Miles B. Gietzmann

Incomplete contracts and the make or buy decision: Governance design and attainable flexibility

Abstract A common recommendation by management advisors is for organizations to adopt procedures which facilitate the forming of close cooperative working relationships with subcontractors. A central theme of this research is to explore why such issues are being emphasized at this time and then to indicate how accounting systems can give rise to powerful countervailing incentives which stifle attempts to work cooperatively. In order to address this problem it is proposed that modification be made to the orthodox computational philosophy, embedded in the traditional accounting make or buy decision calculus. To illustrate the basis for the modification argument, a review of Japanese subcontracting practices is presented. Such practices have relevance since the recent Japanese manufacturing pre-eminence, can in part, be attributed to the institution of effective motivational and control structures for subcontractors. A discussion is presented of how these structures promote rapid flexible technological transfer and sharing between a network of subcontractors and an assembler. The incentives associated with these governance structures are shown to differ markedly from those under traditional make or buy procedures. In the process of developing modification proposals, it is shown that if an assembler is to gain from increased flexibility in the production relationship with a subcontractor this simultaneously requires reduced flexibility in choice over forming competing relationships. Thus it is argued that a search for possibilities of increased overall flexibility needs to be understood within a more naunced comparative sense. This in turn gives rise to important new implications for the focus of accounting calculus. Moreover it is argued that borders between the practices of control and of consultative guidance become less clear, which in turn also has implications for the focus.

Implementation issues associated with the construction of an activity-based costing system in an engineering components manufacturer

A number of researchers have documented how to construct an activity accounting system from first principles (for a comprehensive listing of published activity-based costing cases see Innes and Mitchell [l]). For instance Cooper [2] in a Harvard Business School case study entitled Schrader Bellows discusses in detail the cost driver identification process and the two stage tracing process from cost centres to cost pools and then onto products. Brimson [3] has produced a monograph entitled Activity Accounting which covers in detail the method of how to construct an activity accounting system. This paper appraises the use of an activity-based costing (ABC) system some time after its initial construction. It was felt that a detailed micro analysis of a single (engineering components) manufacturer would be useful in the process of ascertaining exactly how ABC impinges on the management process. To date, some of the discussion of ABC has been based on the presentation of general intuitive ideas rather than detailed analysis of implementation or logical model construction. It is hoped that the case study analysis of an implementation presented here, will provide the focus necessary to understand the logic of when and how ABC is useful. Scapens [4] discusses the general role of case study methods in management accounting research. ABC analysis demonstrates that one should not attempt to artificially restrict the decision-making environment to one in which only volume related decisions are appropriate. In modern manufacturing environments it is not just the volume of products that matter. When production capacity constraints exist careful management of the production process is required. When production capacity constraints and multiple products exist this will be described here as the management of complexity. It is possible to view overhead costs, such as, for example, setup costs as drivenlexplained by the number of setups required to support production. Given some defined production volume over a

Auditor Performance, Implicit Guarantees, and the Valuation of Legal Liability

Liability exposure is now such a major concern for auditors that any discussion of equilibrium audit fee structures needs to take account of the expected costs of liability exposure. We develop a model of audit litigation risk and then proceed to apply insights gained from the application of finance theory to show how liability exposure is related to guarantee provision. Given auditors wish to incorporate the expected cost of guarantees when planning and pricing services, we apply contingent claims analysis to derive valuation equations for expected (litigation) costs. We then proceed to consider wider regulatory issues. Whereas the above analysis assumes stable legal liability rules, we subsequently consider the auditor incentive effects of parametric variation in the rules. Since the quality of audits is unobservable, we consider how the rules could be set so as to ensure auditors are not tempted to provide a low degree of care and collude with management. To illustrate the applicability of this approach we also consider whether recent proposals to reform auditor liability to a proportional basis will always provide appropriate incentives.

Performance assessment for the English community dental services screening programme

This paper evaluates the application of Data Envelopment Analysis (DEA) in a set of public organizations. DEA is a mathematical programming based technique, which determines the efficient production isoquant for a given input–output structure. Here efficiency is taken to mean relative efficiency with respect to the set of actual recorded input–output observations. This paper demonstrates that determining the appropriate input–output variables to characterize the problem requires careful consideration. Naive application of the mathematical programming algorithm will not result in meaningful performance measures. The characterization developed in this paper, yields performance measures which reflect and therefore should motivate achievement of objectives delegated by higher authorities. These results contrast with alternative control process methods, such as cash limits or simple efficiency performance indicators, which can motivate dysfunctional performance.

Predicting firm value: the superiority of q-theory over residual income

Abstract One of the contributions of residual income theory is that it establishes an equivalence between valuation of a firm based upon a discounted stream of future dividends and valuation based on accounting data in which book value and a discounted stream of future residual incomes take centre stage. However, this equivalence result is non-unique: residual income is only one of many income measures for which equivalence can be shown to hold. Given this non-uniqueness, the traditional residual income equivalence result provides at best a weak defence for the necessity of accounting via residual income. The principal objective of the current paper is to address this central limitation of existing research. We consider how to move on from dependence on equivalence as a weak defence for accounting-based valuation, to a framework in which strict preference between alternative valuation methods is possible. The principal reason why previous research has not considered such issues is because it has lacked an underlying microeconomic theory of managerial choice providing a framework within which to rank alternative valuation rules. From first principles we develop a dynamic optimisation model of managerial choice that provides the benchmark by which we can objectively appraise valuation based upon residual and other income measures. We show that hysteresis (non-uniqueness of valuation) can typically arise for residual income, whereas in contrast for the q-theory based income measure which we derive, valuation is, as expected intuitively, increasing in income (under some mild regularity conditions). Furthermore, we show how our proposed g-theory income measure could be estimated empirically and that our model provides an explanation for some of the apparent anomalies in the Burgstahler-Dichev empirical findings.

Cost-variance-based control with noisy observation

We develop a model of managerial planning and control in an environment subject to noisy observation. Our paper differs from other models with noisy observation by focusing on the allocation of a scarce corporate resource. We show that linear performance appraisal is optimal in the noisy observation environment. An application of our results facilitates comparison between accounting and engineering-based planning and control paradigms.