low level of formal involvement by professional accountants in LVOs, the survey displays evidence of some diversity in the use of financial priorities

and practices. The treasurers’ priorities are primarily geared at meeting the statutory book-keeping requirements and at ensuring that their LVO can meet its financial obligations, rather than focus on planning and control. About half of the surveyed VOs use basic financial planning techniques. However, this is limited to devising the initial plan/budget. Indeed, the procedures associated to the use of budgets for control, decision-making and reporting are rarely implemented or inexistent. In addition, reporting regularity during the year is quite low. On a purely technical/rational level, the results indicate a limited awareness as to how financial practices might benefit the treasurers themselves as well as the LVO stakeholders (members, donors, beneficiaries, etc.). This may provide some justifications towards the development of policies/guidance (at a government or, for example, at the MACOSS level) to enhance the financial effectiveness and accountability of LVOs. This may be of interest to all the identified organizations since factors such as the type of VO activities, their different main source of income, size or the treasurers’ knowledge/experience in accounting do not appear to influence the overall responses. The combination of insights from the questionnaires and interviews has provided an in-depth insight in the treasurers’ attitudes, their priorities and the financial practices in their respective organizations. The fact that the interviews have been carried out for a cross-section of LVOs has been influential when considering the wider significance of financial/control practices as a symbol of rationality, aimed at maintaining and/or enhancing legitimacy. Whilst the above initial findings denote a very limited functional use of financial/control practices, we can more crucially report on the varying relevance (and non-relevance) of the “symbolic rationality” and the “legitimating purposes” of these practices. These can be summarised in Table VII. In consideration of the above, the present study has contributed to the literature in two ways. Firstly, it has provided a snapshot of the type/extent of financial priorities, financial planning and control practices in a developing country context, with particular reference to a variety of LVOs. A second contribution has been towards analyzing the symbolic role of such practices in maintaining or enhancing legitimacy, by considering in more detail the “forms” of legitimacy as well the “target” audience to whom such legitimacy may be conveyed. We also find that accounting practices may not necessarily have a positive symbolic effect towards enhancing a VO’s legitimacy, thereby perhaps explaining a deliberate lower use of accounting practices. It is also granted that the legitimacy argument did not apply in all cases. We started the paper by highlighting the academic interest in the “interplay” between the VO’s “emotionally-led” features and the accounting “wealth-maximising” practices/structures. As such, we believe the paper provides some answers towards better understanding and unravelling this inherently “paradoxical” interplay. We are also inclined to believe that the role of trust in the VO literature needs to be further considered, both conceptually and empirically. In view of the research methods adopted, the questionnaire findings cannot be directly compared to other published results and the survey responses may have been biased towards treasurers who felt more confident in responding to the questions. At the same time, however, the study has revealed in greater detail the inancial practices of VOs in an environment which is arguably different from the context of Western developed countries.

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Financial planning and control practices are virtually inexistent

Financial priorities are symbolic reflections of rationality in maintaining the treasurer’s and/or the VO’s legitimacy

An “avoidance” of too many formal practices, which are contradictory to the social objectives of the LVO, suggesting that such practices may not have a moral legitimating effect, i.e. it is not the “appropriate thing to do” No existence of formal planning and more reliance The absence of practices associated to the emotionality of the target audience. This is on informal communication, with little use of possibly due to the in high levels of relational formal processes for control/accountability (LVO1, LVO4, LVO5). Treasurers perceive a high trust “felt” towards the treasurer, thereby rendering financial and control practices level of trust from their executive and lay “irrelevant” members

“Acceptable” financial priorities, symbolic of the seriousness of the treasurer to his/her constituents, as the “right thing to do” (moral legitimacy) A symbol of rationality and normality to maintaining and enhancing the LVO’s pragmatic legitimacy vis-a`-vis the funding body A form of maintaining and enhancing moral legitimacy not conveyed as such to one defined “external body” but to a collective “community” through the visible use of committees and procedures

A symbol of rationality and normality to maintaining the LVO’s legitimacy vis-a`-vis society (via its continued registration)

Table VII. Summary of interpretive-led findings

Strong focus on book-keeping and annual accounts filing as “disconnected” elements with little use of, and reliance on, the data/processes internally Some LVO treasurers focus on “economy” and “efficiency” without necessarily engaging in internal practices/activities to achieve those priorities Significant existence of practices, directed at Financial planning and control practices are extensive in, and are legitimating instruments for, satisfying one main funding body (LVO3, LVO6) the LVOs Significant existence of practices, structures and committees, directed at satisfying the religious-based community (LVO7). In addition, the treasurer is constantly expected to demonstrate rationality and seriousness vis-a`-vis an “internal” audience Limited and “discreet” use of planning and Financial planning and control practices are minimal in, and are not legitimating instruments control practices, although treasurers are quite knowledgeable and experienced (LVO2, LVO8) for, the LVOs

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Notes 1. Refer to the UNDP’s web announcement www.undp.org/cso/documents/mauritius_ CSOprogramme.doc

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2. In this study, treasurers are the executive members who have been assigned the accounting/financial management-related tasks in the LVO. 3. Charities, not-for-profit organisations, non-governmental organisations (NGO), “Community Welfare Organisations” civil society organizations are the main labels used, often interchangeably and synonymously, in the accounting/NGO literature. 4. Anheir (2000) and more recently, Gray et al. (2006) have provided a similar set of features (organised, private, non-profit distributing, self-governing and voluntary) when reviewing the definitions from recent sources. However, it is acknowledged that the definition of an NGO remains contested (Gray et al., 2006), problematic and even ambiguous (Unerman and O’Dwyer, 2006). 5. This study does not include national branches of international NGOs (e.g. Amnesty, Oxfam, Rotary Club) which are professionally run and whose practices are generally imposed by their “head office”. Whilst there is also an interest in such type of organisations, it is expected that the extent of financial practices will be significantly higher and more sophisticated – thereby causing an upwards bias in the findings if these VOs were included in the sample. 6. Evidence of tensions between community objectives and a business rationale (as implied from the use of accounting practices) have been previously documented in the case of a community co-op (Westerdahhl, 2001). 7. Since, Mauritius is part of African political/trade blocks, its economic and social situation has been usually compared to countries located in Sub-Saharan Africa. Refer, for example, to Durbarry (2004) for a more detailed account of its economic situation. 8. According to Transparency International, Mauritius has experienced a slight deterioration in its corruption perception index over the recent years (currently ranked 54th over 158 countries, 4.2/10). 9. It is noted that the non-profit motive is an implicit one in the standard template and the use of the term “association” is not a loaded one, compared to a “charity” in the UK or a “Not-for-Profit” in the USA. 10. It has a similar mandate as the UK’s National Council for Voluntary Organisations (NCVO). Refer to its web site for more information www.macoss.org. As part of its accreditation process, it does not require that VOs adopt any particular management, financial and control or accounting practice. 11. Refer to MANGO’s web site: www.mango.co.uk. The full questionnaire used in this study can be made available upon request but the relevant extracts of the questionnaire are set out in the findings and analysis section. 12. The interview checklist can be made available upon request. 13. Currently, £1 ¼ MUR 60 (Mauritian Rupees). 14. The use of the “very important” scale allowed for a better comparison to the mean scores obtained for each priority. 15. This does not mean that trust was not perceived from discussions with other LVO treasurers but it appears to take a central role in these LVOs.

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Torres, L. and Pina, V. (2003), “Accounting for accountability and management in NPOs a comparative study of four countries: Canada, United Kingdom, USA and Spain”, Financial Accountability & Management, Vol. 19 No. 3, pp. 265-85. Unerman, J. and O’Dwyer, B. (2006), “On James Bond and the importance of NGO accountability”, Accounting, Auditing & Accountability Journal, Vol. 19 No. 3, pp. 305-18. Westerdahl, S. (2001), “Between business and community: a rural co-op and its accounting practice”, Financial Accountability & Management, Vol. 17 No. 1, pp. 59-72. Wise, D.E. (1995), Performance Measurement for Charities, Institute of Chartered Secretaries and Administrators, Hemel Hempstead. Zietlow, J.T. (1989), “Capital and operating budgeting practices in pure non-profit organizations”, Financial Accountability & Management, Vol. 5 No. 4, pp. 219-32. Corresponding author Teerooven Soobaroyen can be contacted at: [email protected]

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New public management-oriented management accounting and political control in the Malawi’s local governance Richard I.C. Tambulasi Department of Political and Administrative Studies, Chancellor College, University of Malawi, Zomba, Malawi Abstract Purpose – This paper seeks to examine the impacts of the new public management (NPM)-oriented management accounting on political control at the Malawian local government level. The objective is to investigate the extent to which NPM-based management accounting practices have increased managerial autonomy and reduced political control. Design/methodology/approach – The paper is based on an empirical study conducted in six local government assemblies in Malawi. These include Salima Town Assembly, Blantyre City Assembly, Lilongwe City Assembly, Mzuzu City Assembly, Mzimba District Assembly, and Zomba Municipal Assembly. It is based on qualitative research methodology. The qualitative data were mainly collected through personal interviews with assembly managers and councillors. In addition, the study also relied on a review of various literature and newspaper articles providing insights to the subject under study. Findings – The paper has found that the NPM-based management accounting has led to loss of local political control. In this regard, politicians resort to unproductive behaviors which include interference, sabotage and corruption to regain their lost political control. On the other hand, the administrators sustain their managererial autonomy through NPM-based managerial prerogatives, seeking central government intervention and colluding with the councillors in corrupt activities. Originality/value – The paper is of both theoretical and empirical value. Theoretically, the paper contributes to the management accounting literature by looking at management accounting in the context of new organizational arrangement models. In addition, the paper makes an empirical contribution to the knowledge vacuum of the impacts and applicability of the NPM-based management systems in developing countries. It provides information and insights for reformers to consider the social, political, and cultural environment of the implementing countries so as to prevent counter-productive consequences that may present massive negative implications on public policy outcomes. Keywords Public administration, Management accounting, Politics, Malawi, Local government Paper type Research paper

Journal of Accounting & Organizational Change Vol. 3 No. 3, 2007 pp. 302-328 q Emerald Group Publishing Limited 1832-5912 DOI 10.1108/18325910710820319

1. Introduction This paper aims at examining the impact of the new public management (hereafter NPM)-oriented management accounting on political control at the Malawian Local Government level. The objective is to interrogate into the extent to which NPM-based management accounting practices have increased managerial autonomy and reduced political control. This paper finds that NPM management accounting practices have resulted into remarkably increased managerial control and decreased political power and control which is feared to seriously jeopardize

efficiency, effectiveness, economy, accountability, and transparency gains that these management accounting practices were supposed to achieve. This is particularly the case as in an attempt to regain their lost political control councilors use various counter productive strategies which include, interference, sabotage and corruption. On the other hand, in order to sustain their autonomy managers use strategies such as NPM-based managerial prerogatives, seeking central government intervention and colluding with the councilors in corrupt activities. Most of these strategies however are counter-productive and are feared to present massive negative implications on public policy outcomes. 2. The new public management Literature on the NPM paradigm is occupying much of the public management space to the extent that some authors equate NPM to public management (Hood, 1991). In this regard, public administration which is synonymous to bureaucracy, or the so-called “traditional public administration,” is slowly trekking to the grave. This is the case as the NPM is meant to replace and change the traditional public administration (Hughes, 1998; Caiden, 1991, 2001; Batley and Larbi, 2004; Ferlie et al., 1996; Pollitt and Bouckaert, 2000, pp. 58-9). The hub of the NPM is the transformation of the public sector (Hughes, 1998, p. 59) to make it more efficient and effective and achieve greater economy in the delivery of goods and services (Hughes, 1998). Key to the concept of NPM is the adoption of private sector instruments into the public sector. The rationale is that the private sector is efficient and effective because it utilizes market-based principles. Moreover, “private business practice offers a set of ready made solutions to public management problems” (Metcalfe and Richards, 1990, p. 20). It is in this context that Dunleavy and Margetts (2000, p. 13) summarise the NPM paradigm as “disaggregation þ competition þ incentivization.” Hood (1991) however identified what he called the seven “doctrinal components” of the NPM movement as follows. Firstly, NPM introduces “hands-on professional management in the public sector” (Hood, 1991, p. 4). This entails managerial freedom where professional managers would be given the liberty to manage. The slogan in this respect is “let managers manage” (Oluwu, 2002, p. 3) or “make managers manage” (Ocampo, 2002, p. 250). This principle implies a clear division of labour between managers and politicians where politicians would be involved in policy formulation while the managers concentrate on policy implementation. Second is the use of “explicit standards and measurement of performance” (Hood, 1991, p. 4). For managers to be accountable for their activities in service delivery, there is need for the development of measures of performance. Specific targets have to be devised and managerial performance would be measured according to the extent they attain such standards. This also calls for managerial positions to be “contractualised” (Oluwo, 2002, p. 3) where by public managers would be appointed on certain contractual terms the renewal of which would be performance-based. This arrangement ensures that managers effectively and efficiently deliver goods and services the public assigned them to deliver. The third aspect is the “emphasis on output controls” (Hood, 1991, p. 4). In essence, this is a “movement away from input controls, rules, and procedures towards output measurement and performance targets” (Hope and Chikulo, 2000, p. 26). In this respect, managers are responsible for outputs not inputs and processes. The same principles also apply to budgets. In this regard,

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“budgets based on inputs and financial compliance are replaced by performance-oriented budgeting systems, with an emphasis on results, outputs and/or outcomes” (Lienert, 2005, p. 3). Fourthly NPM is for the “desegregation of units in the public sector” (Hood, 1991, p. 5). This means the “devolution of management control with improved reporting and monitoring mechanisms” (Hope and Chikulo, 2000, p. 27). In this case “decentralization is generally prescribed as a means of liberating managerial potential shackled by bureaucratic restrictions” (Metcalfe and Richards, 1990, p. 77). In the fifth place, NPM champions for “greater competition in the public sector” (Hood, 1991, p. 5). This calls for “ownership, contestable provision, contracting out of public services” (Hope and Chikulo, 2000, p. 27), introduction of user fees, privatization, commercialization, and public-private-partnerships. This is the case as competition which is a market instrument is pivotal for achieving greater levels of efficiency, effectiveness and economy. Sixthly, is the “stress on private sector styles of management practice” (Hood, 1991, p. 5)? Accordingly, public managers must “move away from military-style public service ethics to greater flexibility in hiring and rewards” (Hood, 1991, p. 5). Lastly, NPM puts greater stress on “discipline and parsimony in resource use” (Hood, 1991, p. 5). This hinges on efficiency where managers seek to “do more with less” (Hood, 1991, p. 5). In this regard, “cost-consciousness and value for money are the watchwords in the quest for least-cost solutions” (Metcalfe and Richards, 1990, p. 31). 3. New public management-oriented management accounting The adoption of the NPM principles necessitates a rethink of the systems that are instrumental in the delivery of public goods and services. One of such systems is management accounting practices. Management accounting systems are vital as they are used to generate useful reports for management decision making. According to Gordon and Miller (cited in Sciulli and Wise, 2004, p. 5), the development of management accounting systems are affected by the environment, the organization, and the style of management. In the contemporary public management circles, the environment is the NPM. The organization is the public sector. Styles of management are the NPM’s business-like-management practices generated from the private sector. As a result of incorporating NPM dictates, management accounting has been reoriented to take a “more business-like approach” (Hodges and Mellett, 2006, p. 1). Accordingly, it has become to be known as “new management accounting” (Miller et al., 2006, p. 5). The reasoning is that traditional management accounting systems “may not generate useful reports for management decision making when there are significant government policy changes” (Sciulli and Wise, 2004, p. 5) like the ones introduced in the NPM. With the NPM’s emphasis on managerialism, management accounting has been seen to be central to effective and efficient service delivery in the public sector. This trend has been called management “accountingization” (Nyland and Pettersen, 2004, p. 4). Management “accountingization means the introduction of ever more explicit cost categorization into areas where costs were previously aggregated, pooled or undefined” (Hood, cited in Nyland and Pettersen, 2004, p. 4). Some of the NPM businesslike management steering (Osborne and Gaebler, 1992) instruments which have changed management accounting trends include; contacting out, public-private partnerships, and performance management as outlined below.

