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M A N A G E M E N T t h e c p a in industry Management Control Systems in a Global Economy By John C. here and Kris Portz I n an increasingly global economy, accountants may find themselves working for a foreign-owned multinational corporation; employed by a U.S.based multinational corporation and designing and implementing a management control system for a recently acquired or opened subsidiary in another country; or responsible for the design and implementation of a management control system for a U.S.-based company that einploys a large number of recent immigrants. An accountant employed by a foreignowned multinational corporation may be faced with a management control system that differs from U.S. practices. An accountant who has dealt with successful design and implementation of rrianagement control systems may find that proven practices may not work well in other countries or in divisions and companies in the United States that employ workers with diverse cultural backgrounds. Differences in cultures can affect the appropriateness and effectiveness of the practices that make up a management control system. Accountants face two questions when involved with situations where traditional U.S. management control systems and practices may not be the most appropriate or effective: In what meaningful, relevant ways do cultures differ between countries? And what do these differences imply about the elements that make up a management control system? How Cultures Differ Understanding differences between cultures can be complex. Although several studies have examined cultural differences, one of the most comprehensive was conducted by Geert Hofstede. From 1967 to 1973, Hofstede collected and analyzed data irom more than 100,000 individuals working in 62 more than 70 countries. From those results, and later additions, Hofstede developed a theoretical framework that identifies four primary dimensions that differentiate cultures: power distance, individualism/collectivism, masculine/feminine, and uncertainty avoidance. He used these dimensions to distinguish the cultures of 50 countries and three regions. Later, with Michael H. Bond, Hofstede added a fifth dimension, Confiician dynamism, which has been used to distinguish cultures among 23 countries. Hofstede's taxonomy is a widely used framework for differentiating among cultures. der role differentiation: "Social gender roles are clearly distinct (i.e., men are supposed to be assertive, tough, and focused on material success whereas women are supposed to be more modest, tender, and concerned with the quality of life)." At the feminine end, there is a low level of discrimination between genders: "Social gender roles overlap (i.e., both men and women are supposed to be modest, tender, and concerned with the quality of life)." Uncertainty avoidance. Uncertainty avoidance focuses on the level of tolerance for uncertainty and ambiguity within the Power distance. In his 1991 book. society. This dimension relates not to risky Cultures and Organizations: Software of situations, but rather to unknown or unfathe Mind, Hofstede defines power distance miliar situations. as "the extent to which the less powerful A country with a strong uncertainty members of institutions and organizations avoidance culture has a low tolerance for within a country, expect and accept that uncertainty and ambiguity. This tends to power is distributed unequally." According result in a society that institutes laws, rules, to Hofstede, workers in large power dis- regulations, and controls in order to reduce tance countries, where centralized power the amount of uncertainty and ambiguity. tends to be accepted, "expect to be told Countries with weak uncertainty avoidance what to do," while workers in small power cultures tend to have less concern about distance countries, where there tends to uncertainty and ambiguity and more tolbe less tolerance of centralized power, erance for a variety of options. This type "expect to be consulted." of society would be less rule-oriented and IndividualismJeottectivism. The individ- would more readily accept change. ualism/collectivism dimension addresses Confucian dynamism. The Confucian whether the individual or the group is a dynamism dimension is often characterized focus. In an individualist society, individu- as one of long-term versus short-term orials tend to act according to their best inter- entation. Important values in countries est. The focus of management is on hiring labeled "long-term orientation" include perand managing individuals, not groups. In a sistence, using status to order relationships, collectivist society, employees tend to act thrift, and having a sense of shame. according to the best interest of the group Important values in countries considered to which they belong. This does not "short-term orientation" include personal always align with their individual interests. steadiness and stability, protecting your Hiring focuses on the group to which one "face," respect for tradition, and reciprobelongs and management techniques focus cation of greetings, favors, and gifts. on the group as a whole. Individuals and companies in cultures with Masculine/feminine. Hofstede's mas- a short-term orientation tend to adapt to culine/feminine dimension is less about change more rapidly, because long-term gender than about gender roles. At the mas- traditions and commitments do not become culine end, there is a high degree of gen- impediments to change. SEPTEMBER 2005 / THE CPA JOURNAL Different Cultures and Management Control Systems The potential implications of cultural differences on management control