Diffusion of Management Accounting Practices in Gulf Cooperation

Diﬀusion of Management Accounting Practices in Gulf Cooperation Council Countries*

PREM LAL JOSHI, University of Bahrain WAYNE G. BREMSER, Villanova University ASHUTOSH DESHMUKH, Pennsylvania State University–Erie RAJESH KUMAR, Institute of Management Technology, Dubai

ABSTRACT This study examines how management accounting practices (MAPs) have been adopted and diffused by publicly listed firms in the Gulf Cooperation Council (GCC) countries. The results of our survey show that the adoption rates for MAPs in the area of cost management and strategy are low while those in the area of performance measurement are moderate. Overall, the respondents favorably perceived their success in implementing MAPs. Power and politics, not economic (or cost–benefit) reasons, were considered to be the most influential reasons for nonadoption of MAPs. The results provide partial support to the view that there is a global convergence of management accounting system designs and ideas and also indicate that the role of cultural differences is diminishing over time. Keywords Management accounting practices; Balanced scorecard; Activity-based costing; Nonfinancial performance measures

DIFFUSION DES PRATIQUES DE COMPTABILITÉ DE MANAGEMENT DANS LES ÉTATS MEMBRES DU CONSEIL DE COOPÉRATION DU GOLFE

RÉSUMÉ Les auteurs examinent comment les pratiques de comptabilite´ de management (PrCM) ont e´ te´ adopte´ es et diffuse´ es par les socie´ te´ scote´ es dans les E´ tats arabes membres du Conseil de coope´ ration du Golfe (CCG). Les re´ sultats de leur sondage montrent que les coefficients d’adoption des PrCM dans le domaine de la gestion strate´ gique des couˆ ts sont faibles, alors qu’ils sont mode´ re´ s dans le domaine de la mesure de la performance. Dans l’ensemble, les re´ pondants ont une perception positive de leur succe` s dans la mise en œuvre des PrCM. Les motifs de nonadoption des PrCM juge´ s les plus de´ terminants se rapportent au pouvoir et a` la politique et ne sont pas d’ordre e´ conomique (ou lie´ s au rapport couˆ ts-avantages). Les re´ sultats appuient partiellement le point de vue selon lequel il y aurait convergence a` l’e´ chelle mondiale dans la conception des syste` mes de comptabilite´ de management et dans les ide´ es qui s’y rattachent ; ils re´ ve` lent e´ galement que le roˆ le des diffe´ rences culturelles s’atte´ nue avec le temps.

* The authors would like to thank the two anonymous reviewers for their helpful comments.

AP Vol. 10 No. 1 — PC Vol. 10, no 1 (2011) pages 23–53 ª CAAA /ACPC doi:10.1111/j.1911-3838.2011.00018.x 24 ACCOUNTING PERSPECTIVES / PERSPECTIVES COMPTABLES

Mots clés : comptabilite´ par activite´ s, indicateurs de performance non ﬁnanciers, pratiques de comptabilite´ de management, tableau de bord e´ quilibre´

Traditional management accounting models have evolved with innovations such as Activity Based Costing (ABC), Activity Based Management (ABM), and Strategic Management Accounting (SMA). Researchers have pointed out that these innovations have altered the processes of planning, controlling, and decision making in business organizations. In the 1970s, management accounting research focused on economics-based mathematical models. A variety of theories and methodological approaches to study management accounting practices (MAPs) were developed in the 1980s and 1990s by extending the theoretical domain from economics to organizational and social theory. The current research streams exhibit a wide range of theoretical diver- sity. Researchers have drawn on disparate disciplines such as economics, organization theory, sociology, social theory, politics, and social anthropology to analyze and synthesize managerial accounting issues (Bjo¨ rnenak and Olson, 1999; Water- house and Tiessen, 1978; Yi and Tayles, 2009; Scapens and Bromwich, 2010; Askar- any, Smith, and Yazdifar, 2007). In the developed countries, there is evidence of changes in MAPs. Libby and Waterhouse (1996) find that on average 31 percent of the management accounting systems in the sample organizations changed during the period 1991–1993. The components of management accounting and control systems that support decision– making and control changed more frequently than components that support planning, directing, or product costing. Burns (2000) also notes that considerable changes have taken place in accounting systems and practices. However, the author states that these changes are in the uses of management accounting rather than changes in management accounting systems and techniques. Scapens (2006) provides a perspective on the evolution of MAPs. In a developing country study, Joshi (2001) examined accounting practices of 60 large- and medium-sized manufacturing companies in India and found that the adoption rate of MAPs had been rather slow. Anderson and Lanen (1999) studied MAPs in 14 Indian firms using a contingency-theory framework. They found that changes in MAPs were associated with shifts in the external environment. Luther and Longden (2001) showed significant changes in the perceived benefits derived from MAPs in South Africa. The purpose of this exploratory study is to extend the literature on diffusion of MAPs and management accounting changes by studying a cultural environment that is different from those studied in prior research. Using survey methodology, we report on the adoption of MAPs and perceived or self-reported success rates of such adoption in the Gulf Cooperation Council (GCC) countries (Bahrain, Kuwait, Saudi Arabia, Oman, Qatar, and the United Arab Emirates). This study provides insights into MAPs used in the GCC countries, and the study findings are of

AP Vol. 10 No. 1 — PC vol. 10, no 1 (2011) DIFFUSION OF ACCOUNTING MANAGEMENT PRACTICES 25 interest to firms operating in similar cultures and other developing countries. Our survey also investigates the reasons for nonadoption of the contemporary MAPs. Our results are somewhat similar to prior research studies. We also find some support for the view that there is a global tendency for convergence of management accounting system designs and ideas and that the role of cultural differences is diminishing. The remainder of the paper is organized as follows: The next section provides the literature review for the research objectives and the MAPs used in our study. In the third section, we explain the research objectives and methodology. The fourth section presents and discusses the findings. Finally, we discuss conclusions of the study and implications for future research.

LITERATURE REVIEW The faults in traditional management accounting techniques have been documented in the literature, for example, Cooper (1987), Kaplan (1984, 1986), and Johnson and Kaplan (1987). Consequently, new MAPs have emerged such as ABC, ABM, Balanced Scorecard (BSC), Life Cycle Costing (LCC), Economic Value Added (EVA), and Strategic Costing (SC). The literature on MAPs is extensive. The MAPs were developed in advanced economies of the West, especially in the United States and Europe.

Management Accounting Innovations The growing realization of the limitations of traditional management accounting systems has led to the examination of multidimensional performance measurement practices. One of the major developments in the area of performance measurement systems during this period was BSC, which concentrates not only on financial performance measures but also on non-financial performance measures (NFPM) (Kap- lan and Norton, 1992). The scope of management accounting has moved toward effectiveness, control, market analysis, quality assessment, customer satisfaction, and competitive status management. Bjo¨ rnenak and Olson (1999) reviewed MAP diffusion, identifying the management accounting innovations of the 1980s and 1990s as follows: ABC, Activity Management (AM) and ABM, Local Information System (LS), BSC; LCC, Target Costing (TC); and SMA. Chenhall and Langfield-Smith (1998) summarized the most popular and mature MAPs in Australia as follows: Performance Measurement and BSC, ABC, Valued Added Concepts, Total Quality Management (TQM), Stra- tegic Management, Risk Management, Benchmarking, EVA, and TC. The study by Guilding, Cravens, and Tayles (2000) examined the SMA practices of New Zealand, the United Kingdom, and the United States. The results suggest fairly similar levels of SMA usage across these countries. Fullerton and McWatters (2004) focused on Just in Time (JIT), TQM, and Six Sigma and their relationship

AP Vol. 10 No. 1 — PC vol. 10, no 1 (2011) 26 ACCOUNTING PERSPECTIVES / PERSPECTIVES COMPTABLES to both traditional and non-traditional cost accounting practices. Cinquini and Tenucci (2006) reported a 34 percent adoption rate for TC by Italian companies. Other studies have reported adoption rates for MAPs in varying institutional and country-speciﬁc settings, for example, Lukka and Granlund (1996), Abdel-Kader and Luther (2006), Nielsen, Melander, and Jacobsen (2008).

