GLOBAL ACCOUNTING AND CONTROL - A MANAGERIAL EMPHASIS

Gray, Salter & Radebaugh Chapter 4GLOBAL ACCOUNTING AND CONTROL: A MANAGERIAL EMPHASISSidney J. Gray, University of New South WalesStephen B. Salter, University of CincinnatiLee H. Radebaugh, Brigham Young UniversitySlides Prepared by: Jennifer Anne SalterGray, Salter & Radebaugh Chapter 4CHAPTER FOURCOMPARATIVE INTERNATIONAL MANAGEMENT ACCOUNTINGGray, Salter & Radebaugh Chapter 4INTRODUCTIONIn this lecture we will cover:•Management control as it applies across borders.•Objectives, form and role of management control in different countries.•Cross-national differences in setting overall corporate objectives and budgeting.Gray, Salter & Radebaugh Chapter 4What is Global Management Accounting?Global Management Accounting is a mixture of 2 disciplines:•Management Control, and•Cost Accounting.Gray, Salter & Radebaugh Chapter 4What is Global Management Accounting -Cost AccountingCost Accounting is:•The skill of understanding how costs are make up and how they change.•The science of computing how & why costs changed.•How costs can be reduced to match market prices.Gray, Salter & Radebaugh Chapter 4What is Global Management Accounting -Management ControlManagement Control focuses on:•The strategic objective of the firm.•The types of resources the firm needs, where it can get them in the short and long terms.•A system that tells the firm if it is going off track and needs to make corrections.•How to evaluate and reward manager performance.Gray, Salter & Radebaugh Chapter 4What is Global Management Accounting ContinuedThe Cross Border setting asks the following questions:•How do external & internal environments affect information needs and questions?•Are there different views in different countries to the points in the previous slide? Why?•See the following slide for another view of a management control value chain.Gray, Salter & Radebaugh Chapter 4What is Global Management Accounting Continued?The Management Control Value ChainFirmObjectivesStrategyPlanning &BudgetingMonitoringGray, Salter & Radebaugh Chapter 4CULTURE, MARKETS & CONTROLCulture: An IntroductionA firm’s social/business environment affects strategy and control dimensions.These environment dimensions are: cultureand markets. Hofstede’s model of culture identified dimensionsof human values that affect decision making by society and individuals.Gray, Salter & Radebaugh Chapter 4CULTURE, MARKETS & CONTROL:An Introduction to Culture ContinuedHofstede’s Dimensions:•Individualism versus Collectivism.•Large versus small power distance.•Strong versus weak uncertainty avoidance.•Masculinity versus femininity.•Long term orientation.Gray, Salter & Radebaugh Chapter 4CULTURE, MARKETS & CONTROL:Culture and ControlThe impact of a cultural variable on management accounting is not always clear.Studies suggest that management control is affected by: individualism, power distance, long-term orientation.Gray, Salter & Radebaugh Chapter 4CULTURE, MARKETS & CONTROL:Studies of Culture and Control IThese studies find:•Asian nations tend to look to longer term market dominance profile.•Collectivists, e.g., Japan, tend to plan and reward at the group level.•Individualist cultures link reward and performance for each individual.Gray, Salter & Radebaugh Chapter 4CULTURE, MARKETS & CONTROL:Studies of Culture and Control II•The Western concept of checks and balances makes the individual responsible & culpable. •The individualist culture is the basis for the system.•In Collectivist cultures group rewards dominate. These take longer to emerge, so planning would be longer term.•High Power Distance societies have few consultative/participative budgeting processes.Gray, Salter & Radebaugh Chapter 4EMPIRICAL STUDIES OF DIFFERENCES IN OBJECTIVES ACROSS NATIONS.US Multinationals:In a study of MNEs, Robbins & Stobaugh (1973) found:•Intangible items rarely taken into account when evaluating performance.•Foreign subsidiaries are judged on same basis as domestic subsidiaries.Gray, Salter & Radebaugh Chapter 4EMPIRICAL STUDIES OF DIFFERENCES IN OBJECTIVES ACROSS NATIONS Con’t.US Multinationals Continued:•Return on Investment is most utilized measure of performance.•A Supplementary device is often used to gauge a foreign subsidiary’s performance.–Comparison to budget is most widely used.•In the following slide we see that Abdallah & Keller (1985) provide support for these findings.Gray, Salter & Radebaugh Chapter 4EMPIRICAL STUDIES OF DIFFERENCES IN OBJECTIVES ACROSS NATIONS Con’t.Percent of the Total 64MNEsFinancial MeasuresForeignSubsidiary(%)ForeignSubsidiaryManager (%)Return-on-investment(ROI)7467Profits7866Budgeted ROI comparedto actual ROI6664Budgeted profit comparedto actual profit8687Other measures3636Gray, Salter & Radebaugh Chapter 4EMPIRICAL STUDIES OF DIFFERENCES IN OBJECTIVES ACROSS NATIONS Con’t.Non US Multinationals:•British Firms:•Appleyard, Strong & Walton (1990) found that British companies:–Preferred to us budget/actual comparison followed by some form of ROI.