3.1 Management accounting and contracting out NPM advances for the contracting out of public goods and services on a competitive basis. The rationale is that NPM regards “rivalry as the key to lower costs and better standards” (Hood, 1991, p. 5). Contracting out which is also known as outsourcing is considered as the “shift of services from the public to the private sector” (Sciulli and Wise, 2004, p. 2). This is where services that were previously provided in-house by the public sector are outsourced from private or other public providers. Public managers are at the centre of the whole contracting out process. This is the case as “under outsourcing a government entity remains fully responsible for the provision of affected services . . . while another entity operates the function or performs the service” (United States General Accounting Office, 1997, p. 3). Therefore, the role of management accounting becomes central to effective implementation of the contracting out exercise. In this regard, management accounting is preoccupied with “regular and formal monitoring of the performance of the contractor to ensure that the performance standards stated in the contract are fulfilled” (PUMA, 1997, p. 3). Moreover, management accounting entails the development of “a well-defined results-based contract, based on clearly defined, result-oriented performance, rather than on the process to be followed” (United States General Accounting Office, 1997, p. 18). Management accounting system must also audits performance information originating from the contractor to ensure its accuracy (PUMA, 1997, p. 3). In this case, management accounting in contracting out activities “ensures that they maintained sufficient expertise and control to effectively oversee the outsourcing vendor to prevent fraud, waste, or mismanagement” (United States General Accounting Office, 1997, p. 3). In addition, management accounting systems must incorporate gadgets for evaluating and analyzing other alternatives, including in-house provision. This activity “involves considering both the costs and outcomes or outputs, including comparative quality” and risks (PUMA, 1997, p. 4). It is very important to highlight that the key to management accounting is outputs. As a result, management accounting systems must ensure operational flexibility on the part of the contractor so as to be “innovative in performing the activity, and thereby securing efficiency gains” (PUMA, 1997, p. 3). 3.2 Management accounting and public-private partnerships NPM considers the use of public-private partnerships as one of the tools for management to achieve effective outcomes. These partnerships are characterized by the use of shared authority and responsibility, shared liabilities and risks, joint investment, shared reward/mutual benefit (Finlayson and Peacock, 2002, p. 1). Therefore, public-private partnerships “drive a wedge between public services and their delivery, creating a category of services that are still public services, but which are privately delivered” (The Ontario Federation of Labor, 2005, p. 2). In this case, public-private partnerships “expand public services and reduce the size of the public sector at the same time” (The Ontario Federation of Labor, 2005, p. 1). The growing importance of the public-private partnerships and the multiplicity of actors involved in service delivery facilitate the adoption of management accounting instruments to generate information on how best players in the partnership can be controlled. In this respect, management accounting systems ensure that all “projects are carefully evaluated and undertaken in the most efficient manner, and that costs

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associated with capital projects within their operating targets are amortized” (Finlayson and Peacock, 2002, p. 1). This is the case as in the public-private partnership, the private sectors’ major functions are “financing, designing, building, operation and maintenance, leaseback, transfer and ownership, rather than just being contracted to build the asset” (Finlayson and Peacock, 2002, p. 2). As a result, public-private partnerships “shift administrative and public policy control to a third party . . . and they compromise ownership rights” (The Ontario Federation of Labor, 2005, p. 2). Therefore, management accounting systems in the public-private partnerships are geared towards the “protection of public interest; value for money; appropriate public control/ownership; accountability; and fair, transparent and efficient process” (The Ontario Federation of Labor, 2005, p. 2). The overwhelming importance of management accounting in the public-private partnerships means that public managers are pivotal in the whole partnership process. Management accounting systems must therefore highlight how best managers can ensure efficiency by tapping private sector resources into the public realm. In this case, management accounting ensure that public-private partnerships “achieve better value for money for taxpayers, so that the savings from partnering does help to narrow the gap between the need for infrastructure and government’s financial capacity” (Finlayson and Peacock, 2002, p. 3). 3.3 Management accounting and performance management The NPM paradigm trumpets performance management in public sector organizations as one of the instrumental mechanisms in achieving quality result. Performance-oriented management “involves a reduction in process rules – thereby increasing managerial discretion – in return for rules needing feedback information on how the task has been done” (Matheson, 2002, p. 8). As a result, managers are employed on a contract the renewal of which is performance-based and budgets are outcome-based. To suit this environment, public organizations have also adopted businesslike management accounting instruments and styles for better performance management. In this case, NPM-based management accounting systems generate reports that measure managerial performance in attaining service delivery results by establishing a contractual relationship between managers and the public. In this respect, management accounting “means changing the task definition and reporting rules to relate more to what is done – and providing more flexibility of action as to how it is done” (Matheson, 2002, p. 7). As a result, management accounting systems recognise salary and remuneration accounting as based on “performance-based contracts that managers negotiate with responsible ministers” (Bale and Dale, 1998, p. 106). Since, the renewal of contracts is based on the performance of the concerned public manager, management accounting systems have performance-based accounting systems that produce reports on the performance of public managers. In this case, organization performance and “effectiveness is increased by achieving a better ration between desired objectives and actual outputs” (Metcalfe and Richards, 1990, p. 30). In addition, management accounting systems have been reoriented in line with budgets that have been transformed from process-based to activity-based. Accordingly, management systems include “performance data (output and outcome indicators) in the budget as well as in the financial reporting of annual accounts” (Reichard, 2002, p. 35). The reasoning is that “decreasing emphasis on ex ante and

processual controls over public sector managers would be balanced by increased emphasis on ex post evaluation of results, creating more discretionary space for managers to add value to public services” (Hood and Peters, 2004, p. 271). This is exactly what Osborne and Gaebler (1992, p. 3) propose as a solution to problems emanating from management accounting in the traditional public of administration. They were concerned that management accounting in the traditional public administration lead to budgets that: . . . encourage managers to waste money. If they don’t spend their entire budget by the end of their fiscal year, three things happen: they lose the money they have saved; they get less next year; and the budget director scolds them for requesting too much last year. Hence, the time honored government rush to spend all the funds by the end of the fiscal year” (Osborne and Gaebler, 1992, p. 3).

4. NPM-oriented management accounting and loss of political control Management accounting in the “traditional public administration” gave more power and responsibility to the politicians while public officials were only regarded as administrators implementing public policies under the strict supervision of politicians. On the other hand, NPM-based management accounting simultaneously promises public managers more freedom and politicians more control and public service users more choice (Pollitt, 2003, p. 26). The slogan has been “increase political control, free managers to manage and empower service consumers” (Ferlie et al., 1996, p. 155). However, the problem with this is that NPM-based management accounting promises empowerment to everyone, a thing that is practically impossible to achieve. In this regard, Ferlie et al. (1996, p. 155) ask as to: . . . how is it possible to give managers greater freedom and yet at the same time place them under the central control of ministers (politicians) and oblige them to be more responsive to newly empowered consumers?

The sober reality is that one section has to gain more power over the others. Following this, Hood (1998, p. 208) questions that “since not everyone can be empowered at the same time, who exactly is to be empowered against whom?” The answer is that in practice, with NPM-based management accounting, managers have gained more autonomy while political control has deteriorated. This is the case as with NPM, “politicians expend little time and energy on the new steering techniques and leave them to a greater extent to the administration leaders, thus in practice transferring power and influence to them” (Christensen and Laegreid, 2004, p. 16). In this case, NPM-oriented management accounting instruments which include contracting out, public-private partnerships and performance management, as highlighted above, all recognize the central role of managers to manage and completely leave politicians out of the picture. In this regard, NPM-based management accounting is so preoccupied with management accountability mechanisms while divorcing political accountability. Indeed, “greater emphasis is given to the role of managers” (Ocampo, 2002, p. 250) and as a result politicians feel out of place in the whole public sector delivery process. NPM-based management accounting emphasizes on managerial autonomy. This is highlighted by the call for “active control of public organizations by visible top managers wielding discretionary power” (Hood, 1996, p. 268). In this case, the management accounting practices attempt to introduce “management structures,

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practices and principles that are based on the precepts of freedom to choose and freedom to manage” (Appana, 2003, p. 52). This is done by “loosening up constraints on their discretion and force them to compete in the market” (Ocampo, 2002, p. 250). Moreover, NPM-based management accounting is concerned with the economics rather than the politics of service provision (United Nations, 2001, p. 38) and it is “anti-politics, with collective choice being replaced with individual choice” (McGarvey, 1997, p. 630) thereby “potentially undermining political control” (Christensen and Laegreid, 2004, p. 19). In addition, “since the public servant is to be managerially accountable, this is seen as detracting from the accountability of a responsible politician” (Hughes, 1998, p. 77). This is the case as a “preoccupation with efficiency overvalues the need for managerial accountability rather than political responsibility” (Christensen and Laegreid, 2001, p. 90) so that “politicians lose control through greater administrative and commercial autonomy” (Christensen and Laegreid, 2004, pp. 21-2). A more recent evidence in this tune is in Norway where politicians agreed that NPM management practices had “undermined their political control, something they saw as somewhat problematic, they also acknowledged the existence of pressure to use their remaining control instruments in a passive and reactive way” (Christensen and Laegreid, 2004, p. 16). The whole mark of representative democracy is the election time where voters elect politicians who control the public sector (Jorgensen and Bozeman, 2002, p. 67). The loss of political control through NPM-based management accounting has implications on democratic governance. Managers are given so much freedom that there is some erosion of democratic control (Pollitt, 2003, p. 47). In this regard, some have argued that with NPM-based management accounting, “democracy is to a large extent by-passed” (McGarvey, 1997, p. 630) so that “the role of elected members is a minimal one.” In this respect, NPM-oriented management accounting raises “huge challenges for the behaviour of elected officials and for the operation of democracy” (Kettl, 1997, p. 457) since “representative democratic mechanisms are being viewed to a large extent as flawed in transmitting the electorates’ preferences” (McGarvey, 1997, pp. 629-30). In this regard, NPM-based management accounting is an “aggressive attack on democratic accountability” (Haque, 2001, p. 67) because public managers are “publicly claiming the right to manage without fully explaining the doctrine of legitimacy on which their claims rest” (Metcalfe and Richards, 1990, p. 45). Owing to its exclusive focus on the delivery of service, NPM-oriented management accounting “defines politics in a very narrow manner” (Stoker, 1996, p. 6) thereby “weakening democratic institutions, limiting citizen participation in politics and weakening the democratic process” (Farnham and Horton, 1996, p. 276). Moreover, NPM-oriented management accounting defines “political involvement in public enterprises as an inappropriate interference in business matters” (Christensen and Laegreid, 2004, p. 16) and thereby “radically transforms the connections between elected officials and voters . . . (and ultimately) affects the sinews of democracy” (Kettl, 1997, p. 457). It must be noted that NPM-based management accounting “ignores the citizen-politician nexus not because it ignores citizen participation but because it ignores the politician – as is natural in a theory drawn from the private sector” (Frant, 1996, p. 9). In practice, this loss of political control has brought a rivalry, an “unstable, and an ebb-and-flow” (Christensen and Laegreid, 2004, p. 19) relationship between the politicians and the bureaucrats. The politicians have regarded NPM-based

management accounting as a “self-serving movement designed to promote the career interests of an elite group of new managerialists rather than the mass of public service customers” (Hood, 1991, p. 9). They consider it as executive attempts to evade legislative areas and usurp their representative function. On the other hand, the bureaucracy perceives intervention by political executives as the intrusion of partisan politics into fields from which politics should be excluded. In this regard, there is a tendency to define political involvement as an “inappropriate interference in business matters” (Christensen and Laegreid, 2001, p. 81). They contend that politicians make decision without scientific evidence (Ham et al., 1995) and political decisions are often considered to lack logic (Schedler, 2003, p. 534). Politicians, however, cannot afford to lose control over the implementation of public policy. This is the case as: . . . in the public sector, politicians also claim a legitimacy to manage. After all, if they are elected to positions of authority and are held accountable for the money spent on public services, they have a right to influence how they are run (Flynn, 2002, p. 5).

As a result, politicians employ various strategies to win back their control. More often than not, politicians “get their revenge by influencing small-scale daily business” (du Voitel, 1996, p. 6) while in other respects they use “politicisation, regulation inside government, and specific incursion into the managerial space” (Hood, 2000, p. 16). They also try to blame the bureaucrats. The administrative leaders on the other hand, are “reluctant to accept blame and try to push the blame back to the politicians and cover their backs” (Christensen and Laegreid, 2004, p. 20). This brings unhealthy confrontation and conflicts in the public service delivery process. 5. Methodology This paper is based on an empirical study conducted in six local government assemblies in Malawi. It uses a case study methodological approach because it takes the Malawi local government assemblies as a case in point. This is due to the fact that as required by this study, case study research “is an ideal methodology when a holistic, in-depth investigation is needed” (Feagin et al., cited in Tellis, 1997). Malawi has three administrative regions (provinces) namely Southern Region, Central Region and Northern Region. In this regard, the study sampled six local government assemblies, two in each region so that conclusions drawn should be representative of Malawi as a country. The particular sampled local government assemblies include Blantyre City Assembly (Southern Region), Zomba Municipal Assembly (Southern Region), Salima Town Assembly (Central Region), Lilongwe City Assembly (Central Region), Mzuzu City Assembly (Northern Region) and Mzimba District Assembly (Northern Region). The study is based on the qualitative methodological approach. In this regard, qualitative data was mainly collected through in-depth personal interviews with assembly managers and local politicians (councilors)[1]. Together 30 councillors and 20 managers were interviewed. Study participants were identified through both random sampling and purposive sampling. Random sampling method was used so as to allow all subjects in the sample frame to have equal chances of being included in the study. Purposive sampling was used to identify those people that were regarded as key to the study. In this regard, at the level of district commissioners, chief executives, mayors

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and chairpersons of assemblies, interviewees were selected purposively since by the virtue of their position, they were seen as to posses information that is key to the study. Other councilors and other members of the administrative wing were interviewed randomly based on their availability at the time of the visit. All the interviewees were promised that their responses would be held in confidence and that the researcher would make no individually identifiable attributes. This encouraged the interviewees to give full information without the fear of some negative implications and consequences. In addition, the study also relied on a review of various literature and newspapers providing insights to the subject under study. Data analysis was done manually based on the trends and the themes emerging from the interviews and literature on NPM-oriented management accounting and political control dynamics at the Malawian local governance level. 6. Policy, administrative and political context of the Malawian local government system Malawi became a multi-party democracy in 1994 under the United Democratic Front (UDF) party leadership after 30 years of autocratic and single party rule of the Malawi Congress Party (MCP). In order to create a viable and vibrant civil service that would be used to deal with the challenges of the new dispensation, namely: poverty alleviation, and the achievement and sustainability of democratic and good governance policy outcomes, the new government implemented a lot of public sector reforms with the support of various donor partners. The reforms were enshrined in the Civil Service Action Plan of 1996 and included the following: institutional rationalisation and realignment with policy and legislative framework; re-organization of ministries (functional reviews) to create autonomous agencies (authorities); viable human resource management practices; conditions of service; performance contracts scheme; privatisation; outcome-based budget and financial management systems; decentralization; private-public-partnerships, outsourcing/contracting out; user fees; information communication technology; and economic management (Malawi Government, 1996). Although the reform initiative bundle was called “Public Sector Management Reform Programme” (PSMRP) (Kamanga, 2002), it can be seen from the stated reforms that these were typical NPM reforms (Hood, 1991; Hughes, 1998; Olowu, 2002; Huque, 2004; Hope and Chikulo, 2000; Bale and Dale, 1998). Despite the fact that the decentralisation reform initiatives are seen as a separate reform element, the rest of the reforms have also been implemented within the decentralised governance structures. In this regard, Malawi adopted the Decentralisation Policy in October 1998. The Policy provides for the establishment of local governments as the basis and a framework for the devolution of functions, responsibilities, powers and resources to district assemblies. The Decentralisation Policy was followed by the Local Government Act enacted in December 1998 to create the legal framework for decentralised governance in Malawi. According to the Local Government Act 1998, the objectives of local government shall be “to further the constitutional order based on democratic principles, accountability, transparency and participation of the people in decision making and development process” (Malawi Government, 1998b). Each local government authority constitutes an assembly. According to the Local Government Act 1998, there are four different types of assemblies in Malawi.

