Custom «Neo-Durkheimian Institutional Theory and Management Accounting» Essay Paper Sample

Neo-Durkheimian Institutional Theory and Management Accounting

Introduction

Management accounting and risk management are integral aspects in the running of organisations. Entities that manage risk effectively are seen as more successful than those that fail to do that. In order to understand management, reference to theoretical strands becomes necessary. In the current paper, reference is made to the neo-Durkheimian institutional theory to ensure understanding of risk responses in the field of management accounting.

Based on the theory, four solidarities that emerge include: fatalist, hierarchy, individualist, and egalitarian ones. Under the hierarchical solidarity, it is noted that emphasis is on a strong external boundary, clear-cut internal boundaries, respect for authority and traditions, and trust in experts on risk management. In light of the above observation by Linsley and Linsley (2014), it is noted that hierarchical solidarity will allow accountants to operate away from the purview of the public owing to clamour for strong boundaries from external forces. However, support for close internal control alludes to the idea that having mechanisms for internal regulation is advisable. In essence, the accounting profession should have internal measures to guide how affairs are carried out. The assertion in support for respect for authority is likely to ensure that professionals execute their mandate judiciously and in line with the set guidelines and regulations. However, the indication that experts should be trusted to manage risk is likely to have adverse effects on the management given that in many instances trust is breached. Such a system would be in support of the elimination of external controls, which would leave a window for professional misconduct in management accounting. Regarding the individualistic worldview, individuals are expected to enjoy the freedom to transact, self-regulate, be free to compete, and be allowed to operate freely in the markets (Linsley & Linsley 2014). If failure occurs, it is an indicator of a weakness, which is one of reasons why risk-taking should be embraced.

a) Neo-Durkheimian Institutional Theory Perspectives on Risk

The neo-Durkheimian theory suggests four major perspectives. The high group-high grid (hierarchical solidarity) represents a framework of coordination that is premised on precedents, defined statuses, rules, and authority (Linsley & Shrives 2009). The system is supported by those who align with traditional arrangements. In such groups, social roles are limited as well-built internal boundaries account for a distinct separation of roles (Linsley & Shrives 2009). In societies of this nature, tradition is valued; thus, authority must be respected. In particular, rules must be followed to the letter. The arrangement also supports the maintenance of order. Hierarchy is an environment that allows individuals to understand their positions within a stratified and bounded environment. Loyalty is highly regarded given the role it plays in safeguarding the boundaries. Outsiders are treated with caution given their possibility of interfering with the boundaries. Owing to the understanding of the society, the above perspective is likely to perceive risk and its management as a preserve of experts in risk management. Individuals who lack the knowledge are expected to steer clear of the topic.

The second component, which is individualistic solidarity, is also useful in the assessment of risk. Dominantly known as the low group grid solidarity, the individualistic perspective holds that individuals should be free to enter networks and cooperate with any person of their choice (Moerman & van der Laan 2012). Thus, the perspective encourages competition. The cosmology aligns with an entrepreneurial type of the society, which is not constrained by either internal or external frontiers. Primarily, the objective behind individual action is to gain resources (Heidhues & Patel 2011). Loyalty to others is secondary and counts for little value. In fact, people are expected to look for new ideas and exploit them to maximise their gain. Such a society is extremely demanding and failures are supposed to take an individual blame. In addition, underperforming persons should not expect help from others. Thus, a difference exists between hierarchical and individualistic solidarities based on their perception of risk. Whereas the former perceives breaching of boundaries as a threat, the latter sees risk as bordering on acquisition and preservation of wealth. Owing to the above realisation, it is expected that a danger to the market place legitimacy will be addressed vigorously.

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The third component borders on the high-low group category, which corresponds to the egalitarian solidarity (enclave or sect). The typology brings together both hierarchical and individualistic forms of culture (Linsley & Shrives 2009). Under this perspective, the outside group boundary plays a bigger role as compared to its influence under the hierarchical cultural dimension given the absence of clear internal divisions. Admitting new members to such an arrangement is controlled in order to preserve the boundary of the group because it is significant (Patel 2007). In a bid to unify members, enclaves define themselves by taking a diametrically opposed position to that of the larger community. Such a move leads to the creation of enclaves that are in a race to uphold a high moral position. Notably, insiders unite against perceived/known outsiders. Hence, it is not surprising that ideas gravitating on justice and equality remain highly significant under the perspective. It is also noted that group commitment assumes utmost significance. At the same time, disloyalty is viewed to be a heinous crime that attracts severe penalties such as exclusion (Grint 2010). Behind the above backdrop, it is not surprising that egalitarian organisations are close-knit groups which often face difficulties in establishing or asserting authority. The failure to demarcate roles lead to authority concerns. In this regard, risk emanates from a blurred differentiation of roles, which leads to confusion in authority.

