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The domination of financial accounting on managerial accounting information:

An empirical investigation in the UAE

Article  in  International Journal of Commerce and Management · November 2012

DOI: 10.1108/10569211211284502

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Sawsan Saadi Halbouni Mostafa Kamal Hassan

University of Sharjah Alexandria University
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IJCOMA
22,4 The domination of financial
accounting on managerial
accounting information
306
An empirical investigation in the UAE
Sawsan Saadi Halbouni and Mostafa Kamal Hassan
College of Business Administration, University of Sharjah,
Sharjah, United Arab Emirates

Abstract
Purpose – The purpose of this paper is to examine Johnson and Kaplan’s claim that “external
reporting influences managerial accounting information” in an emerging capital market, the United
Arab Emirates (UAE).
Design/methodology/approach – The paper relies on a survey instrument and institutional theory
analysis in order to: first, explore accountants’ perceptions of the extent to which financial accounting
conventions-based information is utilized, instead of managerial accounting information, in internal
decision making; and second, articulate respondents’ perception to the UAE’s wider social and
institutional context expressed in terms of accounting regulars, accountancy profession and
partnership with multinational companies.
Findings – In line with Johnson and Kaplan’s claim and contrary to the studies of Hopper et al.,
Joseph et al. and Scapens et al., the paper’s findings show evidence of financial reporting domination on
managerial accounting information in the UAE. Locating such results in a UAE companies social and
institutional context, the paper reveals that the activities of regulators and accountancy professionals
pay more attention to financial reporting, an issue which contributes towards reinforcing respondents’
general perceptions that management accounting is subservient to the demands of financial reporting
requirements.
Research limitations/implications – Although the paper’s findings trigger the importance of the
UAE’s institutional context in reinforcing accountants’ perceptions, the interaction between financial
accounting requirements and managerial accounting information is an area that needs further in-depth
case-study-based investigation in emerging market economies.
Practical implications – The paper’s findings highlight the type of information that UAE’s
managers utilize when making decisions. These findings are in the interest of business investors and
the accountancy profession that aims at increasing practitioners’ professional knowledge.
Originality/value – This is one of few papers that combine survey results and institutional theory
analysis to explore whether financial accounting dominates managerial accounting information and,
at the same time, provides an understanding of the underlying reasons behind that domination in an
emerging market economy such as the UAE.
Keywords United Arab Emirates, Financial reporting, Management accounting, Decision making,
Capital markets, Financial reporting domination, Relevance lost, Decision making process
Paper type Research paper

International Journal of Commerce

and Management 1. Introduction
Vol. 22 No. 4, 2012
pp. 306-327 The last few years have increasingly witnessed calls to improve management
q Emerald Group Publishing Limited accounting systems’ information in the light of the changes taking place in the
1056-9219
DOI 10.1108/10569211211284502 business environment (Xydias-Lobo et al., 2004; San Ong and Heng, 2008; Libby and
Waterhouse, 1996; Abernethy and Chua, 1996). Changes in the business environment The domination
have led managers to manage different organizational activities such as production, of financial
material handling, recycling, marketing and quality control. In today’s business
environment, advanced manufacturing technology has led to an increase in product accounting
ranges, a decrease in direct labor costs and an increase in overhead costs (Sartorius et al.,
2007). Furthermore, firms face severe competition at both national and international
levels. In such a business environment, managers need relevant “management 307
accounting” information in order to make value-adding decisions (Atkinson, 1987;
Agbejule, 2005). Consequently, the management accounting system has attracted
significant attention since it is the system that supplies appropriate information
enabling managers to continually adjust their business activities in response to their
corporations’ environment (Drury and Tayles, 2005; Isa et al., 2007).
Although several studies examine management accounting systems’ information in
manufacturing and non-manufacturing settings (Bhimani, 1993; Anderson, 1995;
Abernethy and Lillis, 1995; Alam, 1997; Adler et al., 2000; Granlund, 2001; Hassan,
2008a), the relevance of such systems’ information has been questioned. Some studies
investigate Johnson and Kaplan’s (1987) claim that “management accounting
information is driven by the needs of financial reporting requirements” and
consequently has “lost” its relevance (Hopper et al., 1992; Joseph et al., 1996;
Porter and Akers, 1987; Rosenzweig, 1985; Scapens et al., 1996; Drury and Tayles, 1997).
Other studies examine how financial reporting standards, particularly International
Financial Reporting Standards (IFRS), influence the information used in internal
decision making related to planning, control and performance evaluation (Pilcher and
Dean, 2009). To date, most of these studies have been conducted in countries broadly
known as Western and European, such as the UK (Hopper et al., 1992; Joseph et al., 1996;
Scapens et al., 1996; Drury and Tayles, 1997), Australia (Pilcher and Dean, 2009), Canada
(Richardson, 2002) and the USA (Porter and Akers, 1987; Rosenzweig, 1985). Therefore,
one of the motivations of the current study is to address this apparent research gap.
Another key aspect of prior studies examining Johnson and Kaplan’s (1987) claim is
that they use different methodological approaches. Some of these studies rely on
anecdotal evidence that evolves exclusively from the historical development of
management accounting practices (Kaplan, 1984a, b; Ezzamel et al., 1990; Drury, 1990;
Lowry, 1993; Richardson, 2002), while other studies survey accountants’ opinions
(Porter and Akers, 1987; Rosenzweig, 1985; Hopper et al., 1992; Joseph et al., 1996;
Drury and Tayles, 1997). Some studies use case study analysis (Scapens et al., 1996;
Pilcher and Dean, 2009). One of the contributions of this study is that it relies on survey
and institutional theory analysis (Covaleski et al., 1993, 1996; Carpenter and Feroz, 2001;
Hassan, 2007, 2008b) in order to provide complementary perspectives to understand the
domination of financial reporting on managerial accounting information in an emerging
market, the United Arab Emirates (UAE).
The study re-examines the validity of Johnson and Kaplan’s (1987) claim but in the
context of an emerging market economy, the UAE. The paper aims at determining to
what extent financial accounting requirements dominate or influence the information
used in different operational issues[1] of UAE listed companies. There are several
reasons behind choosing the UAE for this study. First, the UAE Security and
Commodity Market Authority requests UAE listed corporations to prepare their annual
reports in accordance with IFRS. Accordingly, the paper explores whether such a request
IJCOMA has had an influence on the design and use of a management accounting system and its
22,4 information in the UAE. Second, the UAE has rapidly moved from a relatively
undiversified and inward-oriented economy to an outward-oriented and diversified one
(Irvine, 2008). This fast transformation is expected to be supported with the existence of
proper internal accounting information and practices that are separated from financial
reporting requirements. The paper’s main aims are: first, surveying whether there is an
308 influence of external reporting on management accounting information in the UAE;
second, exploring accountants’ perceptions of nature and importance of information
used to evaluate performance and formulate business strategies in the UAE; and finally,
providing an understanding of the survey results in the light of the UAE institutional
context.
The paper is organized in the following fashion. After this introduction, Section 2
reviews prior literature. Section 3 discusses the research design and theoretical
framework. Section 4 presents the empirical results. Section 5 discusses the empirical
results before conclusion, limitation and direction for future research section.