Firm Characteristics Kellett and Sweeting (1991) suggested that the escalating speed of technological innovations requires study of subsequent innovations in administration systems, particu- larly in cost and management accounting techniques and practices. Drury and Tayles (1994) reported that adoption rates for MAPs are much higher in larger firms, partic- ularly for ABC. Innes and Mitchell (1995) concluded that high adopters of recently developed MAPs such as TC, ABC, and BSC have relatively greater resources. Hoque and James (2000) reported that the adoption of BSC depended on the size of the company. Joshi (2001) discussed reasons for differences in the utilization of accounting practices between India and Australia. He observed that the adoption of BSC was related to company size, because large companies tend to have access to knowledge and resources to implement newer practices. Also, Askarany et al. (2007) examined the association between technological changes in manufacturing practices and the diffusion of ABC. They found a significant relationship. Ehab and Hussain (2010) investigated the impact of the nature and characteristics of organizations on MAPs, in particular on NFPM practices in the banking sector. The study revealed that the nature and characteristics of an organization have a great impact on performance measurement practices in different banks, but the size does not have an impact. Lawson (2009a) reported that the role of the finance and accounting functions in Chinese companies was evolving. Lawson (2009b) observed that the philosophy of the power of masses is a significant characteristic of Chinese business management, and this concept is being adopted in the West. Some Chinese companies are using MAPs, for example, benchmarking, ABC, LC, and value chain costing. The management accounting techniques used by Chinese companies are either borrowed from Western countries or are homegrown methodologies or a combination of both. Lawson (2009c) described the adoption of new Chinese accounting standards as a motivator for companies in China for convergence of the financial⁄managerial reporting standards with the rest of the world, but still several unique differences remain. A study by Wu and Boateng (2010) provided insight into the factors that influence change in Chinese MAPs. The results indicate that the size of the firm, foreign partner, and level of knowledge of senior managers and employees all have a positive bearing on the changes in MAPs of the foreign-partnered joint ventures. Based on the literature cited, it can be said that firm size is the most important variable in the adoption of MAPs. The current study extends this literature by ana- lyzing the characteristics of the adopters and non-adopters.

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Adoption Success and Trends The adoption rates for MAPs may provide insights into successes and related benefits of MAPs. We can argue that firms would not continue to use MAPs if they did not provide adequate benefits. Chenhall and Langfield-Smith (1998) studied adoption and benefits of MAPs in Australia. The authors reported that a majority of the companies intended to adopt newer techniques in future, especially activity-based techniques and benchmarking. Large size and the business environment of Austra- lian companies could be the reasons for such intentions. Abdel-Kader and Luther (2006) observed a trend indicating increased use of cost of quality, nonfinancial measures, and the analysis of the strengths and weaknesses of competitors in the MAPs. Studies of ABC in Norway (Bjornenak, 1997) and in Finland (Malmi, 1999) explored economic and ‘‘fashion or fad’’ motives as influencing diffusion. Survey studies report cost reductions associated with the design, implementation, and use of new MAPs (Chenhall and Langfield-Smith, 1998; Sulaiman and Mitchell, 2005). Dick-Forde, Burnett, and Devonish (2007) explored the perceived importance of MAPs. They reported that there is a preference for conventional and traditional MAPs by the companies. Ilias, Razak, and Yasoa (2010) studied MAPs in small businesses in Malaysia, finding that the most preferable MAPs were standard costing, annual budgets, process costing, and fixed⁄variable cost analysis. Wu and Drury (2007) gathered data, using a questionnaire survey, from 64 joint ventures (JVs) and 115 State Owned Enterprises (SOEs) in China. They found that the MAPs, such as budgeting for controlling costs, profit and sales budgeting, and target costing are perceived to be more beneficial for SOEs compared to JVs. Rezaee, Szendi, Shum, and Elmor (1995) studied trends in the adoption of management accounting techniques and practices by Asian Pacific manufacturing firms. Respon- dents reported increasingly important roles in their organizations for activity-based costing, evaluation of value-added activities, quality control, and production and inventory control systems, while retaining some of the traditional techniques appropriate for their more labor-oriented manufacturing environment. The survey findings indicated that integration of accounting controls with strategic measures and nonfinancial performance measures will become more important in the future.

Management Accounting Change Management accounting should help organizations recognize the need for initiating change and suggest appropriate responses to such change. Burns and Scapens (2000) provided an institutional framework for studying the role of management accounting in managing change. Granlund and Lukka (1998) opined that ﬁrms probably tend to use management accounting systems to improve their operational but not strategic eﬀectiveness. Goldratt (1990) objected strongly to how management accounting was implemented. He suggested that the accounting variance approach to management has

AP Vol. 10 No. 1 — PC vol. 10, no 1 (2011) 28 ACCOUNTING PERSPECTIVES / PERSPECTIVES COMPTABLES been both dysfunctional and debilitating. Studies by Noreen, Smith, and Mackey (1995), Otley, Broadbent, and Berry (1995), and Eisenhardt (1985) explored the role of management accounting in supporting information interface between adaptive organization and its environment. Merchant (1987) observed that the controllability principle may reduce innovation in organizations because managers do not attempt to innovate where the perceived cost–benefit is not acceptable. Accounting systems can also inhibit change. Studies (Greenwood and Hinings, 1996; Van der Ven and Poole, 1995) suggest that accounting systems can slow down change because accounting routines lend stability to an organization. In particular, decision makers develop routines from past experiences, and these routines develop into inflexible decision rules and systems. This stability is valuable as it increases the firm’s ability to respond to external circumstances but reduces the adaptability. The common use of MAPs to develop managerial performance measures also has a powerful effect in creating organizational inertia. When actions taken in response to new information result in lower performance measures, managers become slow to identify and respond to new information (Atkinson, Waterhouse, and Wells, 1997). The literature on management accounting change is extensive. Granlund and Lukka (1998) argued that there is a global tendency for convergence of management accounting system designs and general ideas. Their framework includes economic and institutional perspectives. In their view, the tendency to converge is linked to economic, coercive, normative, and mimetic drivers of convergence domi- nating those of divergence. In the current study, we compare the GCC company adoption rates with prior international studies to provide insight into the global tendency for convergence.

MAPs in GCC Countries There is not much research about MAPs in Arab countries, despite the increased contribution of these countries to the world economy, and the increasingly open policies toward international trade and markets. The GCC comprises six Persian Gulf Arab states. The GCC countries have very similar socioeconomic features. Their economies are oil-based, void of corporate taxes, dependent on a high percentage of expatriate labor, heavily dependent on imports of both raw materials and finished goods, and consisting mostly of family-owned companies. Bahrain and Dubai have become international financial hubs and their public accounting profes- sions have grown in size and expanded their scope of competencies. GCC companies appear to have been adopting cost management practices to keep the costs of their products and services competitive. Religion has a significant influence on the economies, business practices, and politics of the Middle East. Religious values affect consumer behavior, consumer values, preferences, and allocation of resources. Hofstede’s (1980) cultural scores for the Arab World, which included Egypt, Iraq, Kuwait, Lebanon, Libya, Saudi

