View of Management Accounting in Indonesia: Analysis of Current Systems, Potential for Change and Forces behind Innovation

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3 6 M a n a g e m e n t A c c o u n t i n g in In d o n e s i a : A n a l y s i s of.

M anagem ent A ccounting in Indonesia: A nalysis o f C urrent System s, Potential for C hange and Forces behind Innovation*

J o h n n y J e r m ia s, P h .D **

S T A N & UPI Y A I, Jakarta, Indonesia/

S im on Fraser U niversity Faculty o f B usiness A d m in istratio n B urnaby, British C o lu m b ia, C anada,

A nd

H o w a rd M . A r m ita g e , P h .D , F C M A U niversity o f W aterloo School o f A cco u n ta n c y W aterloo, O ntario, C anada,

A b str a c t

The paper begins with a description of the current practice of management accounting in Indonesia and the degree to which management accounting systems and management accountants are expected to change during the next five years. This is followed by an empirical examination of the relationship between management accounting innovation in Indonesia and such factors as organization hierarchy, system design, company performance, size, and age.

As predicted, results from this study indicated that the level of management accounting system innovation can be predicted by the level of hierarchy and the nature of organizational design. Increased hierarchy has a negative association with innovation in management accounting systems.

Similarly, organizations that are process oriented use more innovative management accounting systems than functionally oriented organization.

Key words: innovation, management accounting, hierarchy, Indonesia.

* We would like to thank Indonesian Federation of Accountants (IAI) for helping us gaining access to the respondents. We also gratefully acknowledge the International Federation of Accountants (IFAC) for helping with the funding for this study. The paper also benefited from comments and suggestions of accounting workshop participants at Faculty o f Business Administration, Simon Fraser University.

** The survey instrument and data are available from the first author upon request.

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The In t e rn a t i o n a l J o u r n a l o f A c c o u n t i n g a n d B u s i n e s s S o c i e t y 3 7

1. In tr o d u c tio n

R esearch ers and practitioners have argued th at effectiv e m a n a g e m e n t a c c o u n tin g sy stem s contribute to increasing c o m p e titiv e n e ss (e.g., Elliot, 1992;

S hank & G o v in d a ra ja n . 1989; Jo hnson & Kaplan, 1987). Effective m a n a g e m e n t a c c o u n tin g sy stem s also help m an ag ers m ake better d ecisio n s (Jerm ias, 2000; K aplan

& A tkinson, 1998) and support c o m p a n y strategies such as c o n tin u o u s im p ro v e m e n t, high quality, and c u s to m e r satisfaction (A tkinson, W ate rh o u se and W ells, 1997). To be relevant in an e v e r c h a n g in g e n v iro n m en t, m a n a g e m e n t a c c o u n tin g sy ste m s have to satisfy m an ag ers' d e m a n d s for inform ation that leads to d o in g things better and to doin g better things. H ow ever, there is som e e v id en ce to suggest th at m a n a g e m e n t acco u n tin g , as a tool for m anagerial effectiveness and efficiency, is virtually n o n existent in Indonesia ( A b d o e lk a d ir & Y unus, 1994).

The study c onsists o f tw o phases. First is a description o f the c u rre n t practice o f m a n a g e m e n t a c c o u n tin g in Indonesia and the deg ree to w hich m a n a g e m e n t a c c o u n tin g sy stem s and m a n a g e m e n t a c c o u n ta n ts are e x p ected to c h a n g e d u rin g the next five years. This represents the first em pirical investigation o f the m a n a g e m e n t a c c o u n tin g e n v iro n m e n t in p ublicly held c o m p a n ie s in Indonesia. Second, the paper a d v a n c e s and tests a n u m b e r o f h y p o th eses c o n c e rn in g the relatio n sh ip betw een m a n a g e m e n t a c c o u n tin g innovation in Indonesia and such factors as o rg an izatio n hierarchy, sy stem s design, c o m p a n y p erfo rm an ce, size and age.

2. P h a se 1 - R e sea rch m eth o d s and d a ta c o llectio n

A survey instrum ent w as used to gather inform ation from c o m p a n ie s listed on the Jakarta Stock Exchange. Two hundred and fifty three c o m p a n ie s received q u estio n n a ire s in April 1997. T he survey instrum ent w as a variation o f a q u estio n n a ire d ev e lo p e d by A rm itag e (1994) and w as translated into the Indonesian language. T he q u e stio n n a ire s were sent to the "M a n a g e r o f F inance" or e q u iv a le n t in each co m p a n y . Each q u e stio n n a ire consisted o f three sections. The first section asked for d e m o g ra p h ic inform ation a bout the co m p an y . T he second section requested inform ation about the role o f the m a n a g e m e n t acco u n tin g system and a b o u t the role o f the m a n a g e m e n t a c c o u n tin g gro u p within the c o m p a n y . The last section so u g h t inform ation on the extent to w hich new initiatives in m a n a g e m e n t a c c o u n tin g w ere being a dopted by the firm.

R e sp o n d e n ts were sent the q u estio n n aire a long with a p re -sta m p e d return en v e lo p e and w ere asked to return the q u estio n n aires within three weeks. O u t o f 253 q u e stio n n a ire s sent, 39 total usable resp o n ses w ere received resulting in an overall resp o n se rate o f slightly o v er 15%. A lth o u g h this response rate m ay be c o n sid ered low by N orth A m e ric a n standards, it is consistent w ith, and even slightly h ig h e r than, o th er research ex p e rie n c es in Indonesia. For ex am p le, a recent survey c o n d u c te d by

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the State School o f A c c o u n ta n c y (S T A N ) obtained only a 10% resp o n se rate.

R e sp o n d in g to survey type research is not yet a c o m m o n practice by Indonesian firm s. Inform al d iscu ssio n s indicate th at som e m a n a g e rs have co n c e rn s a b o u t the use to w h ic h su rv ey inform ation is to be put. O th e r Indonesian m a n a g e rs do not believe th eir c o m p a n y can benefit from participating in aca d e m ic research activities and so m e do not participate because they feel that aca d e m ic research findings are not being ad eq u a te ly c o m m u n ic a te d to the respondents.