2. Literature review
This section reviews prior studies. The review covers two broad themes: first,
Johnson and Kaplan’s (1987) claim of a “management accounting crisis,” and second,
the empirical investigation of Johnson and Kaplan’s (1987) claim.

2.1 Management accounting “crisis”: Johnson and Kaplan’s (1987) claim

Johnson and Kaplan (1987, p. 1) argue that management accounting has undergone a
major crisis, that its information, driven by the procedures and cycle of the organization
financial reporting systems, is too late, too aggregated and distorted to be relevant for
management planning and controlling decisions. They argue that management
accounting in US corporations has become subservient to the demands of financial
accounting. Firms continue to use the management accounting information, which is
based on financial reporting requirements, for internal planning, control and evaluating
performance, not because they support the firm strategy but because this information
has been chosen via external reporting regulations (Kaplan, 1984a, p. 410).
Kaplan (1984a, b) argues that the continuity of relying on information-based financial
accounting conventions to make managerial decisions related to planning, controlling
and performance evaluation is called the domination by financial reporting over
management accounting. That domination, he adds, results in very little innovation in
management accounting thought and practice and consequently a crisis in management
accounting in today’s business environment which is described as having high
technology, severe competition and deregulation among local and international markets
( Johnson and Kaplan, 1987).
Ezzamel et al. (1990) add that the emergence of modern giant corporations with
widespread public ownership coupled with the demand for audited financial statements
has led to an overemphasis on information accuracy being placed on aggregated
values in financial reports at the expense of accuracy wanted at the level of the individual
decision-making process associated with product costing, performance evaluation
and formulating business strategies. Likewise, Richardson (2002) argues that
the subordination of management accounting to financial accounting is a part of a
legitimation process whereby management accountants come under pressure from
auditors, accountancy associations, governments and trade associations to develop The domination
internal reporting systems linked to audited statements. of financial
Innes and Mitchell (1992, p. 115) argue that costing is the function that links both
financial and management accounting. Costing systems reinforce the domination of accounting
financial accounting on management accounting. For example, although a direct
costing system is a preferable system in managerial decision making, firms tend to use
a full costing system because it is the one recommended by the external reporting 309
requirements (Drury, 1990; Drury and Tayles, 1997). In this regard, Scapens (1991,
p. 166) argues that costing is the underlying function that institutionalizes the external
reporting domination on management accounting. He adds that the costing function
has several issues, such as cost allocation, inventory valuation, product pricing and
make or buy decisions, which pay attention to identifying as accurately as possible the
product cost following the external reporting requirements.
In line with Johnson and Kaplan’s (1987) claim, Hemmer and Labro (2008) argue that
management and financial accounting systems are not independent, but instead are
linked. They posit that the information is initially created to serve the financial accounting
system and then utilized in the managerial decision making. They conclude that the
characteristics of a management accounting system depend directly on the characteristics
of the financial accounting requirements. In this regard, Drury and Tayles (1997) found in
their survey study that many companies utilize the same financial information for internal
and external accounting systems, even though the traditional opinion would suggest
having a managerial accounting system separate from the financial accounting system.
Taipaleenmäki and Ikäheimo (2009) add that advanced modern technology has
enabled the integration of financial and managerial accounting systems. Despite many
accounting books that separate the financial reporting system from the managerial
decision making, the development of information technology helps the management in
gathering and combining the data in a single database. The utilization of such a single
database, they add, enables the use of the same set of information for financial and
managerial accounting purposes.
The consequences of the above have made management accounting information
become short-term oriented and lose its ability to provide relevant information for planning
and control (Johnson and Kaplan, 1987). On the one hand, management accountants
become more concerned with the short-term impact of their decisions on stock market
prices than the long-term competitive position and profitability of their business. They
become more interested in the impact of their decision on quarterly earnings and return on
assets, rather than the consequence of management decisions in the longer term. On the
other hand, relying on external reporting conventions makes management accounting
information too aggregated and too late to be used in planning and operational control.