systems are vast. Hofstede's framework can indicate how differences in cultures can affect the appropriateness and effectiveness of the various practices that make up a management control system. There are potential impacts of the differences on each of Hofstede's five dimensions. Power distance. Sweden, Norway, Great Britain, and Israel are small power distance countries, as is the United States. The cultures of Asian and Central and South American countries are generally large power distance. A large power distance tends to be associated with centralization and less participative decisionmaking, whereas a small power distance tends to be associated with decentralization and greater participative decisionmaking. Therefore, management control practices consistent with centralization tend to be more effective in large power distance countries. For example, in a centralized organization, management control is likely to remain at high organizational levels, there is likely to be little if any delegation, and managers may have limited authority to make decisions. As a result, measures of performance focusing on following plans and procedures laid out by top management are more likely to be effective in companies in large power distance countries than are measures focusing on the outcomes of decisions made. Therefore, one would expect little, if any, use of accounting measures, such as profit, variances, return on investment (ROI), and residual income, as indicators of managers' performance in large power distance countries. Practices consistent with a decentralized organization will tend to be more effective in small power distance countries. In a decentralized organization, managers perform more independently and can devel- op and apply leadership qualities, problemsolving skills, and decision-making skills. Therefore, measures focusing on the outcome of decisions made are more likely to be appropriate and effective in small power distance countries. Individualism/coHectimm. Out of the 53 countries and regions studied by Hofstede, the United States scored the highest (most individualistic) on the individualism/collectivism dimension. Other individualistic countries include Australia, Canada, Great Britain, and the Netherlands. Collectivistic countries include Colombia, Costa Rica, Ecuador, Guatemala, Panama, El Salvador, Indonesia, Pakistan, Portugal, and Taiwan. Because individuals tend to act for their best interest in individualistic cultures, work and incentives should be designed so that acting in the best interest of the employee coincides with acting in the best interest of the employer. Organizations may want to set up individual-level rewards and hold individuals accountable for unKad s w n PoiW Scrrfn 14. tawti Data (or Cantttjon ClatsBatow Statement of Ownership, Management, and Circulation The CPA Journal 0 4 9 e/12/05 0. Annijd SuMoiptot Priot a. • W . , H u » , b . r r f C c p ^ / « « p r « « t f PaURaquanad Ontild*4;Ba nNad to oMnat Hmdiana CndwCng ttnei and kntdaanmatu) atvtfar iMt aaretkxH Instructions to Publishers HdOifl01 PsiceM or More d TbUltatounlof Bonds. Monsagn. or OtwfSmjrttM Bnnnn.rtwrtrhrer rnQKama »> B Kom Cemplata MalDng Addrau 1. CoRipl«t»9i«JGI« one copy of thbfbmiwID) your posmiastsr annually on w for your rooonJs. 2. tncsse3v>tierelhflStixMui1d«'araeaMityhoUerlsstnistse,lndud«lnitefn3iaand11 the name of the parson or cofporsllan Ibr whom the t u s t n b acting. Abo tndude Via names am) aitckuaes of bdMdusls v t o are Etockholders who o m (V nvxe of tha total smnffil of boncb. rnortgages, or otter ucuffties of ma puUthaq coiporaUOT box. Use bCcinX sheets rf more tpsco [9 requlnd. Besuratoftimlshanclri:ulatkK)tnfonnattonaUedforInteffl1S.Freediiait3lk)nn)^ 9. A. Itanii5^, Copies not Dlsirit)iisd,rnus1lndudaeior^)beIV (2) estimated reitiins from nswa agants, end (3). coptei tor offics use. reftoveis. spoled, and all other copies not < ^ ^ 5.' V (he puUicatkm had Periodical authntzatto as a general Of reqiMSterpublicstxm,thbStaleii)em of Ownership. M ^ ^ and Circula&on iTunt be pubTohed: U must be printed In srv issue in October or. H Itic puUlc&tim ttMfast kssuo pitnted sfter October. 6. nar^nR sstana of and 9 M axwnpl tUtystorMeral income bx purposev The purpoB. (wcllon, and na^nR takhta orgMizaiion g D KurMChaneMOuAtaPitcadlnB KrMChaneMOuAtaPitcadlnB 12 D 12 Month* Month* 7. lnlto)n16.Mkaiettw(}8tflofthebstieinwtichtrilsSt2tern«ntolOwnersMpw11lbepub[bhed. ttem 17 must be signed. Faitan to Bta or publish a MtaaaimBtefowoenhlp PS Fcim 3526, October i ( S M irMruaiont on SEPTEMBER 2005 / THE CPA JOURNAL n October 1. Keep a copy or I t w c n ^ ^ nay had (o auaptmion ofPartoOJeMlg authoriaOon. PS Form 3 K 6 , October 1999 63 results. Training may also be more individual-based. The tendency to act according to the best interest of the group in collectivistic cultures means that there may be less need to use rewards and performance measures to align the interest of the individual with the interest of the group or orgatiization. Management may find it more effective to emphasize work-unit cohesiveness and provide team-based rewards and training. uncertainty and ambiguity. Companies in such a country tend to be less rule-oriented than compatiies in strong uncertainty avoidance countries. These differences are likely to influence the responsibility delegated to managers and the measures used to evaluate and reward performance. In rule-driven companies in strong uncertainty avoidance cotintdes, the role of a manager might not be to make decisions, but rather to see that the rules or proMasculine/feminine. Japan, Austria, cedures are followed. Accounting meastires Great Britain, and the United States