T he research ers knew th ese lim itations in advance. H ow ever, the size o f the c o u n try (In d o n e sia crosses four tim e zones), the nature o f the research q u estio n s and the lim ited research bu d g et m ade survey research the only feasible a p p ro ach to data gathering.

3. D ata A n a ly sis and R esu lts

a. Characteristics o f the respondents

T h irty nine usable q uestionnaires, or 15.42%, w ere returned and included in th e sam ple. T h e y are representative o f the population surveyed in this stu dy in term s o f in dustry classification. Figure 1 sh o w s the c o m p a riso n betw een su rv ey ed and re sp o n d in g firm s with regard to industry classification.

|In se r t F ig u re 1 here]

A m ajo rity o f the re spondents were from the m a n u fa c tu rin g sector (19 c o m p a n ie s or 4 8 .7 2 % ), follow ed by fin a n cial/b an k in g (6 c o m p a n ie s or 15.38% ) and tra d in g (4 c o m p a n ie s or 10.26%). O th e r industry sectors acco u n ted for less than 10%

o f the total response. In term s o f years in operations, 9 5 % o f the re sp o n d e n ts in dicated th at their org an izatio n had been in business for m ore than 10 years, a period that can be co n sid ered long e nough to establish a p resence in the m ark et and to h ave d e v elo p ed internal acco u n tin g system s and policies. M ost c o m p a n ie s e m p lo y b etw een 501 to 5,000 e m p lo y e e s (25 co m p a n ie s or 6 4 .1 % ) while tw o c o m p a n ie s e m p lo y m ore than 10,000 em ployees. In term s o f total assets, a m ajo rity o f the resp o n d e n ts (7 6 .9 3 % ) have total assets m ore than US$ 4 1,000,000.

In s u m m a ry , the data consists o f a significant proportion o f m a n u fa c tu rin g (4 8 .7 2 % ) and financial and banking (1 5 .3 8 % ) c o m p an ies. In addition, m ost c o m p a n ie s have been in business for m ore than ten years and are c o n sid e re d m ed iu m to large size c o m p a n ie s in Indonesia in term s o f total assets, sales, and n u m b e r o f e m p lo y e e s.

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h. M anagement St rue lure and Relative Performance o f the Respondents

For m a n y years, m a n a g e m e n t acco u n tin g in In d o n esia has been su b o rd in ated to financial a c c o u n tin g requirem ents. C o m p a n ie s have been m ore c o n c e rn e d with inventory valuation and financial statem en t preparation for external users than with p ro v id in g inform ation for internal purposes.

In recent years, how ever, c o m p etitio n has intensified and b usiness e n v iro n m e n ts have c hanged. T h r o u g h o u t the w orld, m a n a g e rs are d e m a n d in g m ore frequent, timely and higher quality inform ation for internal m a n a g e m e n t and d ecision m a k in g purposes. C h a n g e s in c o m p etitio n and the bu sin ess e n v iro n m e n t have also had a profo u n d effect on m a n a g e m e n t a c c o u n tin g sy ste m s and m a n a g e m e n t a c c o u n tin g groups. For ex am p le, m a n y recent in n o v atio n s stress m o v in g from the "functional silo" a p p ro ach to m a n a g e m e n t to m a n a g in g the value chain w hich im plies activity or process accounting, o f interest to this research is the d e g re e to w hich m a n a g e m e n t acco u n tin g sy stem s and m a n a g e m e n t a c c o u n tin g g ro u p s in Indonesia are structured and the deg ree to w hich they are c h a n g in g th eir a c c o u n tin g sy stem s to respond to this change. To put this in p erspective, a n u m b e r o f q u estio n s w ere first asked relating to m a n a g e m e n t structure and relative perfo rm an ce.

T h e m ajo rity o f the re sp o n d in g c o m p a n ie s (7 6 .9 2 % ) are p rim arily m an a g e d by function (i.e., production, m arketing, finance). O n ly 2 0 .5 1 % are m a n a g e d by process. T he rest are a co m b in a tio n o f the two.

This functional orientation is co n sisten t with the c h a racteristics o f the resp o n d in g c o m p a n ie s in term s o f level o f hierarchies. G e n e ra lly speaking, functionally oriented firm s have m ore p ro n o u n ced levels o f hierarchy than process o riented firms. In this data, it is in teresting to note that 22 c o m p a n ie s (5 8 % ) have six or m ore levels o f h ierarchy and the rest have 3-5 level o f hierarchy.

T he u ltim ate goal o f m ost c o m p a n ie s is to m a x im ise sh a re h o ld e r wealth.

A c h ie v in g this goal requires that firm s ou tp erfo rm th eir com petitors. T o m e a s u re an o r g a n is a tio n ’s relative p e rfo rm a n c e, re sp o n d e n ts w ere asked to rank the p e rfo rm a n c e o f their main p ro d u ct lines relative to their co m p e tito rs in term s o f cost, quality, and c u s to m e r satisfaction. T he response indicated that a high p ro portion o f the r e sp o n d e n ts (4 1 .0 3 % ) p erceive their firm s to be in the top decile in their respective industry. V irtually all believe th at their organisation is in the top 5 0 % o f their industry.

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c. Types o f management accounting techniques currently used by Indonesian companies

V ario u s m a n a g e m e n t a c c o u n tin g tech n iq u es are taught in Indonesian universities. Since m a n y o f these university graduates are e m p lo y e d by the c o m p a n ie s represented in the study sam ple, it is reasonable to sp ecu late that a n u m b e r o f m anagerial tools and techniques studied at the university are used by Indonesian c o m p a n ie s to help m anagers control operations, evaluate p e rfo rm a n c e and m ake decisions. To develop a picture about m a n a g e m e n t acco u n tin g te ch n iq u es currently used by Indonesian co m p a n ie s and to learn about their perceived effectiv en ess, a set o f questions was asked, fa b le 1 su m m a ris e s the research findings.