 
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Finally, the theory presents the low group-high grid or the isolated solidarity classification of risk. The perspective encompasses persons who are constrained from choosing their social duties or enter contracts that they are able to negotiate (Linsley & Linsley 2014). Given the relative degree of exclusion and isolation that characterises the group, there is a lack of a community sense. Such groups perceive life as being inherently unfair. Given the capricious, arbitrarily, and isolated nature of the world, members demonstrate a passive attitude to the assessment of risk. By and large, the members’ perception is that they hold limited or no control over events. As a result, they await their fate.

The relationship between the four solidarities is concerning. For example, individualistic and hierarchical solidarities occupy the centre as they form a critical column of control as well as command in societies. The two solidarities provide a robust framework, which allows for institutions to play their roles. However, a problem is likely to emerge at the point where interests of the above two solidarities coincide. On the contrary, at the border egalitarian organisations with their stances on institutions as agents of injustice and inequalities reinforce the need for the development of boundaries. Such a development supports development of the view that egalitarians are troublesome by individualistic and hierarchical groups.

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b) Summary Linsley and Linsley’s (2014) Framework

In the views of Linsley and Linsley (2014), both individualistic and hierarchical solidarity world views have an impact on management accounting practice. The authors contend that the development of individualisation is shaped by societal processes and institutions. For instance, primary institutions such as the church, family, and village are critical in influencing personal growth and development. Linsley and Linsley (2014) believe that the above institutions account for the furtherance of the concept of ‘we’ instead of ‘I’. However, with the forces of modernity taking shape, traditional structures and institutions have come under intense pressure/ challenge. In particular, the church has lost the type of influence that it initially enjoyed (Linsley & Linsley 2014). The reason is that other social arrangements that shape views have risen to challenge the dominance of the church. In addition, the earlier influence of the extended family has been replaced with that of the nuclear family. Besides, the role of the type of village has been usurped by the resurgence of the state. Thus, the individual has emerged as the focal point in life, while personal development and freedom of the new institutions take shape.

As the modernity advanced, the individualisation process also shifted. For instance, gender and class barriers have weakened. At the same time, living standards have improved (Mete, Dick & Moerman 2010). The society has also undergone a transformation as manual labour has been replaced largely with information technology. At the current stage, individuals are free to pick their social roles besides shaping their individual lives. Despite the above and many other benefits, the development has not been without its shortcomings. In particular, uncertainty has risen given the expanded pool of choices and demands. In addition, old established patterns have disappeared (Linsley & Linsley 2014). Hence, the modernity has brought risk to individual life. In supporting the position, Linsley and Linsley (2014) quote Beck (1992, p. 135): “in the individualized society the individual must therefore learn, on pain of permanent disadvantage, to conceive of himself or herself as the centre of action, as the planning office with respect to his/her own biography, abilities, orientations, relationships and so on.”

While exploring the concept of reflexive modernisation, Linsley and Linsley (2014) underscore the issue of self-confrontation, which has become prominent as the society transitions from the industrial stage to the modern phase. The shift unintentionally leads to an increase in the element of risk. Risk emerges automatically in modern societies; thus, it is not subject to choices.

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Relying on Douglas’ risk conceptualization, Linsley & Linsley (2014) observe that each society seeks stability. Thus, no effort is spared in the pursuit of stability.

Two dimensions (group and grid) emerge in the bid to preserve societal structures. Under both arrangements, there are either weak or strong categories that give rise to four solidarities, four worldviews, four ways of life, and four cultures.

c) Enclave Solidarities Worldview and Management Accounting

In the initial part of the discussion, it has been stated that the high-low group category, which is also known as the egalitarian solidarity (enclave or sect), has implications for management accounting. It has been established that the typology ties the hierarchical and individualistic cultural forms. The perspective shows that the outside group boundary has a role to play in influencing proceedings. Members of the category define themselves by taking an entirely opposite position to that of the larger community, leading to the creation of enclaves that compete for the upholding of a high moral position (Linsley & Shrives 2009). Particularly, insiders unite against outsiders. Disloyalty is unforgivable. Risk is viewed as a product of the blurred differentiation of roles, which leads to the confusion of authority.

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Owing to the discourse on the group, it becomes evident that the complexities involved in financial reporting are not likely to concern egalitarian groups. Previously, it has been pointed out that enclaves do not take a keen interest in a number of issues affecting the larger society (Douglas 2013b). The position aligns with their preoccupation with justice and fairness owing to the societal classification, which results in the group viewing outside groups as a threat.

A collection of individuals interested in justice and equality is likely to advocate for strict controls on financial reporting and risk management since such a move aligns with the objectives of creating a fair society. In addition, transparency is expected to be a major hallmark of the worldview (Grint 2008). In this regard, the perspective is opposed to dishonest schemes perpetuated at the centre of other sections of the society. Thus, besides creating independent institutions to monitor activities of auditors, the school of thought would advocate for increased surveillance of activities carried out in with respect to every aspect, including management accounting. The perspective would also campaign against the glorification of individualistic tendencies that give advantage to the few instead of the larger society (Douglas et al. 2013). Individuals drawn from the perspective are likely to raise concerns about the appropriateness of financial reports if they do not demonstrate accuracy and ease of comprehension. Ideally, such reports ought to be easily understandable by all stakeholders. In addition, they need to be truthful.