These include: District Assemblies, City Assemblies, Municipal Assembly and Town Assemblies. These local government assemblies became functional following the local elections in 2000. They are composed of the political wing (councillors) and the management wing (the Secretariat) as stipulated in the Constitution of the Republic of Malawi Section 147 (1-2) (Malawi Government, 1995) as follows:

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Local government officers (the political wing) who shall be elected by free, secret and equal suffrage by the registered voters in the area over which that local government authority is to have jurisdiction.

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Administrative personnel (the management wing), subordinate to local government officers (the political wing) to execute and administer the lawful resolutions and policies of those officers

The management wing is headed by a district commissioner in the case of district and municipal assemblies, and a chief executive in the cases of city and town assemblies. Below this are directors of different departments including finance, administration, and planning and development. All these positions are contract-based and together they form a formidable team to run the day-to-day administrative activities and implement public policy at the local level. The political side is headed by a mayor in the case of city and municipal assemblies and a chairperson in the case of district and town assemblies. These are elected by and among councillors. The political wing is responsible for the formulation of policies and receives reports from the managers on the results and outcomes of such policies. It is elected every five years. 7. Management accounting in the Malawi local government system The Malawi Public Service uses management accounting systems in the delivery of services both at central and local levels. This is in line with the Public Service Act (14) (Malawi Government, 2000) that stipulates that the: . . . management of the public service shall be based on modern and appropriate . . . management concepts and techniques within a framework which meets the basic requirements for efficiency and effective delivery of services to the public.

The management accounting practices used in Malawi are in line with the NPM reforms as outlined in the Civil Service Action Plan of 1996. In this regard, the Public Service Act of 2000 (24) provides that: . . . every public officer in the management level of a Ministry or Department shall be responsible for the efficient management of the resources of that ministry or department and shall be accountable in respect of the management of the resources of the ministry or department.

The Decentralisation Policy and the Local Government Act stipulate the transfer of managerial and financial authority from the central government to the local assemblies to ensure efficient and effective service delivery. According to the Decentralisation Policy, the assemblies are “charged with the overall development of the district.” In this context, all the local assemblies are “corporate bodies” (Malawi Government, 1998b, p. 5) and “districts in their own rights” (Malawi Government, 1998a, p. 3). Accordingly, the local assemblies are empowered to employ their own staff, enter into contracts and operate like any other public organisation. It is against this background

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that assemblies adopted management accounting practices with the aim of “creating and strengthening institutional capacities for local government and development” (The Department of Local Government, 2001, p. 32). The management accounting practices followed by the assemblies are “commercial management accounting system but modified to suit their mandate of service delivery and comply with the accountability and transparency requirements” (Department of Local Government, 2001, p. 9). Some of these “commercial management accounting” practices include contracting out, private-public partnerships and performance management as highlighted below. 7.1 Contracting out The Government of Malawi uses contracting out as one of its management accounting tools. This is in line with the Public Finance Management Act (17) (Malawi Government, 2003) that mandates government departments to “enter into contract for works, acquisition, disposal or management of goods, services and construction works.” In this regard, contracting out of public service delivery is considered as one of the mechanisms to promote efficiency and effectiveness. To meet this end, the Contracting out Unit was established in the Office of President and Cabinet to oversee the contracting out of services in the public sector. In addition, sectoral departments and agencies are encouraged to contract out services which can best be carried out by the private sector. Typical of any management accounting instrument, in order to identify potential services and functions to be subjected to contracting out, departments must ask themselves the question: “is it essential that this function/service (which is the responsibility of the department) be performed in-house?” (Office of the President and Cabinet, 2000, p. 38). In this regard, services that usually fall as potential candidates for contracting out include; office cleaning services, security services, laundry, catering, copy typing services, legal services, building and ground maintenance, messengerial services, audit services and secretarial services. It is against this background that service delivery in most of the Malawian Local Government Assemblies is done by external contractors. These contractors are hired on a competitive basis through two main methods, namely by quotation and tender. Contracting out by quotation is “where quotes are invited from at least three selected suppliers on a competitive basis” (Department of Local Government, 2001, p. 98). As a rule, service procurement of up to K400,000.00 is done by way of quotation. Contracting out by tender is a “service procurement method whereby potential suppliers are invited by advertisement in the newspapers” (Department of Local Government, 2001, p. 99). This involves service procurement of more than K400,000.00. Management accounting systems have performance control gadgets. The United States General Accounting Office (1997, p. 18) states that “effective oversight controls are critical to ensuring that outsourcing vendors effectively discharge their fiduciary responsibilities for funds and other resources entrusted to them.” In this manner, contracting out management accounting tools in the Malawi local government system require the contractor to present a performance bond equivalent to 10 percent of the award, valid for the contract. This performance bond is refundable upon the successful completion of the contract (Department of Local Government, 2001, p. 104). This whole contracting out process is a management accounting process and the Management Procurement Committee does it. The Committee comprises of all Directors (Managers) in the Assembly (and no councillor) (Department of Local Government, 2001, p. 98).

7.2 Performance management Performance management is part and parcel of the management accounting system in Malawi. In this respect, the Malawi Government developed a performance management system handbook in 2000. Principles highlighted in this handbook are applicable to senior managers both at local and central government levels. One of such principles is that senior civil servants should sign performance-based three year contracts in which “employment is conditional to the achievement of performance targets” (Fozzard and Simwaka, 2002, p. 13) with pay levels of about 500 percent above current ones and 50 percent increase in compensation net allowances (African Development Fund, 2004, p. 5). This is in line with the Public Service Act of 2000 (11) that stipulates that the “retention of a public officer in the public service . . . shall be justified only on the basis the need for his duties and his satisfactory performance of those duties” (emphasis added). These contract-based performance management schemes have meant that public managers are responsible and accountable for outputs and outcomes rather than inputs and processes. In this regard, performance agreements and expectations are made with public managers based on criteria and instruments for an objective assessment of those on performance contract (African Development Fund, 2004, p. 5). Politicians then assess public managers on how close they are to these agreed performance standards and their contracts are renewed or not based on this assessment. The African Development Fund (2004, p. 5) notes that this has increased the efficiency of the Malawi public sector as public managers “take advantage of better incentives in return for greater accountability in terms of agreed upon results”. The Malawi Public Sector has also management accounting systems designed to control public spending and improve the effectiveness of expenditure management. In this regard, the government put in place an outcome-based performance related budget and improved accounting procedures in the name of the medium-term expenditure framework. This tool ensures that budgets are programme or “activity-based and ceilings are allocated to sectors based on priority” (Malawi Government, 2003a, p. 3). In this tune, “money is spent to produce results and performance is used as a criterion for annual budget allocations” to Ministries and Departments (Malawi Government, 2003a, p. 27). In order to ensure accountability for achieving the targets and milestones set by different programme activities, disbursement of funds and supplies to these levels are linked with results. To ensure discipline in spending within the set ceilings the government uses a cash budgeting system where “Government facilities can only spend funds that are available – no overdrafts or credits” (Malawi Government, 2003b, p. 3). 7.3 Public – private – partnerships Management accounting in the Malawi’s local governance also takes public-private partnerships as a very prominent tool in service delivery. This is the case as the government has for long realised that it does not have all the financial, institutional and human resource capacity to deliver services on its own. In this regard, partnerships with the private sector, non-governmental organizations, and communities are seen as key to the effective provision of services as these organizations have access to larger amounts of resources in terms of money, and qualified and skilled staff. The process is not simply a charitable involvement of the private sector of under the philanthropic

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themes of social responsibility but about “securing better value for money in the delivery of clearly specified outputs” (Malawi Government, 1996, p. 4). In this tune, it was estimated that in 1997, there were over 150 non-governmental organizations with income for development of over K440, 000 million. This was equivalent to 38 percent of the country’s gross domestic product (GDP) and it was being spent among others, on relief and development, education, health, human rights, credit schemes, trade associations and environmental issues (Kalemba, 1997, p. 31). At the local government level, partnerships have thrived. Examples in this regard are numerous. Some of which include: Blantyre City Assembly constructing a road in partnership with Bakhressa Milling Company, a private company; local government hospitals benefiting from doctors and nurses from the private sector and NGOs; the Coca-Cola Company in collaboration with the Ministry of Sports, Youth and Culture buying chalk boards for local government schools. 8. Political control in Malawi’s local governance before the introduction of NPM practices Before the introduction of NPM in Malawi, the political wing of local government had a lot of control over the activities of the local assembly. This was against the backdrop of the fact that after independence in 1964 Malawi became a one party state under the rule of Hastings Kamuzu Banda. In this case, due to the politics of the one party system, the MCP as the only legally existing political party institution at the time controlled both the local and central government systems. The aim was to ensure party control over all institutions from village level to the centre of government (Khembo, 2001, p. 45). In this regard, the District Commissioner and the entire managerial wing of the Assembly did not play a pivotal role on the management of the assembly as they did during the Colonial rule. The councilors, however, were central in all activities at the local assembly. This was the case as councilors being party officials were seen as key in the consolidation of the one party rule. Councilors were regarded as political party stooges through whom the MCP would exercise its control over the local affairs. In this case, council chairpersons were to be delegates to the ruling MCP annual convention and that all councilors were to be members of the party and those who ceased being members automatically lost their seats in the Councils (Kaunda, 1999, p. 122). In cases where the party’s favorites could not be elected, the party leadership used to appoint them as councilors. The same applied to the election of the council chairpersons. Only those that got the favor of the MCP were elected. In this regard, “Councils became increasingly politicized” (Khembo, 2001, p. 45). This situation made the political wing of the local government have more power and control over the affairs of the local government than the managerial wing of the assemblies. In this regard, “the one party state of the Malawi Congress Party altered the nature of political and administrative relations” (Khembo, 2001, p. 27), “to the extent that the Councils were now headed by elected chairpersons (councilors) who assumed some of the developmental responsibilities previously performed by the District Commissioners” (Khembo, 2001, p. 45) during the colonial rule. As a result, “an elected chairman replaced the District Commissioner who was now only supposed to guide and advise the councils and train local government staff without acting as Chief Executive” (Chiweza, 1998, p. 98). In this regard, the district commissioner “ceased to be closely related in the efficiency audit of local councils” (Mbeye, 1998, p. 74)

and “their autonomy was undermined” (Mbeye, 1998, p. 79) as “they were subject to excessive political direction to the detriment of their development objectives” (Chinsinga, 2005, p. 534). Hussein (2004, p. 155) comments that “at the local level, the passing of section 50 of the local government District Council Act No. 22: 02 of 1965 repealed and undermined the autonomy and decision making powers of district commissioners.” “This was the case as the central government stripped District Commissioners of their functions, withdrew some services like road maintenance and controlled staff appointments, promotion, discipline and dismissal” (Hussein, 2004, p. 115). These functions were to be done by the central government through local councilors rather than the district commissioners. In this regard, the local councilors could recommend to the central government on service delivery, staff appointments, promotions, discipline and dismissal. The result was that the councilors became so powerful that they: . . . slept in council rest houses free and used council vehicles as and when they wanted without paying for them. Similarly, they refused to pay rates and fees that were due to the council either for party functions or for personal use (Chiweza, 2007, p. 153).

They did this since as the “party was supreme and nobody (including the District Commissioner or any member of the managerial wing of local government) could challenge its decision” (Chiweza, 2007, p. 153).

9. NPM-based management accounting and loss of political control in Malawi’s local governance 9.1 Historical rationale for the introducing NPM in Malawi Malawi introduced the NPM-based management accounting practices under the banners of Action Plan for Civil Service of 1996 and Public Sector Management Reform Program of 2002. NPM in Malawi was regarded as a measure for “cost-effectiveness and sustainable solution to the management problems” (Corkery et al., 1998, p. 221). In this regard, the aim was to establish managerial autonomy so as to introduce “the most optimal organizational, institutional and individual competence” (Malawi Government, 2002, p. 9) for service delivery. Moreover, managerial autonomy would ensure that “clear distinctions are drawn between policy making functions” appropriate to the political leaders “and service delivery functions” appropriate to public managers (Malawi Government, 1996, p. 5). As a result, this would create a public sector that is “responsive, high quality and result oriented” (Malawi Government, 2002, p. 12). According to Malawi Government (2002, p. 9), the assumption is that managerial autonomy will create an “entrepreneurial public service” which is able to: . empower citizens; . focus not on inputs but outcomes; . be driven by mission and not rules and regulations; . earn more and not simply spend it; . prefer market mechanism to bureaucratic mechanisms; and . focus not simply on providing services but on catalyzing all sectors (Malawi Government, 2002, p. 9).

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The reasoning was that highly autonomous managers would “operate with maximum effectiveness and efficiency” and “ in a manner that ensures transparency, consistence, and predictability in decisions and practices, reward for innovation, initiative and exceptional performance, responsiveness to the needs of the public and attention to excellence” (Corkery et al., 1998, p. 221). This would further allow the “enhancement of the management of performance by managers and policy making capacity” (Malawi Government, 1996, p. 10) by political leaders. As a result, there would be an improvement in “planning, resourcing, monitoring, management and accounting systems so that resources are more sharply focused on priorities and public expenditure is more effectively controlled” (Malawi Government, 1996, p. 3). The vision in this regard was to create “an affordable, highly motivated, productive, professional and result oriented public service” that would “deliver services to the public in an efficient, effective and responsible manner in order to satisfy national aspirations and promote the growth of wealth creating private sector” (Malawi Government, 2002, p. 11). The need was “to design and implement organization and staffing structures and management systems which enable ministries and departments to achieve their objectives efficiently” (Malawi Government, 1996, p. 3). 9.2 NPM-based management accounting and managerial autonomy The NPM-oriented management accounting gives managers greater autonomy to manage as they are contractually responsible for outputs. However, according to Christensen and Laegreid (2004, pp. 21-2), “politicians lose control through greater administrative and commercial autonomy.” The Local Government Act 1998 assigns councillors to “make policy and decisions on local government and development for the local government area.” It also gives the autonomy to assembly managers to “implement the resolutions of the assembly.” Typical of NPM-based management accounting, this division of labour gives the management wing the freedom to manage without political interference. However, since it is the policy implementation aspect that is visible rather than policy formulation, the study found that councillors feel that it is the managers who have the power and control. Personal interviews conducted with councillors revealed that councillors feel that their power and control is being eroded. This is attributed to the fact that the management team has more responsibilities and take on too many things that councillors felt they would be doing. Managers have to be proactive and identify work for the assembly and have the autonomy to manage. This makes councillors feel useless. In this regard, some councillors expressed that: . . . we are told to do nothing at the assembly rather than hear what the secretariat has done. If we do anything we are told we are interfering in policy implementation. This really makes us feel unimportant and lacking in political control (interview with Councillor at Salima Town Assembly).

