Pergamon

Accting., Mgmt. & Info. Tech., Vol. 7, No. 1, pp. 1-19, 1997
1997 Elsevier Science Ltd. All rights reserved
Printed in Great Britain
0959-8022/97 $17.00 + 0.00

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ACCOUNTING
INFORMATION
SYSTEMS AND
ORGANIZATION
LEARNING: A SIMULATION
Aris M. Ouksel

University of Illinois at Chicago

Ken Mihavics

Roosevelt University
Peter Chalos

University of Illinois at Chicago and City University of Hong Kong

Abstract--Accounting Information Systems may facilitate or impede organizational learning. Critical

attributes of accounting systems that have the potential to affect organizational learning include: (1)
characteristics of the information environment, whether uniform, dispersed or clustered importance weights;
(2) information distribution, whether overlapping or segregated information; and (3) information coordination
mechanisms, whether expert teams, majority voting teams or hierarchies. Organizational learning and
performance was simulated in the following manner: (i) the organization was faced with a continuous sequence
of repetitive but not identical problems; (ii) the organizational task was subdivided between analysts; and (iii)
analysts learned by basing their decisions on the relationship found between information available to them and
organizational outcomes. Simulation results indicated that learning in flatter (team) organizations is generally
more accurate than in hierarchical organizations. Learning is also faster with majority teams than hierarchies,
but slower with expert teams. Overlapping accounting information transmission between agents was found to
offer only limited benefits. These findings have implications for the design of accounting information systems
in organizations. 1997 Elsevier Science Ltd

INTRODUCTION
Accounting Information Systems (A.I.S.) play a central role in organizational learning,
prompting claims that "the aim of the design of A.I.S. is quite simply to improve organizational
learning" (Emmanuel, Otley & Merchant, 1990, p. 371) and "to activate learning and
experimentation" (Senge, 1990, p. 253). Our interpretation of firm learning builds on three
classical observations of behavior (Levitt & March, 1995). The first is that a great deal of
organizational learning is based on routines (Cyert & March, 1963; Nelson & Winter, 1982)
which are environmentally conditioned (Fiol & Lyles, 1985). The second observation is that
organizations are goal orientated. Their behavior depends on the relationship between targeted
and achieved outcomes. The third observation is that organizational actions are historical.
Output goals are tempered by interpretations of the past, as organizations adapt incrementally
and learn from goal attainment in response to feedback about outcomes (Den Hertog &
Wielinga, 1992). The emphasis on routines and the ecology of learning distinguishes this

A.M. OUKSELet al.

approach from alternative theories and closely resembles paradigms of individual learning found
in the accounting literature (Hammond &Deane, 1973; Harrell, 1977).
An interactive learning process of periodic planning, measurement, feedback and performance appraisal characterizes many A.I.S.: (1) goals are determined; (2) environmental
information is coded, stored and subsequently retrieved; (3) deviations of actual outcomes from
predetermined goals are recorded for future corrective action; and (4) goal attainment is
rewarded (Flamholtz, Das & Tsui, 1985, p. 39). Recent evidence from the accounting literature
supports this view of organizational learning. The most commonly cited applications include
project management reports such as path analysis for production scheduling; profit planning
systems for lines of business which report actual to forecast revenue and expense comparisons;
revenue budgets which analyze market share, volume, price, etc.; reports used to monitor
competition; and human resource planning budgets (Simons, 1995, p. 108).
A number of factors are critical in A.I.S. design. Organizational memory, whether tacit or
formalized, may be systematically coded but information may not always be readily available.
Organizations vary in the emphasis they place on formal routines. Goals and feedback, by
definition, are strongly conditioned by the environment in which the firm operates. Firms
operating in uncertain environments face challenges in implementing A.I.S. designed to promote
routinized organizational learning. As environmental uncertainty increases, organizations need
to adapt their A.I.S. in order to promote learning (Ouchi, 1977).
The impact of organizational complexity on learning is also critical in A.I.S. design
(Galbraith, 1977; Weick & Roberts, 1993). Organizational hierarchies and multi-divisional
responsibility centres shape information routines. The complexity of organizational design
usually precludes complete dissemination of accounting information to all divisional sub-units.
Typically, information is aggregated or compressed as it flows vertically up the organizational
hierarchy. Laterally, information is often selectively distributed across sub-units. The ecological
structure of the organization complicates modeling of the learning process. Senge (1990, p. 289)
argues that hierarchies often impede organizational learning, while teams more effectively
promote learning. Recent initiatives to flatten organizational structures, establish crossfunctional teams, and increase electronic information sharing are in part motivated by a desire
to improve organizational learning.
In this study, we replicate and extend previous computational organization theory research
(Carley, 1992) within an A.I.S. framework. Specifically, we measure previously unexamined
effects of environmental information characteristics on team and hierarchical information
processing across segregated and overlapping A.I.S. Outcome effectiveness is measured in terms
of both accuracy and speed of organizational learning. As this is extremely difficult, if not
impossible, to capture in an organizational setting, a simulation is used. While the simulated task
is admittedly stylized, the methodology lays the groundwork for a set of empirically testable
propositions for future experimental and field research.

THEORETICAL DEVELOPMENT
Organizational learning

Current literature on organizational learning tends to be theoretically fragmented, drawing on

analogies of individual learning or simply using organizational learning as an explanation for
many different kinds of observed organizational change or adaptation (Argote, Beckman &
Epple, 1990; Carley, 1992; Fiol & Lyles, 1985; Levitt & March, 1988). Some authors (Argyris
& Schon, 1978; March & Olson, 1976) deal explicitly with individual learning, while others

