Relating the Institutional Approach in Management Accounting to Institutional Economics: An Essay on Dual-Mode Rationality

Article excerpt

In management accounting literature an institutionalist stream is emerging that generates intense discussions and research (Scapens 1994; Burns and Scapens 2000; Duindam and Verstegen 2000). Although the discussion in the discipline of management accounting often refers to new institutional economics literature as well as original institutional economics literature, there are fewer references in the opposite direction. In this paper we try to strengthen the connection between management accounting and institutional economics. Analyzing the functioning of management accounting rules and practices creates an opportunity to substantiate the view of the economy seen as an instituted process. Management accounting practices are one part of the institutional infrastructure that control, coordinate and facilitate human decision-making.

We start from the very heart of management accounting, by giving contents to the concepts of "Management" and "Accounting." William Redmond's (2004) institutional rationality provides one of the cornerstones of the analysis. We consider management accounting rules as a means through which institutional rationality is achieved. Given these foundations, the functioning of management accounting mechanisms and principles within an organization is derived. If management accounting is based on institutional rationality, management accounting mechanisms can be seen as institutional rules i.e., a structure of routines and habits that guide behavior and create a predictable order. Through their influence on the decision room of decision makers in organizations, management accounting principles can play a coordinating role. Furthermore, management accounting principles evolve in interaction with other coordinating mechanisms; their development is context bound and path dependent.

As management accounting rules come to be seen as part of the institutional infrastructure, questions emerge about the relationship between management accounting rules and other institutional rules. A further elaboration of this relationship entails specifying "upward" and "downward causation" between institutional rules on various levels of generality (Hodgson 2003). In particular, upward causation would highlight processes of institutionalization of management accounting rules, which affect higher order institutional rules like laws or behavioral rules.

In this article we first show how management accounting systems and mechanisms support decision making within an organization. For this purpose decision making is regarded as being, by nature, institutionally rational. It appears that accounting principles, through their supporting function for the decision maker, also perform a role in coordinating various decision makers in an organization. Second, the evolutionary character and context bound nature of management accounting rules will be highlighted. We close by introducing several examples of the upward causation Hodgson (2003) talks about.

"Management" and "Accounting"

Management accounting is concerned with the mechanics of management accounting methods and techniques, the aims for which these principles can be used, and any adaptation of these principles. In this paper we restrict ourselves to the way management accounting principles function and to the adaptation of these principles.

We use a common definition of management accounting principles in which the principles are seen as the means through which information is acquired, processed and provided for the management of an organization. In general, management is concerned with decision-making and with planning and control. We focus on those situations where management can be interpreted as decision making (Atkinson, Kaplan and Young 2003). Therefore, we describe management accounting principles as the means of providing information for decision making within organizations (Hogarth 1993; Atkinson et al. 1997). Management accounting is not only concerned with financial information. …