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Arabia, and the United Arab Emirates, suggest that faith plays a significant role in the people’s lives. Business issues like working hours, interest on funds, relationship between debtor and creditor, and ethics are affected by religious practices. The culture of GCC countries is different from the Western countries. GCC countries are collectivist countries. Arabian culture is characterized by wide power distance, strong uncertainty avoidance, and low individualism. At the business organizational level, autocratic decision making is a characteristic of managers in GCC organizations. As such, GCC managers are generally risk averse. Hofstede (1980) reported a high power distance index of 80 and uncertainty avoidance index of 68 as predominant characteristics for the Arab countries. Also, a high uncertainty avoidance index of 68 indicated the Arab society’s low level of tolerance for uncertainty. In an effort to minimize or reduce this level of uncertainty, strict rules, laws, policies, and regulations are adopted and implemented. GCC institutions, especially private institutions, hire foreign experts and rely on their knowledge and experience to deal with uncertainties. Studies, for example Harris and Moran (1999), have provided evidence that exposure to Western education and multinational management has resulted in reducing the power distance index in the GCC countries. There is a growing aware- ness among GCC companies of the importance of social needs, customers’ preferences, competitor practices, and new management techniques. Therefore, the adoption of innovative MAPs by companies in GCC is a relevant research prob- lem. Company ownership patterns are also changing in the GCC countries as family- owned companies are being listed on stock exchanges. The increasing level of competition, opening up of economies, new joint ventures, foreign direct investment, technological change, and customer focus are forcing companies to adopt innovative management techniques. GCC countries are generally ruled by royal families. Consequently, these countries are politically centralized, which encourages the presence of a power distance condition. At the same time, all GCC countries have established Al-Shura Councils (consultative assemblies) to discuss important decisions (Parker, 1993). The Arab cultural similarities were among the bases for creating the GCC (Shaker, 1986a, 1986b). By the 1990s, some social changes in the GCC countries had occurred because of the wealth that had accumulated since the 1970s. This wealth was the reason for the formation of joint ventures and other business dealings that resulted in a greater exposure to other nations, especially from the West.

RESEARCH OBJECTIVES AND METHODOLOGY This study surveyed the MAPs used by the corporate sector companies in GCC. The study was designed to extend the literature on diﬀusion of MAPs and

AP Vol. 10 No. 1 — PC vol. 10, no 1 (2011) 30 ACCOUNTING PERSPECTIVES / PERSPECTIVES COMPTABLES management accounting change by studying a different cultural environment. The specific objectives were: 1. to investigate adoption rates, which indicate the extent to which corporate listed companies in GCC countries have been using the MAPs; 2. to analyze the characteristics of the adopters and nonadopters; 3. to gain insight into the degree of success achieved in adopting MAPs and plans to use MAPs in the future; 4. to analyze the possible reasons for not using the MAPs; and 5. to compare GCC company adoption rates with those in prior international studies to investigate the global trend for convergence of management accounting system designs. We used a questionnaire survey because it was a cost-effective method for gathering information on the adoption of MAPs. Due to globalization and increased international business competition, GCC companies appear to have been adopting cost-management practices to keep the costs of their products and services competitive. Many manufacturing facilities are undergoing a gradual modernization process. El-Ebaishi, Yusuf, and Naser (2003) and Joshi, Al-Modhahki, and Bremser (2003) provide some evidence regarding modernization of traditional MAPs in Saudi Arabian manufacturing companies and in corporate budgeting and performance measurement for Bahrain, respectively. Thus, a priori, we expect that the management accounting profession in GCC countries would be using newer MAPs. The sample of companies selected for this study came from the companies listed on the GCC stock exchanges. A total of 534 companies were listed in these six countries in 2006. We relied on a judgmental sampling method to select half of the listed companies and mailed out 244 questionnaires during the fourth quarter of 2006. Research budget constraints and incomplete addresses contributed to survey- ing only half the population of listed companies. The survey included sixteen MAPs. The appendix summarizes the names and definitions of the MAPs. We selected these based on the most prevalent MAPs included in the prior studies cited earlier. Pilot tests were conducted with three companies in Bahrain, Oman, and Kuwait. Based on the feedback, the questionnaire was revised. In the first phase of the study, a seven-page questionnaire with a cover letter and self-addressed envelope was mailed to each company’s Manag- ing Director⁄ Director of Finance⁄Finance Controller⁄Chief Accountant in the first week of October 2006. The respondents were given six weeks to return the questionnaire. Reminders were sent three weeks after the initial mailing. The questionnaire comprised of two parts. Part A consisted of demographic questions such as type of industry, position, experience, number of employees, sales, foreign operations, number of divisions, and composition of board, among other things.

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TABLE 1 Sample proﬁle

Listed companies Number of Total Usable GCC countries in 2006 questionnaires sent responses responses

Bahrain 49 26 21 20 76.9% Oman 119 50 8 6 12.0% Qatar 36 20 8 8 40.0% Kuwait 186 78 8 6 7.7% Saudi Arabia 80 36 9 7 19.4% United Arab Emirates 64 34 12 10 29.4% (Abu Dhabi)* Total 534 244 66 57 23.4%

Notes: * Dubai has a Financial Market separate from Abu Dhabi. Only the Abu Dhabi Stock Market was included.

Part B consisted of questions relating to the use of, benefits derived from, future plans to use, and reasons for not using the MAPs. A four-point Likert-type rating scale was used. The definition of each MAP was explained in the questionnaire. The response rate for the 244 questionnaires was 23.4 percent. There were 57 usable questionnaires. Information about the respondents is presented in Table 1. One of the most common problems cited with a survey methodology is of nonresponse bias. We followed Oppenheim (1992) and Wallace and Mellor (1988) methodology by using a t-test to find significant differences between the first and last fifteen questionnaires. There were no significant differences indicating the absence of nonresponse bias in the sample. Table 1 provides information regarding response rates from various countries. The response rate was considerably higher for Bahraini firms as compared to the five other GCC countries. The range was 7.7 percent to 76.9 percent. One possible reason is that the questionnaires were mailed from Bahrain. The possible implications are discussed later. Table 2 presents information on the respondents’ demographic characteristics. The largest (35.1 percent) group of respondents was from Bahrain, followed by UAE (17.6 percent) and then Qatar (14.0 percent). The educational background, professional qualifications, experience, and current positions indicate that respondents are knowledgeable about issues relating to the adopting of MAPs in their respective organizations.

RESULTS AND DISCUSSION Table 3 presents descriptive statistics on the adoption of MAPs by the corporate sector companies in GCC countries. The Cronbach’s alpha coeﬃcient for the

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TABLE 2 Respondents’ demographic characteristics

Characteristics of respondents N Percentages

Respondents : by country Total = 57 100 1) Bahrain 20 35.1 2) Kuwait 6 10.5 3) Oman 6 10.5 4) Qatar 8 14 5) Saudi Arabia 7 12.3 6) United Arab Emirates (UAE) 10 17.6 B) Respondents: Type of industry Total = 57 100 1) Industrial 29 50.9 2) Nonindustrial 28 49.1 C) Respondents by Position: Total = 57 100 1) Accountants 29 50.9 2) Finance Managers and Financial Controllers 25 43.8 3) Others 3 5.3 Respondents by experience in present position Total = 55 100 1) Less than 7 years 20 36.4 2) 7 to 14 years 16 29.1 3) 14 and more 19 34.5 E) Respondents: Academic degree Total = 55 100 1) Master 34 61.8 2) Graduate 21 38.2 3) Others 0 0 Respondents: Professional qualiﬁcations Total = 36 100 1) CA 10 27.8 2) CPA 20 55.6 3) CMA 1 2.8 4) Others 5 13.9 Respondents by Number of employees Total = 55 100 1) Less than 100 14 25.5 2) 100 to 200 24 43.6 3) 200 to 400 14 25.5 4) 400 to 800 2 3.6 5) 800 and more 1 1.8 Respondents have a separate Management Total = 55 100 Accounting ⁄ Costing Department 1) Yes 42 73.7 2) No 15 26.3 Members on the Board of Directors Total = 55 100 1) Less than 5 0 0 2) 5 to 10 28 49.1 3) 10 and over 29 50.9

(The table is continued on the next page.)