In the same manner, the assembly managers interviewed confirmed that the increasing demands of greater responsibility for planning, supervision, implementation and communication with the public have increased their autonomy on local activities. Managers have the autonomy to carry out projects as required with minimal political interference and councillors view this as a usurpation of their control and powers. Managers also expressed that since most councillors are not conversant even with policy formulation issues they constantly come to management for policy

formulation advice. As a result, councillors feel powerless and are reduced to “mere rubber stamps.” To this extent, one Chief Executive Officer felt that councillors are themselves to blame if they feel we are gaining more autonomy and they are losing political control. This is the case as:

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. . . they do not dwell much on policy making and seek much help from the assembly managers and ultimately it is the managers who make policies and implement them and as a result councillors feel they are losing control and power (interview with Chief Executive Officer).

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9.3 NPM-based management accounting and loss of political control Most of the people interviewed attested that management accounting under the NPM reforms implemented in the Malawian local governance system have led to reduced local political control. In this regard, one assembly manager expressed that “councillors feel threatened by the assembly secretariat” (interview with Assembly Manager at Salima Town Assembly). It was clear from the personal interviews the NPM-based management accounting reform elements meant that: . . . political leaders have lost the capacity to control the delivery of many of the policies for which they are nominally responsible, and in some cases also have lost the power to formulate policy (Peters, 2004, p. 132).

This paper measures three NPM-based management accounting instruments namely contracting out, performance management and public-private partnerships as outlined below. 9.4 Contracting out According to the interviews, 93 percent of the councillors and 80 percent of assembly management officials expressed that contracting out, as one of the central instruments of NPM-based management accounting, has reduced local political control and power. According to Christensen and Laegreid (2004, p. 16), with contracting out, “politicians expend little time and energy leaving it to the administration leaders, thus in practice transferring power and influence to them.” Consequently, the councillors interviewed were concerned that contracting out has greatly reduced their power and control. They felt that in the contracting out process, it is the managers who count rather that the councillors themselves. The councillors are left out of the picture as contracting out is regarded as a managerial activity which is entirely under the realm of management. They see it as a policy implementation activity rather than a policy-making activity as a result, contracting out does not come under the control of councillors. In this regard, councillors feel that they are losing power and control to contracting out. To this extent, one Councillor expressed that contracting out is: . . . purely a managerial activity that we are told not to get involved in. They only tell us that we will have a say when the contractors hand over the finished project (interview with Councillors at Zomba Municipal Assembly).

In addition, some councillors expressed that contractors do not respect them as they claim that they are under the responsibility of management and it is management that give them their money and not councillors. This makes the councillors feel unimportant before the contractors and as a result they feel losing their control and power to the assembly managers who are regarded highly by the contractors.

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In the same manner, 80 percent of assembly management officials also acknowledged contracting out as a point of contention between officials and councillors because councillors feel that they are losing power and control because of contracting out. The managers felt that the councillors think that their role is undermined with contracting out. This is the case as they do not get actively involved in contracting out issues. One clear thing was that the councillors do not have the technical know how for the administration of contracts and even if they have, contracting out is not a policy making issue. In this regard, one Chief Executive Officer explained that: . . . the process of contracting out is an implementation issue, not a policy making issue as a result it falls under the direct realm of management, not councillors. This makes councillors feel they are losing control as they cannot exercise their power on the contractors. This is compounded by the fact that almost every activity is contracted out and there is less of direct provision (interview with Chief Executive Officer).

In addition, it was mentioned that the councilors feel loosing control through contracting processes because: . . . when councilors were campaigning for their seats they had high hopes of making rich pickings for themselves through awarding themselves contracts and controlling contract arrangements so as to misappropriate public resources. As a result they feel loosing power since managerial controls which prevent them from corrupting the contract system are in place (Interview with District Commissioner).

This was confirmed by Lilongwe City Assembly Chief Executive who attested that the “problem is that when the Assembly wants to contract some people for a particular job, councilors want to be favored and be given contracts for their personal benefits” (Malawi News, 2003). 9.5 Performance management The councillors interviewed felt that performance management measures, as an aspect of NPM-oriented management accounting, reduce their political control. In particular, they cited employment of assembly managers on contract basis. The issue was that “since through contract based employment the public servant is to be managerially accountable, this is seen as detracting from the accountability to a responsible politician” (Hughes, 1998, p. 77). In this respect, the councillors felt that with performance management, it is the contract that controls the managers rather than the councillors themselves, although the Local Government Act of 1998 places the assembly managers under the control of councillors. The councillors are concerned that the assembly managers are shielded by their contract that binds the councillors from effectively controlling the assembly managers. During the interviews, one councillor expressed that: . . . there was one instance where we did not want the Chief Executive Officer because of his dictatorial tendencies. We asked the Ministry of Local Government to dismiss him but they said his three-year contract had not yet expired. We felt we had no control over him although the Local Government Act puts him under us (interview with Councillors at Lilongwe City Assembly).

In the same manner, the fact that the assembly managers sign their contracts with the ministry of local government rather than the councillors themselves indicates that

the performance management instruments limit councillors’ control and power. In this regard, the councillors do not have the power to terminate managers’ contracts if they do not perform according to the agreed standards. This makes councillor feel that the real power and control rests in the ministry of local government rather than them. In this respect, during the interviews councillors were concerned that assembly managers: . . . sign the contracts with the Ministry of Local Government, not with us assembly councillors. This means that they are directly controlled by the Ministry. If we cannot control them or discipline them as we may contravene their contractual instruments it means we do not have any powers (interview with councillors at Mzuzu City Assembly).

Confirming this view, 87 percent of the assembly managers interviewed attested that the concern of local political leaders that contract-based management erode their political control and power, provides for conflict. Councillors feel that they cannot adequately control assembly managers as they are protected by their contracts. In this regard, managers acknowledged that councillors feel that managers can do anything without any fear as they are secured by their contractual agreements. In fact, managers themselves confirmed that they feel more secure as their contracts entail protection from arbitrary decisions of councillors. 9.6 Public-private partnerships During the personal interviews, it was noted that public-private partnerships, as tools for NPM-based management accounting, are considered as a vehicle for reduced local political control and power. About 93 percent of the councillors interviewed indicated that they feel losing political control and power due to the public-private partnership arrangements. This is the case since managers now spend most of their times with private providers, non-governmental organizations or customers other than councillors. The local assembly managers neglect the councillors as they get preoccupied with external actors. Moreover, external partners do not most of the times get in contact with the councillors as most of the issues they are involved in are in the area of policy implementation rather than policy formulation. This makes councillors feel that they are not important stakeholders in the assembly activities. They also feel that they are losing power and control as most of the time assembly decisions are taken with external actors. Personal interviews with the assembly managers also revealed the same trends. A total of 80 percent of the assembly managers interviewed ascertained that they spend most of their time engaged with private providers and non-governmental organizations rather than councillors. The assembly managers were further asked to rank the frequency of their contact with different assembly stakeholders per week. These stakeholders included councillors, private sector organisations, non-governmental organisations and citizens. Assembly managers indicated that they get in contact more with private sector organizations, non-governmental organizations and citizens and less with councillors. Most managers interviewed indicated that their interaction with councillors is irregular. In terms of private sector organizations, all the assembly managers interviewed indicated that they meet the private sector organizations more often. This also applied for their contact with citizens. For non-governmental organizations, it was found that 93 percent of the assembly managers get in contact with them more often. These trends confirm that councillors spend less time with the assembly managers than other stakeholders. As a result, councillors feel left out in the

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Table I. Local government election results in 2000

local assembly service delivery processes. This makes them regard themselves as losing power and control in so far as assembly issues are concerned. 10 Local governance political stratification system and political control The loss in political control of some councilors to assembly managers must also be understood in terms of the Malawian Local Government political stratification. At the time of the study, Malawi had three major parties, Alliance for Democracy (AFORD), MCP and the UDF. Administratively, the country is divided along three region (or provinces) namely Southern Region, Central Region and Northern Region. These regions are further divided within ethnical lines – thus the Northern Region predominantly inhabited by the Tumbuka and Tonga tribes, the Centre the Chewa tribe and the South the Yao, Lomwe and Sena tribes. Malawi had its first democratic local governance elections in 2000. The elections determined the political stratification system of local governance in Malawi as they followed a polarized voting pattern among the electorate which is based on regionalism and ethnicity. As can be noted from the Table I, UDF won most of the votes in the southern region as the majority of its leaders come from the south. However, the UDF also won most seats in the central region which is the stronghold for MCP partly because MCP boycotted the pools and lacked resources to filed candidates. AFORD maintained its grip on the Northern Region as their leaders come from this area. About 30 candidates stood as independent candidates. The results of the elections are portrayed in Table I. This political stratification also had an implication on local-governance structures. This is the case as this political stratification penetrated into the local governance especially in the removal, transfers and appointment of administrators. An example in this regard is Donton Mkandawire who was a UDF sympathizer and from the Northern Region and of Tumbuka tribe. He was however Chief Executive Officer for Lilongwe City Assembly which is the stronghold of MCP which is Chewa tribe dominated. Being an MCP and a Chewa dominated local assembly, he faced much opposition from the councilors in putting forward NPM-based management accounting practices. This is the case as they felt losing power and control to a “stranger.” In this regard, the councilors asked “government not to renew his contract accusing him of being dictator in the way he runs the assembly” (The Nation, 2003c). The councilors complained that the Mkandawire “was arrogant and not acceptable to them” (Daily Times, 2003a). The councilors went to an extent of “chasing him after removing the tyres of his official vehicle” (The Nation, 2003c). However, some councilors who belonged to UDF however, petitioned President Muluzi “distancing themselves from the City Assembly’s attempts to remove Mkandawire” (Daily Times, 2003b). In his study, Khembo (2001, p. 37) noted the same trends at Mzuzu City Assembly in the Northern

Region

AFORD

MCP

Independent

UDF

Total

North Centre South Total

114 4 0 120

5 71 7 81

6 5 16 30

30 257 327 611

156 337 348 842

Source: Malawi Electoral Commission (2000)

Region which is controlled by the opposition AFORD party. His findings were that Mzuzu Assembly faces problems of political antagonism between AFORD and the ruling UDF members to the extent that the mayor of the assembly was accused in the presence of the state president of plotting to dismiss workers who support the UDF. However, the mayor countered the allegations by pointing out that whenever there are problems among workers of the assembly, administrators who support the UDF do not want to be disciplined. Instead of being corrected by the system of the place, they are running to the UDF party to report that the Assembly which is predominantly AFORD is discriminating against them. 11 Who is fooling who? Councilors’ tactics to regain the lost political control This paper has illustrated that the NPM-based management accounting systems implemented in the Malawian local governance system have increased managerial autonomy and have eroded political control. However, as much as possible, councillors employ many tactics to regain their lost political control and power. du Voitel (1996, p. 6) notes that politicians “get their revenge by influencing small scale daily business” while Hood (2000, p. 16) observes that politicians regain their political control, by using “specific incursion into the management space.” This was validated by the in-depth personal interviews where it was found that policy implementation interference, sabotage, and corruption were the most common instruments the councillors used to regain the lost political control as explained below. Councilors regarded their interference in policy implementation a way they could assert themselves and hence reduce the impacts of NPM-oriented management accounting packages like contracting out, performance management and public-private partnerships on political control. In this tune, assembly managers expressed that “there are some councillors who are a problem. They think we take up everything and they feel useless. As a result they would like to do managerial work” (interview with Assembly Managers at Blantyre City Assembly). Other managers emphasised that “some councillors have an inferiority complex problem as they feel that they have fewer powers and would want to get more by getting involved in policy implementation” (interview Assembly Managers at Zomba Municipal Assembly). An example was cited where councillors proposed that they recruit staff at the assembly instead of the Appointments and Disciplinary Committee. In the same arena, a Director of Finance echoed that “councillors would want to act as if they are internal auditors. They assess and examine each and every voucher processed when we have our own professional internal auditors.” In moreover, at one site, the Chief Executive Officer was demanded to hand over to the councilors his duties and let the Mayor use his office. In some cases, in an attempt to win back the lost political control councillors use disruptive behaviors to frustrate the work of the assembly managers. These behaviors include sabotage. In this case, some councillors deliberately cause commotion at the assembly to frustrate the efforts of the assembly managers. To illustrate, at Lilongwe City Assembly, councillors carried out demonstrations and strikes against the assembly managers as they accused the chief executive officer (management wing) of being a “dictator in the way he runs the assembly” (The Nation, 2003d) and demanded not to renew his contract. The real reason for being labeled “dictator” was that the chief executive officer could not allow any political intrusion into

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policy implementation. To this extent, the councillors even deflated the tyres of the chief executives vehicle and ordered him not to report for work. Councilors also use corruption as a means to win back their lost political control. In this regard, councillors have been intervening in policy implementation by forcing junior employees (of the management wing) to flout procedures and award the councillors contracts. For instance, Tambulasi and Kayuni (2007) found out that at Lilongwe City Assembly, some councillors force employees at the Assembly to “float procedure, inflate figures and award the councilors contracts to alleviate their poverty.” In addition, when there are vacancies at the Assembly, councillors tend to impose their relatives (Tambulasi and Kayuni, 2007). Moreover, the Mangochi Town Assembly Chairman (of the political wing) and his deputy were convicted of participating in a tender process and corruptly awarding themselves a contract to the tune of MK6.5 million[2] (The Nation, 2003b). Meanwhile the Blantyre City Mayor has many times been “accused of abusing and draining the assembly’s coffers” (Tambulasi and Kayuni, 2007). Still more, the Mayor was convicted of theft by a public servant and sentenced to 38 months custodial sentences without an option of fine for stealing K400, 000 donation he received from Bakhressaa Grain and Milling Company to be used for the rehabilitation of Nanjiriri Road (Tambulasi and Kayuni, 2007, p. 18). It must be noted that all these cases of corruption hinge on the tactics of councillors to regain their lost political control as awarding contracts, rehabilitation of roads and handling of finances are policy implementation issue which were supposed to be under the realm of the assembly management and not councillors. The councillors do all these to demonstrate to management that they also have some power and control in terms of assembly operational decision. 12 Who is fooling who? Administrators’ tactics to sustain and reproduce their gained power Administrators on the other hand are not passive. They continuously work to assert themselves in order to sustain, gain and reproduce their power otherwise politicians would use the above-mentioned tactics to overpower them. In this regard, administrators employ three main tactics. In the first place, they use their managerial prerogatives embedded in the NPM. In this case, they reprimand the councilors when they interfere with managerial activities. For instance, at one site the Chief Executive Officer wrote to his Mayor that he “observed with a lot of concern that for a long time now, you (the Mayor) are unduly interfering in the decisions of the Assembly and performance of the Assembly Secretariat” (Memorandum of Assembly Chief Executive Officer to his Mayor of July 29, 2004). A section of this memorandum is depicted below: The Objective of this letter is to appeal to you not to indulge in administrative/management issues of the Assembly, to take technical advice, and to request your Worship to develop trust and respect in the Management of the Assembly. May I also remind you Your Worship that yourself together with all the other Members of the Assembly have a duty to make policy. I am answerable to the Assembly for the implementation of such policies, and please discuss such issues with me when you feel the implementation is out of context.” (Source: Memo of Assembly Chief Executive Officer to his Mayor of July 29, 2004).