2.2 The empirical validity of Johnson and Kaplan’s (1987) claim

The general validity of Johnson and Kaplan’s (1987) claim of “management accounting
crisis” has been questioned (Hopper et al., 1992, p. 310; Lowry, 1993; Ezzamel, 1994;
Johnson, 1994; Joseph et al., 1996; Porter and Akers, 1987; Rosenzweig, 1985; Scapens et al.,
1996; Otley, 2008). Several empirical studies examined Johnson and Kaplan’s (1987) claim
that external reporting dominates management accounting information. These studies
provided inconclusive findings. Some empirical studies did not support the fairly bold
statements that financial reporting requirements affect the internal accounting processes.
IJCOMA Porter and Akers’ (1987, p. 61) survey of US Chief Financial Officers (CFOs) reveals that
22,4 companies either do not use external reporting conventions for internal purposes or, if they
do, it is primarily because of the cost-benefit relationship: that means “there is no reason to
maintain an internal accounting system that is inconsistent with the external one unless its
benefits outweigh its costs.”
Likewise, Rosenzweig’s (1985) study examines the impact of FAS33[2], an external
310 reporting requirement, on management internal decision-making processes.
Rosenzweig (1985) concludes that top management did not encourage the use of
FAS33 information internally by not working it into the internal reporting systems and
not committing resources (i.e. qualified accountants and cost of adjustment methods) to
incorporate FAS33 requirements into the internal reporting systems.
The pilot study by Hopper et al. (1992, p. 310) surveying some UK firms found no clear
evidence of a belief that external reporting requirements dominate management
accounting, even though most of the firms studied had a single database. This result
coincides with Joseph et al. (1996, p. 90) who extended the study by Hopper et al. (1992)
and surveyed UK management accountants and found little evidence of a generally held
belief that external reporting dominates internal accounting. They argue that while
there was evidence of the belief that management can and does attempt to influence
investors’ views through accounting policy choice, there were mixed findings regarding
the impact of external reporting on management decisions. Likewise, Scapens et al.
(1996) extended the study by Joseph et al. (1996) through a case study analysis of some
UK firms and found no evidence that management reporting is subservient to the
demands of financial reporting, or that management accounting systems are determined
principally by external reporting requirements.
Recently, Jermakowicz and Gornik-Tomaszewski (2006) investigated the domination of
financial accounting, particularly IFRS, on managerial accounting. They argue that the
adoption of IFRS standards creates a possibility of integrating management and financial
accounting. Jermakowicz and Gornik-Tomaszewski (2006) argue that listed European
Union companies implement the IFRS not only to facilitate the preparation of consolidated
annual reports but also to harmonize the external and the internal reporting practices.
They conclude that the IFRS are used for internal decision making and performance
measurement processes in both the subsidiaries and the parent companies. Likewise,
Pilcher and Dean’s (2009) study aims at determining the impact of financial reporting
obligations, in particular the IFRS, on local government management decision-making
processes. They aimed at presenting a picture of local government reporting and its
subsequent impact on managerial decisions. Because of the survey’s mixed results, they
decided to extend the survey by conducting interviews in order to analyze whether IFRS
dominates management decisions in local government or otherwise.
The empirical findings of external reporting domination on management accounting
are inconclusive. On the one hand, some argue that it is the internal accounting
procedures and processes which affect the external reporting, not vice versa (Porter and
Akers, 1987, p. 61). On the other hand, Richardson (2002) argues that management
accounting is technologically, organizationally and professionally subservient
to financial accounting. He clarifies that management accounting has not been able
to develop because of the following: the use of financial accounting criteria to judge the
quality of management accounting systems, the assignment of management
accountants to subordinate positions in organizational units whose primary purpose
was financial accounting, the dominance of financial accounting in the market for The domination
educational materials, and the assumption in the labor market that a financial of financial
accountant could replace a management accountant.
accounting
3. Research design and theoretical framework
fIn order to explore whether financial accounting conventions dominate management
accounting information in the UAE, the paper relies on both survey and institutional 311
theory analysis. On the one hand, the survey results reveal the accountants’ perceptions
as to whether financial accounting conventions dominate the managerial accounting
information. On the other hand, the institutional theory provides tools to explain why
accountants perceive there to be such domination. The use of survey and institutional
theory analysis strengthens the explanations behind managerial accounting practices in
an emerging capital market such as the UAE, since a single approach may not fully
explain these practices given the specific social and institutional features of listed
corporations operating in that market (Hassan, 2009; Pilcher and Dean, 2009).

3.1 Survey instrument

A total of 126 postal questionnaires were distributed to financial and managerial
accountants holding various positions in listed UAE companies during 2009. Only one
questionnaire was considered from each company. A stamped addressed envelope was
enclosed with the questionnaire (written in Arabic and English) in order to encourage
respondents to mail the questionnaire back. A response rate of 77.7 percent (98 respondents
out of 126) was achieved. To keep data homogeneity, nine incomplete questionnaires were
removed leaving a total of 89 useable questionnaires with a response rate of 70.6 percent.
The survey questions were adapted from the study by Joseph et al. (1996). The paper
selects some of the study’s questions to explore the general views on the impact of
external reporting on management accounting information. In line with Joseph et al.
(1996), respondents’ responses to each question are measured on a scale of five points
(scale of 1 is strongly disagree while 5 is strongly agree). The postal questionnaire
includes 29 questions divided into three sets. The first set includes five question
exploring respondents’ organizational characteristics and personal circumstances
(see Table I for summary of results).
The second set includes:
.
nine questions to measure accountants’ opinions about the influence of external
reporting on internal accounting (Table II);
.
two questions to obtain evidence about the respondents’ awareness of the
difference between financial accounting reports and internal accounting reports
(Table III); and
. six questions exploring the perceived influence of imposing accounting
standards on management discretional accounting policy, internal control
system and content of management accounting reports (Table IV).

