Controllability Principle in Responsibility Accounting

Controllability Principle in Responsibility business relationshipOne at a lower placelying concept of the traditional management control clay is the province chronicle. It is viewed as an important feature beca call it permits the ease of decentralization in M-form organizations. It distri simplyes accountability and provides story says on these distri besidesed accountabilities. It provides a way for large mutinous organizations to be managed much(prenominal) that both suborganizations need similar goals. It net be defined as a remains where passenger vehicles atomic number 18 held responsible for activities under their leadership. Built on responsibleness accounting is the teaching of controllability. This dogma has been viewed as the cornerst unitary of righteousness accounting (S. Modell and A. Lee, 2001). The rule states that charabancs should only be evaluated on elements that are in spite of appearance their control. Research belles-lettress on certi ficate of indebtedness accounting tear to the circumstance that responsibility accounting and the controllability prescript washstand non be made breakaway of one an a nonher(prenominal)(prenominal). The relationship becomes obvious when both are looked at in concert responsibility accounting holds the theater director responsible for a discloseicular divergence but the controllability doctrine ensures that the managers are held responsible only for factors that they preserve control. For this reason, Ferrara (1964) c each(prenominal)ed responsibility accounting a communication system with the sole purpose of fate the organization grasp its goals. The controllability principle, at that placefore, serves to make this communication channel clearer and understandable. The role compete by the controllability principle makes it an appealing notion. However, much interrogation articles remove suggestd for the ceremonial occasion of controllability principle as well as aga inst its observance in responsibility accounting. This paper seeks to evaluate the arguments for and against the observance of the principle of controllability.Arguments For and Against the Observance of Controllability Principle new-fangled research concludes that there are 2 types of ung e realplacenable factors within the borders of controllability immanent unwieldy and external mutinous factors. Studies also understand that when it comes to controllability, managers consider responsibility accounting sane when the arranges of internal un manageable factors on their exploit is negated in judgement. The concept of luridness was given in McNally G. (1980) as one of the rationales for observing the principle of controllability. He stated this using the expectancy speculation of demand. The notion of fairness makes the observance of controllability desirable when mathematical operation paygrades are carried appear on the managers. The controllability principle make s the appraisal a fair one. This is as a result of the appraisal done in consideration of the controllable factors and rambunctious factors. The result of the appraisal would be a satisfied and possibly execute manager. Choudhury N. (1986) goes further to say that this conforms to the commonly held principle of justice. The equity theory of motivation also encourages to explain it further the theory says a fair days maneuver for a fair days pay. In the case of the manager and controllability, this would be a fair assessment for a fair periods work. Achieving organisational goals are very important for any firm and the bureau of doing that is with the managers of the decentralized firms but if the managers learning of the performance appraisal is unfair, he is demotivated and unsatisfied. He also loses focus and possibly direction. Going by McGregors Y theory of motivation, this could damage the managers perception of his work. He wants to work and put in his scoop up but i f his best is judged against things pop out of his control, this could lead him to learned helplessness or to leave the firm (Nandan C, 1986). For much(prenominal)(prenominal) an organization whose appraisal system is deemed to be unfair, they would have a high overthrowover rate. The implications of this are far hit as harmful managerial demeanour might crop up.With fairness in place, observing the principle of controllability helps managers to pay attention to uncontrollable factors. The responsibility accounting holds them accountable for what goes on in their categorys controllability principle makes the uncontrollable factors obvious. Managers result direct corrective labors to these uncontrollable factors (McNally G., 1980). This in turn would help to find out the managers behaviour such that it aligns with organisational goals. The knowledge that his appraisal is a fair one would motivate him to try to exert several(prenominal) bias over these uncontrollable factor s. If the specify pays off, then he is one step contiguous to achieving organizational goals. This also induces him/her to pay more(prenominal) attention to factors previously perceive as uncontrollable but now influenceable because of the effort he has apply (F. Giraud, P. Langevin and C. M abateoza, 2008). In the agency theory model of management control where all information is used to appraise the managers performance in line with the controllability principle, the appraisal report highlights the controllable and uncontrollable factors. Senior management can bind rewards to these seemingly uncontrollable factors to ensure that managers do their best to attain them without neglecting other duties necessary for the organizational goal attainment. S. Modell and A. Lee (2001) announce to the influence over seemingly uncontrollable factors when they noted that reliance on controllability principle helps to lift managerial control of powerful institutional actors such as ma nagers. The empirical study carried out by Frow N, Marginson D, and Odgen S. (2005) at Astoria PLC also points out the fact that factors that cannot be controlled can be influenced with or so effort they found out that the firm uses the AIP (Astoria Improvement Process) to reinforce influenceablity. They noted that the AIP helps the manager retain some form of control where they have only partial controllability but the AIP also imposes expectation on the managers. This would ensure that the managers make extra effort to influence these factors to meet the expectation laid up on them.Controllability principle helps to undermine the effects of uncontrollable factors on a managers performance, thus giving a true picture of the managers efforts. This is