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TABLE 2 (Continued)

Characteristics of respondents N Percentages

Number of divisions Total = 55 100 1) Less than 2 8 14.5 2) 2 to 4 24 43.6 3) 4 and more 22 40 4) none 1 1.8 M) Foreign operations Total = 55 100 1) Yes 37 67.3 2) No 18 32.7 N) Total sales (BD)* Total = 57 100 1) Less than 5 million 2 3.5 2) 5 million to 10 million 9 15.8 3) 10 million to 20 million 26 45.6 4) 20 million and more 20 35.1 Notes: * 1 BD = USD 2.64 sixteen MAPs (adoption rate) is 0.746, suggesting that the items have relatively high internal consistency. A high value of alpha is often used as evidence that the items measure an underlying (or latent) construct, thereby reflecting reliability or consistency. In Table 3, we grouped the sixteen MAPs into three categories based on the MAP’s primary purpose. We classified ten MAPs under Cost Management (alpha coefficient 0.685), four under Performance Management (alpha coefficient 0.480), and two under Strategic Valuation and Analysis (alpha coefficient 0.478). The adoption rate was measured by asking respondents to rate the ‘‘extent of implementation’’ for their firm on a Likert-type rating scale: (4) to a very large extent, (3) to a large extent, (2) to some extent to (1) not adopted. Table 3 documents the highest mean and percentage of firms that the respondents reported as adopting (at least to some extent). Under the Cost Management category, the higher numbers are for TQM, ABM, ABC, and Kaizen Costing (KC). TC was noticeably the lowest at 6 percent. In the Performance Measurement category, Table 3 shows the highest adoption rate for shareholder value (SHV). The survey questionnaire defined SHV as representing ‘‘the portion of the company owned by the shareholders and normally defined as the market value of the shares and other hybrid instruments that could be converted to shares.’’ This definition allows for a broad interpretation of the SHV model. The majority of respondents reported that their firms had adopted NFPM (63.2 percent) and BSC (50.9 percent). The lowest adoption rates are shown in the Strategic Valuation and Analysis category. Value Reporting (VR) and the Intellectual Capital Statement (ICS) are found to be in the developmental stages as compared to the other MAPs.

AP Vol. 10 No. 1 — PC vol. 10, no 1 (2011) 34 AP TABLE 3 o.1 o — 1 No. 10 Vol. Adoption of management accounting models by corporate sector companies by primary emphasis and statistical diﬀerences by category COMPTABLES PERSPECTIVES / PERSPECTIVES ACCOUNTING

I vs. NI Mode of operations Size (number of employees)

I NI Z F D Z <100 >100 Z PC MAPs VLE LE SE NU Mean Mean Mean MW Mean Mean MW Mean Mean MW o.1,n 10, vol.

A) Cost Management: 1.TQM 10 (17.9) 17 (30.4) 4 (7.1) 25 (44.6) 2.21 2.07 (29) 2.37 (27) 1.00 2.19 (36) 2.28 (18) 0.22 2.23 (13) 2.21 (43) 0.16 o

(2011) 1 2. ABM 9 (16.1) 13 (23.2) 1 (1.8) 33 (58.9) 1.96 1.76 (29) 2.19 (27) 1.25 2.16 (37) 1.53 (17) 1.79*** 2.57 (14) 1.76 (42) 2.12* 3. ABC 10 (18.2) 11 (20.0) 1 (1.8) 33 (60.0) 1.96 1.78 (27) 2.19 (28) 1.12 2.08 (36) 1.76 (17) 0.85 2.54 (13) 1.78 (42) 1.87*** 4. KC 6 (10.7) 11 (19.6) 6 (10.7) 33 (58.9) 1.82 1.82 (28) 1.82 (28) 0.10 1.94 (36) 1.50 (18) 1.56 1.78 (18) 1.83 (42) 0.27 5. BEM 3 (5.6) 14 (25.9) 1 (1.9) 36 (66.7) 1.70 1.63 (27) 1.78 (27) 0.74 1.88 (35) 1.23 (17) 2.22* 1.86 (14) 1.65 (40) 0.72 6. QC 2 (3.8) 10 (18.9) 3 (5.7) 38 (71.7) 1.55 1.61 (28) 1.48 (25) 0.59 1.73 (34) 1.23 (17) 1.89*** 1.50 (14) 1.56 (39) 0.09 7. TC 1 (2.0) 2 (4.0) — 47 (94.0) 1.14 1.00 (27) 1.30 (23) 1.92*** 1.22 (31) 1.00 (17) 1.31 1.38 (13) 1.05 (37) 1.67*** 8. LCC 2 (3.8) 8 (15.1) 1 (1.9) 42 (79.2) 1.43 1.64 (28) 1.20 (25) 1.61 1.38 (34) 1.59 (17) 0.88 1.00 (14) 1.59 (39) 2.20* 9. CE 1 (1.9) 5 (9.4) 2 (3.8) 45 (84.9) 1.28 1.36 (28) 1.20 (25) 0.66 1.35 (34) 1.17 (17) 1.23 1.21 (14) 1.31 (39) 0.84 10. SC 2 (3.8) 3 (5.8) 2 (3.8) 45 (86.5) 1.22 1.22 (27) 1.32 (25) 1.16 1.27 (33) 1.12 (17) 0.93 1.21 (14) 1.29 (38) 0.02 B) Performance Measurement: 11. SHV 18 (31.6) 19 (33.3) – 20 (35.1) 2.61 2.55 (29) 2.68 (28) 0.62 2.67 (37) 2.39 (18) 1.02 2.50 (14) 2.65 (43) 0.55 12. NFPM 6 (10.5) 24 (42.1) 6 (5.7) 21 (36.8) 2.26 1.90 (29) 2.64 (28) 2.64** 2.38 (37) 2.17 (18) 0.65 2.35 (14) 2.23 (43) 0.38 13. BSC 5 (8.8) 12 (21.1) 12 (21.1) 28 (49.0) 1.90 1.97 (29) 1.82 (28) 0.23 2.08 (37) 1.50 (18) 2.16* 1.93 (14) 1.88 (43) 0.11 14. EVA 3 (5.3) 14 (24.6) 4 (7.0) 36 (63.2) 1.72 1.55 (29) 1.89 (28) 1.58 1.86 (37) 1.50 (18) 1.20 1.57 (14) 1.77 (43) 0.68 C) Strategic Valuation and Analysis: 15. VR 2 (3.9) 3 (5.9) 2 (2.9) 44 (86.3) 1.28 1.11 (27) 1.46 (24) 2.10* 1.37 (32) 1.12 (17) 1.21 1.46 (13) 1.21 (38) 1.86*** 16. ICS — 3 (5.6) 4 (7.4) 47 (87.0) 1.19 1.04 (28) 1.35 (26) 2.15* 1.21 (34) 1.17 (18) 0.34 1.28 (14) 1.15 (40) 1.05

(The table is continued on the next page.) TABLE 3 (Continued)

Notes: 1. Figures in parentheses show percentages. Means are computed on a four point scale. 2. MW = Mann-Whitney U-test (2-tailed) * significant at 0.05 level ** significant at 0.01 level *** significant at 0.10 level Definitions of MAP variables used: TQM–Total Quality Management; ABM–Activity Based Management; ABC–Activity Based Costing; KC–Kaizen Costing; BEM–Business Excel- lence Model; QC–Quality Costing; TC–Target Costing; LCC–Life Cycle Costing; CE–Cost of Engineering; SC–Strategic Costing; SHV– Shareholder Value; NFPM–Non-Financial Performance Measures; BSC–Balanced Scorecard; EVA–Economic Value Added; VR–Value Reporting; ICS–Intellectual Capital Statement.