[In sert T a b le 1 here]

M ost c o m p a n ie s use routine decision m a k in g tools (type A in table 1).

A lm o st all c o m p a n ie s ( > 9 7 % ) use cash, revenue and ex p e n d itu re budgets.

C o n trib u tio n m argin analysis is also used by m ajority o f the resp o n d en ts (9 2.31% ).

O th e r tech n iq u e s such as standard costs, v ariance analysis, and break even analysis are also frequently used (ranging from 6 4 .1 0 % to 74.36% ). w hile specific costing m e th o d o lo g ie s (such as j o b and process costing) and tran sfer pricing systems*

a p p e a r to be used by less than h a lf o f the respondents. In term s o f th eir effectiveness, m ost re sp o n d en ts perceived that the tools they used are m o d erate to very effective (ra n g in g from 3 to 5 in the scale).

In ev alu a tin g capital budgeting projects, m ost c o m p a n ie s used present value, internal rate o f return, and payback period m ethods. It seem s th at the a c c o u n tin g rate o f return m eth o d is not as p opular a m ethod for ev alu atin g project p erfo rm an ce. In te rm s o f effectiveness, present value and internal rate o f return are p erceived to be m ore effectiv e than p ayback period and a c c o u n tin g rate o f return m ethods.

T he resp o n d in g co m p a n ie s m ainly used net incom e c o m b in e d with ex p e n d itu re budgets to evaluate m anagers' p erform ance. R esp o n d en ts c o n sid e r these bases for p e rfo rm a n c e evaluation to be highly effective. Return on investm ent is only used by less than 50% o f the respondents but is perceived as having a m o d e ra te to high level o f effectiv en ess by those that use it. The fact that return on in v estm en t is not a very p o p u la r m easu re for ev alu atin g m anagers' p e rfo rm a n c e is understandable.

In Indonesia, m ost investm ent decisions are m ade at the highest level o f the hierarchy and so m e tim e s by the ow ners. M an ag ers are m ore responsible for the profit o f their business units or divisions. T herefore, m any business units, divisions, or even c o m p a n ie s are c onsidered as profit centres rather than investm ent centres.

I. All b u t o n e m a n u f a c t u r i n g c o m p a n y , h o w e v e r , u s e d job o r d e r c o s t i n g , p r o c e s s c o s t i n g o r b o t h . O n t h e o t h e r h a n d , t w e l v e o f n i n e t e e n m a n u f a c t u r i n g c o m p a n i e s ( o r 6 3 . 1 6 % ) d i d n o t u s e t r a n s f e r p r i c i n g s y s t e m s .

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d. The role o f management accounting systems in management decision making

T rad itio n ally , m a n a g e m e n t a c c o u n tin g inform ation has been m a in ly financial in nature. Prim arily non-strategic, its focus has been on a d h e re n c e to standards, fee d b a c k on budget varian ces and on d e p a rtm e n ta l or unit cost effectiveness.

R ecently, h ow ever, m a n a g e m e n t acco u n tin g inform ation has incorporated co n sid e ra b le operatio n al (n o n -fin an cial) inform ation such as quality, cy cle tim e, and c u s to m e r satisfaction and has begun focusing on inform ation th at assists in the rem oval o f n o n -v a lu e added activities and in the d e v e lo p m e n t o f m o re robust p e rfo rm a n c e m e a s u r e m e n t system s.

M ost re sp o n d in g c o m p a n ie s (7 1 .7 9 % ) have an identifiable m a n a g e m e n t a c c o u n tin g g ro u p and this g roup pro v id es inform ation to m a n a g e rs (as o p p o se d to b eing p rim arily co n c e rn e d with satisfying external reporting re q u ire m e n ts). This fin d in g c o n tra d ic ts p revious research that m a n a g e m e n t a c c o u n tin g p ractices are virtually n o n -ex isten t in In d o n esia (see for e x a m p le A b d o e lk a d ir & Y u n u s, 1994). It is also e n c o u ra g in g to note th at in 63.16%) o f the o rg a n iz a tio n s sa m p le d , the m a n a g e m e n t a c c o u n tin g g ro u p increased in size relative to o th er g ro u p s w ithin the business.

To assess the nature o f m a n a g e m e n t a c c o u n tin g sy stem s used by Indonesian co m p a n ie s, resp o n d e n ts w ere asked to evaluate their m a n a g e m e n t a c c o u n tin g sy ste m s on a 5-point Likert scale with respect to the fo llo w in g issues for the tw o tim e fram es o f 1997 (current co n d itio n ) and 2002 (ex p ected condition):

1. W h e th e r m a n a g e m e n t a c c o u n tin g sy stem s in Indonesia focus p rim a rily on dep a rtm e n ta l or tin it level cost e ffectiv en ess (1 in scale) or overall o rg an izatio n al level cost effectiv en ess (5 in scale).

2. W h e th e r m a n a g e m e n t a c c o u n tin g sy stem s in In d o n esia focus p rim a rily on a c h ie v in g co st control (1 in scale) or c o n tin u o u s i m p r o v e m e n t (5 in scale).

3. W hether m a n a g e m e n t a c c o u n tin g sy ste m s in In d o n esia focus p rim a rily on non- strategic (1 in scale) or strategic cost m a n a g e m e n t issues (5 in scale).

4. W h e th e r m a n a g e m e n t a c c o u n tin g sy stem s in In d o n esia p ro v id e m a in ly static c o m p a ris o n s and static view s o f costs and cycle tim e (1 in scale) or pro v id e inform ation on co m p a n ie s' key success factors (5 in scale).

5. W h e th e r m a n a g e m e n t a c c o u n tin g sy stem s in Indonesia p rovide p rim arily financial (1 in scale) or both financial and o perational inform ation (5 in scale).