ACCOUNTINGINFORMATIONSYSTEMS AND ORGANIZATIONLEARNING

(Lant & Mezias, 1992) propose a learning model which accounts for patterns of changes at the
level of the organization. Argyris and Schon (1978) distinguish between single- and double-loop
learning. This distinction can be thought of in terms of operational (know-how) and strategic
(know-what) learning. Single-loop learning occurs at the operational level because it concerns
processes, while double-loop learning occurs at the strategic level because it concerns the
definition of goals.
The effect of individual learning on organizational learning can be seen by analyzing the
impact of persistence of shared models on the performance of organizations. Others emphasize
the importance of individual learning only in so far as personal skills, insights and knowledge
become "embodied in organizational learning routines, practices, and beliefs that outlast the
presence of the original individual" (Attewell, 1992). This persistence of conceptual knowledge
is consistent with the notion of organizational learning adopted in this paper, namely "the
encoding of inferences from history into routines that guide future behavior" (Levitt & March,
1988).
Organizational learning however is more than the sum of individual learning of constituent
members. Rather, it is the ability to store data (in some type of memory), to recognize patterns
and rules from this data, and to build shared mental models across individuals and divisions of
an organization. A.I.S. play a critical role in shaping these routines. The notion of shared mental
models is central to work on continuous organizational improvement (Senge, 1990).
Organizational learning in this case is viewed as "improving actions through better knowledge
and understanding" (Fiol & Lyles, 1985) or as "increasing an organization's capacity to take
effective actions" (Kim, 1993) by using discovered patterns and rules to guide future decision
making. This requires constant monitoring of information at the individual as well as at the
organizational level, a role for which A.I.S. are ideally suited.
Environmental uncertain~ and A.I.S. coordination

The environment facing the firm has been shown to have a significant impact on A.I.S.
design. Khandwalla (1972) was one of the first researchers to emphasize the importance of
environmental competition on the firm's information system. A similar conclusion was reached
by Otley (1980) who determined that budgetary systems were strongly influenced by the firm's
environment. Gordon and Miller (1976) found that heterogeneity of product lines was a primary
determinant of A.I.S. reporting frequency and sophistication. Another study, pertaining to
environmental uncertainty (Govindarajan, 1984) found no connection between budgetary
accounting systems and organizational learning effectiveness until the mediating effect of
uncertainty was considered. This considerable body of work relating environmental predictability to A.I.S. has been summarized in such works as Galbraith (1977), Mintzberg (1979) and
Pfeffer (1982) but "has yet to be fully incorporated into accounting systems research"
(Emmanuel et al., 1990, p. 62).
Early and Hopwood (1981) distinguished environmental uncertainty in diagnostic causeeffect relationships from uncertainty in strategic objectives. When objectives are clear and
cause-effect relationships are well understood, decisions are programmable. Examples of this
might include an optimization function when constraints are known, or a discounted cash flow
analysis under relative environmental certainty. Rarely however do A.I.S. provide perfect
decision predictability. As the environment becomes less certain, Earl and Hopwood (1981)
argue that the accounting system "serves as a learning machine" from which probabilistic
inferences are made based upon system inputs. This would be the case for example when
budgetary revenues are compared to actual revenues for a new product, or when a post audit of
an investment in an uncertain environment is performed.

A.M. OUKSELet

al.

This probabilistic view of organizational learning bears a striking similarity to individual

probability learning models (Hammond &Deane, 1973). Compensatory linear additive models
measure subject learning in terms of environmental predictability, consistency, and matching of
subject cue weights to actual environmental weights. Feedback allows the individual to better
match his/her decision weights to ecologically valid environmental weights. Individual studies
of learning in auditing and managerial accounting environments have found that cue feedback
improves multiple cue probability learning and the matching of subject decision weights to
environmental weights (Ashton & Brown, 1980; Harrell, 1977). Similar studies have not
however been performed at the organizational level. Our study methodologically borrows in
spirit from individual learning experiments in operationalizing learning at the organizational
level.
Contingency theorists argue that A.I.S. should be designed to match environmental
uncertainty (Gordon & Miller, 1976; Govindarajan, 1984). Lawrence and Lorsch (1967) have
shown that environmental uncertainty affects divisional structure and the A.I.S. design used to
integrate these divisions. Multi-divisional organizational structure recognizes the unique
environmental uncertainty facing different product market environments. Under such a
structure, it is highly improbable that top management possesses the best predictive information
model for each divisional environment. Sub-unit managers not only have a better understanding
of local environments, but are also in a position to react more quickly to this information.
Hierarchical information transmission functions well in centralized and relatively predictable
environments. It encourages specialization, improves monitoring and reduces uncertainty
(Williamson, 1975). However, vertical information flows also lead to information compression
and time delays as information travels up the hierarchy. A.I.S. are often designed to aggregate
information in summary reports at each hierarchical level. For example, sales goals are often
determined at the top level. These goals are then translated into divisional and product line
profitability objectives. Production is determined by plant operations and goals are set for each
plant. Once sales and production occur, periodic divisional profit and plant performance are
reported to upper levels but detailed production reports and marketing variances remain at lower
levels.
The organization learns by comparing reported results to budgeted goals at each reporting
level. Actual performance feedback is initially gathered at the local level. Divisional production
and sales reports are examples of such feedback. Periodically, A.I.S. issue summary financial
control reports. Examples include production variances for cost centers and divisional
contribution margins for profit centers. The organization learns by comparing reported results to
budgeted goals at each reporting level. This vertical cybernetic loop constitutes organizational
learning in its simplest form.
Accounting forecast errors of individual departments however become magnified when
aggregated at each successive level (Otley & Berry, 1979). Galbraith (1977) has suggested that
vertical information distortion be reduced by improving lateral communication through team
processes and matrix information structures. Recent trends towards cross-functional teams and
flatter organizational structures typify these information communication changes. Flatter A.I.S.
are replacing vertical A.I.S. (Den Hertog & Wielinga, 1992). Cross-functional teams that now
perform previously distinct value activities require greater lateral information flows in order to
be effective. Outsourcing and electronic data interchange between internal and external subunits also demand greater horizontal A.I.S.
The trend towards flatter organizational structures suggests that as less information
compression occurs, organizational learning will improve. This ignores, however, environmental
contingencies facing the organization. When accounting information is very differentiated or