another appealing notion of the controllability principle. It has been argued that the organization is a social system that grows in multifactorialness like the biological systems. This complexity brings with it constant changes and in the organizational context, this would mean unforeseen changes that can have positive or negative effects on the efforts of the manager. One of such complexity is the competitive and frugal elements. Both of these can affect the managers effort in a positive or negative way. An appropriate good example is the financial crisis of 2007-2010 which has caused a downturn in stock prices. This in turn affects the profit and investment levels but the controllability principle neutralizes the effects of the financial crisis on the managers performance. Giraud et al (2008) noted that neutralization of uncontrollable factors can take two forms ex-ante neutralization and ex-post neutralization, both of which have the same the same result, neutralizing the effects of uncontrollable factors on the performance of the managers.The Controllability principle provides a reliable assessment of the managers performance. When all uncontrollable factors have been neutralized, the assessment will be establish on the efforts of the manager in improving the section under his control. Choudhury (1986) notes this when he says that the results of the division under the mangers control is a combination of the managers efforts and the uncontrollable factors. Separating managers effort from uncontrollable factors provides a better basis for assessment. In the principal agent framework, this would be a very necessary basis for rewards, the principal uses everything in his organization to appraise the manager but when controllability principle removes the uncontrollable factors, the managers efforts are intelligibly seen. The rewards can then be ground on the managers efforts at imperious the factors that he could to achieve organizational objectives.Ferrara (1964) argues that the controllability principle in responsibility accounting helps the organization to grow in that it helps to locate the errors and mistakes of the organizational members. He argues that errors and mistakes a re the stuff of which progress is made . He also argues that controllability is a means of locating those activities and people in the organization in need of help so that assistance can be rendered and scarce resources of the organization would be more utilized. This would mean that controllability principle works in line with the organizational goals and where a positive attitude about it is inculcated in managers, the organization should move at the targeted pace. The responsibility accounting reports will make clear the controllable factors and the uncontrollable factors but amidst the controllable factors, a well prepared report will let out where there might be problems. These problems can be considered and worked on or used as a base for early strategic plans. When all errors and mistakes are corrected, they make room for improvement.In outrage of these appealing advantages for controllability principle, there have been arguments against its observance in the responsibilit y accounting. Choudhury (1986) argues that controllability principle is not sacrosanct. Considering the size of big firms, a lot of factors hinder the practicality of the controllability principle. The interdependencies of the divisions within these firms create an unclear line with respect to divisional boundaries and places fuss on the responsibility accounting process. One such factor is the task complexity of some divisions. If a particular manager works with another divisional manager to accomplish a difficult task, it becomes difficult to appraise the managers efforts because supposedly, the manager with the task had control over the particular task but performance appraisal with controllability principle makes this difficult. The manager had the task under his control but the other manager that helped had no control over the task but had beliefs and participated in accomplishing the task. In this aspect Amey (1979) compares organizations to biological systems that grow in co mplexity. The complex growth makes controllability impossible.Observing the controllability principle in complex organizations is limiting on the innovativeness and the creativity of managers in the organizations. When managers are aware that they are being assessed on controllable factors, they would not be willing to take on bad ventures that have potential benefits for the organization. In their examination of the limitations of controllability principle, Antle and Demski (1988) conclude that the limitations of controllability on organizational growth can be modified through the information center notion. The limitation of the controllability principle is a hindrance on the positive results of group work. M-form organizations require team work to succeed, however, the observance of the controllability principle in the principal-agent framework breeds competition and this affect team work negatively thus a sales manager might have a good idea on how to achieve the tasks of the marketing manager but because he does not want the marketing manager to do better that him in their performance appraisal, he would not assist or offer advice. Team work is therefore placed at the bottom of the list of useful organizational ethics. On the contrary where both managers would work together without neglecting their divisional duties, they could achieve desired results and if possible, meet their separate targets. The study carried out by Frow et al (2006) supports this fact their findings revolve around accountability without controllability and the results also shows that the Astoria Plc. encouraged more co-operations because of organizational promotion of greater interdependencies. Another aspect where the observance of controllability principle is limiting is the area of performance evaluation. It limits the use of market measures in evaluating the managers performance. The use of market measures is one of the ways of evaluating senior management employees and the l imiting effect of the controllability principle weakens the effectiveness of these measures (Merchant, 2006).The limitations of the controllability principle lead to rigidity in organizations. The controllability principle does not allow room for organizational flexibleness. It limits the organization to growth based on only controllable factors. Modern day organizations are very dynamic and this constant change is not compatible with the concept of controllability. If controllability principle is been observed