Making Trade-offs in Organizational Design Choices
Multinational firms face trade-offs when delegating autonomy to make internal accounting choices.
ANN ARBOR, Mich. Multinational firms face trade-offs when delegating autonomy to make internal accounting choices to their business units (BUs), according to a new study by a University of Michigan Business School researcher.
"Accounting decentralization is subject to a severe trade-off between the decision-making and control demand for information," says Michal Matejka, assistant professor of accounting. "High accounting decentralization implies more information for decision-making of local management, but less information for corporate control."
Thus, delegating to a BU greater autonomy in making internal accounting choices allows the BU controller to become more of a "local consultant" rather than a "corporate auditor," he says.
In his study, "Accounting Decentralization and Organizational Design Choices: Complements or Substitutes?" Matejka surveyed both BU managers and controllers in 130 business units at seven multinational corporations headquartered in the Netherlands. His objective was to examine the relationship among accounting decentralization, performance measurement and BU decentralization.
"This is a first step toward improving our understanding of the complement-substitute relationships among multiple organizational-design choices," Matejka says. "Such an understanding is important for any study of firms' compensation or decentralization choices."
How firms resolve the trade-off inherent in accounting decentralization depends on the choice of incentive compensation for the BU manager.
"Shifting the emphasis from financial to non-financial measures reduces managers' incentives to misreport financial incomes and lowers the control costs of accounting decentralization," he says.
The findings show that "firms limit BU managers' discretion over cost allocation and budgetary-target choices when their bonus plans are more sensitive to these choices." Thus, accounting decentralization and non-financial performance measures are considered to be complementary.
Matejka's findings further demonstrate that both dimensions of accounting decentralization (the right to make cost-allocation choices as well as to set budgetary targets) are positively correlated to BU decentralization, which entails the delegation of operational decision-making rights to the business unit.
This implies that "the decision-making benefits of increasing the amount of private information at the BU level dominate the control costs." In other words, the controller's consultant role is more important than the auditor role in BUs where the manager has great operational autonomy.
Finally, Matejka reports that BU decentralization and non-financial performance measures are negatively correlated, making them substitutes for one another rather than complements.
"BU decentralization reduces the set of events outside the control of the BU manager," he says. "This makes financial performance measures more appropriate for determining bonus plans."
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