ACCOUNTINGINFORMATIONSYSTEMS AND ORGANIZATIONLEARNING

clustered across sub-units, learning how to recognize and integrate this diverse information
becomes problematic. Horizontal information transmission is much more vulnerable than vertical
transmission to the degree of local sub-unit expertise. The impact of a single front line analyst is
not diluted by the filtering action of layers in the hierarchy. Operating under much narrower spans
of control, hierarchies have the potential to recognize highly diagnostic sub-unit information to a
greater degree than flatter organizational structures with much wider spans of control.
Hierarchical information transmission in uncertain environments also directly affects the
speed of organizational learning. In flat organizations with relatively uniform sub-unit
environments, simple decision rules are presumably much faster than hierarchical decisions.
While decision models such as simple majority rule of sub-units are simple and quick, learning
how to distinguish where more important sub-unit information resides is much more
complicated. In such cases, under a flat information structure, the speed of organizational
learning will decrease in proportion to the number of sub-units. With different sub-unit
information, the wider the span of control, the slower the organizational learning. A hierarchy
with more levels, but progressively smaller spans of control at each level, should learn more
quickly albeit, as noted, less accurately in many cases.
Our study examined the relative speed and efficiency of organizational learning under flat and
hierarchical A.I.S. Within the flatter organizational structure, two decision rules were employed,
majority and expert teams (defined later). The information system was conditioned by its
environment. Three types of probabilistic information were examined: uniform, dispersed and
clustered information weights. In the uniform case, each organizational sub-unit's information
had the same importance relative to overall problem resolution. In the clustered case,
information varied in importance and information bits of similar weights were grouped together
by sub-unit. In the dispersed case, information bits also had varying weights of importance but
were randomly distributed across sub-units.
The success or failure of organizational learning when combining different information cues
to determine organizational outcomes depends critically, as argued, upon the coordination of
environmental information across sub-units. Organizational learning under flat information
coordination was posited to differ significantly from hierarchical learning as a function of the
environment. While previous research (Carley, 1992) has examined accuracy and speed of
learning under uniform binary bit information, the effect of clustered and dispersed probabilistic
environmental information upon organizational outcomes has not been examined. Accordingly,
the following general propositions were examined:

Proposition 1: Learning in flat organizations (majority and expert teams) under

uniform and dispersed information is more accurate than learning in hierarchical
organizations. With clustered information, only expert terms outperform
hierarchies.
Proposition 2: Learning in flat expert (majority) organizations under uniform and
dispersed information is slower (faster) than hierarchies.
Environmental uncertainty and A.LS. distribution
Information diffusion is low when it is available to only a subset of organizational sub-units.
The wider spans of control found in flat organizations often required broader dissemination of
information. In a distributed task, such as the one examined in this study, sub-units
independently solve components of an organizational problem. Each unit manager has local
information which may or may not be shared with other managers. Organizational tasks with
distributed A.I.S. are common. Product development depends on localized information from

A.M. OUKSELet al.

marketing. Divisional Income Statements report sub-unit profitability. Divisional cost

information is used in inter-divisional transfer pricing negotiations. In such cases, local
accounting information may or may not be shared across sub-units.
Advances in information technology have improved A.I.S. diffusion in several ways. First,
these systems have the ability to simplify complex accounting data by reporting comprehensible
summary information. Trends in revenue data, quality reports and number of new orders are
examples of this type of information. Second, the proliferation of networked computers allows
information to be shared electronically. Profit planning goals can be broadly disseminated. Point
of sale data collection can be transmitted to production, marketing and finance in real time about
customer buying patterns. Third, database management allows managers to ask "what if"
questions about alternative scenarios such as investments or pricing. All of this permits more
relevant and timely data to be transmitted about the firm's environment.
Organizations increasingly recognize the value of cross-functional information sharing
networks. Lateral information flow has increased with the advent of recent software information
packages such as Lotus Notes; by the formation of cross-functional teams; and by the wider
spans of control found in flat organizations. These lateral networks define the distribution of
information in terms of number of nodes or links. Using network analysis, shared accounting
information has been found to amplify as well as minimize errors in individual units (Monge,
1987). As managers gain access to more information, theoretically greater organizational
learning is possible, depending on the value of shared information. Sharing information of
diagnostic importance should clearly be more useful than sharing redundant information or
information of low relevance. Vulnerability to local optima is decreased and outcomes have
been found to improve (Hutchins, 1990).
In the extreme, all units may share all information. In such cases, information diffusion is
complete and redundant. Practical considerations, however, limit information distribution.
Coordination costs arise and time delays occur as network nodes increase (Malone, 1987).
Information revelation between units may be subject to misrepresentation. Cognitively, the
ability of individuals to process large amounts of information and to integrate this information
is limited. Decision makers suffer from information overload as the amount and complexity of
information increases. Learning time also increases. While A.I.S. should be designed to activate
learning, information overload may limit the organization's ability to focus attention. We
speculate that organizational learning differs significantly between shared and segregated A.I.S.
as a function of the environment. The following general propositions were examined:
Proposition 3: Organizational learning under overlapping A.I.S. is more accurate

than learning under segregated A.I.S. with clustered information, but there is no
difference under uniform or dispersed information conditions.
Proposition 4: Overlapping A.I.S. systems decrease the rate of organizational

learning relative to segregated A.I.S. under all information conditions.

SIMULATION
Two aspects of A.I.S. are addressed: management reporting structure, "who reports to whom".
and task decomposition, "who has access to what information". Our approach is an extension of
Carley's (1990, 1992) experiential learning model (ELM) research framework for examining
organizational learning performance under various design constraints and operating conditions.
In previous work, Carley (1992) examined the role of hierarchy and overlapping information