T able 2 sh o w s the m ean response to the live questions. In 1997, the m ean resp o n ses are around three w hich indicate that responding c o m p a n ie s are prim arily using traditional m a n a g e m e n t acco u n tin g system s. T he m ean resp o n ses for 2002,

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h o w e v e r, indicate th at resp o n d en ts are prepared, and expect, to a d o p t m ore innovative a p p ro a c h e s to m a n a g e m e n t a c c o u n tin g system s (m ean >4).

It seem s that in this globalization era, Indonesian c o m p a n ie s are w illin g to ad ap t th eir m a n a g e m e n t a c c o u n tin g sy stem s to w h at others in the w orld are doing.

Several reaso n s m ig h t acco u n t for this p h en o m en a. First, c h a n g e s in m a n a g e m e n t a c c o u n tin g sy ste m s m ig h t be driven by a m im etic process in w h ich c o m p a n ie s copy w h a t o th er successful o rg an izatio n s have been d o in g ( D iM a g g io and Pow ell, 1983).

S econd, ad ap tatio n m ig h t be caused by the fact that m an y In donesians are being trained abro ad w h ere th ey are e xposed to new ideas. Third, m a n y c o m p a n ie s are b eing advised to adopt innovative m a n a g e m e n t acco u n tin g sy stem s by professional g ro u p s such as In d o n esian Institute o f A c c o u n ta n ts and I FAC.

e. The perceived role o f accountants in organizations

The role o f acco u n tan ts in general, and m a n a g e m e n t a c c o u n ta n ts in particular, has been c h a llen g ed by a c a d e m icia n s and practitioners. S o m e argue th at a c c o u n ta n ts tend to w ork in their ow n d o m ain and are not interested in innovation.

T ab le 3 s h o w s the p erceived role o f a c c o u n ta n ts in Ind o n esia in 1997 and h o w that role is ex p e c te d to c h a n g e by the y e a r 2002. Based on the m ean responses, the resp o n d e n ts (recall that the resp o n d en ts were “ M an ag ers o f F in a n c e ” or e q u iv a le n t) perceiv ed that the role o f acco u n tan ts is still so m e w h a t traditional. This role, ho w ev er, is e x p ected to evolve to a b ro ad er set o f responsibilities in the next five years. A gain, the results indicate that Indonesian c o m p a n ie s are in line w ith other c o m p a n ie s in the world. The traditional view o f acco u n ta n ts as record keepers is ex p e c te d to c h a n g e in the future as acco u n tan ts b e c o m e an integral part o f the b usiness te am .

f Improvement initiatives

The increased level o f international c o m p etitio n has caused m any o rg a n iz a tio n s to im prove their products in term s o f quality, speed, and price to meet c u s to m e r s ’ d e m a n d . C o m p a n ie s often find th at their e xisting sy ste m s c a n n o t provide info rm atio n needed in this ever c h an g in g en v iro n m en t. Fortunately, new innovations in m a n a g e m e n t acco u n tin g m eth o d s are being dev elo p ed with the u ltim ate goal to increase c u sto m e r's satisfaction.

T he fo llo w in g section describes the extent o f o rg an izatio n s' use o f im p ro v e m e n t initiatives, prediction about their use in the next five years, and the

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level o f in v o lv e m e n t o f m a n a g e m e n t acco u n ta n ts in w o rk in g with the p a rticu lar initiative. R e sp o n d e n ts w ere asked to indicate the intensity level on a 5-point Likert scale (1: not intense; 5: highly intense).

T ab le 4 provides the m ean response to the current level o f intensity o f interest (1997), the prediction o f level o f intensity o f interest in the y e a r 2002, and in v o lv e m e n t level o f acc o u n ta n ts (or m a n a g e m e n t acc o u n ta n ts) in these initiatives.

T he level o f intensity in 1997 is m oderate. H ow ever, c o m p a n ie s e x p e c t that the interest in, and use of, these n ew initiatives will be m uch m o re intense in the y e a r 2002. A c c o u n t a n t s ’ in v o lv e m e n t in these initiatives is only m oderate.

T hese findings send a clear signal a bout co m p a n ie s' desire to im p ro v e their m a n a g e m e n t a c c o u n tin g system s. M a n a g e m e n t is b eing ex p o sed to new initiatives to in crease c o m p e titiv e n e s s o f their c o m p a n ie s th rough new literature, sem inars, train in g and w o rk s h o p s available both d o m e stic a lly or internationally. U nfo rtu n ately , Indonesian a c c o u n ta n ts seem not yet involved intensively in the innovation process.

It a p p e a rs that there is so m e distance to travel before the perceiv ed role o f the a c c o u n ta n t in the y e a r 2 002 (as describ ed in T able 3) is reached.

4. P h a se 2 - H y p o th e sis d e v e lo p m e n t

T he pu rp o se o f the second part o f this study is to add to the d escrip tiv e findings by e x a m in in g w h e th e r there is any relationship b etw een innovation in m a n a g e m e n t a c c o u n tin g sy stem s in Indonesia and org an izatio n al characteristics.

S p ecifically, the study posits and tests the relationship betw een the d e p e n d e n t variable, in novation in m a n a g e m e n t acco u n tin g system s, and in d e p e n d e n t v ariables o f hierarchy, org an izatio n al design, c o m p a n y p e rfo rm a n c e ranking, o rg an izatio n al size and age.

A review o f in novation adoption literature reveals that contextual v ariables play an im p o rtan t role in e x p lain in g the deg ree o f in novation in o rg a n iz a tio n s (e.g.

A b ra h a m s o n , 1991; G resov, 1989). In this literature, innovation is defined as tools, d evices, and k n o w le d g e that co n stan tly im prove o p era tin g p ro cesses from the level p rev io u sly achieved. T hus, co m p a n y A is co n sid ered m ore innovative than c o m p a n y B if c o m p a n y A tra n sfo rm s equal inputs into greater outputs than does c o m p a n y B.