Abbreviations explained: PRACTICES MANAGEMENT ACCOUNTING OF DIFFUSION VLE: To a very large extent; LE: To a large extent; SE: To some extent; NU: Not Using; I vs. NI: By Industrial vs. Non-Industrial; F: By Foreign Operations; D: By Domestic; <100: Employees less than 100; >100 Employees 100 and more. AP o.1 o — 1 No. 10 Vol. PC o.1,n 10, vol. o (2011) 1 35 36 ACCOUNTING PERSPECTIVES / PERSPECTIVES COMPTABLES

Based on the mean values and percentages, the adoption rate of MAPs in GCC countries appears to be lower in the Cost Management and the Strategic Valuation and Analysis category. Based on our review of prior studies, we define low as less than 33 percent and moderate as 33 percent to 67 percent. Thus, only TQM, ABM, ABC, and KC are in the moderate range, that is, four out of ten Cost Management MAPs. All MAPs in the Performance Measurement category are in the moderate adoption range. Apparently, companies in the GCC region are putting most emphasis on Performance Measurement techniques, which suggests that they are becoming conscious about monitoring and enhancing their performance. Our discussion of international comparatives studies later will provide additional perspective. In Table 4, we present statistical differences in the adoption of MAPs. Because this is an exploratory study, we indicate significance levels of .01, .05, and .10. We used the Mann-Whitney U-test for the two-independent-samples, which does not need normality assumption. Management accounting change may be motivated by economic factors and ‘‘fashion or fad’’ motives (Bjo¨ rnenak, 1997; Malmi, 1999; Abrahamson, 1991). Chenhall and Langfield-Smith (1998) studied the benefits of MAPs (realized and expected) in Australian companies, and they reported that the benefits appear to be related to the adoption rates. Thus, industrial firms may tend to adopt similar practices such as ABC or TQM because they are effective and efficient or they are mim- icking competitors. Similarly, firms with foreign operations may tend to use the same practices as their foreign counterparts. For industrial versus nonindustrial companies, there were four significant differences, mostly for the least adopted MAPs, except for NFPM. The adoption rate means tended to be lower for the industrial firms. There were four significant differences for the foreign operations variable, and the four means indicate higher adoption rates for firms with foreign operations. Overall, firms with foreign operations tended to report higher adoption rates. Guilding et al. (2000) reported firm size as measured by sales to be a confound- ing variable for a majority of the MAPs studied in an international comparative study of New Zealand, the United Kingdom, and the United States. In Table 3, where company size is measured by number of employees, we see five significant differences. The mean adoption rate was higher for smaller firms in four of the five variables, which is contrary to Guilding et al. (2000). It is also contrary to prior contingency studies (Otley et al., 1995; Haldma and La¨ a¨ ts, 2002; Abdel-Kader and Luther, 2008). However, the four significantly higher means constitute 25 percent of the sixteen MAPs, and therefore may have limited informational value. We expected that the respondent’s country is an important variable. Guilding et al. (2000) reported some indications of the country effects. As noted earlier, the response rate was considerably higher for respondents from Bahraini firms as compared to the five other GCC countries. Therefore, we analyzed the adoption rates by country, but we did not find significant country differences for any of the MAPs.

AP Vol. 10 No. 1 — PC vol. 10, no 1 (2011) TABLE 4 Success rate in implementing management accounting models and statistical diﬀerences

I vs. NI By experience Size (number of employees)

I NI Z Less than More than Z <100 >100 Z MAPs VLE LE SE NU Mean Mean Mean MW 7years 7 years MW Mean Mean MW

A) Cost Management: 1.TQM 2 (11.1) 12 (66.7) 4 (22.2) — 2.89 3.20 (5) 2.77 (13) 1.30 2.71 (7) 3.00 (11) 0.98 2.80 (5) 2.92 (13) 0.36 2. ABM 1 (4.5) 14 (63.4) 7 (31.8) — 2.73 2.67 (9) 2.77 (13) 0.36 2.92 (13) 2.44 (9) 2.02* 3.00 (9) 2.54 (13) 2.14* 3. ABC 3 (15.0) 16 (80.0) 1 (5.0) — 3.10 3.12 (8) 3.08 (12) 0.28 3.27 (11) 2.89 (9) 1.91 3.14 (7) 3.07 (13) 0.28 4. KC 1 (6.7) 8 (53.3) 6 (40.0) — 2.67 2.50 (6) 2.78 (9) 0.80 2.20 (5) 2.90 (10) 2.14* 2.75 (4) 2.63 (11) 0.44 5. BEM 1 (7.7) 5 (38.5) 6 (46.2) 1 (7.7) 2.46 2.67 (6) 2.28 (7) 0.70 2.20 (10) 3.33 (3) 2.20* 2.50 (6) 2.43 (7) 0.54 6.QC 4 (30.8) 4 (30.8) 4 (30.8) 1 (7.6) 2.85 3.28 (7) 2.33 (6) 1.72*** 2.78 (9) 3.00 (4) 0.32 2.50 (4) 3.00 (9) 0.73 7. TC — 1 (33.3) 2 (66.7) — 2.33 — 2.33 (3) — 2.33 (3) — — 2.50 (2) 2.00 (1) 0.71 IFSO FACUTN AAEETPRACTICES MANAGEMENT ACCOUNTING OF DIFFUSION 8. LCC — 6 (85.7) 1 (14.3) — 2.86 3.00 (5) 2.50 (2) 1.58 2.50 (2) 3.00 (5) 1.58 2.86 (7) — 9. CE — 2 (66.7) 1 (1.8) — 2.67 2.67 (3) — — 2.50 (2) 3.00 (1) 0.71 2.67 (3) — 10. SC — 2 (50.0) 2 (50.0) — 2.50 3.00 (1) 2.33 (3) 1.00 2.50 (2) 2.50 (2) 0.00 2.50 (2) 2.50 (2) 0.00 B) Performance Measurement:

AP 11. SHV 7 (23.3) 17 (56.7) 6 (20.0) — 3.03 2.71 (14) 3.31 (16) 2.47* 2.55 (9) 3.24 (21) 2.56* 2.85 (7) 3.09 (23) 0.82

o.1 o — 1 No. 10 Vol. 12. NFPM — 18 (62.1) 11 (37.9) — 2.62 2.78 (9) 2.55 (20) 1.15 2.78 (14) 2.47 (15) 1.74 2.50 (6) 2.65 (23) 0.67 13. BSC 1 (4.3) 4 (17.4) 16 (69.6) 2 (8.7) 2.17 2.50 (10) 1.92 (13) 2.10* 2.17 (12) 2.17 (11) 0.15 2.40 (5) 2.11 (18) 1.15 14. EVA — 5 (27.8) 12 (66.7) 1 (5.6) 2.22 2.14 (7) 2.27 (11) 0.60 2.00 (8) 2.40 (10) 1.50 2.20 (5) 2.23 (13) 0.18 C) Strategic Valuation and Analysis: 15. VR — 1 (20.) 1 (20) 3 (60) 1.60 — 1.60 (5) — 1.75 (4) 1.00 (1) 0.79 1.33 (3) 2.00 (2) 0.52 16. ICS 1 (14.3) 3 (42.9) 3 (42.9) — 2.71 — 2.71 (7) — 2.75 (4) 2.67 (3) 0.38 2.67 (3) 2.75 (4) 0.00 PC o.1,n 10, vol. Notes: Figures in parentheses show percentages. Means are computed on a four point scale.