The third set of questions aims at exploring accountants’ perceptions regarding the nature
and importance of information utilized by the board of directors. This set includes:
.
four questions exploring respondents’ perceptions regarding whether their
company’s board of directors relies on financial accounting conventions-based
information to evaluate past performance (Table V); and
 22,4

312

Table I.
IJCOMA

organizations and
Descriptive analysis of

respondents’ background
A. Organizational background
, 1,000,000 Dh. , 1,000,000,000 Dh. . 1,000,000,000,000 Dh.
Company turnover Total (small) (medium) (large)
No. cases 89 12 43 34
Percentage 100 13.5 48.3 38.2
Bank and financial
Business type Total Manufacturing investments Insurance Service
89 15 30 20 24
100% 16.9% 33.7% 22.5% 27%
B. Personal background
Hierarchical location in the Middle level No group
organization Total Top management management Member in department structure
No. cases 85 38 18 27 2
Percentage 100 44.7 21.2 31.8 2.3
Years of post-qualification
experience Total ,5 5-10 . 10
No. Cases 86 4 17 65
Percentage 100 4.6 19.8 75.6
Years with the present
employer Total ,5 5-10 . 10
No. cases 87 40 22 25
Percentage 100 46 25.3 28.7
 The domination
Percentage Percentage
n Mean SD rating 1 or 2 rating 4 or 5 t-value Sig. of financial
1. Externally imposed accounting
accounting
standards for published financial
statements influence management
decisions 88 3.87 1.09 7.9 67 7.52 0.000 * *
2. Internal accounting systems are
313
designed primarily to provide
information for published financial
statements 88 3.58 1.16 22.7 59 4.68 0.000 * *
3. External auditors have significant
influence on companies’ choice of
accounting policies 89 3.30 1.25 22.5 49.4 2.3 0.024 * *
4. External auditors have considerable
influence on the design of internal
accounting system 89 2.75 1.19 40.4 28 21.96 0.053 *
5. Companies can influence the market
perception of their financial
performance and position through
their choice of accounting policies 89 3.61 1.95 21.3 50.6 2.62 0.010 * *
6. Companies on occasion change their
accounting policies simply to
influence stock market perception of
performance 89 2.31 1.23 60.7 21.3 25.07 0.000 * *
7. Investors can usually see through an
attempt to use accounting policies
simply to improve the published
financial statements 89 2.76 1.24 43.8 30.3 21.79 0.077 *
8. Internal accounting systems are
designed primarily to meet
management information needs
independently of requirements for
published financial statements 89 3.39 1.26 25.8 55 2.95 0.004 * *
9. Management decisions to allocate
resources to particular activities are
based primarily on internal
accounting reports 89 3.55 1.21 13.5 56.2 4.31 0.000 * *
Table II.
Overall perception of influence of
The perceived opinion of
financial reporting on internal
the influence of financial
accounting 88 3.24 0.59 4.19 0.000 * *
reporting on management
Note: Significant at: *10 and * *5 percent accounting

.
three questions exploring the nature of information utilized by the board of
directors when they formulate their business’s future strategies (Table VI).

3.2 Institutional theory

Institutional theorists argue that organizational members’ responses are constituted by
processes of isomorphism (DiMaggio and Powell, 1983; Meyer and Rowan, 1977). The
UAE institutional context can be envisaged as a field in which multiple constituents
constitute individuals’ perceptions. The constituents’ activities legitimate
organizational individuals’ perceptions through what DiMaggio and Powell (1983)
IJCOMA call isomorphic pressures (Hoque and Alam, 1999; Granlund and Lukka, 1998; Hassan,
22,4 2008a, b). For instance, the governmental agencies can be a source of coercive
pressures, professional bodies can contribute to the creation of normative pressures
and consultants and partnerships may facilitate the emergence of mimetic pressures.
Coercive pressure is illustrated by the influence of the state or government agencies
on other organizations through the enactment of legislations (DiMaggio and
314 Powell, 1983, p. 150). The Emirate Security and Commodity Market Authority
(ES&CMA) and the UAE Central Bank requirements passed various legislations that
request listed UAE companies to adopt IFRS. These legislations contribute to
constituting individuals’ perceptions about the domination of financial accounting
standards on managerial accounting information.

Percentage Percentage
n Mean SD rating 1 or 2 rating 4 or 5 t-value Sig.

1. Published financial statements

and internal accounting
reports have the same form 89 2.62 1.38 46.1 28.1 22.62 0.010 *
2. Data capture systems used to
provide information for
Table III. preparing the published
Respondents’ awareness financial statements and the
of the difference between management reports 89 3.30 1.32 21.3 48.3 2.17 0.033 *
financial accounting and
management accounting Note: Significant at: *5 percent

Percentage Percentage
rating 1 or rating 4 or
n Mean SD 2 5 t-value Sig.