ACCOUNTINGINFORMATIONSYSTEMS AND ORGANIZATIONLEARNING

under uniform information conditions. We replicate this and extend the model to environmental
uncertainty. Specifically, we examine how A.I.S. design is contingent upon the nature of
differential information available to individual agents.
Before explaining the model, the following terminology must be defined: (1) a bit of
e v i d e n c e - - a single binary input which the organization gathers from its external environment,
where each bit represents the presence or absence of some feature of the environment; (2) a
task--the set of bits of evidence for which a single organizational decision must be rendered;
(3) a subtask--a subset of the input bits of evidence; (4) an a g e n t - - a decision maker within the
organization hierarchy, who converts input evidence from below in the organization structure
into an output decision recommendation, which is passed up the structure; (5) an event--the
process by which an input task is converted into a single organizational decision.
The model assumes that : (1) organizational decision making behavior is historically based;
(2) organizational learning depends on the bounded rationality of individual decision makers
who make up the organization; (3) individual decision makers analyze subsets of the overall
task; (4) subordinates condense their input data into output recommendations to their superiors,
and this information compression occurs at each node in the structure; (5) overall organizational
decisions do not require that a consensus be reached (e.g. a legitimate policy might be to let the
majority opinion rule); (6) the overall organizational decision is two valued (e.g. go/no go); (7)
each intermediate decision is similarly two valued; and (8) the organization faces quasirepetitive integrated decision making tasks.
Quasi-repetitive tasks are similar but not identical to previous tasks. An integrated task means
the task is too complex for a single decision maker to handle. Firm examples include periodic
divisional budgets and performance reports, and multi-product scheduling. Sub-decisions of
multiple agents must be combined in some fashion, depending on organizational design, to reach
an overall decision. The tasks of interest here are assumed to be non-decomposable, meaning
that combining the correct solutions to each sub task may not always yield the correct solution
to the overall task.
In this model, each time the organization faces an input task and determines what its
organizational response will be, a decision making event is said to have occurred. Each of the
input tasks that the organization faces is represented by a binary string of n bits, which we
denote by b = ( b i . . . . . b n ) . Each bit bi represents one element of the input task. We can thus
consider each bit as a feature of the input task and the string of bits as input evidence that the
organization must analyze to determine an appropriate response. This is not uncharacteristic of
frequently modeled accounting decision environments such as audit or managerial judgments in
which decision makers are presented with either sequential of simultaneous probabilistic
information bits and asked to reach a binary decision such as investigate variances/do not
investigate variances, invest/do not invest, sample further/do not sample further, or qualify
opinion/do not qualify opinion.
The organization is represented by a number of agents (the sub-decision makers) each of
whom has access to a subtask (subset) of the n bit string, bi, bi + 1. . . . . bj where 1 < i < j < n.
Each agent examines his/her local memory of prior tasks (bit patterns) and the corresponding
past decision outcomes in an attempt to learn what the decision on the current task ought to be.
That is, they try to learn from their past experience, for example whether or not past cash flow
projections were accurate or what was the cause of high defect rates. To study organizational
learning via this model, it is assumed that the organization initially knows nothing about the bits
of evidence that comprise each task other than the fact that each bit is two-valued (0 or 1) and
that the overall decision to be reached is similarly two-valued (0 or 1). The constructs of the
general model and their interrelationships are described in Ouksel and Mihavics (1995).

A. M, OUKSEL et

al.

Three different stylized organizational structures are studied. These structures can all be viewed
as being hierarchical in architecture, but composed of varying numbers of levels (one, two, or
three). The first is a single level structure which Carley referred to as a "majority team". The
second is a two level structure referred to as an "expert team," and the third is a three level structure
known as a "hierarchy" (Carley, 1990). Figure 1 shows the structures used in the simulation.
Twenty-seven bits (n = 27) of evidence are available per input task and each bottom level agent
handles three bits. A 27 bit task is used here since it is the smallest number of bits which allows at
least a 3 level hierarchy where each decision maker has an odd number of subordinates. An odd
number of bits is chosen so that a unique correct decision can always be directly determined (i.e. so
the majority rule decision mechanism would never result in a tie).
Each bottom level agent examines his/her past experience with the 3 bit data pattern
encountered and probabilistically determines which organizational response (0 or 1) is more
likely to be correct. The agent bases this decision upon the historical accuracy of the bit pattern

Hierarchy
(final decision = leader'sjudgement)

/to

... bits of evidence ...

1

o,

Expert Team
(final decision = leader'sjudgement)

o t

t
I

I t
o

ob,ts of e,,iden I ..... o

1

~)t

Majorily Team
(final decision = majority w.'~te)

Agents
,,

,t
o

, ...,,
...o bits of e'.,idence
I

Fig. 1. Organization structures,

,,t
I

t/
o

ACCOUNTINGINFORMATIONSYSTEMS AND ORGANIZATIONLEARNING

encountered relative to the actual outcome--i.e, the hit rate. In the case of the majority team,
these predictions become "votes" and the organizational response is determined by majority
rule, whereas in the other structures the predictions become recommendations to the agents'
superiors. Each superior in turn treats his/her subordinates' recommendations as input data to
his/her own decision making process, following the same probabilistic historical learning
procedure as employed by the subordinates (i.e. pattern matching). An example of this would be
sales forecasts submitted by product line managers which are used to determine overall
divisional sales estimates. These estimates are then reviewed at a higher level and consolidated
into a corporate sales budget.
The basic model assumes that the actual environmental classification function, which
associates a correct decision with each task, is based on a simple majority rule. That is, if more
than n/2 data bits have values of 1, then the true outcome is 1 (also denoted Hi). Otherwise, the
true outcome is 0 (also denoted Ho). We assume n is odd to avoid "ties" or inconclusive data,
such as a bit pattern of 0 0 11. Suppose n = 9 and there are 3 bottom level "agents" or decision
makers reporting to a single manager. After a number of task trials, a typical decision maker's
memory might resemble that shown in Table 1.
Further suppose the current input task was modeled as 1 1 1 0 10 0 0 1. That is, agent # 1 sees
111 and agent #2 sees 0 10 and agent #3 sees 0 0 1. After matching on the input pattern 11 1
agent #1's decision would be a 1; with pattern 0 10 agent #2's decision is 0; and with 0 0 1 agent
#3 decides to recommend a 0 (Table 1). The manager's input pattern is thus 1 0 0 and after
matching this to local memory, he/she sets the overall organizational decision equal to a 0.
However, he/she is incorrect. The true outcome is a 1 since the input task has more l's than O's
(5 vs. 4). This type of task, where completely correct sub-decisions at each stage do not
necessarily lead to a correct overall decision, is what is referred to as a "non-decomposable
decision task" (Carley, 1992).
"Task decomposition scheme" is defined as the set of subtasks assigned to the agents at the
lowest level of the organizational structure. The "segregated" scheme is one in which each data
bit can be analyzed by one and only one bottom level agent (i.e. the subtasks do not overlap).
The "overlapping" task decomposition scheme is one in which a data bit can be analyzed by
more than one agent. Figure 2 shows the two different task decomposition schemes that were
studied. This overlapping scheme was included to study the effect of data redundancy on
organizational learning.
This simulation captures the notion of "weights" of evidence and accords with environmental
reality. That is, not every bit of evidence is necessarily equally important in determining the

Table 1. Typical memory for an agent

Input evidence

H0

H1

000
00 1
0 10
0 11
10 0
10 1
1 10
111

57
42
42
22
42
22
22
7

7
22
22
42
22
42
42
57

l0

A.M. OUKSEL et al.