o * signiﬁcant at 0.05 level (2011) 1 ** signiﬁcant at 0.01 level

*** signiﬁcant at 0.10 level 37 38 ACCOUNTING PERSPECTIVES / PERSPECTIVES COMPTABLES

Success Rate Perceived success of management accounting changes reported in previous adoption surveys varies considerably, for example, Innes and Mitchell, 1995; Foster and Swenson, 1997; McGowan and Kalmmer, 1997; Chenhall and Langfield-Smith, 1998; Innes, Mitchell, and Sinclair, 2000; Sulaiman and Mitchell, 2005. The success rate in our study was measured by asking respondents to rate ‘‘degree of success achieved’’ on a Likert-type scale ranging from (4) very successful to (1) unsuccess- ful. Table 5 shows the respondents’ success ratings. A few respondents did not provide ratings. The response frequencies for eleven of the sixteen MAPs were the highest in the ‘‘to a large extent’’ column. Looking at the mean column, we see that the median and mode is 2.67. Thus, the overall self-reported success rate appears to be favorable. The three lowest means provide additional insight. VR is the lowest mean (1.6) in Table 4, which is not surprising because it is one of the newest models; and consequently the adoption rate is very low. In contrast, the next lowest are BSC (2.17) and EVA (2.22), which are models that were introduced in the early 1990s. The BSC and EVA models have been extensively used in practice. We view VR as being in a developmental stage, and conceptually not mature. In contrast, the BSC and EVA are relatively mature MAPs. Thus, the low adoption rates for BSC and EVA are surprising. Table 4 presents statistical differences in the success of MAPs. Looking at type of operations, we see significant differences for BSC, QC, and SHV, with the mean for industrial firms being higher than for nonindustrial firms for the BSC and QC, but not for SHV. The means were higher for eleven of the sixteen MAPs for industrial firms, indicating higher reported success rates in the industrial firms. The analysis by respondents’ experience shows significant differences for ABM, KC, and SHV. For firm size measured by number of employees, there is a significant difference for ABM, the mean being higher for smaller firms. The means are higher for eight of the larger firms as compared to six small firms, suggesting higher reported success rates in larger firms, but the differences are not significant.

Planned Implementation In the questionnaire, we also asked ﬁrms whether they were planning to implement any of the MAPs in the next three years. The responses in Table 5 show the highest reported expected planned adoptions for VR (33.3 percent), BSC (29.8 percent), QC (28.1 percent), and NFPM (26.3 percent). Because the current adoption rates for VR and QC were reported as being relatively low (13.7 percent and 28.3 percent, respectively), the relatively high percentages of planned implementation is interesting. In contrast, the current adoption rates for NFPM (63.2 percent) and BSC (50.9 percent) are relatively high, indicating a trend toward very high adoption rates for these measures. Table 5 shows projected usage⁄adoption rates of MAPs, which was calculated by adding the reported percent using from Table 3 to the respondents’ expected

AP Vol. 10 No. 1 — PC vol. 10, no 1 (2011) TABLE 5 Number of companies planning to implement management accounting models in next three years

Number of Projected adoptions Current adoption Total projected companies next 3 years rate reported adoption rate (usage) MAPs N =57 N = 119 N =93 N = 122 t-test

A) Cost Management: 1. Total Quality Management (TQM) 10 17.5% 55.3% 72.8% )3.20* 2. Activity Based Management (ABM) 7 12.3% 41.1% 53.4% )2.30** 3. Activity Based Costing (ABC) 13 22.8% 40.0% 62.8% )3.37* 4. Kaizen Costing (KC) 7 12.3% 41.1% 53.4% )2.30** 5. Business Excellence Model (BEM) 7 12.3% 27.8% 40.1% )1.97 6. Quality Costing (QC) 16 28.1% 28.3% 56.4% )3.63*

7. Target Costing (TC) 3 5.3% 6.0% 11.3% )0.70 PRACTICES MANAGEMENT ACCOUNTING OF DIFFUSION 8. Life-Cycle Costing (LCC) 10 17.5% 20.8% 38.3% )2.34** 9. Cost of Engineering (CE) 1 1.8% 15.1% 16.9% )0.56 10. Strategic Costing (SC) 2 3.5% 13.5% 17.0% )0.70 B) Performance Measurement: AP 11. Shareholder Value (SHV) 11 19.3% 64.9% 84.2% )3.62* o.1 o — 1 No. 10 Vol. 12. Non-Financial Performance 15 26.3% 63.2% 89.5% )4.31* Measures (NFPM) 13. Balanced Scorecard (BSC) 17 29.8% 50.9% 80.7% )4.37* 14. Economic Value Added (EVA) 11 19.3% 36.8% 56.1% )2.92* C) Strategic Valuation and Analysis:

PC 15. Value Reporting (VR) 19 33.3% 13.7% 47.0% )3.81*

o.1,n 10, vol. 16. Intellectual Capital Statement (ICS) 13 22.8% 13.0% 35.8% )2.70**

Notes:

o * significant at 0.05 level (2011) 1 ** significant at 0.01 level 39 40 ACCOUNTING PERSPECTIVES / PERSPECTIVES COMPTABLES planned adoptions. The highest projected percentages are indicated for NFPM, SHV, and BSC; all three are in the Performance Measurement category. Thus, we see the greatest interest in the Performance Measurement category. Because BSC is a major development in management accounting (Ittner and Larcker, 2001), this is not surprising. We also tested if there is a difference between current adoption rate and total projected adoption rate. On an overall basis, the results (t = )3.679; df = 30; p < 0.01) indicate that there is a significant difference between current adoption rate and total projected adoption rate. t-tests for the differences in each technique are presented in Table 5.

Reasons for Nonadoption The respondents indicated possible reasons for not applying some or all of the MAPs in their organizations. The reasons were measured on a Likert-type rating scale of (4) to a very large extent to (1) not at all. Table 6 shows that the highest- ranked reasons were related to costs and benefits: 1. Fully satisfied with the existing models 2. Most of the models in our company are not easy to change 3. Costs of implementing MAPs are high 4. Perceived benefits of MAPs do not justify the cost of implementing Power and politics are important organizational factors in management- accounting change, and resistance can be expected (Burns, 2000; Burns and Vaivio, 2001). The first and second reasons could be viewed as reflecting the importance of organizational power and politics. The third and fourth reasons reflect economic motivation (cost–benefit) as being reasons for not adopting MAPs. The perceived reasons ranked from five through eight below can be viewed as organizational factors. It seems that some organizations are not fully aware of the most recent MAPs, and they are not considering initiating steps toward acquiring sufficient knowledge to adopt such models. It also seems that most companies still prefer to maintain traditional systems rather than replacing them with newer ones. Table 6 shows five significant differences for firm size as measured by number of employees. For four of the five significant differences, the means for small firms were lowest. In contrast, the mean for small firms was highest for the variable ‘‘MAPs are not appropriate for the type of business we are in.’’ In order to avoid limiting the responses to the reasons listed in Table 6, the respondents were asked to comment on some of the major benefits and problems faced when using MAPs. Some examples of respondents’ comments on the major benefits included improvement in the quality and speed of information and

AP Vol. 10 No. 1 — PC vol. 10, no 1 (2011) TABLE 6 Reasons for not applying all or some of the MAPs

By size (number of employees)

To a very To a large To some Not Large Medium Small F test ⁄ Reasons large extent extent extent at all N Mean Rank SD >200 Mean 100–200 Mean <100 Mean Chi-square (df)

The MAPs are 7 (14.0) 12 (24.0) 25 (50.0) 6 (12.0) 51 2.41 12 0.88 2.13 (15) 2.17 (23) 3.15 (13) F = 8.04** not appropriate (df = 2; 50) for the type of business we are in. Consultants on — 9 (20.0) 32 (71.1) 4 (8.9) 45 2.09 14 0.55 2.07 (14) 2.13 (22) 2.00 (9) Chi = 0.417 MAPs models are (df = 2) not available. IFSO FACUTN AAEETPRACTICES MANAGEMENT ACCOUNTING OF DIFFUSION Nobody has initiated 7 (15.6) 16 (35.6) 18 (40.0) 4 (8.9) 46 2.50 9 0.89 2.80 (15) 2.43 (21) 2.20 (10) F = 1.53 consideration of (df 2, 43) MAPs in my company.