Secondly, the administrations seek for central government intervention. They appeal to the central government to intervene so that the councilors work within their ream as

per the dictates of NPM. In this regard, when Councilors wanted to wrongfully remove the Chief Executive for Lilongwe City Assembly, he sought intervention of the ministry of local government. In this regard, the: Principle Secretary for Local Government Willy Samute disputed Mayor Chimzeka’s claims that the Councilors have powers to appoint senior secretariat staff including Chief Executive. Samute said that it was the duty of the Local Government Service Commission under the Local Government Act (The Nation, 2003c).

Thirdly, administrators sustain their powers by colluding with councilors. This is mostly in cases where councilors use corruption as a means of regaining their control. In this regard, in an attempt to win back the managerial control, the managerial wing of the Assembly has in many a time worked hand in hand with the councilors in corrupt deals. To illustrate, in Mangochi Town Assembly, the Assembly’s Director of Finance Robert Chaguza (an Administrator) colluded with the Assembly Chairman Idi Kalosi and his Deputy Alex Itende (councilors) to embezzle a grant that the Danish International Development Agency (DANIDA) donated to the Assembly (The Nation, 2003a). In addition, in Rumphi residents approached the assembly with complaints that some employees associated with the procurement of materials agreed with councilors to divert materials meant for projects their plots. A report in this regard revealed that when the K6 million meant for development activities was being deposited there was shortage of K200,000; the cheque payments were issued in the names of some officials in the assembly’s accounts department and councilors; there was no contract signed between the assembly and a transporter identified to carry from various sites bricks mounded and burnt by the chiefs” (The Weekend Nation, 2003). 13 Conclusion This paper has established that NPM-based management accounting practices have led to increased managerial autonomy and reduced political control at the Malawian Local Government level. The problem however is that reduced political control has brought with it political behaviors that derail the accountability, efficiency, effectiveness and economy gains that these market-based management accounting practices were supposed to achieve in the delivery of public services. These behaviors range from policy intervention, sabotage and corruption. On the other hand, in an attempt to sustain their increased autonomy, assembly managers also employ various strategies which include the use of managerial prerogatives embedded in NPM, seeking central government intervention and colluding with the councilors in corrupt activities. Unfortunately, this makes the managers to be so much preoccupied with sustaining their control to the extent of relegating their primary managerial responsibilities – a situation which is feared to have massive negative implications on public policy outcomes. In this regard, the paper has both important empirical and theoretical contributions to make in the field of management accounting. Theoretically, the paper contributes to the management accounting literature by looking at management accounting in the context of new organizational arrangement models. As has been discussed in the paper, NPM has had massive influence on management accounting practices. However, various management accounting theoretical constructions and ideas have approached the subject in isolation of NPM organizational arrangements within which

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modern management accounting practices have to operate. This paper therefore fills this theoretical lacuna. Empirically, the study contributes to the question of the applicability and understanding of unintended consequences of NPM-based instruments in developing countries. Most studies assume that NPM tools are universal and can be applied worldwide regardless of country specific contexts. In this arena, NPM practices have been championed as “global” (Hughes, 1998, p. 58); “inevitable” (Osborne and Gaebler, 1992, p. 325); “public management for all seasons” (Hood, 1991); and an “example of globalization at work” (United Nations, 2001, p. 36). However, specific impacts in developing countries have not been studied. But, as shown by this study the consequences of NPM in less developed countries and Malawi in particular have been counter-productive. The paper, therefore, is a contribution on the knowledge vacuum of the adverse consequences of the NPM-based management systems in developing countries. It provides information and insights for reformers to consider the social, political, and cultural environment of the implementing countries so as to prevent counter-productive consequences that may present massive negative implications on public policy outcomes. Notes 1. As the study was being concluded, assemblies were dissolved awaiting elections whose date has not yet been determined. 2. MK ¼ Malawi Kwacha. Kwacha is Malawi’s currency. As of 17 May 2006, MK135.00 ¼ US$ 1. References African Development Fund (2004), Republic of Malawi Support for Good Governance Loan Appraisal Report, ONCF, Abingdon, May. Appana, S. (2003), “New public management and public enterprise restructuring in Fiji”, Fijian Studies A Journal of Contemporary Fiji, Vol. 1 No. 1. Bale, M. and Dale, T. (1998), “Public sector reform in New Zealand and its relevant to developing countries”, The World Bank Research Observer, Vol. 13 No. 1, pp. 103-21. Batley, R. and Larbi, G. (2004), The Changing Role of Government: The Reform of the Public Services in Developing Countries, Palgrave, New York, NY. Caiden, G.E. (1991), Administrative Reform Comes of Age, Walter de Gruyter, Berlin. Caiden, G.E. (2001), “Administrative reform”, in Farazmand, A. (Ed.), Hand Book of Comparative and Development Public Administration, 2nd ed., Marcel Dekker Inc., New York, NY, pp. 655-67. Chinsinga, B. (2005), “District assemblies in a fix: the perils of the politics of capacity in the political and administrative reforms in Malawi”, Development Southern Africa, Vol. 22 No. 4, pp. 529-48. Chiweza, A.L. (1998), “Is the centre willing to share power? The role of local government in a democracy”, Bwalo: A Forum for Social Development, No. 2, pp. 93-107. Chiweza, A.L. (2007), “Local government”, in Patel, N. and Svasand, L. (Eds), Government and Politics in Malawi, Montifort Press, Blantyre, forthcoming book chapter in 2007. Christensen, T. and Laegreid, P. (2001), “New public management: the effects of contractualism and devolution on political control”, Public Management Review, Vol. 3 No. 1, pp. 73-94.

Christensen, T. and Laegreid, P. (2004), “The fragmented state – the challenges of combining efficiency”, Working Paper 3, Institutional Norms and Democracy, Stein Rokkan Centre for Social Studies, UNIFOB, Bergen, AS. Corkery, J., Daddah, T.O., O’Nullain, C. and Land, T. (1998), Management of Public Service Reform, International Institute of Administrative Science, Oxford. Daily Times (2003a), “Councilors Defy Muluzi’s directive”, Daily Times, 6 February. Daily Times (2003b), “New twist in Lilongwe Saga: we are not against Muluzi”, Daily Times, 12 February. Department of Local Government (2001), Financial Management and Accounting Procedures for District Assemblies, Decentralization Secretariat, Lilongwe. du Voitel, R.D. (1996), “Political controlling concepts and outcome controlling”, paper presented at the Conference on New Public Management in International Perspectives, Institute of Public Finance and Fiscal Law, St Gallen, 11-13 July. Dunleavy, P. and Margetts, H. (2000), “The advent of digital government: public bureaucracies and the state in the internet age”, paper presented at the Annual Conference of the American Political Science Association, Omni Shoreham Hotel, Washington, DC, 4 September. Farnham, D. and Horton, S. (1996), “Public service managerialism”, Managing the New Public Service, Macmillan, New York, NY. Ferlie, E., Ashburner, L., Fitzgerald, L. and Pettigrew, A. (1996), The New Public Management in Action, Oxford University Press, Oxford. Finlayson, J.A. and Peacock, K. (2002), “The what and why of public-private partnerships”, Policy Perspectives, Vol. 9 No. 1, pp. 1-6. Flynn, N. (2002), Public Sector Management, 4th ed., Financial Times/Prentice-Hall, Harlow. Fozzard, A. and Simwaka, C. (2002), “How, when and why does poverty get budget priority? Poverty reduction strategy and public expenditure in Malawi”, Working Paper No. 166, Oversees Development Institute,. Frant, H. (1996), “The new public management and the new political economy: missing pieces in each other’s puzzle”, paper presented at the Conference on New Public Management in International Perspectives, Institute of Public Finance and Fiscal Law, St Gallen, 11-13 July. Ham, C., Robinson, R. and Hunter, D. (1995), “Evidence based policy making”, British Medical Journal, Vol. 310, pp. 71-2. Haque, S. (2001), “The diminishing publicness of public service under the current mode of governance”, Public Administration Review, Vol. 69 No. 1, pp. 3-19. Hodges, R. and Mellett, H. (2006), “Accounting regulation in the UK: one nation, two sectors”, Cardiff Accounting and Finance Working Papers A2006/1, Accounting and Finance Section, Cardiff Business School, Cardiff University, Cardiff. Hood, C. (1991), “A public management for all seasons?”, Public Administration, Vol. 69, pp. 3-19. Hood, C. (1996), “Exploring variations in public reforms of the 1980s”, in Bekke, H.A.G.M., Perry, J.L. and Toonen, T.A.J. (Eds), Civil Service Systems in Comparative Perspectives, Indiana University Press, Bloomington, IN, pp. 268-87. Hood, C. (1998), The Art of the State: Culture Rhetoric, and Public Management, Oxford University Press, Oxford. Hood, C. (2000), “Paradoxes of public-sector managerialism, old public management and public service bargains”, International Public Management Journal, Vol. 3, pp. 1-22.

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Hood, C. and Peters, B.G. (2004), “The middle aging of new public management: into the age of paradox?”, Journal of Public Administration Research and Theory, Vol. 14 No. 3, pp. 267-82. Hope, K.R. Sr and Chikulo, B.C. (2000), “Decentralization, the new public management, and the changing role of the public sector in Africa”, Public Management: An International Journal of Research and Theory, Vol. 2 No. 1, pp. 25-42. Hughes, O.H. (1998), Public Management and Administration: An Introduction, 2nd ed., Palgrave, New York, NY. Huque, A.S. (2004), “Competition, contracts and privatisation: globalisation and public administration in developing countries”, McMaster University Working Paper Series, GHC04/5, Institute on Globalisation and Human Condition, Hamilton, ON. Hussein, M.K. (2004), “Decentralization and development: the Malawian experience”, Africa Development, Vol. 29 No. 2, pp. 106-33. Jorgensen, B. and Bozeman, B. (2002), “Public values lost? Comparing cases on contracting out from Denmark and United States”, Public Management Review, Vol. 4 No. 1. Kalemba, E. (1997), “Anti poverty policies in Malawi: a critique”, in Chilowa, W. (Ed.), Bwalo: A Forum for Social Development, Centre For Social Research, Zomba, No. 1, pp. 21-37. Kamanga, R.T.E. (2002), Report on Inventory of Public Sector Reform Initiatives, Office of the President and Cabinet, Lilongwe. Kaunda, J.M. (1999), “Malawi: local government democratization and decentralization: an uncertain agenda”, in Reddy, P.S. (Ed.), Local Government Democratization and Decentralization: A Review of the Southern African Region, Juta & Co Ltd, Kenwyn, pp. 113-28. Kettl, D.F. (1997), “The global revolution in public management: driving themes, missing links”, Journal of Policy Analysis and Management, Vol. 16 No. 3, pp. 446-62. Khembo, N.S. (2001), “Local government and decentralization in Malawi: an certain agenda”, Master of Public Administration dissertation, University of Botswana, Gaborone, unpublished. Lienert, I. (2005), “Are laws needed for public management reforms? An international comparison”, IMF Working Paper, WP/05/62. McGarvey, N. (1997), “Unravelling two coalitions for local government reform”, in Stanyer, J. and Stoker, G. (Eds), Contemporary Political Studies, Vol. II, PSA, Nottingham. Malawi Electoral Commission (2000), Local Government Elections Report, Malawi Electoral Commission, Blantyre. Malawi Government (1995), Constitution of the Republic of Malawi, Government Printer, Zomba. Malawi Government (1996), Civil Service Action Plan, Government Printer, Zomba. Malawi Government (1998a), Malawi Decentralisation Policy, Government Printer, Zomba. Malawi Government (1998b), The Local Government Act, Government Printer, Zomba. Malawi Government (2000), Public Service Act, Government Printer, Lilongwe. Malawi Government (2002), Public Sector Management Reform Program, 2002-2006, Government Printer, Zomba. Malawi Government (2003), Public Finance Management Act, Government Printer, Lilongwe. Malawi Government (2003a), Health Information System: National Policy and Strategy, Government Printer, Zomba. Malawi Government (2003b), Malawi National Immunisation Programme Financial Sustainability Plan, Government Printer, Zomba.

Malawi News (2003), “Councilor’s greed killing assemblies”, Malawi News, 22-28 February. Matheson, A. (2002), “Outcome-focused management in OECD countries”, in Van der, M., van Rooyen, A. and van Wyk, B. (Eds), Outcome-Based Governance: Assessing the Results, Heinemann Publishers (Pty) Ltd, Sandown, pp. 7-22. Mbeye, J. (1998), “Decentralization in Malawi: an assessment of the policy process”, Bwalo: A Forum for Social Development, Issue 2, pp. 73-92. Metcalfe, L. and Richards, S. (1990), Improving Public Management, Sage, London. Miller, P., Kurunmaki, L. and O’Leary, T. (2006), “Accounting, hybrids and management of risks”, HMR No. 16, 8 February available at: www.unicatt.it/convegno/UC-LSE/paper/ Miller-Kurunmaki-OLeary.pdf (accessed 29 March 2006). (The) Nation (2003a), “Corrupt councilors convicted”, The Nation, 3 April. (The) Nation (2003b), “Corrupt councillors convicted”, The Nation, Blantyre, 3 April. (The) Nation (2003c), “LL councilors lock out chief: Mayor says Mkandawire’s contract expired”, The Nation, 5 February. (The) Nation (2003d), “Lilongwe Councillors lock out Chief: Mayor says Mkandawire’s contract expired”, The Nation, Blantyre 5 February. Nyland, K. and Pettersen, I.J. (2004), “Performance management and measurement concepts for better management control in public hospitals? A study of the hospital sector in Norway”, Health Organization Research Norway, Working Paper 2004: 5, University of Oslo, Oslo. Ocampo, R.B. (2002), “Models of public administration reform: ‘new public management’”, Asian Review of Public Administration, Vol. 24 No. 1, pp. 248-55. Office of The President and Cabinet (2000), Report on Functional Review of the Department of District and Local Government Administration and Assemblies, Government Printer, Zomba. Olowu, D. (2002), “Introduction new public management: an Africa African reform paradigm”, Africa Development, Vol. 27 Nos 3/4. Osborne, D. and Gaebler, T. (1992), Reinventing Government: How the Entrepreneurial Spirit is Transforming the Public Sector, Penguin Group, New York, NY. Peters, G. (2004), “Back to the centre? Rebuilding the state”, The Political Quarterly, Vol. 75 No. 1, pp. 130-40. Pollitt, C. (2003), The Essential Public Manager, Open University Press, Philadelphia, PA. Pollitt, C. and Bouckaert, G. (2000), Public Management Reform: A Comparative Analysis, Oxford University Press, Oxford. PUMA (1997), “Best practice guidelines for contracting out government services”, Puma Policy Brief No 2, Public Management Service, Herzogenaurach, February. Reichard, C. (2002), “Outcome-based service delivery: some experiences from Germany and Switzerland”, in Van der, M., van Rooyen, A. and van Wyk, B. (Eds), Outcome-based Governance: Assessing the Results, Heinemann Publishers (Pty) Ltd, Sandown, pp. 23-38. Schedler, K. (2003), “‘. . . And Politics?’ Public management development in the light of two rationalities”, Public Management Review, Vol. 5 No. 4, pp. 533-50. Sciulli, N. and Wise, V. (2004), “Public sector market testing for contracting out: some implications for accounting and management”, Victoria University Occasional Papers No 5. Stoker, G. (1996), “Redefining local democracy”, in Pratchett, L. and Wilson, D. (Eds), Local Democracy and Local Government, Macmillan, New York, NY.