1. The external proposed accounting

standards lead to changes in the
company’s internal information system 89 3.15 1.19 27 41.6 1.16 0.251
2. The external proposed accounting
standards lead to changes in the content
of reports to top management 89 3.06 1.18 31.5 39.3 0.449 0.655
3. The external proposed accounting
standards lead to changes in the
decision taken in the company 89 3.02 1.22 30.3 40.4 0.174 0.862
4. The internal selected accounting policy
leads to changes in the company’s
internal information system 89 2.98 1.1 25.8 32.6 20.193 0.947
5. The internal selected accounting policy
leads to changes in the content of
Table IV. reports to top management 89 2.96 1.25 34.8 35.9 20.339 0.736
The effect of imposed 6. The internal selected accounting policy
accounting standards on leads to changes in the decision taken in
managerial accounting the company 89 2.98 1.25 32.6 34.8 20.169 0.866
 The domination
Percentage Percentage
rating 1 or rating 4 or of financial
n Mean SD 2 5 t-value Sig. Rank accounting
1. The cash flow is the most
important information for
the board of directors to 315
evaluate past performance 89 3.04 1.16 28 33.7 0.367 0.715 3
2. The share market price is the
most important information
for the board of directors to
evaluate past performance 89 2.416 1.11 51.7 12.4 2 4.98 0.000 * * 4
3. The earnings per share are
the most important
information for the board of
directors to evaluate past
performance 89 3.22 1.16 28.1 43.8 1.82 0.072 * 1
4. The deviation from the plan
is the most important Table V.
information for the board of Perception of the
directors to evaluate past nature/importance of
performance 89 3.15 1.15 25.8 40.4 1.20 0.235 2 information used by the
board of directors to
Note: Significant at: *10 and * *5 percent evaluate performance

Percentage Percentage
n Mean SD rating 1 or 2 rating 4 or 5 t-value Sig. Rank

1. The board of public companies

decides future strategy based
on its effect on cash flow 89 3.28 0.982 16.9 42.7 2.97 0.004 * * 2
2. The board of public companies
decides future strategy based
on its effect on share price 89 2.82 1.09 32.6 28.1 21.55 0.124 3 Table VI.
3. The board of public companies Perception of the
decides future strategy based nature/importance of
on its effect on earnings per information used by the
share 89 3.34 1.14 18 50.6 2.80 0.006 * * 1 board of directors to
formulate the firm future
Note: Significant at: *10 and * *5 percent strategy

Normative isomorphism stems primarily from the professions. The educational and
professional training programs reinforced by the university education and professional
associations’ activities contribute to creating individual perceptions about managerial
accounting practices. For example, the professional education and training programs
influence the education of potential members, who eventually become organization
members. The fragile UAE accountancy profession does not support the separation
between managerial and financial accounting.
Finally, mimetic isomorphism reflects the desire to mirror practices that
are recognized as both successful and worthy of adopting. DiMaggio and
IJCOMA Powell (1983, p. 151) add that in situations where there are uncertainties about the proper
22,4 approach to proceed, it is recommended to seek a successful reference group and “mimic”
their course. The UAE lack of domestic desires to adopt management accounting
practices, and the immature accounting profession that is incapable of raising
professional managerial accounting standards have led individuals to rely on financial
accounting information in internal decision-making processes.
316
4. Empirical results
4.1 Descriptive analysis
Table I presents both respondents’ organizational characteristics and respondents’
background. It shows company turnover and different sectors to which respondents
belong. Respondents are accountants working in industrial companies (15), banks and
financial investment companies (30), insurance companies (20) and service companies (24)
listed on UAE financial markets. Respondent background information includes location in
organization, years of post-qualification experience and years with the present employer.
Table I indicates that 44.7 percent of the respondents described their positions as closer
to top management and 21.2 percent as middle level management, while 31.8 percent
indicated that they are members of the accounting and finance department in their
enterprises. Table I also shows that 4.6 percent of respondents have less than five years’
post-qualification experience, 19.8 percent have between five and ten years’ and
75.6 percent have more than ten years’ post-qualification experience. It also shows that
46 percent of the respondents have been with their present employer for less than five
years while 54 percent have more than five years’ experience with the same employer.
Respondents’ profiles suggest that respondents work in different companies with
different sizes. It also shows that they have different hierarchical locations in their
organizations and have different years of post-qualification experience.