Segregated

Agents

E1

E2

E3

E4

E5

E6

E7

E8 E9

E19 E20 E21 E22 E23 E24 E25 E26 E27

Bits of Evidence

Overlapping
Agents

E6

E7

E8

E9

E22 E23 E24 E25 E26 E27 E1 E2

E3 E4

E5

Bits of Evidence

Fig. 2. Task decomposition schemes.

correct decision for an input task. The potential for non-uniform weights of evidence is modeled
via the inclusion of integer coefficients for each bit of evidence. Thus each binary variable, bi,
is multiplied by its weight coefficient, wi, and the summation of these products is then compared
to some threshold value to determine whether the correct decision is H 0 or Hi.
As mentioned earlier, it is reasonable to suspect that organizational learning performance
depends on the "goodness of fit" between an organization's structure and its environment In
addition, it seems intuitive, due to the law of averages over a large sample of simulation runs,
that non-uniform weights distributed across input data bits would not yield results different from
the uniform weights case.

SIMULATION RESULTS
Design of virtual experiment
The design was a 3 2 2 . Three different organizational structures were studied: majority
teams, expert teams, and hierarchies (see Fig. 1). Using a Monte-Carlo simulation, two different
task decomposition schemes were contrasted, segregated and overlapping (see Fig. 2), as were
three types of weight distributions, clustered (similar weights adjacent to each other), dispersed
(dissimilar adjacent weights), and uniform (all weights were equal). For example, 9 9 9 5 5 5 1 1 1
is an example of clustered weights, whereas 9 1 5 9 1 5 9 1 5 is dispersed. Thus, in total 18
different organizational case manipulations were studied. The operationalization of these
manipulations was described in the Simulation section above. The model output provided two

ACCOUNTING INFORMATION SYSTEMS AND ORGANIZATION LEARNING

11

dependent variables: asymptomatic performance level (learning accuracy) and speed of

learning.
Each case was replicated 50 times. That is, the simulation was run 50 times. Each run
consisted of 2500 sample decision tasks (except for Expert Teams, where 5000 tasks were
needed before organizational performance became asymptotic) 1. Each task involved 27 bits of
probabilistic information, 3 bits each across 9 agents, except the overlapping treatment which
involved 5 information bits. Tasks were repeated each time with information bits randomly
chosen with replacement (see Simulation section). "Performance level" was operationalized by
calculating the percentage of correct decision made in a given set of trials. If 65 out of the last
100 trials were correct, the performance level was 65% at that point in the learning process.
Speed of learning was measured by the number of decision trials required until the
organization attained at a least a 69% performance level, significantly above a 50% random
accuracy hit rate. The 69% figure was chosen because it lay just below the level at which the
worst performing organizational design (majority team/segregated task decomposition/clustered
weights) had its performance cease to improve over time.
Performance scores were calculated via a moving average of the number of correct decisions
out of the most recent 100 trials. In addition, the performance scores were subjected to an
exponential smoothing technique to attenuate much of the variance which they would otherwise
exhibit. The weighting factor was chosen, so that for any time window the estimate of
performance was calculated as: estimate = 0.3* (current estimate) + 0.7* (previous estimate).
The smoothing factor was chosen to minimize the variance in the performance estimates,
without unduly lengthening the number of time periods required to reach the 69% performance
threshold previously discussed.
Simulation results

Results on learning performance and speed are summarized in Tables 2 and 3. To better
visualize the simulation resuilts, Figs 3-5 are included to show graphs of learning performance
improvement (under a segregated task decomposition scheme).
Figure 3 shows that under conditions of uniform weights of evidence the flattest structure, the
majority team, learned both faster and ultimately better than the hierarchy. The improvement in
speed was due to decreased cognitive load. The majority team only had to learn 23 bits per agent
whereas the hierarchy had two levels of 23 learning. The majority team's advantage in terms of
learning speed is even more pronounced when compared to the intermediate structure, the expert
team. The cognitive load of the expert team was much greater, involving 2 9 bits of learning.
However, given a long enough time horizon, the expert team eventually catches up to a majority
team's learning proficiency level.
Figure 4, with clustered evidence weights, shows that under these conditions the majority
team structure suffers a large penalty in its organizational learning potential, as a one vote/one
person decision rule does not discriminate between analysts with different predictive
information. Figure 5, on the other hand, reveals similar trends with dispersed weights among
the three organizational structures studied to those exhibited under conditions of uniform
weights (see Fig. 3).
In the case of uniform weights, majority teams achieved a final performance level (84.8% for
segregated decomposition and 82.8% for overlapping) significantly above that of hierarchies,
A sample size of 50 was chosen since the binomial probability distribution approaches a normal distribution when both
n*p and n*q are >5. Since our proportions of success (p) range from 0.70 to 0.85 an n = 50 was deemed
sufficiently large.

12

A.M. OUKSEL et al.