–Tended to use the same ROI measure for foreign subsidiaries as for domestic subsidiaries.Gray, Salter & Radebaugh Chapter 4EMPIRICAL STUDIES OF DIFFERENCES IN OBJECTIVES ACROSS NATIONS Con’t.•Japanese Firms–Shields et al (1991) compared US and Japanese MNEs and found that:–Japanese firms tend to use sales as the major performance criteria.–US firms prefer ROI.–The following slide contains Shield et al’s (1991) criteria used for evaluating divisional managersGray, Salter & Radebaugh Chapter 4EMPIRICAL STUDIES OF DIFFERENCES IN OBJECTIVES ACROSS NATIONS Con’tJapanA (%)USA A(%)Sources:Sales6919Sales growth2828Market share1219Asset turnover713Return-on-sales3026ROI775Controllable profit2849Residual income2013Profit minus corporatecosts4438Manufacturing costs2813Other817Gray, Salter & Radebaugh Chapter 4EMPIRICAL STUDIES OF DIFFERENCES IN OBJECTIVES ACROSS NATIONS Con’tBailes & Assada (1991) also compared US and Japanese MNEs (see table next slide).•Japanese firms prefer to use sales volume as overall objective. Net Profit is second.•American companies tend to use ROI most often, then controllable profit.Demirag (1994) -Japanese MNEs in the UK tend to use sales/market share targets.Gray, Salter & Radebaugh Chapter 4EMPIRICAL STUDIES OF DIFFERENCES IN OBJECTIVES ACROSS NATIONS Con’tJapan(%)UnitedStates (%)Sales volume86.327.9Net profit after corporateoverhead44.735.0Controllable profit28.251.8Profit margin on sales30.730.5Sales growth19.422.4Return on investment(ROI)3.168.4Production cost40.712.4Gray, Salter & Radebaugh Chapter 4EMPIRICAL STUDIES OF DIFFERENCES IN OBJECTIVES ACROSS NATIONS Con’tAPEC Firms:•Merchant, Chow & Wu (1995) found little evidence of a link between national culture and firm’s goals in Taiwan.•Kong, Harrison et al (1994) find that Anglo-Saxon managers prefer shorter term but more quantitative objectives.Company objectives vary from culture to cultureGray, Salter & Radebaugh Chapter 4EMPIRICAL STUDIES OF DIFFERENCES IN THE BUDGET PROCESS ACROSS NATIONSIssues needed to be resolved are:•is there a formal budget setting process?•Who participates and how?•What style of communication should be used?•How are objectives set?•Time period to be covered?•Should there be a monetary objective or non-quantitative objective?Gray, Salter & Radebaugh Chapter 4EMPIRICAL STUDIES OF DIFFERENCES IN THE BUDGET PROCESS ACROSS NATIONSUS Firms:•Anglo-American practice assumes that performance is improved through participation of persons in carrying out the budget.Gray, Salter & Radebaugh Chapter 4EMPIRICAL STUDIES OF DIFFERENCES IN THE BUDGET PROCESS ACROSS NATIONSJapanese Firms:•Bailes & Assada compared US/Japanese cos.:–90% of companies in both countries prepared master budgets.–This process varied by country.–US Managers tend to be more involved.–Japanese managers tend to see this process as a way to improve performance.Gray, Salter & Radebaugh Chapter 4EMPIRICAL STUDIES OF DIFFERENCES IN THE BUDGET PROCESS ACROSS NATIONSJapanese Firms Continued:•Ueno and Sekaran (1992) found:–US Managers use a more formal structure.–Budgeting thus becomes a drawing together of diverse, often conflicting interests.–US budget makers tended to create more “slack.”–Japanese managers tend to measure performance over a longer time horizon than US managers.Gray, Salter & Radebaugh Chapter 4EMPIRICAL STUDIES OF DIFFERENCES IN THE BUDGET PROCESS ACROSS NATIONSMexican Firms•Frucot & Shearon (1991) found:–Performance of Mexican managers is the same as typical US managers.–Higher level managers participate more.–Lower level managers participate less. This is attributable to the high power distance culture.–Managers of foreign owned subsidiaries show no desire to participate in the budget process. See themselves as powerless and process as alien.Gray, Salter & Radebaugh Chapter 4EMPIRICAL STUDIES OF DIFFERENCES IN THE BUDGET PROCESS ACROSS NATIONSAPEC Firms:•Comparing managers in Australia and Singapore, Harrison (1992) found no significant relationship between national origin and participation, interaction and satisfaction.•Both groups seem to prefer a participative style of budgeting.Gray, Salter & Radebaugh Chapter 4EMPIRICAL STUDIES OF DIFFERENCES IN THE BUDGET PROCESS ACROSS NATIONSHarrison et al (1994) compared Australia, US, Singapore and Hong Kong. They found:•Anglo-American firms place emphasis on decentralization, responsibility centers, organizational design, as well as quantitative and analytical techniques in planning and control•Singapore/Hong Kong Firms place emphasis on long term planning & group centered decision makingGray, Salter & Radebaugh Chapter 4CopyrightCopyrightCopyright 2001 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make backup copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.Gray, Salter & Radebaugh Chapter 4Chapter 4