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Tambulasi, R.I.C. and Kayuni, H.M. (2007), “Decentralization opening a new window for corruption: an accountability assessment of Malawi’s four years of democratic local governance”, Journal of Asian and African Studies, Vol. 42 No. 2, pp. 164-83. Tellis, W. (1997), “Application of a case study methodology”, The Qualitative Report, Vol. 3 No. 3, available at: www.nova.edu/ssss/QR/QR3-3/tellis2.html (accessed 19 May 2007). The Ontario Federation of Labour (2005), Private-Public Partnerships and the Transformation of Government, The Ontario Federation of Labour, Don Mills, available at: http://ofl.ca/ uploads/library/policy-papars/P3.pdf (accessed 12 February 2006). United Nations (2001), World Public Sector Report: Globalisation and the State, United Nations, New York, NY. United States General Accounting Office (GAO) (1997), “Financial management: outsourcing of finance and accounting functions”, Report to Congressional Requesters, GAO/AIMD/NSIAD – 98-43, October, United States General Accounting Office, Washington, DC. (The) Weekend Nation (2003), “Suspicion lingers over K6M Muluzi donation”, The Weekend Nation, 4-5 January. Further reading Hussein, M.K. (2003), “The role of Malawian local government in community development”, Development Southern Africa, Vol. 20 No. 2, pp. 272-82. Schout, A. and Jordan, A. (2005), “Coordinated European Governance: self organising or centrally steering”, Public Administration, Vol. 83 No. 1, pp. 201-20. Siverbo, S. (2003), “Purchaser provider slit in principle and practice public administration”, Working Paper no. 5, University School of Gothenburg, Gothenburg. Corresponding author Richard I.C. Tambulasi can be contacted at: [email protected]; rtambulasi@ yahoo.co.uk

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The use of costing information in Egypt: a research note

The use of costing information

Sander van Triest Amsterdam Business School, University of Amsterdam, Amsterdam, The Netherlands, and

329

Mohamed Fathy Elshahat Accounting Department, Benha University, Benha, Egypt Abstract Purpose – This paper aims to investigate the use of costing information in Egypt. Design/methodology/approach – A survey was carried out of 40 Egyptian privately held firms in four sectors (pharmaceutical, foodstuff, chemical, and packing and wrapping industries). Findings – The paper finds that the use and sophistication of costing information in Egypt is limited. No advanced accounting techniques seem to be applied, activity-based costing concepts are largely unknown, and the main purpose of costing information is pricing decisions, rather than performance measurement, process improvement or cost reductions. Research limitations/implications – Considerable problems were encountered in obtaining responses to the questionnaire. The results suggest that not all questions were understood by the respondents, which could be caused by the use of Western management (accounting) terms and concepts in the questionnaire with which the respondents were unfamiliar. Originality/value – The paper is one of few surveys of management accounting practices in Africa, and (to the best of one’s knowledge) the first in Egypt. Keywords Egypt, Developing countries, Management accounting, Surveys Paper type Research paper

1. Introduction Research on management practices in general, and accounting practices in particular, in non-Western countries is limited in volume[1]. This is a problem, since a lack of knowledge of the current state of these practices limits the possibilities to improve management practices in non-Western countries. Furthermore, without adequate empirical data, it is not clear whether the findings on this subject in Western (especially US) organizations are universally applicable. Parnell and Hatem (1999) refer to the experiences of expatriate managers, which are well documented and show substantial problems in applying Western concepts in a non-Western business environment. In this paper, we present the results of a survey study on the use of management accounting information in Egypt. Egypt is an important country in the Arab world, both in terms of political influence and economic impact (Abd-Elsalam and Weetman, 2003). Furthermore, the Egyptian business environment has experienced substantial reforms in the past few decades (HassabElnaby et al, 2003). Owhoso et al. (2002) document that after South Africa, Egypt was the most popular African country for US The authors thank participants at the 29th EAA Congress in Dublin 2006 and the referees and the guest editors of this special issue for helpful comments, and Jan Bilderbeek for his guidance. This research was partly financed by a grant from the Egyptian Government.

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listed firms to start activities in during the period 1975-1997. However, as Parnell and Hatem (1999, p. 403) state, “[although] Egypt has a rich cultural and commercial tradition, most scholars agree that its present business and management practices lag behind its Western counterparts. None the less, Western influence in Egypt has grown recently.” Our sample consists of 40 industrial firms, and the survey results are complemented by interviews and field visits. We report on the costing systems used, and on the application of costing information in strategic planning and decision making. The results indicate that acquaintance with modern management (accounting) techniques is limited. The most salient detail is the almost complete absence of advanced costing techniques such as activity-based costing. The most important use of costing information is in pricing decisions, implying a cost-plus approach to pricing. Next to this, we report on the problems of doing survey research in the non-Western setting of Egypt. We ran into substantial difficulties in gathering the data. The original method of using a postal survey resulted in an almost zero response rate. Only personally collecting the questionnaires at the sample firms worked in obtaining responses. Furthermore, much of the terminology used in the questionnaire – taken from the literature – seemed unknown, or not clear to the respondents. Based on our experiences, we suggest that survey research in non-Western countries requires the involvement of at least one native researcher. Also, it is prudent not to assume that the Western management terminology is known or understood in non-Western countries. As a result of the practical problems encountered, the study ultimately plays out as a pilot study. We discuss methodological issues and pitfalls that researchers should be aware of, and suggest some avenues for further research. The paper is structured as follows. In Section 2, we review the relevant research in non-Western countries, and Egypt in particular, with respect to (management) accounting practices and also from a methodological point of view. The research design is presented in Section 3. In Section 4, we present the empirical results. We close with a discussion of our findings. 2. Literature review 2.1 Empirical research on management accounting in non-Western settings Within the field of accounting, attention for the financial accounting practices in non-Western countries has increased in recent years, partly because international accounting standards are being introduced in these countries (Uche, 2002; Abd-Elsalam and Weetman, 2003; Ashraf and Ghani, 2005). Research focusing on management accounting practices in non-Western countries is limited. For example, Lee (2002) reviews the literature on activity-based costing adoption and theory development in an international context, but he only cites studies carried out in Europe, the USA, Japan, and Australia. Granlund and Lukka (1998, p. 154) argue that management accounting practices over the world are more similar than different, but they refer to studies of “British, German, American, Japanese, etc. management accounting practices” indicating a focus on Western settings. Results from countries that are less well developed in terms of GDP or GDP growth are hardly available, although there is a limited tradition of case research in less developed countries (Hopper et al., 2003). Nevertheless, to get an idea of the state of management accounting practices in non-Western countries, we briefly discuss a number of studies, focusing on the costing system and the use of activity-based costing.

Firth (1996) investigates the use of managerial accounting procedures in China. His questionnaire was administered in 1993, at which time the Chinese economy was opening up substantially to both market forces and foreign investments, Western but still at the beginning of its ongoing transformation into a market economy in close contact with firms and practices (O’Connor et al., 2004). The sample firms consisted of partners in international joint ventures (foreign and Chinese firms) as well as a control group of Chinese firms that did not cooperate with foreign firms. The non-cooperating Chinese firms show lower levels of adoption of accounting techniques than the Chinese joint venture partners. Use of multiple cost pools and multiple allocation bases for costing purposes is 10 percent or lower for non-cooperating firms, while joint venture partners have usage rates of up to 20 percent. The application of activity-based costing is 2 percent for partners, and 1 percent for the other group (although it should be noted that activity-based costing was relatively new in 1993 – on the other hand, 15 percent of the foreign firms in the sample report using it). The costing information is used by 12 percent of non-cooperating firms for decision-making purposes such as make or buy, and by 17 percent for setting prices. The use is considerably higher for the joint venture partners, with 39 percent using it for decision making and 28 percent for pricing. Like China, India has made major steps towards becoming a fully-developed market economy, and there are a number of firms (most notably in the software sector) that are competitive players on the world market, providing high level services to Western companies at lower costs. Joshi (2001) reports on a survey administered in 1998 among 60 Indian industrial firms. Overall, the level of sophistication seems high: 65 percent of the respondents uses multiple allocation bases, and ABC adoption in the sample is 20 percent. Especially, the ABC adoption seems high, given that reported adoption rates in Western countries range between 10 and 20 percent (Brown et al., 2004, p. 330). Eastern European countries are also relative newcomers to the Western management culture. Haldma and La¨a¨ts (2002) report on a 1999 survey of 62 Estonian firms. Of their sample, 7 percent use ABC. Multiple allocation bases for costs are used by 70 percent of respondents. Haldma and La¨a¨ts (2002, p. 395) also observe that within their sample, the “level of sophistication is of a cost accounting system tends to increase in line with company size”. Szychta (2002) surveyed 60 Polish firms in 1999. Multiple cost allocation bases are used by 13 percent of firms, and although three respondents report using activities as a cost classification basis, Szychta (2002, p. 408) states that “this does not mean that they have implemented activity-based costing.” Not surprisingly, the extent of application of Western management accounting practices appears to be related with the exposure to Western firms, regulations and market structures. For example, Firth (1996) and O’Connor et al. (2004) find a relationship between the use of foreign partners in joint ventures and the adoption of advanced accounting practices. Haldma and La¨a¨ts (2002) stress the impact of changes in reporting regulations (such as moving away from compulsory full costing) next to the introduction of market forces; 74 percent of their sample of Estonian firms report making changes in their cost accounting system during 1996-1999. Likewise, Szychta (2002, p. 408) reports that 76 percent of her sample introduced or changed its cost accounting system in the 1990s, when the market economy in Poland was restored. All this concurs in the observation of Anderson and Lanen (1999, p. 407) that transition to a more Western economic structure leads to “an overall increase in the use of

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fact-based decision making and increased demand for data that, in Western firms, are provided by management accountants.” 2.2 Empirical research in Egypt To our knowledge, there is no empirical data on the use of management accounting information in Egypt other than a case study by Hassan (2005) in a hospital setting. Empirical data from other Middle East or African countries is not readily found in Western accounting journals, with the exception of South Africa (Luther and Longden, 2001; Waweru et al., 2004). Parnell and Hatem (1999) give a number of reasons for the absence of a substantial literature on Egyptian management practices. Among these reasons are the problems of understanding the (Egyptian) Arabic language by Westerners, and the lack of substantial numbers of Egyptian researchers working in Western academic environments – as opposed to especially China and India. According to Parnell and Hatem (1999, p. 405): . . . [the] shortage of management research may result from the fact that studies in Egypt that involve primary data collection through field surveys, interviews, and opinion polls often, depending on their nature, require special and tedious governmental permission. Cultural differences are often manifested in the differences in indicators used in scales designed to measure the same constructs. Those who seek secondary data must consider the frequent lack of availability of accurate and current data.

Despite these problems of doing empirical research in Egypt, reported response rates for mail surveys in Egypt are not always low. Parnell and Hatem (1999) obtain a response rate of 26 percent on a sample of 411 “top executive members” of the American Chamber of Commerce in Egypt. However, only 20 percent of the respondents are Egyptian nationals, and the questionnaire was sent out in English rather than translated into Arabic. Humphreys (1996) used a sample of 75 principals of technical schools, obtaining 57 replies for a response rate of 76 percent. Notably, the questionnaires were delivered personally to the sample. Mady (2000) surveyed 49 state-owned manufacturing enterprises in Egypt using a mailed questionnaire. He obtained 37 questionnaires for a response rate of 76 percent. Rice (2006) investigates the impact of values and context on creativity by performing a survey of employees in nine organizations in Cairo. She succeeds in obtaining a response rate of 84 percent out of a total sample of 240 questionnaires by using a drop-off, pick-up method where the chief executive of each organization was asked to distribute the questionnaire in such a way that a representation of all departments would be obtained. There was no check whether this representation actually was achieved. Finally, Douglas et al. (2007) report a response rate of 76 percent in a survey of ethical positions and budgetary slack; their sample consists of Egyptian managers at the US and Egyptian firms “located in Egypt” (Douglas et al., 2007, p. 104), but no further information on size, industry or sample selection procedure is given. 2.3 Applying Western concepts in non-Western countries The question whether Western management concepts are applicable in non-Western settings is one which is asked frequently. For example, Humphreys (1996) scores Egyptian managers on the well known scales of Hofstede (1980). He finds that Egyptian managers show high uncertainty avoidance, extremely low individualism, and a moderate power distance. Based on his empirical results, he concludes that

management theory is not necessarily transferable across cultures. These cultures differ in issues such as motivation, resistance to change, attitude to appraisal, the use of delegation, risk-taking behavior and expected career structure (Humphreys, 1996, p. 39). On the other hand, HassabElnaby and Mosebach (2005) investigate the use of accounting-based debt covenants in private debt agreements in Egypt over the period 1978-1997, and find that this use increases over the years. Interpreting these covenants as a tool to reduce agency costs, they suggest that as a country’s economy becomes more developed it begins to adopt tools used by Western management. Abd-Elsalam and Weetman (2003) provide some information on the impact of non-familiarity with business and management concepts on the use and understanding of these concepts in non-Western settings. They study the compliance with IAS disclosure requirements upon implementation of certain standards in Egypt. They expect that familiarization with accounting regulation depends on the relative knowledge of the contents of the standards, as well as on the availability of the regulations in the language of the country. They identify three groups of disclosure requirements: (1) a group that is similar to existing Egyptian disclosure rules and available in Arabic; (2) a group that is new, and available in Arabic; and (3) a group that is new and not available in Arabic. The level of compliance was significantly higher for the first group than for the second group, which in turn had a significantly higher level of compliance than the third group. This is quite convincing evidence that both language and familiarity impact the implementation of accounting standards. Although, this conclusion cannot be extended directly to accounting concepts in general, such activity-based costing, it does convey a warning not to assume that such concepts will automatically be understood in non-Western settings. Mady (2000) provides some results on the understanding of Western management techniques by Egyptian respondents. He investigates the sales forecasting practices of Egyptian firms. One of his findings is that an advanced technique called demand composition, which is rarely used in the USA, scores relatively high in his sample, leading him to conclude that “[although] a brief explanation for each technique was included in the questionnaire, the author has some doubt that the decomposition method was fully understood by all respondents.” Furthermore, the finding that two thirds of the sample uses some sort of probabilistic confidence interval in forecasting is qualified by the statement that “the author doubts that these probabilistic estimations were done through the conventional quantitative methods” (Mady, 2000, p. 362). Finally, the study by Rice (2006) mentioned above also shows problems in transferring Western concepts to an Egyptian setting. She tries to measure organizational context through constructs such as “structure, control, and hierarchy” and “atmosphere” by using multiple question per construct. However, the questions per construct do not load as expected (i.e. Cronbach’s a is below the threshold value). Therefore, she has to revert to choosing individual items instead of constructing values from multiple items, indicating that the survey population did not interpret the questionnaire as she expected.