Table 2. Simulation results: final performance
Segregated task decomposition

Overlapped task decomposition

Majority
team

Expert
team

Hierarchy

Majority
team

Expert
team

Hierarchy

Uniform weights

/a = 84.8
~r = 1.7

~ = 82.3
cr = 1.9

p = 80.0
~r = 1.8

~ = 82.8
~r = 2.0

p = 81.9
cr = 1.9

p = 78.8
cr = 2.0

Clustered weights

~ = 70.9
cr = 4.2

la = 83.5
cr = 1.8

la = 79.4
~r = 2.0

~ = 76.2
~y = 1.9

ja = 83.5
~r = 1.5

IJ = 80.9
cr = 1.8

Dispersed weights

la = 82.6
o- = 2.2

~ = 80.9
~ = 1.7

la = 78.2
~r = 2.3

~t = 83.4
cr = 1.8

~ = 82.1
o" = 1.7

la = 78.2
o- = 2.1

Notes: Each cell has n = 50 simulation runs. The final performance figures reported are the percentage of correct
organizational decisions achieved during the last 100 tasks (i.e. tasks 2401 through 2500).

which suffered information compression (80.0% for segregated decomposition and 78.8% for
overlapping). In addition, with u n i f o r m weights, majority teams learned significantly faster than
h i e r a r c h i e s ( 1 8 . 6 vs. 4 3 . 9 d e c i s i o n p e r i o d s r e q u i r e d f o r s e g r e g a t e d d e c o m p o s i t i o n a n d 21.2 vs.
50.9

for overlapping). These

results confirm those found

by Carley

(1992)

for u n i f o r m

weights.
S i n c e the t w o d e p e n d e n t v a r i a b l e s w e r e n o t s i g n i f i c a n t l y c o r r e l a t e d , t w o s e p a r a t e u n i v a r i a t e
analysis o f variance tests ( A N O V A ) were used rather than a single multivariate analysis o f
v a r i a n c e ( M A N O V A ) 2. U s i n g C o c h r a n ' s C a n d B a r l e t t ' s B o x F tests, h o m o g e n e i t y o f v a r i a n c e s
a s s u m p t i o n s w e r e f o u n d n o t to b e v i o l a t e d f o r p e r f o r m a n c e d a t a b u t w e r e v i o l a t e d f o r s p e e d
data. A L i l l i e f o r s test f u r t h e r i n d i c a t e d that T a b l e 2 w a s f r o m a n o r m a l d i s t r i b u t i o n . I n T a b l e 3,

Table 3. Simulation results: speed of learning

Segregated task decomposition

Overlapped task decomposition

Majority
team

Expert
team

Hierarchy

Majority
team

Expert
team

Hierarchy

Uniform weights

la = 18.6
o - = 5.6

~t = 88.1
er = 19.2

~ = 43.9
c r - - 9.2

la = 21.2
~r = 6.2

/a = 77.2
o" = 16.8

p = 50.9
cr = 14.7

Clustered weights

~t = 36.0
o- = 25.5

~ = 54.7
o- = 14.5

la = 27.4
cr = 8.2

la = 24.4
cr = 9.4

p = 62.0
~r = 13.6

p = 30.0
o" = 6.2

Dispersed weights

~ = 19.7
o - = 5.5

~a = 87.2
o - = 19.3

~ = 41.6
o - = 10.2

~ = 20.3
o" = 5.9

la = 72.1
o" = 15.2

~ = 45.3
o - = 10.1

Notes: Each cell has n = 50 simulation runs. The speed of learning figures reported were calculated by dividing the # of
decision tasks encountered (until a 69% exponentially smoothed performance level was attained) by 10. See Figs 3-5.

2 Only one of the 18 cells showed a significant correlation coefficient at the a = 0.05 level, and no cells showed
significance at the ~ < 0.01 level.

ACCOUNTING INFORMATION SYSTEMS AND ORGANIZATION LEARNING

90 ~

13

Majority Team

~
-

!:o

Majority

50 ~
0

0
OJ

....

0
~"

0
tO

0
O0

0
0

0
04

0
'q"

0
~0

0
~

0
0
00q
OJ
O4

--

Hierarchy

- -

0
I~"
O4

T i m e (in periods)

Fig. 3. Learning s p e e d - - u n i f o r m weights.

however, the test cast some doubt as to the assumption of normality. Non-lJarametric tests for
differences in medians were therefore used for speed of learning.
More formally, our proposition 1 (P1) posited that majority and expert teams would
outperform hierarchies when information weights were uniform or dispersed. As can be seen in
Figs 3 and 5, mean final performance of both types of teams was better than for hierarchies
across overlapping and segregated information distribution schemes for both uniform and
dispersed conditions (F = 390; P = 0.00) 3, confirming P1. Hierarchies suffered performance
degradation because they encountered information compression losses across two levels of
decision making,
Proposition 1 also predicted that hierarchies would not be the best performer when weights
were clustered. This conjecture was also corroborated. Hierarchies performed significantly
better than majority teams (F = 197; P = 0.00) but significantly worse than expert teams across
overlapping and segregated information distribution schemes under the clustered weight
condition (F = 166; P = 0.00). Looking at the figures shown in Table 2, we see that when
weights are clustered, the majority teams' final performance is significantly worse than either
hierarchies or expert teams. This is also seen in Fig. 4.
A simple majority rule, where each analyst's opinion counted equally towards the
organizational decision, was ineffective when some decision makers had access to more (less)
important information than others. The reason for this is that having each agent's vote count
equally towards the determination of the overall organizational decision is simply not
appropriate when some agents have access to more important evidence than do others. The real

90 85 !

o~ 80
75
~ 70
65
60

Expert Team
~_4~_~.~-~w(~

.
H=erarchy _ ~ . . _ ~ . - ~ e - 4 ~ - - ~ . ~ - ~ ~
4 --9~ T
-~-~
~
-

4
i

..-'~

I
i .-''.

~n~

-~--

.~'~;~-.m-IC~ C ~ = - - ~

i-m-B" I

~q- = H / = - ~ - a
Majority Ieam

-e~-=

.cU

Majority

Expert
]

.~

.~.~

Hierarchy

-'i
50
0

0
Owl

0
~

0
~

0
aO

O
0

04,.

8 8 8

04

O4

O4

Time (in periods)

Fig. 4. Learning s p e e d - - c l u s t e r e d weights.

~ In each F test, the degrees of freedom for the numerator (between groups variance) was 1 while the d.f. for the
denominator (within groups variance) was 98.