4.2 The influence of external reporting on managerial accounting information

Table II presents respondents’ perceptions related to the relationship between financial
accounting and management accounting. Table II shows the mean response, the
standard deviation (SD) of opinions associated with the nine questions used to explore
the influence of external reporting on managerial accounting information.
Table II presents averages of respondents’ perceptions of the influence of external
reporting on management which varied between 2.31 and 3.87 across different
questions, with a range of 1.56. Question 1, in Table II, indicates that respondents
strongly believed that externally imposed accounting standards are used to influence
management decisions (average is greater than 3.00 with 67 percent recording a rating
of 4 or 5). Moreover, respondents confirmed the influence of external auditors on
companies’ choices of accounting policies (question 3, average is greater than 3.00 with
49.4 percent recording a rating of 4 or 5). These results provide evidence of a belief
amongst respondents that internal accounting systems are dominated by the needs of
external financial reporting.
Question 6, in Table II, also shows that respondents have some doubts about using
accounting policies by companies to improve financial results in order to affect the stock
market perception of company performance (average is less than 3.00 with 60.7 percent
recording a rating of 1 or 2) while question 7 casts doubts about companies’ use of
accounting policies to improve published annual reports (average is less than 3.00 with
43.8 percent recording a rating of 1 or 2). Table II, question 2, also indicates that the The domination
internal accounting system is designed primarily to provide information for published of financial
financial statements (average is greater than 3.00 with 59 percent recording a rating of
4 or 5). Respondents expressed their doubts, question 4, about the influence of external accounting
auditors on the design of internal accounting systems (average is less than 3.00 with
40.4 percent recording a rating of 1 or 2).
Table II shows inconsistencies between the respondents’ views concerning the 317
beneficiary of internal accounting systems. On the one hand, question 2 in Table II
shows that respondents believe that an internal accounting system is designed
primarily to provide information for published financial statements (average is greater
than 3.00). On the other hand, question 8 in Table II illustrates that respondents
consider an internal accounting system is designed to meet management information
needs (average is greater than 3.00 with 55 percent recording a rating of 4 or 5).
Moreover, question 9, in Table II shows that respondents believe that management
decisions to allocate resources relied primarily on managerial accounting (average is
greater than 3.00 with 56.2 percent recording a rating of 4 or 5).
One of the possible explanations for the inconsistencies between questions 2 and 8 is
that UAE companies have a separate managerial accounting system, yet the system’s
information outputs are reconciled to serve the external reporting purposes
(Allan, 1982). Another possible explanation is that respondents believe that the
internal accounting system is capable of providing accounting information to satisfy
the needs of both financial reporting and management accounting at the same time.
A third possible explanation is the UAE companies may have a computerized
information system where a single database may have been used to generate the
information needed for both external reporting and internal accounting systems (Sori,
2009; Wilkinson et al., 2000). Finally, respondents may simply believe that there is no
difference between internal and external accounting information for different decision
purposes.
Table II also shows that respondents positively agreed on the influence of external
reporting on management accounting for the nine questions (the overall responses on
the respondents’ perception) (average is 3.24). To test whether there is a significant
difference between the neutral value of 3 and the averages of the items listed above,
one sample t-test is performed. Table II indicates that the mean value of all questions
and overall responses are significant at levels of 5 or 10 percent.
Table III provides evidence about the respondents’ awareness of the difference
between financial accounting and management accounting. Question 1, in Table III,
indicates that respondents viewed published financial statements as having different
forms from those prepared for internal accounting (average is less than 3.00 with
46.1 percent recording a rating of 1 or 2). Question 2, in Table III, shows a general
tendency towards a belief that the internal accounting system is capable of providing
accounting information to satisfy the needs of both financial reporting and
management accounting at the same time (average is greater than 3.00 with
48.3 percent recording a rating of 4 or 5). This coincides with one of our explanations
that the UAE companies may have used a single database where its information is
used for internal accounting and external reporting purposes.
To get a closer view of the effect of accounting standards of management accounting
and its information, respondents were asked further questions to express their
IJCOMA perceptions on the effect of accounting standards on the company’s internal control
22,4 system, content of the report to top management and information needed for the
company’s decisions. Table IV shows that imposed accounting standards are perceived
to have an influence on the nature of management accounting information (question 1),
content of managerial accounting reports (question 2) and information needed for
managerial decision making (question 3). Nevertheless, Table IV indicates that the
318 t-value of the differences in the means is insignificant for all questions used to measure
respondents’ views on this issue.

4.3 Accountants’ perceptions of the nature/importance of information utilized to

evaluate performance and formulate business strategy
Both Tables V and VI present respondents’ perceptions of the nature and importance of
information utilized by the board of directors to evaluate firm performance and
formulate future strategies. Table V, question 3, indicates that respondents perceived
earning per share as the most important information for the board of directors to
evaluate past performance (average is greater than 3.00 with 43.8 percent recording a
rating of 4 or 5). The table also shows that respondents ranked deviation from the plans to
be the second most important information used by the board of directors to evaluate
performance (question 4 in Table V). Furthermore, Table V, question 2, shows that
respondents perceived the share market price as the least important information needed
by the board of directors to evaluate performance, at significant level 0.05.
Table VI, question 3, shows that respondents emphasize the importance of earning
per share as the strongest driving force behind formulating the firm strategy (average
is greater than 3.00 with 50.6 percent recording a rating of 4 or 5). Table VI, question 1,
also indicates that respondents perceived cash flow information as an important input
when their firm’s board of directors formulate future strategies. Meanwhile, the table
shows that the share market price is the least important piece of information when
formulating the firm strategy.
Results of both Tables V and VI indicate that respondents perceived that financial
accounting conventions-based information, rather than managerial accounting
information is widely used by the board of directors. The results coincide with
Grinnell and Kochanek’s (1976) arguments about the importance of external reporting
information in internal decision making related to internal planning and control. This
casts doubt on the role of managerial accounting information in evaluating
performance and formulating future strategies.

5. Discussion
This section aims at exploring the reasons behind accountants’ perceptions of the
influence of external reporting on management accounting information. The section
explores and reveals the possible personal and socio-political reasons behind
accountants’ responses.

5.1 Respondents’ organizational and personal circumstances

Scapens (2006) argues that personality and individuals’ backgrounds impact the choice
of management accounting information. Joseph et al. (1996) found that personal and
organizational circumstances affect respondents’ perceptions towards the relationship
between management accounting and financial reporting. Likewise, Halbouni (2009)
argues that the environmental and cultural factors should be considered in order to The domination
enhance the relevancy of accounting information to meet the demands of the different of financial
interested users. In line with the above studies, the paper discusses whether the
organizational characteristics and individuals’ personal circumstances affect accounting
accountants’ perceptions. The organizational characteristics include the company’s
turnover and business type (columns 1 and 2 in Table VII), while respondents’ personal
circumstances include years of experience, years with present employers and their 319
hierarchical locations in the organization (columns 3-5 in Table VII).