Innovative m a n a g e m e n t a c c o u n tin g tech n iq u e s are those th at b etter support c o m p a n ie s' strategies to im prove c u s to m e r satisfaction in term s o f quality, speed, and price o f their pro d u cts or services. In contrast, traditional m a n a g e m e n t a c c o u n tin g tech n iq u e s are defined as those that w ere desig n ed to support c o m p a n y strategies to pro d u ce m o re h o m o g e n e o u s products and services in stable te c h n o lo g ic a l e n v iro n m e n ts (e.g., Jo hnson & Kaplan 1987). T h ese tech n iq u e s in clude standard

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cost, v a ria n c e analysis, flexible budgets, j o b o rd er costing, process costing, o v erh ead ap p licatio n and analysis, cash budget, production budget, and d ivisional p e rfo rm a n c e analysis. For the pu rp o se o f this study, the level o f innovation in m a n a g e m e n t a c c o u n tin g sy ste m s is m easu red by c o m p an ies' intensity levels in using the c o n te m p o r a r y m a n a g e m e n t a c c o u n tin g sy stem s listed in T ab le 4.

C o n tin g e n c y theory indicates that the adoption o f innovative m a n a g e m e n t a c c o u n tin g te c h n iq u e s m ay be driven by several factors, including tech n o lo g ical innovations, p roduction techniques, e n v iro n m e n ta l u ncertainties, o rganizational design, ad m in istra tiv e control strategies, and size o f o rg a n iz a tio n s (T iessen &

W a te rh o u se , 1981; Otley, 1981; G hozali & Lin negar, 1996; W a te rh o u se & Libby, 1996; T iesen & W aterh o u se, 1983). W e use various surrogates o f these m e a su re s to test their link to in novation in m a n a g e m e n t a c c o u n tin g system s.

a. Level o f hierarchy

Recent tech n o lo g ical innovation d e m a n d s m ore flexible a p p ro a c h e s to pro d u ctio n te c h n iq u e s and w ork force m an a g e m e n t. The introduction o f te a m -b a se d a p p ro a c h e s, for e x a m p le , requires m u lti-skilled e m p lo y ees. As a result, o rg a n iz a tio n s that use innovative te ch n iq u es tend to be flatter than th ose o rg a n iz a tio n s th at use traditional tech n iq u es.

T h e re is a w id e sp re a d view th at hierarchy is the antithesis o f initiative and c reativity. H ierarchical structure has been perceived as the source o f tro u b le and inefficiency. E x cessiv e layering has caused inefficiency and inflexibility because in fo rm atio n passes th ro u g h too m a n y people and decisio n s m ust go th ro u g h too m a n y levels (see for e x a m p le Jaques, 1990). G iven this p h e n o m e n o n , w e expect:

H I: O rg a n iz a tio n s with few er levels o f h ierarchy tend to use m o re innovative m a n a g e m e n t a c c o u n tin g sy stem s than those with m o re levels o f h ie ra rc h y ."-

h. Organizational design

W ith increasing levels o f com petition, o rg an izatio n s are forced to respond m o re q u ic k ly to c u s to m e r needs. O rg a n iz a tio n s that are oriented to w ard process are m o re flexible in resp o n d in g to custom ers' needs as c o m p a re d to those oriented to w ard function. In a process oriented organization, w o rk ers are g rouped based on related fun ctio n s to be perform ed. This condition provides a c lim a te for m utual s u p p o rt and learning as well as inter-departm ental multi-skill d ev e lo p m e n t. The c h a racteristics inherent in process oriented org an izatio n s are co n siste n t with

2. For convenience, all hypotheses are stated in the alternative form.

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c o n te m p o r a r y m a n a g e m e n t acco u n tin g sy stem s such as T e a m - B a s e d A p p ro a c h e s, Total Q u a lity M a n a g e m e n t, E m p lo y e e E m p o w e rm e n t, and A ctiv ity -B a se d M a n a g e m e n t. T herefo re, w e predict:

H2: Process o riented o rg a n iz a tio n s tend to use m o re innovative m a n a g e m e n t acco u n tin g sy stem s than those o riented to w a rd function.

c. Organization performance

M a n a g e m e n t acco u n tin g system s play a crucial role in a ssisting m a n a g e rs in th eir p lan n in g and control activities. In light o f rapid and a c c e lera tin g c h a n g e s in p roduction system s, m a n u fa c tu rin g tech n o lo g y , and particularly the e n o rm o u s innovation in inform ation p ro cessin g te ch n o lo g y , m a n a g e m e n t a c c o u n tin g sy stem s need to respond appropriately by pro v id in g the relevant and tim e ly inform ation d e m a n d e d by to d ay 's m anagers. A lth o u g h e x cellen t m a n a g e m e n t a c c o u n tin g sy stem s m a y not g u a ra n te e organ izatio n s' success, ineffective m a n a g e m e n t a c c o u n tin g s y ste m s w h ich p ro d u ce delayed, distorted, or too highly a g g reg ated inform ation can easily put o rg a n iz a tio n s at risk. Innovative m a n a g e m e n t a c c o u n tin g sy ste m s su p p o rt o rg an izatio n s' effort to b e c o m e m ore co m p e titiv e th ro u g h better quality, lo w er costs, h ig h e r productivity, and better resp o n siv en ess to cu sto m ers' d em an d . T herefo re, the follo w in g h y p o th esis is offered:

H3: G o o d p erfo rm ers tend to use m ore innovative m a n a g e m e n t a c c o u n tin g sy stem s than p o o r perform ers.

d. Organization size

Prior studies have argued that organ izatio n size influences the level o f in novation in m a n a g e m e n t acco u n tin g system s (e.g., G hozali & L innegar, 1996;

M erch an t, 1984; Bruns & W aterh o u se, 1975). L arger o rg a n iz a tio n s need m ore so p h isticated sy stem s to acco u n t for their operations. In addition, larger o rg a n iz a tio n s tend to have m ore resources invested in innovation efforts. T h erefo re, we posit that:

H4: L arge o rg an izatio n s tend to use m ore innovative m a n a g e m e n t acco u n tin g sy stem s than small organizations.

e. Organization age

S o m e em p irical studies have found th at o rganizational age is p ositively correlated with in novation (e.g., G hozali and L innegar, 1996). T h ey argue th at o ld er

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c o m p a n ie s h ave the o p p o rtu n ity to establish th e m se lv e s in the m a rk e t w h ich en ab les th em to spend their resources on innovation efforts. Thus, w e posit that:

H5: O ld e r org an izatio n s tend to use m ore innovative m a n a g e m e n t acco u n tin g system s than new er organizations.