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3. Methodology We use a mail survey to obtain our data. The questionnaire was discussed with academics and consultants in Egypt before it was sent out, and we did not encounter major problems. We mailed the questionnaires (in Arabic) to 100 firms randomly selected from the public and private sector. However, we obtained responses from only two firms after four weeks. This forced us to take a different approach. We selected 40 firms in four sectors: ten each in the pharmaceutical, foodstuff, chemical, and packing and wrapping industry. These sectors were chosen because of their presence in the Egyptian economy, their development and growth, and their diversity in technology. All firms are privately held firms, meaning that there is no state ownership. This choice was based on the expected bureaucratic problems in dealing with state-owned firms, as indicated by Parnell and Hatem (1999). These 40 firms were all visited personally to drop off the questionnaire and take it in after being filled out. Thus, access was the essential criterion for inclusion in the sample. Obviously, this influences any generalization attempts. Next to the questionnaire, we interviewed some 30 people in Egypt. They were active as academics (12), but also in industry: financial accountants (6), production managers (2), sales and marketing managers (3), and management accountants (7). These interviews were used to gain perspective on the questionnaire results. 4. Survey results 4.1 General characteristics of the sample As indicated in the methodology section, the sample is limited to firms from four sectors. Table I presents information on the size distribution of the sample. Although, the food sector companies are somewhat smaller, there is no statistical difference between the sectors with respect to the distribution of firm size according to a x 2-test. Information on overhead costs is shown in Table II. The average overhead as a percentage of total costs is 35 percent. This is comparable (though somewhat high) with findings from the literature of 30.5 percent for a sample of the US firms (Krumwiede, 1998), 21-25 percent for a sample of UK and New Zealand (Lamminmaki and Drury, 2001), and 33.5 percent for a sample of Polish firms (Szychta, 2002). Although, the food sector seems somewhat lower in its average overhead percentage, the averages do not differ significantly between the sectors: a one-way ANOVA test leads to a p-value of 0.218. We analyze the relationship between firm size and overhead by computing bivariate correlations. We take the natural log of sales to correct for the skewed distribution. The results in Table II are somewhat mixed. Although, the normal Industry

Table I. Sales size distribution of sample

Pharmaceutical Food Chemical Packing Total

Below 100

100-150

Over 150

Average

Minimum

Maximum

4 7 4 7 22

4 3 5 1 13

2 0 1 2 5

145 84 120 106 114

75 56 54 55 54

440 120 305 210 440

Note: Numbers are in millions of Egyptian £. at the time of the research, Egyptian £1 was approximately e0.14 or $0.16

Industry Pharmaceutical Food Chemical Packing Total

Overhead as percent of total costs Average Minimum Maximum 38.7 28.9 35.8 36.4 35.0

15 18 19 20 15

70 41 54 52 70

Correlations Pearson Spearman 0.384 20.529 0.459 0.150 0.332 * *

2 0.082 2 0.555 * 0.419 0.201 0.107

Notes: *Indicates significant at 10 percent; * *at 5 percent. Overhead as a percentage of total costs; correlations: bivariate correlations between the log of firm size and percentage overhead

(Pearson) correlation shows a significant positive relationship between firm size and overhead, this is not apparent at the sector level. The non-parametric Spearman correlation has no overall relationship between firm size and overhead, and a weakly significant negative one for the food sector. This is the sector with the smallest firms. 4.2 Costing system The cost objects in the costing system in general are products: only three of the 40 firms stated that products were not costed. Nine firms use the customer as cost object, and ten the (production) department. The number of cost pools used is 1 for 10 percent of the firms, 2 for 12.5 percent, 3 for 22.5 percent, and 55 percent of the firms used four or more cost pools in their costing system. Multiple allocation bases for costs are used by 90 percent of the firms; only 10 percent report using a single allocation basis. The number of cost pools and allocation bases are higher than those reported by the studies discussed in Section 2.1. Firms were asked to assess their costing system on four aspects: (1) Specificity. To what extent is the costing system tailored specifically to the firm’s operations instead of using standard systems? On a scale of 1 (low) to 4 (high), the average is 2.13, indicating that firms do not analyze their operations to design a unique costing system. (2) Accuracy. To what extent do firms consider the costing information provided by their costing system to be accurate? Accuracy is measured on a scale of 1 (inaccurate) to 5 (completely accurate). The average score is 3.28, which indicates that firms realize their costing system does not provide information which is completely correct. (3) Satisfaction. Are firms satisfied by the numbers? This question is asked using a scale anchored by completely satisfied versus refusing to depend on them. While seven firms are completely satisfied with the numbers, 13 are satisfied, and 20 use the figures because they are available, no firms indicate that they do not use the numbers because of inaccuracies. Apparently, even inaccurate information is better than no information. (4) Development plans. Do firms want to develop the cost information system? Of the respondents, 45 percent want to develop the existing costing system (scoring 4 on the scale), and a further 35 percent want to make adjustments gradually or in the future (scoring 3 or 2); 20 percent do not want to take on the costing system at all (scoring 1).

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Table III presents bivariate correlations of the assessments of the costing systems, and also relates them to the average number of cost pools, the overhead percentage and firm size. We use non-parametric Spearman correlations to control for the different scale sizes. We see that the specificity of the costing system has a positive correlation with satisfaction, and a negative one with development plans (meaning that more specific costing systems lead to less need for developing the costing system). However, the number of cost pools has a negative correlation with accuracy. This seems strange, since in general an increase in the number of cost pools leads to more accuracy. This finding might suggest that the concept of cost pools is not completely understood. On the other hand, it may also be the case that firms that use more cost pools are more aware of the difficulties in establishing correct cost prices, and better realize the shortcomings of their current system. The correlations with firm size are somewhat contradictory: larger firms are less satisfied, but also less inclined to develop their costing system. The concept of activity-based costing is almost completely unknown in Egypt. Of the 40 firms, only two indicate that they are working on implementing it. All other firms did not reply to any of the questions regarding ABC, this while the questionnaire part on ABC contained 12 questions. The implications of this go further than the observation that only 5 percent of the sample is trying to apply ABC: the other firms do not seem to have heard of it at all. This inference is perhaps somewhat strong, but answers to other questions reinforce the feeling that knowledge on modern management accounting techniques is rather limited. On the question whether products differed in their usage of firm resources, only six firms answered. The other 34 did not provide any answer. Since, the notion of resource usage and differences in consumption of resources is central to the logic behind ABC, this suggests a lack of familiarity with the basic concepts involved in ABC. A related question asked whether overhead costs are assigned to cost centers, again a standard procedure in any advanced costing system. Seven firms answered yes, two no, and 31 did not give an answer. The unfamiliarity with accounting concepts such as ABC could also extend to the concept of cost pools, as suggested above. This also qualifies the reported use of multiple allocation bases and cost pools by 90 percent of the firms. The size of the respondents’ firms could be a factor in the use of advanced costing techniques. In Western countries, ABC usage is often found to be related to firm size (Chenhall and Langfield-Smith, 1998); larger companies also attach more importance to cost information (Hoque, 2000). Within the sample, firm size has no correlation with costing system characteristics such as specificity, accuracy or number of cost pools (Table III). This could imply that all firms fall within the category of small, Variable

Table III. Bivariate non-parametric Spearman correlations of several assessments of the costing system, the number of cost pools and overhead percentage

1. 2. 3. 4. 5. 6. 7.

Specificity Accuracy Satisfaction Development plans No of cost pools Overhead percent Firm size

1

2

3

4

5

6

7

1.00 0.15 0.34 * * 20.28 * 20.05 0.27 * 20.14

1.00 0.25 20.09 20.32 * * 0.18 20.14

1.00 2 0.25 2 0.14 0.27 * 2 0.45 * *

1.00 0.08 20.17 20.38 * *

1.00 20.14 .02

1.00 .11

1.00

Notes: *Indicates significance at 10 percent; * *at 5 percent

unsophisticated firms. On the other hand, the average sales number of Egyptian £114 million translates into e15 million, which suggests that we are not dealing with corner shops or start-ups. Also, the pharmaceutical and chemical industries require certain levels of sophistication. Thus, it seems that the unfamiliarity with ABC, and the almost total absence of ABC usage in practice, cannot be explained solely from a size effect.

The use of costing information

4.3 Use of costing information – functions and purposes Respondents were asked to score the use and application of costing information on a scale of 1-6. Functions using costing information are especially top management and marketing (Table IV). Both functions score significantly higher than the other three at the 1 percent level using paired samples tests (this holds for the t-test and the Wilcoxon test). The difference between the marketing and the top management functions is not significant. The application of costing information reflects the focus on these two functions (Table V). Pricing decisions are the most important area where costing information is used at an average of 4.48, followed by customer profitability at 4.23. Performance measurement, which can be important for control purposes of top management, is also important with an average of 4.13. These three all score significantly higher than the other applications of costing information using paired sample tests: both the t-test and the Wilcoxon test result in significant differences at the 1 percent level between product mix decisions, adding/deleting products and activity analysis on the one hand, and pricing decisions, customer profitability and performance measurement on the other. The difference of the latter three with make or buy decisions is less substantial, but still significant at 10 percent for both tests. Noteworthy again is the low score on activity analysis, an application that is typically associated with advanced management accounting techniques.

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Function Top management Marketing Production Engineering Finance

Mean

Median

Pharmaceutical

Food

Chemical

Packing

4.22 4.13 3.30 2.93 2.38

5 4 3 3 2

3.80 3.80 3.10 2.50 2.40

4.60 4.10 3.20 2.90 2.40

4.50 3.90 3.20 2.90 2.70

4.00 4.70 3.70 3.40 2.00

Note: Mean and median are for total sample, industry numbers are means

Purpose Pricing decisions Customer profitability Performance measurement Make or buy decisions Product mix decisions Adding or deleting products Activity analysis

Mean

Median

Pharmaceutical

Food

Chemical

Packing

4.47 4.20 4.13 3.75 3.30 2.93 2.38

5 5 4 4 3 3 2

4.10 3.50 3.80 3.70 3.30 3.00 2.20

3.80 4.00 4.20 3.60 2.90 2.30 2.30

5.00 4.50 3.90 3.90 3.70 3.20 2.50

5.00 4.80 4.60 3.80 3.30 3.20 2.50

Note: Mean and median are for total sample, industry numbers are means

Table IV. Usage of costing information per function

Table V. Application of costing information

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In all, this suggests that costing information is used mainly for marketing and measurement purposes. This would imply that using costing information in obtaining production process improvements, cost price reductions or efficiency increases is less important. Perhaps, this reflects the state of the Egyptian economy: whereas in a fully developed economy market prices are leading, the influence of the government on the economy of Egypt leads to less impact of market forces. We can relate this to the finding of Szychta (2002, p. 415) in her survey of Polish firms, where 70 percent reports using the cost-plus method for pricing purposes, “due to the nature of data available and the strong reliance of many practitioners on this method”. This is also suggested by the lack of differences between sectors. For example, product mix decisions, or decisions on adding or deleting products presumably are less important in the chemical industry where the process characteristics lead to a relatively stable set of products. However, with one exception, no significant differences were found between the sectors with respect to the importance attached to either the usage per function or the purpose of costing information based on an ANOVA test. The only exception is the importance of pricing decisions, which scored significantly lower in the food sector relative to the packing and the chemical sector. Related to this, the industry-level means for functions and purpose of costing information presented in the tables show largely comparable patterns with respect to the ordering. For the functions using costing information, all orderings are identical except for the packing industry where marketing is more important than top management. The pattern of the purposes is somewhat more varied, but the lowest scoring items are decisions on product mix, adding or deleting products, and activity analysis in all industries. Furthermore, the results are not necessarily consistent with the information about the costing system that respondents provided. For example, firms that use costing information for customer profitability calculations can be expected to use the customer as cost object. However, no significant difference is found between the score on using costing information for customer profitability calculations and the use of the customer as a cost object. 4.4 Notes from interviews Next to the survey results, a number of interviews were conducted. These interviews reinforce the message from the survey: the application of costing methods is in a state which can be characterized as primitive at best. There is a focus on cost-plus pricing, and that seems to be the main reason to compute cost prices. Activity-based costing is largely unknown, although at least one consulting academic indicated that he was involved with firms where ABC-projects were being considered or even in a preliminary phase. Other advanced techniques, such as customer profitability analysis, are probably not applied in ways that are common in Western countries. Specifically, according to several interviewees, customer profitability is interpreted as product profitability times sales per customer, rather than including customer-specific activities that differ in usage per customer. In fact, several interviewees from industry indicated that the goal is to increase the profitability of products regardless of to whom these products will be sold. Usage of multiple performance measures (beyond costing information) is not wholly absent. For example, some companies indicated that they use customer surveys to learn their customers’ opinions. On the other hand, several interviewees stated that returns to research and development activities require such

a long time to be realized that they are not undertaken. Yet there has been substantial interest in performance measurement in research and development in the Western literature exactly to counter this issue. Apparently, this newer application of performance measurement has not gained ground in Egypt. The use of information technology is becoming more widespread. However, it is difficult to attract good people to work with IT at a good level. In this respect, it is problematic for this area, as for most other areas in business, that Egyptian experts can earn more in countries such as Saudi Arabia or Kuwait. Thus, there is a lack of experts in many advanced fields in Egypt. Finally, an overall issue was the unfamiliarity with the Western management terminology. This extends to a very basic level. For example, the cost pool concept is inherent to the advanced costing methods (whether it is activity-based costing, or the allocation of multiple service departments using different allocation bases). This means, that if there is no tradition in these advanced methods, an Arabic equivalent is not available. We had to describe the concept, rather than being able to refer to a more or less well-known term from the Egyptian accounting tradition – although some interviewees knew the English term “cost pool” as such. This is problematic in applying the concepts (and even more in doing empirical research on their usage). 5. Discussion and conclusion 5.1 Cost accounting in Egypt We surveyed cost accounting practices in Egypt. Based on the results from a sample of 40 industrial firms, we conclude that cost accounting is still very much in a developing stage in Egypt. Activity-based costing is virtually unknown, and accounting concepts such as cost pools and resource consumption seem unfamiliar to the respondents. The findings from interviews with academics, accountants and managers reinforce this interpretation. Furthermore, as Lee (2002, p. 75) states in a review on international developments in ABC: “Since, ABC has gained the image of being up-to-date and strategically resourceful, practically all executives would like to say that they are applying these ideas.” If this were true, it only reinforces our inference that ABC is almost unknown in Egypt. Relating this to the thesis of Granlund and Lukka (1998, p. 155) with respect to a global convergence of management accounting practices, their confinement of management accounting’s small world to the “industrialized/post industrial” nations is a necessary caveat. In our Egyptian sample, costing information is used mainly for pricing purposes, implying a cost-plus approach to pricing. This is an approach that can be fitted to the economic circumstances in Egypt: with the Egyptian Government retreating from the economy more and more, firms are increasingly faced with market forces. However, it is very likely that market prices are not yet completely determined by these market forces, and that firms are not yet used to the market determining the price. Overall, the use of costing information for efficiency improvement seems less important. The use of any advanced accounting techniques, such as activity-based costing, seems absent. Thus, our contribution to the management accounting literature is limited, but clear: cost accounting information in Egypt is available at a basic level at the most, and used more for external (pricing) purposes than for internal (performance) purposes.