have are less likely to be used to indicate perforan above-average ranking (more mascu- mance than as targets to be strictly followed. line) on the masctiline/feminine dimension. Accounting measures as overall indicators Denmark, Sweden, and Norway rank low of performance would be more appropriate in weak uncertainty avoidance cultures. on this dimension (more feminine). A major impact of this dimension on Confucian dynamism. Long-term orimanagement control systems is apt to be entation countries include Hong Kong, on how the rewards used to align the inter- Taiwan, South Korea, and Singapore; the ests of managers with the organization United States is a short-term orientation are defined. Because achievement, hero- country. Differences in this dimension are ism, assertiveness, and material success are likely to affect the types of measures used valued in a masculine culture, workers in to evaluate performance and the types of these cultures tend to emphasize perfor- incentives offered. mance and growth, focus on excelling to Profit-based measures, such as profit be the best, believe work is central to life, growth, ROI, and residual income, tend to and find job recognition is important. focus more on short-term performance and, Therefore, opportunities for high earn- therefore, are more likely to be used to evalings, recognition, advancement, and uate performance in short-term oriented culrewards based on merit are apt to be effec- tures. Measures such as sales growth, custive motivators in masculine cultures. tomer satisfaction, and employee training In feminine cultures, relationships, mod- tend to reflect a long-term orientation. esty, and caring for the weak are imporWhile financial incentives may be effectant values. Work is less central to life; tive in short-term oriented cultures, rewards quality of life, time off, and vacations are that convey status, such as titles and progiven greater emphasis by organizations in motions, may be more effective in longfeminine cultures. Financial rewards are apt term oriented culttires. to be less effective in such a culture. Uncertainty avoidance. Countries with Recognizing Cuiturai Differences a strong uncertainty avoidance ranking and When designing a management control a low tolerance for ambiguity include system to be used in multiple countries or Greece, Guatemala, and Portugal. Weak with employees from several countries, uncertainty avoidance countries include there are several points to remember: Jamaica, Singapore, Denmark, and the • Differences in culture can impact the United States. effectiveness of the practices that can be Because strong uncertainty avoidance combined to make up a management conimplies discomfort with unfamiUar situa- trol system. Practices that work well in the tions, individuals in such a culture would United States may not be effective in other want guidance for any situation they might countries or with employees from other face. To accommodate this, effective man- countries. agement control systems operating in • When benchmarking, a company's culstrong uncertainty avoidance cultures will ture should be considered. Because culture tend to have many formal or informal rules can affect the appropriateness of managethat limit the decision making of managers. ment control system practices, benchmarkIndividuals in a weak uncertainty avoid- ing against a company with a dissimilar culance culture are less uncomfortable with ture may be ineffective or undesirable. 64 • Additional training may be necessary to help bridge the gap between the management control system and the local culture. Responding to Cultural Differences Studies have indicated several ways that multinational companies have responded to differences in culture. Some companies select subsidiary managers whose attitudes more elosely reflect the culture of the multinational's home country than that of the subsidiary country, and use postings to the home country to modify the employees' attitudes. Other companies have modified their home-country system to refiect differences in a subsidiary country's culture. If the management control system is to be designed or modified to refiect differences in culture, there are important points to recognize: • Systems designed to operate in highly decentralized U.S. companies are likely to be less effective the larger the power distance or strength of uncertainty avoidance that characterizes the subsidiary's country. A more centralized system may be appropriate. • Delegating to individuals, which is common in the United States, is apt to be less accepted in collectivistic countries. Because in collectivistic cultures the focus is on the group, efforts should be made to delegate decision making and implementation to the group. • Collectivism mayresuUin less need for extemal incentives than in the United States. • In subsidiaries in countries at the feminine end of the masculine/feminine dimension, rewards recognizing quality of life may be more effective than the financial rewards common in the United States. • Performance measures reflecting a longer-term orientation, such as sales growth and market share, may be more meaningful in a long-term orientation culture. Nonfinancial rewards, such as rank and title, may also carry greater meaning than financial rewards. Greater emphasis on long-term measures can result in improved system effectiveness in long-term orientation culture. • John C. Lere, PhD, is a professor of accounting, and Kris Portz, CPA (inactive), PhD, is an associate professor of accounting, both at St. Cloud State University, St. Cloud, Minn. SEPTEMBER 2005 / THE CPA JOURNAL
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