5. V ariab le m e a s u re m e n t

Th ere are five variables used to test the h y p o th eses m en tio n e d in the prev io u s section. T he d e p en d en t variable is innovation in m a n a g e m e n t a c c o u n tin g s y ste m s w hile the independent variables are hierarchy, o rganizational design, p e rfo rm a n c e, size, and age.

a. Innovation

T he level o f innovation was m easured using the scales show n in T ab le 14.

T he in stru m en t has 17 items and responses were given on a 5-point L ikert-type scale based on the principle o f sem antic differences described in O s g o o d et al. (19 5 7 ) (e.g., l= n o t d e v elo p ed ; 5=highly developed). T herefore, the highest possible score is 85 and the low est possible score is 17).

b. Hierarchy

H ierarchy is m easu red by the n u m b e r o f layers from top m a n a g e m e n t (C E O ) to the tech n ician s and operato rs (see for ex a m p le Jaques, 1990). For analysis purposes, re sp o n d in g firm s are classified into tw o groups; flat and steep. An o rg an izatio n is flat if it has a m a x im u m o f five layers w hile a steep o rg an izatio n is one with m o re than five levels o f hierarchy-5.

c. Organizational design

O rg an izatio n al design is classified into tw o categories: process o riented and fu n c tio n a lly oriented. (O rg an izatio n s that indicated they utilize both process and function a p p ro a c h e s to m a n a g e m e n t w ere exclu d ed from the analysis).

d. Performance

P e rfo rm a n c e o f an organization is m easured by the ran k in g o f its principal pro d u ct(s) or service(s) in term s o f the key pe rfo rm a n c e factors such as cost, tim e, or quality in its respective industry. R esp o n d en ts were asked to p rovide a self-ran k in g o f their organ izatio n as c o m p a re d to their com petitors. Clearly, this self-ran k in g is 3. The dichotomy is determined following the empirical study by Jaques, (1990). The five layers consist of the CEO, President, General Managers, Unit Managers, and Technicians and Operators. More than five layers in an organization is therefore considered excessive.

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flic In t e rn a t i o n a l J o u r n a l o f A c c o u n t i n g a n d B u s i n e s s S o c i e t y 4 7

not ne c e ssa rily w h a t the real ranking w ould be if c o n d u c te d by an o b je c tiv e analyst.

H o w ev er, it does provide a m e a su re o f relative perfo rm an ce. G o o d p e rfo rm e rs w ere classified as those w h o s e self-ran k in g s w ere in the top 3 0 % w hile p o o r p e rfo rm e rs w ere classified as those w h o se rankings were below the top 30% .

e. Size

Fo llo w in g p rev io u s studies, o rganizational size is m easu red by total assets.

O rg a n iz a tio n s are c ateg o rized into three classes: small, m e d iu m and large. For this analysis, the total assets in each categ o ry were: less than $ 40 m illion, 4 0 -2 0 0 m illion, and m o re than 200 million US dollars respectively.

f A g e

This variable is m easu red by the length o f period in o p eratio n since esta b lish m e n t. R esp o n d e n ts w ere divided into tw o categories: new o rg a n iz a tio n s (less than 10 years in op eratio n ) and established o rg an izatio n s (m o re than 10 years in op era tio n ) organizations.

6. H y p o th e sis te stin g

A separate o n e -w a y A N O V A test w as co n d u c te d for each in d ep e n d e n t variable since w e w ere interested in ev alu a tin g the d iffe re n c es in the level o f in novation betw een g ro u p s for each in d ep en d en t variable. In this design, A N O V A is co n sid e re d the m o st a p p ro p ria te (see for e x a m p le B loom , 1992; H ow ell, 1992;

Evans, 1992).

a. Hypothesis one

T h e first h y p o th esis predicted that level o f hierarch y has a negative a sso ciatio n with innovation in m a n a g e m e n t a c c o u n tin g system s. T able 5 s h o w s the results o f the statistical test. T he results indicate a significant d iffe re n c e in the innovation level in m a n a g e m e n t a c c o u n tin g sy ste m s b etw een flat and steep o rg an izatio n s, F( 1,36)= 2.87, p<. 10. Flat o rg a n iz a tio n s use m ore innovative m a n a g e m e n t a c c o u n tin g sy stem s ( m e a n = 5 5 .0 6 ) than steep o rg a n iz a tio n s ( m e a n = 4 5 .5 7 ). T h e results is co n sisten t with h y p o th esis H I.

b. Hypothesis two

T he second h y p o th esis exp ected that o rg a n iz a tio n s o riented to w a rd process w o u ld use m o re innovative m a n a g e m e n t a c c o u n tin g sy ste m s than th o se o riented

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to w a rd function. T ab le 6 depicts the results o f the h ypothesis testing. T h e results s h o w a significant differen ce in innovation level b etw een process o riented and functional oriented o rg an izatio n s F ( 1 ,3 5 ) = 7 .19, p < 0 5 . Process o riented o rg a n iz a tio n s are m ore innovative ( m e a n = 6 3 .3 8 ) than functional o riented o rg a n iz a tio n s (m e a n = 4 7 .0 0 ). The results confirm h ypothesis H2.

c. Hypothesis three

T h e third h y p o th esis stated th at good perfo rm ers tend to use m o re innovative m a n a g e m e n t a c c o u n tin g system s than poor perform ers. T ab le 7 sh o w s the results o f the statistical test. T he results indicate a significant difference in innovation level betw een g ood p erfo rm ers and p oor p erform ers, F( 1,3 0 )= 6 .4 1 , p<.05. C o n tra ry to ex p ectatio n s, it is the poor perfo rm ers th at use m ore innovative te c h n iq u e s ( m e a n = 6 0 .8 0 ) than good perfo rm ers (m e a n = 4 4 .9 5 ). T he results are not co n sisten t with h y p o th esis M3.