AP Fully satisﬁed with 16 (34.0) 18 (38.3) 12 (25.5) 1 (2.1) 48 3.02 1 0.86 3.07 (15) 3.13 (22) 2.73 (11) Chi = 0.96

o.1 o — 1 No. 10 Vol. the existing models. (df = 2) Most of the models 15 (32.6) 15 (32.6) 14 (30.4) 2 (4.3) 45 2.91 2 0.90 3.00 (14) 3.14 (21) 2.30 (10) F = 3.41* in our company (df = 2, 42) are not easy to change MAPs are not 9 (17.0) 21 (39.6) 20 (37.7) 3 (5.7) 54 2.69 8 0.91 2.56 (16) 2.92 (25) 2.31 (13) Chi = 5.77*** PC current priorities (df = 2) o.1,n 10, vol. of our management. o (2011) 1

(The table is continued on the next page.) 41 42 AP TABLE 6 (Continued) o.1 o — 1 No. 10 Vol.

By size COMPTABLES PERSPECTIVES / PERSPECTIVES ACCOUNTING (number of employees)

To a very To a large To some Not Large Medium Small F test ⁄ Reasons large extent extent extent at all N Mean Rank SD >200 Mean 100–200 Mean <100 Mean Chi-square (df) PC o.1,n 10, vol. Lack of 4 (8.7) 10 (21.7) 25 (54.3) 7 (15.2) 46 2.33 13 0.89 2.33 (15) 2.52 (21) 1.90 (10) Chi 2.99 supporting data. (df = 2) Other companies in 1 (2.2) 19 (42.2) 24 (53.2) 1 (2.2) 46 2.41 11 0.58 2.26 (15) 2.50 (20) 2.45 (11) Chi = 1.08 o

(2011) 1 our industry are (df = 2) not implementing MAPs. Corporate culture 12 (24.0) 17 (34.0) 15 (30.0) 6 (12.0) 51 2.71 6 0.94 3.00 (15) 2.63 (22) 2.50 (14) Chi = 2.44 limits the (df = 2) implementation of MAPs. Costs of implementing 10 (21.7) 22 (47.8) 13 (28.3) 1 (2.2) 48 2.90 2 0.90 3.06 (15) 2.86 (22) 2.54 (11) Chi = 2.39 MAPs are high. (df = 2) Perceived beneﬁts 8 (17.0) 26 (55.3) 13 (27.7) — 47 2.85 4 0.72 2.80 \ (15) 2.95 (22) 2.70 (10) Chi = 1.22 of MAPs do not (df = 2) justify the cost of implementing them. Lack of relevant 10 (19.6) 20 (39.2) 20 (39.2) 1 (2.0) 53 2.74 5 0.84 2.81 (16) 2.88 (26) 2.27 (11) Chi = 3.71 skills in designing (df = 2) and implementing MAPs. Insuﬃcient 5 (10.6) 12 (25.5) 29 (61.7) 1 (2.1) 49 2.43 10 0.74 2.86 (15) 2.30 (23) 2.09 (11) Chi = 7.12* support from (df = 2) top management.

(The table is continued on the next page.) TABLE 6 (Continued)

By size (number of employees)

To a very To a large To some Not Large Medium Small F test ⁄ Reasons large extent extent extent at all N Mean Rank SD >200 Mean 100–200 Mean <100 Mean Chi-square (df)

We have not — 7 (14.9) 30 (63.8) 10 (21.3) 47 1.96 15 0.62 2.06 (15) 1.95 (22) 1.80 (10) Chi = 1.08 heard about (df = 2) these models. Management 12 (24.0) 21 (42.0) 12 (24.0) 5 (10.0) 50 2.70 7 0.93 3.13 (15) 2.71 (24) 2.09 (11) Chi 8.66* resistance (df = 2) to change.

Notes: IFSO FACUTN AAEETPRACTICES MANAGEMENT ACCOUNTING OF DIFFUSION Figures in parentheses show percentages. Means are computed on a four-point scale. The F ratio is also used because the data was found to be parametric for those statements. (M-W) = Mann-Whitney U-test (2-tailed) * signiﬁcant at 0.05 level AP

o.1 o — 1 No. 10 Vol. ** significant at 0.01 level *** significant at 0.10 level PC o.1,n 10, vol. o (2011) 1 43 44 ACCOUNTING PERSPECTIVES / PERSPECTIVES COMPTABLES decision-making, improvement in monitoring and controlling of performance, and better measures of the profitability levels within business⁄products. The problems encountered included time to implementation, implementing change, and the need for specialized staff. We argue that power is the capacity to influence decisions while politics is the actual process of exerting this influence. The organizational change literature stres- ses the importance of power and politics in organizational life. MAPs are a part of the information system in an organization and constitute a power resource. There- fore any changes in MAPs are partly political. In the context of the influence of power and politics on organizational change in GCC, the decision makers of companies have to consider the influence of political atmosphere when considering the diffusion of MAPs. The Arab states that comprise GCC exhibit a combination of social attributes and political conditions that make them a unique political system. As global business and economic expansion continues, albeit unevenly, Middle Eastern countries have been witnessing a gradual move from state-owned and family-owned enterprises to international venture participation and ownership from small business firms to large-scale multinational manufacturing companies and more competitive markets. This creates a demand for more relevant timely, comprehensive, and sophisticated management accounting systems for both multinational corporations and local partners.

International Comparisons One of our research objectives was to compare the GCC company adoption rates with those of other countries to ascertain whether there is a global tendency for convergence of management accounting system designs. We present an international comparison in Table 7, providing insights into the diffusion of management accounting models. For the cost-management MAPs, the reported percentages of GCC companies’ adoption are similar to recent prior studies for ABC and CE. We report higher adoption rates for TQM, KC, and BEM. We also report a higher adoption rate for ABM, except for the 1998 study of Australia. There are noticeably lower adoption rates for QC, TC, LCC, and SC for GCC countries. In the case of Performance Measurement models, the NFPM percentage for GCC countries is the median across the different countries reported. For SHV, EVA, and BSC, the percentages for the GCC countries are almost the lowest. For strategic valuation and analysis, there is a paucity of prior study data. Our international comparisons provide some support for Granlund and Lukka’s (1998) argument that there is a global tendency for convergence of management accounting system designs and ideas. While the percentages are relatively low for performance measurement models, the planned adoptions reported in Table 7 suggest a trend toward convergence. Our data also provide support for their view that the role of cultural differences is diminishing.

AP Vol. 10 No. 1 — PC vol. 10, no 1 (2011) TABLE 7 International comparisons with prior studies: Adoption of management accounting models: Reported percentage of companies adopting

Italy Australia Finland Cinquini UK Chenhall Lukka Denmark and Abdel-Kader India New Zealand UK USA and and GCC Countries Nielsen Tenucci, and Joshi, Guilding Guilding Guilding Langﬁeld-Smith, Granlund, Adoption rate Present study et al., 2008 2006 Luther, 2006 2001 et al., 2000 et al., 2000 et al., 2000 1998 1996 (in percentages) N =57 N = 119 N =93 N = 122 N =60 N = 109 N =54 N = 116 N =78 N = 134

A) Cost Management: % % % % % % % % % % 1. Total quality 44.4 33 16 management (TQM) 2. Activity Based 40.7 12 13 68 8 Management (ABM) IFSO FACUTN AAEETPRACTICES MANAGEMENT ACCOUNTING OF DIFFUSION 3. Activity Based 38.9 31 28** 44 20 56 30* Costing (ABC) 4. Kaizen Costing (KC) 27.8 6 5. Business 30.9 11 Excellence

AP Model (BEM) o.1 o — 1 No. 10 Vol. 6. Quality Costing (QC) 21.6 17 38 56 49 44 44 7. Target Costing (TC) 6.3 13 34 57 35 45 41 46 38 7* 8. Life-Cycle 13.7 8 23 41 45 35 37 39 70 3* Costing (LCC) 9. Cost of 11.8 10 Engineering (CE) PC 10. Strategic 10 5 41 49 53 43 o.1,n 10, vol. Costing (SC) B) Performance Measurement: 11. Shareholder 30.9 35 33 20 64

o Value (SHV) (2011) 1 45 (The table is continued on the next page.) 46 AP TABLE 7 (Continued) o.1 o — 1 No. 10 Vol.