14

A . M . OUKSEL et al.

MajorityTeam
8O

~,~

70 I

~ 6 5 t j
60 ~ ,

Hi~y
~

~ ~

..~j~-

-~

~'~

-~

Majority
Expert

.=

._.

Hierarchy

50 ~l~
'~"
O
M

O
~1"

O
(.O

O
G0,

Q
O
r--

(~1

~1"

rid

~--

Od

~"
O,J

Time (in periods)

Fig. 5. Learning speed--dispersed weights.

world analog for this situation is that, with majority teams, the agents who really "know what
they are talking about" have no more influence on the final decision than those who may be
merely guessing. Both expert teams and hierarchies had some means by which to learn which
analysts were more reliable, and thus came to weigh their recommendations more heavily. The
hierarchy was still subject to greater information compression loss than the expert teams,
however, and thus did not perform as well.
Proposition 2 was also confirmed. As indicated in Table 3, due to the increased cognitive
learning of two levels of processing, it took hierarchies considerably more time to learn than
majority teams across overlapping and segregated information distribution schemes, when
information weights were uniform or dispersed (X 2 = 283; P = 0.00). This occurred because the
majority teams' learning rate was dependent only on each analyst's speed of learning 23
different bit patterns, whereas hierarchies also had to wait for managers to learn (2(23)).
However, hierarchies needed significantly less time to learn than did expert teams, again under
uniform or dispersed information (X 2 = 237; P = 0.00). The reason for this was that the leader
within an expert team had to learn 2 9 different bit patterns. In other words, expert teams were
significantly slower in learning than either hierarchies or majority teams because the expert had
512 different possible input data patterns to learn. This reflects the common notion of cognitive
overload.
Proposition 3 was confirmed since a significant improvement in organizational performance
was found with overlapping information systems relative to segregated systems across teams
and hierarchies under clustered information weights (F = 67; P = 0.00), but not under the other
information conditions. Here we see that the expansion of each analyst's data access from 3 bits
of evidence to 5 bits helped reduce the number of analysts whose votes were based on
unimportant information. In the uniform and dispersed information conditions, overlapping
information had little effect, as anticipated.
The only proposition not borne out by the results was P4. No significant differences were
found when comparing learning speeds for overlapping versus segregated distribution schemes
for majority teams facing uniform or dispersed information weights (X2 = 0.048; P = 0.83). The
increase in task complexity of learning 25 patterns v e r s u s 23 was not significant. Had the
overlapping distribution scheme been wider (say 7 bits per analyst), significant differences may
have begun to appear. On the other hand, perhaps the enhanced quality of the analysts'
predictions (since each could view a larger proportion of the total problem) served to mitigate
the increasing complexity of learning more bit patterns.
Additionally, Table 3 seems to indicate a possible increase in learning speed when
information is clustered, both for hierarchies and for expert teams.. This is due to the fact that
with clustered weights, some analysts' recommendations (the ones with little useful

ACCOUNTING INFORMATION SYSTEMS AND ORGANIZATION LEARNING

15

information) can be safely ignored. The reduction in complexity which results once such
analysts can be identified seems to more than offset the time needed to learn which analysts
these are.
It is also interesting to note that the final performance levels for hierarchies are not
significantly different across the information conditions or between the task decomposition
schemes. The real world analog here seems to be that hierarchies are fairly stable, consistent
performers. They underperform majority teams when weights of evidence are evenly distributed
among decision making agents, but outperform them when important evidence is concentrated
in certain areas. Similar results were found when comparing expert teams to majority teams.

Simulation parameters and cognitive load

It is important to appreciate the extent to which the results are attributable to cognitive load.
Expert teams learn more slowly due to an increased number of patterns they must recognize. As
this is a function of the number of agents in the team, a natural question to be considered is
whether the results are invariant to team size. In our simulation, decreasing team size from nine
to six decreases the number of patterns to be learned by the team from 2 9 to 26, a 4-fold
decrease. A similar agent decrease does not affect the hierarchy as significantly. The number of
middle level managers would decrease from three to two, resulting in one less 23 middle
manager pattern to be learned and one less manager pattern for the leader to learn. Hierarchies
will continue to have less complex patterns to learn because of narrower spans of control. The
speed differential between hierarchies and expert teams however will narrow as team size
decreases result in proportionately greater reduced cognitive load. This is an important
consideration when trading off expert team accuracy against speed.
Second, in our study only one hierarchical level was simulated. As the number of hierarchical
levels increases, hierarchical accuracy further deteriorates due to information compression.
Speed would also decrease as more managerial patterns need to be learned. This would make
teams comparatively more advantageous. Third, overlapping information was simulated using
25 v e r s u s 2 3 agent bits in the segregated condition. As overlapping information only improved
majority team accuracy with clustered information, increasing the overlapping information bits
would improve performance in this condition, but at a cost, speed. Cognitive load would
increase by 2n for n additional overlapping bits of information.

DISCUSSION
A.I.S. are designed to activate learning across a range of management accounting activities.
Current corporate concerns include, among others, operating budgets, capital investments,
productivity measures, new product development, value added activity analysis, target costing,
outsourcing and process re-engineering. In each of these areas, financial and non-financial goals
are determined. Actual performance is measured relative to these goals as managers learn
through feedback. An empirical question is the extent to which A.I.S. design and performance
in these operational areas have been affected by recent trends in flatter informational structures,
team decision making and lateral information sharing networks. Our study provides preliminary
theoretical evidence with respect to these issues.
Forecast accuracy is particularly important for certain accounting decisions such as budgetary
profit projections, capital budgeting cash flow estimates and target cost projections. Consistent
with Carley (1992) and Williamson (1975), our results suggest that as vertical information
compression is decreased, lateral A.I.S. perform well relative to hierarchical A.I.S., provided the

16

A.M. OUKSELet al.