T h e result is unexpected. In general, it is reasonable to predict a positive correlation betw een innovation level o f m a n a g e m e n t a c c o u n tin g s y ste m s and o rg a n iz a tio n p e rfo rm a n c e. T he contrary results raises som e q u estio n s a b o u t the relatio n sh ip b etw een innovation and p erform ance. Is it innovation th at cau ses p e rfo rm a n c e or p e rfo rm a n c e exp ectatio n s that create the need for o rg a n iz a tio n s to in novate? In Indonesia, for ex am p le, w e w itness that p oor p e rfo rm e rs are often forced to u n d erg o a restructuring program that in cludes new m a n a g e m e n t and n ew m a n a g e m e n t m e th o d s and system s to operate their business. P oor p e rfo rm a n c e could be a trig g e r that forces Indonesian o rg an izatio n s to be innovative. H o w ev er, it is also true that innovative m a n a g e m e n t te c h n iq u e s are still in the early stages o f being in troduced to c o m p a n ie s in Indonesia. An alternative e xplanation to the u nexpected results is the possibility o f a lagged variable effect w h ich could not be te sted in this study. It is also possible th at since a lm o st all firm s in the sa m p le rated th eir p e rfo rm a n c e as a b o v e average, the p e rfo rm a n c e variable is poorly specified.

d. Hypothesis fo u r and five

T h e fourth and fifth h y p o th eses investigate the association b etw een level o f innovation and o rganizational size and age. Statistical an aly ses w ere p e rfo rm e d on these tw o h ypotheses. T he results show that there is no association betw een in novation and size or age. The results, therefore, do not support h y p o th e se s four and five.

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T h e I n t e rn a t i o n a l J o u r n a l o f A c c o u n t i n g a n d B u s i n e s s S o c i e t y 4 9

7. C o n c lu sio n

C o n tra ry to ex istin g beliefs, th is study p rovides e v id e n c e that m a n a g e m e n t a c c o u n tin g is used as a tool for m an ag erial effic ie n cy and decision m a k in g in Indonesia. M a n y c o m p a n ie s h ave an identifiable m a n a g e m e n t a c c o u n tin g g ro u p w h o s e p rim a ry p u rp o se is to p rovide inform ation for m a n a g e rs' d ecisio n m aking.

T his s tu d y also reveals that traditional m a n a g e m e n t a c c o u n tin g tools are b ein g used in ten siv ely by In d o n esian co m p a n ie s. A d o p tio n o f new in itiatives in m a n a g e m e n t a c c o u n tin g a p p e a r to lag, but are e x p ected to increase by the tu rn o f the century.

T h e traditional v iew o f m a n a g e m e n t a c c o u n ta n ts as a g ro u p that p rovides routine s ch ed u les and reports still dom in ates. H ow ever, there is a b e lie f on the part o f finance m a n a g e rs th at m a n a g e m e n t acc o u n ta n ts will play a m o re active role in the future - one that fosters c h a n g e and takes on bro ad er resp o n sib ilities for the direction and m a n a g e m e n t o f the o rganization.

A lth o u g h this study m ig h t be c o n sid ered exp lo rato ry , the results are c o n siste n t w ith tw o o f o u r co n je c tu re s based on ex istin g literature. T h e level o f m a n a g e m e n t a c c o u n tin g sy ste m s innovation in o rg a n iz a tio n s can be pred icted by the level o f h ierarch y and the nature o f o rganizational design. Increased h ierarch y has a n eg ativ e a ssociation with innovation in m a n a g e m e n t a c c o u n tin g system s. S im ilarly, o rg a n iz a tio n s th at are o riented to w a rd process use m ore innovative m a n a g e m e n t a c c o u n tin g sy ste m s than functio n ally o riented organ izatio n s.

A co n tra d ic to ry result w as found w hen testin g the a sso ciatio n betw een in novation in m a n a g e m e n t acco u n tin g sy stem s and p e rfo rm a n c e. W h ile w e e x p e c t a positive association, the o p p o site direction w as found. It m ig h t be th a t p oor p e rfo rm a n c e triggers the a d option o f m ore innovative m a n a g e m e n t a c c o u n tin g s y ste m s or th ere m ig h t be a lagged variable effect w h ich could not be te sted in this study or the v ariab le w as sim p ly m isspecified. This is an interesting fin d in g that d e se rv e s fu rth er research p articularly in d e te rm in in g the causal relatio n sh ip betw een innovation and p e rfo rm a n c e.

T h e results o f the study m u st be te m p e re d by the k n o w le d g e that the resp o n se rate o f 15% w as low and that the 39 c o m p a n ie s th at p articipated in this study are not a perfect representative o f all p ublicly held c o m p a n ie s in Indonesia.

N e v e rth e le ss, given that hardly any inform ation a b o u t m a n a g e m e n t a c c o u n tin g p ractices in In d o n esia exist, this study m ay be c o n sid ered as a first step in g a in in g an a p p reciatio n o f the types o f m a n a g e m e n t a c c o u n tin g sy ste m s that cu rre n tly exist in In d o n e sia and the d e g re e to w hich these system s, and the m a n a g e m e n t a c c o u n ta n ts, w h o o p e ra te th em , are ex p e c te d to c h a n g e o v e r the next five years.