Years of Hierarchical
post- location in
qualification Years with the
Business Company experience present organization
Q type (1) turnover (2) (3) employer (4) (5)

1 External auditors have a 9.29 (0.054)

significant influence on
companies’ choice of
accounting policies
2 Companies can influence 5.103 (0.078) 11.55 (0.009)
the market perception of
their financial
performance and position
through their choice of
accounting policies
3 Management decisions to 7.142 (0.068)
allocate resources to
particular activities are
based primarily on
internal accounting
reports
4 Data capture systems 8.450 (0.076)
used to provide
information for preparing
the published financial
statements and the
management reports
5 The external proposed 5.174 (0.075)
accounting standards lead
to changes in the
company’s internal
information system
6 The internal selected 6.927 (0.031)
accounting policy leads to
changes in the company’s Table VII.
internal information Influence of
system organizational
7 The cash flow is the most 5.478 (0.065) characteristics and
important information for personal circumstances
board of directors to on respondents’
evaluate past performance perceptions
IJCOMA The paper applies the non-parametric Kruskal-Wallis test1[3] at a significant level
22,4 a # 0.10 to the second and third sets of questions. Table VII reports the results of those
questions that were found to be significantly different depending on organizational
characteristics and personal circumstances. Table VII, question 1, indicates that
respondents from different sectors have different opinions towards the influence of
external auditors on a company’s choice of accounting policies (K 2 W ¼ 9.29,
320 a ¼ 0.054). Question 4 shows that the nature of the data processing system affects
respondents’ perceptions towards the ability to provide information needed for both the
external reports and the management reports at the same time (K 2 W ¼ 8.450,
a ¼ 0.076). Results of question 3, in Table VII, coincide with our prior explanation that
UAE companies may have a computerized information system where a single database
may have been used to generate the information needed for both external reporting and
internal accounting systems (Sori, 2009; Wilkinson et al., 2000).
Table VII, question 5, indicates that respondents from large companies have
different views from those of small ones in relation to the effect of external imposed
accounting standards on the change of internal information system (K 2 W ¼ 5.174,
a ¼ 0.075). Furthermore, the table indicates that respondents with at least ten years’
post-qualification experience (33.7 percent of respondents) agree with the view that
cash flow is the most important information for the board of directors to evaluate
performance.
Table VII, question 3, indicates that the respondents’ location in the organization
significantly affects their views towards the importance of management accounting
information to allocate resources (K 2 W ¼ 7.142, a ¼ 0.068). Furthermore, Table VII,
question 2, shows that the location in the organization and respondents’ years with
present employer have a significant effect on their views towards the ability of
companies to influence the market perception of their performance through their
accounting choice. Finally, Table VII, question 6, shows that number of years with
present employer also influences the respondents’ views towards the effect of
discretional management choice of internal control system.
In sum, Table VII indicates that both organizational characteristics and personal
circumstances partially constitute respondents’ opinions and views of the influence of
external reporting on management accounting information. The table reports that only
seven questions (out of 25 questions in both the second and third sets of questions) were
found to be affected by organizational characteristics and personal circumstances.
This partial explanation is believed to be compensated with explanations obtainable
from analyzing the UAE social and institutional context as presented in the following
subsection.

5.2 The UAE socio-political context

In the light of the partial understanding obtainable from the above analysis, we argue that
analyzing the UAE institutional context provides a complementary understanding of
why respondents have perceived a dominance of external reporting on managerial
accounting information. The UAE social and institutional context, around UAE
organizations, can be envisaged as a field in which multiple constituents contribute to
forming organizational members’ perceptions (Hassan, 2007, 2008a, b, 2010). Those
constituents are the accounting regulators, the accountancy profession, consultancy firms
and professional activities or what DiMaggio and Powell (1983) call isomorphic pressures.
The UAE organizations and organizational members, i.e. respondents, exist in the The domination
country’s institutional context that provides the foundation for accounting practices and of financial
respondents’ perceptions of these practices.
In the UAE, three sets of legislations, or what DiMaggio and Powell (1983) call accounting
coercive pressure, govern the practicing of accounting: first, the Corporation Act of
1984 that governs the preparation of financial reports for listed corporations except
banks and financial institutions; second, the UAE central bank that obliges the UAE 321
banks and financial institutions to use IFRS in the preparation of financial reports
(Al-Qahtani, 2005; Hassan, 2009); and, finally, ES&CMA set registration conditions
that directly request listed corporations to use IFRS.
Furthermore, recently the UAE developed the Dubai Financial Service Authority
(DFSA, 2007) with an aim “to improve the climate for private investment” (Irvine,
2008). DFSA’s underlying principle is to comply with accepted international best
practices. DFSA requested that listed companies prepare financial reports under IFRS
and comply with best practices adopted in other security markets (Irvine, 2008).
Therefore, one can argue that the UAE regulators’ emphasis on financial reporting,
particularly IFRS, has contributed to respondents’ preference of financial accounting
conventions-based information, instead of managerial accounting information,
in internal decision making.
Another key institutional constituent which may influence respondents’ perception
in the UAE, is the professional associations’ requirements and activities or what
DiMaggio and Powell (1983) call normative pressure. The UAE accountancy
professional associations, similar to others in emerging economy countries, are
immature (Samuels and Oliga, 1982; Chamisa, 2000; Hassan, 2008a). The UAE
Accountants and Auditors Association (AAA) is an official body that has an important
influence on the practice of accounting in the UAE, yet the profession is not a member of
IFAC (Al-Qahtani, 2005). Furthermore, the UAE formed another professional
association, known as the UAE Institute of Internal Auditors (IIA), in 1995 (IIA-UAE
Newsletter, 2007).
Although both professions perform some activities such as conferences and meeting
with guest speakers (IIA-UAE Newsletter, 2007), they do not offer educational programs
and/or professional certificates that highlight the role of management accounting
information in decision making. These professions pay more attention to financial
accounting and the importance of its information for external decision makers. Some
scholars argue that the practicing of the accountancy profession in the UAE has become
dominated by the big international auditing firms (Hussain et al., 2002; Islam, 2003).
These big audit firms may legitimate their UAE client companies to pay more attention
to financial reporting rules instead of managerial accounting systems. Once more, one
can argue that the UAE accountancy profession has contributed to respondents’
preferences for financial accounting conventions-based information, instead of
managerial accounting information, in internal decision making.
Finally, the UAE actively seeks commercial partnerships with Western and
European countries in order to benchmark international best practices in different
fields (Irvine, 2008). The UAE maintains a strategy of “marketing the country as an
attractive destination for business” (Irvine, 2008). The active seeking of commercial
partnership, together with the UAE’s aspiration to establish itself as an international
business country that attracts international investments, has contributed to the
IJCOMA persistence of respondents’ perceptions of the importance of managerial accounting
22,4 information following their partners of multinational companies. The UAE’s desire to
join the international business community has provided the momentum to raise the
importance of management accounting information among UAE companies. Since the
UAE regulators and accountancy professions pay more attention to financial
reporting, the partnership momentum has not been capitalized on. Therefore, the paper
322 highlights inconsistencies among respondents in relation to the importance of financial
accounting information vis-à-vis managerial accounting information in decisions
related to performance evaluation and formulating business strategies.

