Introduction and background

A theory is a system of ideas, built from general philosophical principles, created to improve our understanding of the world. Theory does not merely help to explain the world; in the social realm, theories also shape the world. Once a theory is selected, the results of research studies utilizing that theory are predictable. If the theories used to investigate management accounting are too limited in scope, management accounting can be shaped so that in practice it fails to consider ethical issues that are actually very important to individuals and society. A narrow, commonly adopted theoretical focus in managerial accounting is shareholder theory. Implicit in any theory about firms is a statement about the desirability of ends. Ethics is not just about consideration of permissible behavior; it is also about what the proper ends to be served by our behavior are. The end served by shareholder value theory is singularly that of the economic well-being of shareholders, which can result in management accounting ignoring the ethicality of the means by which shareholder wealth maximization may be achieved. Shareholder value theory promotes accounting and management practices that aim to maximize a company’s profits, with less regard for how these practices might negatively impact employees, communities, and other stakeholders in society. When management accountants and other business professionals internalize shareholder theory as their sole criterion for developing and executing management accounting practice, it is likely that the practices developed will fail to adequately consider ethical concerns for other individuals and society. For example, under this theory, management decisions that have negative consequences for non-shareholder stakeholders and broader society are viewed as externalities for which a company is not held accountable. Psychologists call this way of thinking the business case mentality (Kouchaki et al. 2013).

In this chapter we consider how our common understanding of the nature of management accounting has been shaped by this particularly narrow view of what management accounting can be. We assess the shortcomings of such a narrow focus, particularly delving more specifically into why and how current theories and research approaches ignore important ethical issues relevant to management accounting. By doing this we hope to accomplish two goals. We hope to use academic research to help explain and illustrate (1) why ethical considerations often are not explicitly incorporated into management accounting practice and (2) how ethical considerations can help build a more inclusive view of management accounting practice.

Management accounting tends to focus on a selective group of managerial topics, with the major four topics being management control, budgetary slack, employee effort, and compensation schemes. These topics are usually examined by researchers through one of three basic research methods. Examinations are performed through the use of archival methods (quantitatively analyzing large data sets through statistical techniques), qualitative field methods (going out to individual businesses to observe and inquire about their specific practices), and experimental methods (running behavioral experiments under controlled conditions) (Hesford et al. 2006). In this chapter we discuss management accounting research that has used each of these methods; however, later in the chapter we focus on behavioral, experimental management accounting research because we think it best illustrates how management accounting practice can infuse more ethical concerns into daily practice. While we find the narrow set of managerial topics and research methodologies to be a concern, we believe that a greater concern lies in the limited number of theories used to help explain and advise management accounting practice. Most often, shareholder theory is the underlying basis for the development of research and practice, and additional psychological theories are employed to bring additional understanding to how individuals make decisions in a business or accounting setting.

Contemporary management accounting research also tends to be positivist (i.e., concerned with uncovering empirical relationships between things), focusing primarily on the relationship between management decision making (Lachmann, Trapp, and Trapp 2017) and the financial success of the organization. However, very few studies in this stream of research have thoroughly examined these topics using ethical lenses. For instance, research examines the financial benefit of improving employee effort through the utilization of different compensation schemes for the primary benefit of the organization.1 This stream of literature, however, tends to overlook the consequences of these compensation schemes on the individual, with some of these consequences producing ethical harms for the individual employee and for individuals in broader society. For example, outcome-oriented sales incentives can implicitly encourage employees to lie about product quality or about the timing of deliverables. Furthermore, the widespread adoption of these types of management practices can undermine the general integrity of social interactions in business and society. In sum, a consistent theme in prior management accounting is its focus on understanding the financial or economic impact of management accounting techniques at the organizational (i.e., company) level, generally ignoring other critical ethical impacts at the individual or societal level. This focus does not mean that there are no ethical implications of management accounting research that could help shape practice. It just means that ethical aspects of management accounting practice are neglected when the research emphasizes economics over ethics. It is important to note, however, that ethical perspectives are studied by some highly regarded management accounting researchers who examine management accounting practices from an alternative theoretical view.

The current book chapter examines three relevant behavioral management accounting topics and assesses their ethical implications. Specifically, we achieve this goal by examining a body of behavioral management accounting research in prominent accounting journals, obtaining a sense of understanding of how different researchers approach the study of management topics. By gaining this understanding, we show that there are differences in how researchers approach behavioral management topics, driven in large part by their research paradigms (i.e., beliefs about how knowledge is created and tested) and whether their level of analysis is on the individual, organization, or broader society. These viewpoints impact how researchers examine management topics (i.e., the theoretical perspective applied and methodology used). Thus, it is essential to understand how management accounting research examines these management tools, techniques, and processes to help behavioral management accounting research and practice progress toward a stronger focus on ethics. Achieving this goal can provide insight into management accounting's future direction.

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