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Individualistic and Hierarchical Worldviews and Accounting Regulation

The theory is useful in understanding attitudes of accountants in practice and accountants who are involved in financial reporting. Accountants are expected to adhere to complex expectations. The goal is to ensure that independent regulatory guidelines are not compromised.

Individualistic biases are likely to emerge concerning the reporting that has to be carried out. In particular, individualistic tendencies are likely to influence the kind of information shared with investors for purposes of making decisions. It is noted that for a large number of accountants a common feeling is that the fundamental function of annual reports is to help investors in making decisions in their pursuit of investment opportunities. Thus, the ambition aligns with the individualistic solidarity paradigm. However, under key regulations such as those proposed by the Financial Reporting Council (FRC) (2009), which recommends the application of common sense, this view would be contradictory. Whereas, the FRC calls for the simplification of the reporting, individualistic-oriented accountants are likely to feel no obligation to do so because of the need for individual search for information. In addition, the development and use of standards such as those suggested by the FRC are likely to be opposed by individuals from the individualistic solidarity group since such recommendations are external market interventions, which contradict the need for individuals to operate without limitations. In practice, an individualistic accountant desires self-regulation rather than collective control. However, it is accepted that some sort of regulation might be warranted. For members of the individualistic solidarity, such control should be limited to the facilitative one rather than the directional one.

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However, it must be noted that external standards such as those suggested by the FDR acknowledge the objective of wealth creation (FRC 2009). The leaning is in line with the individualistic worldview, which emphasises wealth creation. Overall individualistic minds support the idea of letting markets operate through self-regulation as opposed to being subject to external influence. In brief, members who belong to the individualistic perspective are likely to object to notions of external interference. As already deliberated, the hierarchical worldview is equally critical in assessing risk perception or management.

For Douglas (2013a), hierarchic members are concerned with the past, while the individualistic members do not focus on what happened in the past. The reason lies in their perception of markets as being in constant shifts. As a result, individualistic persons look at markets as being ahistorical based on their conception of time. At the same time, they perceive rule-led regulations as paralysis to the vitality of operations that ensure equilibrium in markets. In the views of individualistic accountants, regulations reduce the ability of individuals to negotiate and reach agreements. Based on the views of an individualistic person, the problem of regulation goes beyond limiting entrepreneurship besides increasing market complexities. Regulations interfere with the profit-making opportunity of players, among other shortcomings.

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Under the individualistic cosmology, the preference for standard-based accounting is expected to take precedence. The state of affairs is supported by the view that the arrangement allows individuals to employ personal evaluation in the pursuit of the due process. In this regard, an accountant would be interested in flexibility or a diverse pool of guidelines from which to choose. Thus, in financial reporting an individual would welcome the freedom that facilitates adoption of a method deemed appropriate given the circumstances.

The hierarchical worldview is equally useful in understanding the conduct of accountants and accounting regulations. In practice, accountants who abide by the perspective are not expected to accept measures that are contradictory to its ideals. The perception that the individualistic and hierarchical perspectives are central and exclusive is likely to push adherents into believing that no need exists to prevail upon opponents to agree with them.

Given the complexity of the engagement, conflict avoidance, goal commonality, conformity, stability, and pro-regulation dispositions are the attributes that differentiate the hierarchical adherents from the individualistic ones. The perpetuation of a group arranged hierarchically is reflected in the possession of shared objectives (Clinton & Van der Merwe 2006). Such view reinforces group togetherness in addition to militating societal conflict. The aspiration is to ensure that all stakeholders involved in operations of a sector such as the financial services sector operate collectively towards the pursuit of common objectives (Malsch, Tremblay & Gendron 2012). Thus, to avoid discord, setting a common agenda is necessary. In this regard, regulators, investors, bankers, and accountants need to work towards the achievement of a common goal. The approach differs from the individualistic one since self-interest does not assume significance. Adherents of this school of thought focus on establishing measures to punish individuals who deviate from the norm. The existence of such provisions is to ensure that those who disrupt known procedures do not go unpunished. Such societies desist from setting unattainable objectives. Hierarchists are likely to be tempted to trust experts in addition to looking up to them for professional help. Thus, it is assumed that accounting professionals should be left to solve any concerns such as risk. It is also noted that there is a tendency of relying on information from professionals in a bid to handle adversities or complexities. Hierarchical groups are also likely to support pro-regulation measures given that such approaches align with entrusting selected professionals with the task of monitoring others and ensuring compliance.

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Conclusion

From the essay, it is evident that the institutional theory is instrumental in understanding how individuals view the world. Although the theory is applicable to many fields in the field of social sciences, its significance for management accounting is clear in the paper. In particular, it emerges that it facilitates understanding of how accounting professionals perceive and work towards controlling risk. Under the hierarchical solidarity, emphasis is on a strong external boundary and respect of the traditional authority. Thus, trust in experts regarding risk management is high.

 

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