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5.2 Methodological issues During the research, we have encountered a number of methodological problems that are related to the familiarity of Egyptian firms with Western management concepts. One of these concepts is the mail survey as a tool of empirical data gathering. As is clear from the 2 percent response rate in the initial stage of the research, mail surveys do not seem to be useful in this respect. We obtained responses only by visiting firms, dropping off the questionnaires and picking them up in person. This is possibly related to certain aspects of the Egyptian culture, one of which is a tendency towards secrecy (Dahawy et al., 2002). Even more problematic is the fact that most of the concepts that are researched seemed unfamiliar. This holds for the accounting concepts mentioned above, but also for more general concepts like strategy or environmental uncertainty. For example, we tried to measure the construct strategy using questions that would indicate whether firms followed a cost leadership strategy in the line of Porter (1985; Frey and Gordon, 1999), but the internal consistency as measured with Cronbach’s a was way below acceptable standards. Obviously, this does not mean that Egyptian firms have no idea about strategy, but we can conclude that the Western terminology used to describe strategy is not interpreted by our respondents as we expected. Another example is in the measurement of environmental uncertainty. We tried to measure this construct with a number of questions on the importance of, e.g. suppliers’ actions, government regulations and technology developments (Gul and Chia, 1994; Hoque, 2004), but again we did not obtain an acceptable Cronbach’s a[2]. As such, we ran into the same problems as Rice (2006), who also could not arrive at good constructs (Section 2.3). The use of data reduction methods such as factor analysis also did not lead to results that were readily interpretable. Furthermore, the number of responses is too low to justify the use of factor analysis: Fabrigar et al. (1999, p. 274) strongly advise a minimum sample of 100 observations. Based on our experience, we have serious doubts that straightforward application of Western concepts in doing empirical research on management accounting is useful in the Egyptian setting. As other authors have experienced or remarked, Egyptian respondents do not always react to questions in ways that are comparable with Western firms (Rice, 2006), or else they seem to interpret the questions differently (Mady, 2000). Coupled with the unfamiliarity with questionnaires and a tendency towards secrecy, this makes doing survey research in Egypt a daunting task. It seems essential to include a form of personal contact, which means at the very least visiting organizations in person to drop off questionnaires in order to obtain any responses. Furthermore, because of the unfamiliarity with Western accounting and managerial concepts, it may be more useful to conduct a series of interviews to assess their use and usefulness. Should a questionnaire be used, it would seem advisable to include definitions and explanations of the main terms. An example of such an approach is provided by Guilding et al. (2000). They anticipate possible misconceptions with respect to accounting concepts such as life cycle costing, strategic management accounting, and target costing by including a glossary in the questionnaire – this while their questionnaire was mailed to New Zealand, UK and US companies. Even then, it is wise to take into account the following remark of Van der Stede et al. (2005, p. 678) which they make after assessing the quality of recent management accounting survey research:

Conducting high-quality survey research requires a set of conditions that are not all within the researcher’s control. It requires a population that has good access; that uses a common language; that is willing to discuss a wide-range of subjects with strangers; and that trusts pledges of confidentiality. . .

The use of costing information

All four criteria they list are not met in the case of Egypt. 5.3 Suggestions for future research There are ample possibilities for further research on the use of accounting information in Egypt. Based on our results, we suggest that it is more useful to start taking stock of the current management accounting practices, also with respect to internal control mechanisms such as the use of budgets, performance measurement and management, capital budgeting decisions, etc. As discussed before, we would advise to take care in the use of terminology. Also, it is important to gain more insight into the actual needs of Egyptian firms. Given the current state of cost accounting, simply trying to implement advanced accounting techniques does not seem useful. Finally, the difficulties in obtaining responses means that it is impossible to conduct empirical research with the “average” (non-international) Egyptian firm without input from native researchers, especially with respect to the language barrier. Notes 1. The nominator “non-Western countries” is defined differently by different researchers; also used are terms like “less developed countries” or “emerging countries”. For this research, the essential quality of non-Western countries is that they are relatively new to both the economic structures of Western countries, specifically the absence of wide-ranging government regulations in favor of market forces, and to the management theory and practices of Western countries. 2. For example, our measure of environmental uncertainty coincides with Hoque (2004), using eight statements on the importance of suppliers, customers, etc. Hoque (2004, p. 493) finds a Cronbach’s a (of 0.70, while this measure is negative in our sample. References Abd-Elsalam, O.H. and Weetman, P. (2003), “Introducing international accounting standards to an emerging capital market: relative familiarity and language effect in Egypt”, Journal of International Accounting, Auditing and Taxation, Vol. 12 No. 1, pp. 63-84. Anderson, S.W. and Lanen, W.N. (1999), “Economic transition, strategy and the evolution of management accounting practices: the case of India”, Accounting, Organizations and Society, Vol. 24 Nos 5/6, pp. 379-412. Ashraf, J. and Ghani, W.I. (2005), “Accounting development in Pakistan”, The International Journal of Accounting, Vol. 40 No. 2, pp. 175-201. Brown, D.A., Booth, P. and Giacobbe, F. (2004), “Technological and organizational influences on the adoption of activity-based costing in Australia”, Accounting and Finance, Vol. 44, pp. 329-56. Chenhall, R.H. and Langfield-Smith, K. (1998), “Adoption and benefits of management accounting practices: an Australian study”, Management Accounting Research, Vol. 9 No. 1, pp. 1-19.

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Dahawy, K., Merino, B.D. and Conover, T.L. (2002), “The conflict between IAS disclosure requirements and the secretive culture in Egypt”, Advances in International Accounting, Vol. 15, pp. 203-28. Douglas, P.C., HassabElnaby, H., Norman, C.S. and Wier, B. (2007), “An investigation of ethical position and budgeting systems: Egyptian managers in US and Egyptian firms”, Journal of International Accounting, Auditing and Taxation, Vol. 16 No. 1, pp. 90-109. Fabrigar, L.R., Wegener, D.T., MacCallum, R.C. and Strahan, E.J. (1999), “Evaluating the use of exploratory factor analysis in psychological research”, Psychological Methods, Vol. 4 No. 3, pp. 272-99. Firth, M. (1996), “The diffusion of managerial accounting procedures in the People’s Republic of China and the influence of foreign partnered joint ventures”, Accounting, Organizations and Society, Vol. 21 Nos 7/8, pp. 629-54. Frey, K. and Gordon, L.A. (1999), “ABC, strategy and business unit performance”, International Journal of Applied Quality Management, Vol. 2 No. 1, pp. 1-23. Granlund, M. and Lukka, K. (1998), “It’s a small world of management accounting practices”, Journal of Management Accounting Research, Vol. 10, pp. 153-79. Guilding, C., Cravens, K.S. and Tayles, M. (2000), “An international comparison of strategic management accounting practices”, Management Accounting Research, Vol. 11 No. 1, pp. 113-35. Gul, F.A. and Chia, Y.M. (1994), “The effects of management accounting systems, perceived environmental uncertainty and decentralization on managerial performance: a test of three-way interaction”, Accounting, Organizations and Society, Vol. 19 Nos 4/5, pp. 413-26. Haldma, T. and La¨a¨ts, K. (2002), “Contingencies influencing the management accounting practices of Estonian manufacturing companies”, Management Accounting Research, Vol. 13 No. 4, pp. 379-400. HassabElnaby, H.R. and Mosebach, M. (2005), “Culture’s consequences in controlling agency costs: Egyptian evidence”, Journal of International Accounting, Auditing and Taxation, Vol. 14 No. 1, pp. 19-32. HassabElnaby, H.R., Epps, R.W. and Said, A.A. (2003), “The impact of environmental factors on accounting development: an Egyptian longitudinal study”, Critical Perspectives on Accounting, Vol. 14, pp. 273-92. Hassan, M.K. (2005), “Management accounting and organisational change: an institutional perspective”, Journal of Accounting & Organizational Change, Vol. 1 No. 2, pp. 125-40. Hofstede, G. (1980), Culture’s Consequences, Sage, Beverly Hills, CA. Hopper, T., Tsamenyi, M., Uddin, S. and Wickramasinghe, D. (2003), “The state they’re in”, Financial Management (CIMA), pp. 14-19, June. Hoque, Z. (2000), “Just-in-time production, automation, cost allocation practices and importance of cost information: an empirical investigation in New Zealand-based manufacturing organizations”, The British Accounting Review, Vol. 32 No. 2, pp. 133-59. Hoque, Z. (2004), “A contingency model of the association between strategy, environmental uncertainty and performance measurement: impact on organizational performance”, International Business Review, Vol. 13 No. 4, pp. 485-502. Humphreys, M.S. (1996), “Culture difference and its effect on the management of technical education”, Leadership & Organization Development Journal, Vol. 17 No. 2, pp. 34-41. Joshi, P.L. (2001), “The international diffusion of new management accounting practices: the case of India”, Journal of International Accounting, Auditing and Taxation, Vol. 10 No. 1, pp. 85-109.

Krumwiede, K.R. (1998), “The implementation stages of activity-based costing and the impact of contextual and organizational factors”, Journal of Management Accounting Research, Vol. 10, pp. 239-77. Lamminmaki, D. and Drury, C. (2001), “A comparison of New Zealand and British product-costing practices”, The International Journal of Accounting, Vol. 36 No. 3, pp. 329-427. Lee, J.Y. (2002), “An examination of international differences in adoption and theory development of activity-based costing”, Advances in International Accounting, Vol. 15, pp. 65-77. Luther, R.G. and Longden, S. (2001), “Management accounting in companies adapting to structural change and volatility in transition economies: a South African study”, Management Accounting Research, Vol. 12 No. 3, pp. 299-320. Mady, M.T. (2000), “Sales forecasting practices of Egyptian public enterprises: survey evidence”, International Journal of Forecasting, Vol. 16 No. 3, pp. 359-68. O’Connor, N.G., Chow, C.W. and Wu, A. (2004), “The adoption of ‘Western’ management accounting/controls in China’s state-owned enterprises during economic transition”, Accounting, Organizations and Society, Vol. 29 Nos 3/4, pp. 349-75. Owhoso, V., Gleason, K.C., Mathur, I. and Malgwi, C. (2002), “Entering the last frontier: expansion by US multinationals to Africa”, International Business Review, Vol. 11 No. 4, pp. 407-30. Parnell, J.A. and Hatem, T. (1999), “Cultural antecedents of behavioural differences between American and Egyptian Managers”, Journal of Management Studies, Vol. 36 No. 3, pp. 399-418. Porter, M.E. (1985), Competitive Advantage: Creating and Sustaining Superior Performance, The Free Press, New York, NY. Rice, G. (2006), “Individual values, organizational context, and self-perceptions of employee creativity: evidence from Egyptian organizations”, Journal of Business Research, Vol. 59 No. 2, pp. 233-41. Szychta, A. (2002), “The scope of application of management accounting methods in Polish enterprises”, Management Accounting Research, Vol. 13 No. 4, p. 401. Uche, C.U. (2002), “Professional accounting development in Nigeria: threats from the inside and outside”, Accounting, Organizations and Society, Vol. 27 Nos 4/5, p. 471. Van der Stede, W.A., Young, S.M. and Chen, C.X. (2005), “Assessing the quality of evidence in empirical management accounting research: the case of survey studies”, Accounting, Organizations and Society, Vol. 30 Nos 7/8, pp. 655-84. Waweru, N.M., Hoque, Z. and Uliana, E. (2004), “Management accounting change in South Africa: case studies from retail services”, Accounting, Auditing & Accountability Journal, Vol. 17 No. 5, pp. 675-704. Corresponding author Sander van Triest can be contacted at: [email protected]

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Call for papers

Global Accounting and Organisational Change Conference 2008 Hosted by the School of Business, La Trobe University, Australia In association with the Journal of Accounting & Organizational Change, Emerald Publishing, UK Date: Wednesday 9 July-Friday 11 July 2008 Venue: Hilton on the Park – Melbourne, Victoria, Australia Conference theme: ‘‘The role of accounting in organisational (and social) change.’’ Keynote speakers: Professor Colin Ferguson, The University of Melbourne Professor John Burns, The University of Dundee, UK.

Electronic submission deadline for papers is 14 December 2007 We are pleased to announce that the first biennial international conference of the Global Accounting and Organisational Change (GAOC) network will be held at the Hilton on the Park in Melbourne from 9-11 July 2008. The theme of the conference is ‘‘The role of accounting in organisational (and social) change.’’ The GAOC network is committed to high quality research on contemporary issues in organizational and accounting change. It aims at providing a platform for international researchers and practitioners from multiple disciplines to disseminate information on organisational and accounting systems change. The 2008 conference will be organised by the School of Business, Faculty of Law and Management of La Trobe University in association with the Journal of Accounting and Organizational Change (JAOC). Founded in 2005, JAOC represents a new emphasis on exploring how organisations change, and how the change process affects organisational and social processes. For further details about JAOC, visit www.emeraldinsight.com/info/journals/jaoc/jaoc.jsp Empirical and review papers are sought from a variety of theoretical and methodological perspectives. In addition to empirical and case study articles, we also welcome replication of previously published studies and review articles on advances in accounting and organisational change research. We welcome manuscripts from any emerging and developed economies both in the public and private sectors on the following areas:

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Sarbanes Oxley Act and its implications for the changes to the regulation of financial practice and corporate governance;

.

accounting and management control systems change;

.

performance management and the balanced scorecard;

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changes in social and environmental accounting and performance reporting;

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accounting change in transitional and developing economies;

.

professional ethics, risk and ethical management;

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public sector reform and accounting change;

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corporate failure and auditing change;

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international donor agencies, development economics and accounting change;

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development economy and accounting policy choice; and

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change in accounting education.

These themes are only indicative. Papers outside of these themes with relevance to understanding the role of management control systems in organisational (and social) change are welcome. All papers will be subject to a double-blind review process. Papers accepted for concurrent sessions can also be designated as submissions to the JAOC. Please indicate whether you would like to submit your paper for consideration: .

for conference only; or

.

for both conference and publication in JAOC.

Notification of papers accepted for inclusion in the conference program will be made by 31 March 2008. Submit your paper via e-mail to Professor Zahirul Hoque (Conference Chair), School of Business, La Trobe University, Victoria 3086, Australia. Tel:613 9479 3433; Fax: 613 9479 2356; E-mail: [email protected]; [email protected]. Registration enquiries to Stephen Muir (Conference Manager), Tel:61 3 9479 2693; Fax: 61 3 9479 3363; E-mail: [email protected]. Only full papers will be considered for conference. There is no submission fee. Conference information and related sites are available at: www.latrobe.edu.au/GAOC

Call for papers

Journal of Accounting & Organizational Change Special issue on Sarbanes Oxley and the new world order of accounting regulation The events that precipitated the recent crisis in financial reporting (Enron, WorldCom, Arthur Andersen and Parmalat) are well known. This volume is not interested in their re-summarization. What is less well known is their consequence. Accounting as a profession and the entities that deploy the technologies and practices of accounting are still in the wake of what has been a tidal wave of institutional change in the developed economies. The most visible part of the transition from that which apparently did not work to that which we hope will work has been the Sarbanes-Oxley Act enacted in 2002 by the USA.

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market reactions to Section 404 information;

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auditing around Sarbanes Oxley information;

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the ‘‘trickle down’’ effect to non-publicly held companies and the nonprofit world;

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international consequences to capital markets and participants;

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collateral changes in other spheres of regulation;

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altered conceptions of accounting by external parties; and

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new roles for internal auditors.

We are interested in papers that address the phenomenon as an environmental change. Accordingly, we are desirous of projects that explore how organizations have altered their procedures, technologies and perspectives in the face of the new regulatory regime.

These themes are only indicative of what might be the contents of this special edition. Papers outside them with relevance to understanding the regulatory environment of accounting practice are welcomed. The deadline for submissions is 31 December 2007. Accepted papers will be published in later 2008.

The aim of this special edition of Journal of Accounting & Organizational Change is to promote informed debate on the shape of that which has emerged in the context of the debacle of excess and problematic ethical behavior. We invite historical, theoretical, empirical, practical and review papers whether quantitative or qualitative, from scholars across disciplines. Some possible topics include:

Please prepare your manuscript according to JAOC guidelines. For details, visit web site: www.emeraldinsight.com/info/ journals/jaoc/jaoc.jsp. Either of the special edition editors can be contacted with inquiries. All papers should be submitted electronically to: Timothy J. Fogarty, Case Western Reserve University, E-mail: [email protected], and Lawrence P. Kalbers, Loyola Marymount University, E-mail: [email protected]