6. Conclusion, limitations and future research

The study investigates the influence of financial reporting on managerial accounting
information in an emerging market economy, the UAE. It relies on both survey
instruments and institutional analysis to understand how accountants’ perceptions
have been formed. The empirical results show that financial reporting influences
management accounting information in the UAE. These results coincide with
Johnson and Kaplan’s (1987) claim regarding the subordination of management
accounting to financial accounting. Nevertheless, the study’s results do not coincide
with the studies of Hopper et al. (1992), Joseph et al. (1996) and Scapens et al. (1996)
which either found no clear evidence of a belief that external reporting requirements
dominate management accounting (Hopper et al., 1992) or found little or no evidence of
a generally held belief that external reporting dominates internal accounting
(Scapens et al., 1996; Joseph et al., 1996).
The study results also highlight that respondents perceive managerial accounting
information as less important when they evaluate performance or set future strategies.
They ranked the managerial information as a second source of information needed for
internal decision making. These results coincide with the study of Isa et al. (2007)
which found that financial accounting reports were perceived to contain important
information needed for management purposes. The study also shows that business
type is an influential variable behind respondents’ views of the influence of financial
accounting on management accounting information. Furthermore, respondents’ past
experience affects their perception of the importance of the information needed to
evaluate performance, while the company’s size and hierarchical position are
important variables which affect respondents’ views of the need to impose accounting
standards or internal accounting policies.
In order to augment the analysis of the empirical findings, the paper articulates
the above results to the UAE social and institutional context. This articulation
highlights that the UAE regulators and accountancy professions pay more attention to
financial reporting and consequently formed respondents’ preferences towards
financial accounting conventions-based information, instead of managerial accounting
information, in internal decision making. The UAE does have a professional association
for management accountants like the Chartered Institute of Management Accountants
(CIMA) in the UK or Chartered Management Accountants (CMA) in the USA.
Meanwhile, UAE partnerships with multinational organizations made practitioners
aware of the differences between management accounting and financial accounting, yet
they perceive the latter information to be more important in internal decision-making
processes.
 There are, however, some limitations to this study. First, although postal The domination
questionnaires were sent to accountants, there was no guarantee that respondents were of financial
actually accountants. Willimack et al. (1999) argue that if a surveyed sample of individuals
do not have access to the necessary data or do not have the time to complete the accounting
questionnaire, they may delegate the task to others who have the necessary knowledge in
the area. What mitigates this problem is that we sent only one questionnaire to each
company and we asked respondents to stamp questionnaires before they sent them back. 323
Second, respondents’ perceptions may be influenced by UAE market conditions and
economic fluctuations. What mitigated this problem is that the paper utilizes institutional
theory to locate respondents’ perceptions in the broader socio-political context of the UAE.
These limitations represent opportunities for future research where the influence of
market conditions and economic fluctuation on management accounting design and
use is discussed in depth through a case study analysis. The case study analysis is also
required to examine accountants’ roles in emerging economy countries and whether
they perform multiple tasks or otherwise. Further research is also recommended to
investigate whether management accounting influences external accounting. Finally,
a comparative study across Gulf States may provide additional insights related to the
practice of management accounting in the Gulf region.

Notes
1. Operations management is defined by Chanaron and Dominique (2002) as several decisive
factors such as productivity, quality, cost, lead-time and flexibility for a company’s
competitive strategy.
2. Financial Accounting Standard 33 concerned with “inflation accounting”.
3. The probability (a) value associated with the test statistics is shown in parenthesis for only
cases with a # 0.10.

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Corresponding author
Sawsan Saadi Halbouni can be contacted at: sawsanhalb@sharjah.ac.ae

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