Spanner in the works

Spanner in the works

The last 20 years have seen vigorous innovation and debate in management accounting, generating new tools and practices like activity-based costing, EVA and strategic performance measurement systems.

But while these tools and practices are intended to improve profitability,
there are indications of a fad-like cycle of over-promising, underperformance
and abandonment of management accounting innovations.

Implementation failure rates for many innovations are high. Even
organisations that initially rate an innovation as successful may change their
view over time and abandon it later.

Some of this fad-like cycling can be explained by behavioural-economic ideas
about how rational human beings try to solve complex problems.

Many management accounting innovations appeal because they promise insights
into organisational complexity. But because they tackle complexity, they are
vulnerable to the side effects of tactics used to simplify complex situations
and the judgment biases that result from them. New tools and practices create
conflict because individuals are subject to overconfidence and ‘false consensus
effects’.

Some complex systems function adequately, not because they are free of major
errors but because they include countervailing errors.

A major overestimate generated by one element in a faulty budgeting system
can be cancelled out by underestimates elsewhere in the system. The simplifying
tactic of correcting the major over-estimate increases net error in the system.

Innovative systems often provide information that is relevant but highly
uncertain. To simplify, this information is treated as if it were relatively
certain.

Processes such as these lead to disappointment with the performance of
innovations. Awareness of these simplifying tactics and their consequences can
make innovations more effective by enabling managers to guard against their
potential side effects.

Joan Luft is professor of accounting at Michigan State University and
editor of the Journal of Management Accounting Research

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