informational environment is relatively uniform across agents. This suggests that for fairly
routinized accounting projections such as project management scheduling or operating budgets
for mature product lines, flatter A.I.S. with only local agent feedback should be adopted.
Majority teams follow a one person/one vote decision rule and so have no way of learning to
discriminate between analysts with good predictive information. Assuming relatively uniform
weights of evidence for operating budgets and project management, there is no need for such
discrimination since all analysts have access to equally important information. Thus the majority
team structure is well suited to this type of environment.
When environmental information of differential importance is clustered within agents, lateral
A.I.S. no longer indiscriminately outperform hierarchies. With clustered information, majority
teams are more vulnerable to uninformed analysts' errors than hierarchies. In hierarchies,
multiple levels of information processing buffer the organization from analyst error by reducing
the number of cases in which a single analyst can affect the overall organizational decision
outcome (Carley, 1990). These hierarchical levels on the other hand also introduce information
compression and loss of accuracy. In clustered environments, expert teams outperform both
majority teams and hierarchies. Managers learn to differentially weight their subordinates
recommendations. As found empirically (Gordon & Miller, 1976; Govindarajan, 1984;
Khandwalla, 1972), environmental contingencies affect accounting reporting. In more uncertain
environments, where the relative importance of local information differs widely between agents,
expert learning is necessary. A.I.S. should be designed to track agents and differentially weight
multi-agent information.
Capital investments for example demand multi-agent expertise. A.I.S. should be designed to
monitor cash flow components of project forecast accuracy over repeated capital budgeting
decisions. This reinforces learning of the relative importance of subsets of accounting
information such as technology transfers, quality assurance and taxation issues which are jointly
vital to the success of the investment. Institutional memory of these events can be captured and
transferred to newly formed capital budgeting teams in order to mitigate the risks associated
with environmental uncertainties.
Overlapping agent A.I.S. reporting only improves performance when information is clustered
within majority teams. This accords with intuition. Sharing uniform or randomly distributed
accounting information does not improve performance. Nor is sharing clustered agent
information necessary for an expert team that learns where diagnostic information resides. For
example, performance of process re-engineering does not depend on overlapping production or
human resource information between team members. Since individual expertise is recognized
by the team, there is no point in duplicating this expertise between agents.
The findings related to the value of overlapping A.I.S. in majority teams have implications for
a d hoc cross-functional teams. For example, teams constituted solely for the purpose of
decreasing targeted production costs, developing product prototypes and launching new
products are increasingly common. In order to attain a target cost at Toyota, marketing provides
sales projections for alternative engineering designs under various cost scenarios associated with
these designs. In newly constituted teams, with no possible history of environmental prediction
expertise, a majority rule decision may well prevail. Our results suggest that A.I.S. designed
with overlapping clustered information between agents significantly improves performance.
In today's rapidly changing technological environment, not only accuracy but speed of
organizational learning is also a vital consideration in A.I.S. design. A.I.S. must reflect the fact
that the firm's value chain from product development through customer delivery is very time
dependent. Product development times and life cycles are much shorter; supplier linkages are
Just-in-Time; and production throughput and product delivery are faster. When information is

ACCOUNTINGINFORMATIONSYSTEMS AND ORGANIZATIONLEARNING

17

not clustered between agents, our results indicate that majority teams are not only more accurate
than hierarchies but perform significantly faster as well. This corroborates the intuition of
hierarchical A.I.S. having a slower response time than flatter information structures. Routinized
decisions such as raw material deliveries, production scheduling and local performance
reporting feedback are well suited to flatter non-overlapping A.I.S. design. In such
environments, majority teams minimize information compression and thus tend to learn better
than hierarchies, and also more quickly than expert teams.
More complex management accounting decisions such as a value chain analysis of a product
line or outsourcing decisions may require greater agent expertise. Information of differential
importance exists between team members. While expert teams can lead to improved
performance, they do so at a cost, time. Expert team leaders need time to learn the relative
abilities of their subordinates. Managers within hierarchies also face this problem, but the
reduced span of control afforded by increased levels of management limit the complexity of
learning (i.e. 23 possible input patterns per manager in the hierarchy versus 29 for the expert
team leader). As a result, hierarchies also incur speed of learning delays, but to a much lesser
extent than the expert team.
The implication for A.I.S. design is the cost-benefit tradeoff of speed versus accuracy in
clustered information environments such as capital investments and value chain analysis. When
speed is a predominant concern, hierarchies should be used. When accuracy is essential, expert
teams should be employed. These findings are summarized in Fig. 6, a contingency model for
choosing A.I.S. support based on the parameters identified in this study. When faced with a high
degree of uncertainty with respect to task environmental characteristics, hierarchies seem to
represent a conservative choice since they provide the most stable accuracy and speed of
learning performance across all combinations of environmental parameters in the study. These
findings extend Carley's (1990, 1992) earlier results regarding the robustness of hierarchies to
uncertain environments.
While the task is an abstraction of the organizational learning proces, it does provide a set of
empirically testable propositions for future research. Of interest are issues of information
asymmetries and how problems of agency might impede the learning process. In addition,
organizational learning becomes more complex in dynamic environments. In such cases,
Bayesian learning models might be of interest. The optimal tradeoff between the number of
analysts and breadth of information is particularly important in "rightsized" managerial
environments. Finally, it would be of interest to examine alternative information structures and

Clustered
Hierarchy

Expert
Team

Majority
Team

Majority
Team

Weights
Distribution

Dispersed
and Uniform
Time

Accuracy
Critical Factor

Fig. 6. A contingency model.

A.M. OUKSEL et al.

18
the cost of information
methodological

relative

approaches

such

to o r g a n i z a t i o n a l

outcomes

as f i e l d

organizational

studies,

(Malone,

1987). A l t e r n a t i v e

surveys

and

controlled

e x p e r i m e n t a l t e s t s o f t h e s i m u l a t i o n r e s u l t s n e e d to b e p e r f o r m e d to e i t h e r s u b s t a n t i a t e o r r e f u t e
t h e p r e l i m i n a r y f i n d i n g s o f this study.

Acknowledgements--The helpful comments of the editor, an anonymous reviewer and workshop participants at the
Fifth Biannual Accounting Research Conference at the University of New South Wales and the City University of Hong
Kong are gratefully acknowledged.

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