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A. Routine Decision Tools

1. Cash Budget 2.56 97.44 5.26 2.78 31.58 39.47 21.05

2. Revenue Budget 2.56 97.44 2.78 5.26 13.16 47.37 31.58

3. Expenditure Budget 2.56 97.44 5.26 2.78 13.16 47.37 31.58

4. Standard Cost 35.90 64.10 0.00 16.00 32.00 32.00 20.00

5. Variance Analysis 25.64 74.36 0.00 6.90 31.03 41.38 20.69

6. Break-Even Analysis 30.77 69.23 3.70 18.52 37.04 25.93 14.81

7. Job Order Costing 53.84 46.15 0.00 11.11 22.22 50.00 16.67

8. Process Costing 53.84 46.15 5.56 0.00 11.11 66.67 16.67

9. Contribution Analysis

7.69 92.31 2.78 2.78 22.22 50.00 22.22

10.Transfer Pricing 56.41 43.59 0.00 17.65 41.18 35.29 5.88

TheInternational Journal of Accountingand BusinessSociety53

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Vol. 8. No. 1. August2000

B. Project Evaluation

1. Present Value Model 17.95 82.05 6.25 9.38 9.38 59.38 15.63

2. Internal Rate of Return

15.38 84.62 6.06 6.06 21.21 42.42 24.24

3. Payback Period 15.38 84.62 0.00 30.30 36.36 18.18 15.15

4. Accounting Rate of Return

43.59 56.41 0.00 27.27 36.36 31.82 4.55

C. Performance Evaluation 1. Return on

Investment

51.28 48.72 5.26 5.26 36.84 36.84 15.79

2. Net Income 17.95 82.05 3.13 6.25 21.88 31.25 37.5

3. Expenditure Budget 15.38 84.62 0.00 6.06 36.36 36.36 21.21

54Management Accountingin Indonesia: Analysis of...

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The In t e rn a t i o n a l J o u r n a l o f A e c o u t i n g a n d B u s i n e s s S o c i e t y 55

Table 2

Mean Response of the Nature of Management Accounting Systems

Question

Mean (scale o f 1 - 5)

1997 (current)

2002 (expected)

1. Unit vs. organizational effectiveness. 3.00 3.72

2. Cost control vs. continuous improvement 3.03 4.15

3. Non-strategic vs. strategic issues 3.18 4.23

4. Static vs. key success factors 3.23 4.13

5. Financial vs. operational results 3.18 4.18

Table 3

The Perceived Role of Accountants in Indonesia

Question

Mean

1997 2002

1. Deliver routine reports (1 in scale) vs. service to internal customers

for customer satisfaction (5 scale) 3.05 4.00

2. Inhibits or uninterested in change (1 in scale) vs. fosters change (5 in scale)

3.05 4.18

3. Isolated (1 in scale) vs. part o f management team (5 in scale) 3.36 4.23 4. Exist to support financial accounting requirements (1 in scale) vs to

serve internal customers (5 in scale) 3.33 4.08

5. Provides structured facts about costs (1 in scale) vs. advice based

on potential cost behaviour (5 in scale) :>. 1 j 4.03

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5 6 M a n a g e m e n t A c c o u n t i n g in In d o n e si a : A n a l y s i s o f

Table 4

Improvement Initiatives and Accountants' Involvement

Intensity of Level o f Interest in Improvement Initiatives

Mean (scale o f 1-5)

1997 (current)

2002 (expected)

Level of Current Involvement

1. Benchmarking 2.56 3.41 2.82

2. Total Quality Management 3.10 3.90 3.23

3. ISO (9000, 14000, etc) 3.18 3.97 3.08

4. Flexible Manufacturing 2.08 2.51 2.1-5

5. Customer Focus 3.49 4.08 2.97

6. Team-Based Approach 3.18 3.62 2.95

7. Activity-Based Costing 2.57 3.54 3.51

8. Activity-Based Management 2.49 3.41 3.15

9. Social Responsibility 3.08 3.67 2.72

10. Employee Empowerment 3.18 3.77 3.00

11. Target Costing 2.87 3.28 3.44

12. Computer Integrated Manufacturing

2.74 3.67 3.41

13. Just-in-time 2.26 3.15 2.85

14. Non-financial Performance Measurement

3.00 3.56 2.85

15. Business Process Reengineering

2.72 3.56 3.03

16. Value-chain Analysis 2.18 2.64 2.41

17. Economic Value Added 2.54 3.26 2.97

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T h e In t e rn a t i o n a l J o u r n a l o f A c c o u t i n g a n d B u s i n e s s S o c i e t y 57

T a b l e 5

O n e - w a y A N O V A r e s u lt: I n n o v a t i o n w i t h h i e r a r c h y

S o u r c e S S IMS F -ra tio F -p rob .

B e t w e e n G r o u p s 1 8 1 8 . 0 3 8 1 8 . 0 3 2 . 8 7 .0 9

W i t h i n G r o u p s 35 9 , 9 7 2 . 0 8 2 8 4 . 9 2

T o ta l 36 10 .790.1 1

T a b l e 6

O n e - w a y A N O V A r e s u lt: I n n o v a t i o n w i t h o r g a n i z a t i o n a l d e s i g n

S o u r c e

D F

S S M S F - r a t io F - p r o b .

B e t w e e n G r o u p s 1 1 , 6 6 8 .4 3 1 ,6 6 8 .4 3 7 . 1 9 .01

W i t h i n G r o u p s 3 4 7 . 8 8 5 . 8 8 2 3 1 . 9 4

T o ta l 35 9 , 5 5 4 .3 1

T a b l e 7

O n e - w a y A N O V A r e s u lt: I n n o v a t i o n w i t h p e r f o r m a n c e

S o u r c e

D F

S S M S F - r a t i o F - p r o b .

B e t w e e n G r o u p s 1 1 , 7 2 6 .1 6 1 ,7 2 6 . 1 6 6.41 .02

W i t h i n G r o u p s 3 0 8 , 0 8 0 . 5 5 2 6 9 . 3 5

T o t a l 31 9 , 8 0 6 . 7 2

V ol . 8. N o . 1. A u g u s t 2 0 0 0