in an organization, the organization would not allow change such that it is flexible and easily adaptable to changes in its environment. Amey (1979) argued that businesses needed to maintain flexibility in internal arrangements such that adjustment would not be keep and its links with its environment would grow stronger.Observing controllability principle in responsibility accounting involves some elements of subjectivity. This occurs when the basis for establishing controll able and uncontrollable factor are unclear. The performance evaluation team will have to set a criterion to use when carrying out an appraisal this criterion would be based on what they think and probably not what they are aware of. In doing this, they become subjective in the appraisal. This would be perceive by the manager as unfair appraisal. He would view himself as being unfairly treated without consideration of factors contingent upon his performance. As a result of this perception of the performance appraisal, the manager could behave in a dysfunctional way. such(prenominal) actions would be detrimental to the organizational goals. A manager who perceives an unfair system would also be demotivated. The findings of the research done by Giraud et al (2008) conclude that managers do not want uncontrollable external factors neutralized because of the level of subjectivity involved in it. Similarly, drawing from the study carried out by Modell and Lee (2001) institutional factor s affect the controllability principle, in turn these factors affect the power of the responsibility accounting system.The controllability principle is also expensive to maintain in an organization. I would argue that the process involved in ensuring the observance of responsibility principle is not cost efficient. The process would require constant research into the market forces so as to distinguish controllable factors from uncontrollable factors where it is not possible to make such a attribute, the organization would have to catch more costs to ensure that the performance appraisal system is perceived as fair by its managers. The energies and costs that would be consumed by such a process would be effectively used in another part of the organization where it would be beneficial. Giraud et al (2008) also argues on the difficulty of evaluating uncontrollable factors, they specifically note the difficulty as regards the impact of economic recession. Thus, I would also argue that payment for the services of qualified experts on the distinction between controllable and uncontrollable factors for performance evaluation is an supererogatory cost to the organization.Research has also shown that observing the controllability principle leads to dysfunctional behaviour of managers. Hirst (1983) noted that reliance on performance measures that capture uncontrollable factors countenance dysfunctional behaviour. This as a result of the managers perception of the performance evaluation system he wants to avoid the effects of uncontrollable factors and he does that by engaging in activities that do not promote organizational objectives. Giraud et al (2008) mention such activities to include data manipulation, creating slack and developing an ease culture. He narrows his focus to just the factors that he knows he would be appraised by and where he fails, his self-efficacy is reduced. Observing controllability principle in responsibility accounting can have consequenc es for organizational goals. It can lead to short boundaryism on the part of manager. In narrowing their focus, managers focus on the components of the performance evaluation system and not on the organizational goals. This would lead to the neglecting of organizational long term goals. Thus, a manager with a long term goal of meliorate return on investment but with a sales division short term goal of number of user complaints per month and region variation from budgets will focus only on reducing the percent variation from budgets thereby maligning the chances of improving the ROI. This might mean inferior sales strategies that would result in a drop in sales figures which have negative effects on the ROI.ConclusionTheoretically, observing the controllability principle in responsibility accounting has been perceived to have its advantages and disadvantages to the organization. The definition of the controllability principle indicates that there is a clear distinction between co ntrollable and uncontrollable factors. This distinction supposedly makes it easy to observe in responsibility accounting. However, empirical studies reveal that organizations do not fully observe the controllability principle. Findings indicate that there is some sort of continuum that has controllable factors on one end and uncontrollable factors on the other end with varying degrees of control in between. Studies also show that some managers do not see themselves on either end of the continuum but somewhere in the middle. This means that strict observance of the controllability principle is impractical. Choudhury (1986) argues that the responsibility accounting concept should not be hindered by controllability and that it should be interpreted independently of controllability. Moreover, controllability should be defined contingent upon the contexts of the organization. McNally (1980) also argues that controllability can be applied in a modified version. Recent literature also indi cates that organizations tend to hold managers for factors that they can influence rather than factors that they can control. This lies somewhere between controllable factors and uncontrollable factors on the controllability continuum. Giraud et al (2008) refer to this as the influencable factors. In addition, the interdependencies of organizations blur the lines separating controllability and other sub-systems in the responsibility accounting system (Hirst, 1983) as well as the uncertainties of the organizational environment.Consequently, I would argue that strict observance of the controllability principle is unrealistic. The modification and the re-definition of the controllability principle is a drowsy shift away from the premise of the controllability principle. The difference between controllable and uncontrollable factors is lacking in clarity as regards modern organizations. It also does not align well with the structure of modern day organizations. Similarly, factors that can be influenced today might not be influenced the next day or next operating period because of the unpredictability of the environments of the organizations. Besides, can the ability to influence an event be measured and to what extent can it be measured?