Italy Australia Finland COMPTABLES PERSPECTIVES / PERSPECTIVES ACCOUNTING Cinquini UK Chenhall Lukka Denmark and Abdel-Kader India New Zealand UK USA and and GCC Countries Nielsen Tenucci, and Joshi, Guilding Guilding Guilding Langﬁeld-Smith, Granlund,

PC Adoption rate Present study et al., 2008 2006 Luther, 2006 2001 et al., 2000 et al., 2000 et al., 2000 1998 1996

o.1,n 10, vol. (in percentages) N =57 N = 119 N =93 N = 122 N =60 N = 109 N =54 N = 116 N =78 N = 134

12. Non-Financial 54.5 41 74 53 92 – Performance o

(2011) 1 Measures (NFPM) 13. Balanced 30.8 40 28*** 40 88 Scorecard (BSC) 14. Economic Value 29.1 25 56 Added (EVA) C) Strategic Valuation and Analysis: 15. Value 10.2 Reporting (VR) 16. Intellectual 5.8 15 Capital Statement (ICS)

Notes: * Includes both implemented and considered.

** Includes ABC ⁄ ABM *** Others called it ‘‘Integrated Performance Management.’’ A: Percentages were estimated using reported Likert scale scores. DIFFUSION OF ACCOUNTING MANAGEMENT PRACTICES 47

CONCLUSIONS, LIMITATIONS, AND DIRECTIONS FOR FUTURE RESEARCH This study of public corporations in GCC countries examined the current usage of contemporary MAPs. The reported adoption rates of MAPs in GCC countries are generally low in the Cost Management and Strategic Valuation Analysis categories. We report the highest adoption rates in Cost Management for TQM, ABM, ABC, and KC. In contrast, we found moderate adoption for all MAPs in the Performance Measurement category. We compared our results with prior international studies and found that the adoption percentages for GCC countries are approximately at the median level in the Performance Measurement category. The findings to a large extent support prior research that corporate sector companies are slow adopters of these practices. Prior literature shows that management accounting change may be motivated by economic factors and⁄or ‘‘fashion or fad’’ motives. The respondents from firms with foreign operations tended to report higher adoption rates. We found significant differences for firm size for five of the MAPs, but, contrary to prior studies the means were significantly higher for smaller firms in four of the sixteen variables. The size effect is not as pronounced in the GCC countries. Using the respondents’ views on their firms’ planned adoptions over the next three years, we projected the percentages of firms that will be using MAPs. The highest projected usage by firms is for MAPs in the Performance Measurement category, specifically NFPM, SHV, and BSC. The respondents’ expectations could be influenced by perceived economic factors or ‘‘fashion or fad.’’ From an economic perspective, however, we can infer that companies in this region are becoming conscious about monitoring and enhancing their performance. We report that the respondents view the success rates in adopting MAPs in their firms as varying but generally being favorable. Our survey information also provides insight into the reasons for not adopting the contemporary MAPs. Power and politics are important organizational factors in management accounting change; and they appear to be most influential with regard to the primary reasons cited by the respondents for nonadoption of MAPs as compared to economic motivation (cost–benefit) reasons. The primary contribution of this study is to extend the literature on diffusion of management accounting models and management accounting change by studying a different cultural environment. Our survey results provide some support for the view that there is a global tendency for convergence of management accounting system designs and ideas and that the role of cultural differences is diminishing. One of the limitations of the study is that judgmental sampling was used for the sample survey in order to select companies that had complete postal address from the list of all companies. Another limitation could be the misunderstanding of MAPs terms used in the mailed questionnaire survey. The sampling design of this study also restricts generalization. The exploratory survey findings are based on a small sample of respondents.

AP Vol. 10 No. 1 — PC vol. 10, no 1 (2011) 48 ACCOUNTING PERSPECTIVES / PERSPECTIVES COMPTABLES

There exists a need for more studies on MAPs in the United States, Europe, and Asia, as well as in other emerging economies. Another research issue that needs to be explored is whether MAPs provide insight into the quality of a firm’s management. Specifically, slow adoption and nonadoption of MAPs may be an indication that the firm’s management does not encourage or value innovative practices. The MAPs in our survey are based on the MAPs included in prior studies. Future research could investigate adoption of other models such as lean accounting and Six Sigma. Further research may be undertaken about the successful implementation by companies in individual GCC countries and others such as Egypt, Jordan, Algeria, Libya, and Sudan. Since there is a large number of non-industrial companies operating in GCC countries, MAPs of those companies which have received Sovereign Wealth Funds may be another area for future research.

APPENDIX Definition of Each Model Activity Based Costing (ABC): A refinement of the traditional costing system which aims at finding out a more accurate cost of a product. It identifies activities, determines the cost for each activity, determines cost drivers, collects activity data, and calculates product cost. There are multiple direct cost categories and multiple indi- rect cost pools. Activity Based Management (ABM): Used to describe the cost management applications of ABC. Mainly focuses on value and non-value-added activities. Balanced Scorecard (BSC): A set of measures that gives top managers a fast but comprehensive view of the business; the set includes financial and nonfinancial measurements. Business Excellence Model (BEM): Used to improve business performance by assessing organizations to improve their performance and profitability within a framework of self-assessment. Cost Engineering (CE): Costs that have an explicit physical relationship with output. The relationship between input (cost) and output can be accurately determined from the technical specifications of the product or from an analysis of histor- ical cost. CE can be changed by daily operating decision of management. Economic Value Added (EVA): A measure of the value added or depleted from shareholder value in one period. EVA = (return on invested capital – weighted average cost of capital) · average invested capital. Intellectual Capital Statement (ICS): This statement is an instrument in assessing and managing the knowledge resources and intellectual capital of the company. It also helps to make the best investment decisions in intangible assets, and manage the return on investment in information technology.

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Kaizen Costing (KC): Continuous improvements in all aspects of performance, at every level within the organization. Kaizen means ‘‘improvement’’. Kaizen strategy calls for neverending efforts for improvement involving everyone in the organization, managers and workers alike. Life Cycle Costing (LCC): Full sequence of value-chain business functions from R&D through customer support for a product. Nonfinancial Performance Measures (NFPM): Measure of performance based on non-financial information, which may originate in and be used by operating departments to monitor and control their activities without any accounting input. Quality Costing (QC): To prevent or rectify production of low-quality products. This cost focuses on conformance quality and is incurred in all areas of the value chain. Strategic costing (SC): A tool for competitive advantage used for accurate cost measurement, reducing costs in all areas of the value chain, and determining cost drives. It helps to make better strategic and operational decisions and align cost management behavior with strategic objectives. Shareholder Value (SHV): Represents the portion of the company owned by the shareholders and is normally defined as the market value of the shares and other hybrid instruments that could be converted to shares. Target Costing & Pricing (TC): A product pricing variant of the cost-based model. It is market-based pricing in which the target price per unit is determined first and then profit per unit is deducted and the remaining figure becomes Target Cost. It is achieved by using design for manufacturing assembly, value analysis, and value engineering methods. Total Quality Management (TQM): An integrated and comprehensive system of planning and controlling all business functions so that products and services are produced which meet or exceed customer expectations. It is a philosophy of business behavior, and includes Just in Time (JIT). Value Reporting (VR): Performance measurement and corporate reporting designed to meet investors’ needs for more and better information. It supplements traditional financial reporting by helping companies provide a more detailed, trans- parent picture of their performance—market opportunities, strategy, risks, intangible assets, and other important reports.

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