The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/2051-6614.htm

JOEPP
5,2 Risk and organizational
effectiveness
The role of accounting systems as
110 a managerial process
David Brookfield
Management School, University of Liverpool, Liverpool, UK

Abstract
Purpose – The purpose of this paper is to explore how risk management is supported by and interacts with
process or transactions “technologies” to inform and influence organizational behavior as it changes in the
face of risk. Accounting systems represent a collection of processes that are designed to support broader
organizational or firm activities. As such, they represent information processes that help inform finance
management and control, strategy, and risk management.
Design/methodology/approach – The paper synthesizes work relating to transaction cost economics that
describes the nature of the organization and indicate how this perspective may be developed to incorporate
the dynamic forces that change an organization’s approach to risk. From a practical perspective, the value,
relevance and limitations of accounting information may be more clearly determined.
Findings – The information perspective of accounting helps practitioners understand and decide how
activities within their organization have impact and are related with one another. In this sense, accounting is
not merely a book keeping system, nor a payments process, nor merely a narrow functional device that seeks
to minimize tax liabilities, for example. Instead, accounting-based information conveys the importance of
context and of viewing the organization as a whole as an open system within the organization that both
transmits and receives information, including accounting information, and then adapts and co-evolves with
whole-organizational forces to shape how the firm responds to environmental factors, such as risk.
Practical implications – The paper raises challenges to the conceptualization and compartmentalization of
risk as typified in risk management frameworks such as COSO and provides direction and focus to identify
how accounting systems can contribute to risk management.
Originality/value – The paper offers a perspective that allows us to synthesize our understanding of how
management can seek to manage risk by seeing risk as part of a broader range of “transactions technologies”
with which a firm engages. It identifies how accounting technologies interact with risk in shaping
organizational or whole firm, architecture as an adaptation that mitigates or embraces risk.
Keywords Complexity, Accounting, Risk, Adaptation and learning, Effectiveness and risk management,
Transactions costs
Paper type Research paper

Journal of Organizational
Effectiveness: People and
Performance
Vol. 5 No. 2, 2018
pp. 110-123
© Emerald Publishing Limited
2051-6614
DOI 10.1108/JOEPP-01-2018-0005
Introduction
Until I know this sure uncertainty, I’ll entertain the offered fallacy (Shakespeare, Comedy of Errors).
Conceptualizing risk relies on clearly defining the object of attention. In the case of
accounting issues, the firm as an organization exchanges information to help inform
management decisions[1]. The firm is seen as being comprised of information resources and
processes that interact with and are dependent on the environment, including the risk and
uncertainty that is present within the environment. One approach is to view the
organization as an open system, which is defined by a set of information transactions over
which it has a comparative advantage compared to the market. Accepting this, it then
becomes possible to bring together a number of theories and practices that enable insight
into the role of accounting as a means by which management can seek to manage risk and
where risk (as a calculator practice) is seen as one aspect of the broader range of
“transactions technologies” with which a firm engages. The interaction of accounting
technologies with other transaction technologies encompasses aspects of risk management,
but there are restrictions which are inherent to the firm and which limit the scope of Risk and
effectiveness of accounting systems to manage risk. The purpose of this paper is to offer a organizational
perspective that allows us to synthesize our understanding in this area and to identify how effectiveness
accounting technologies interact with risk in shaping organizational or whole firm,
architecture as an adaptation that mitigates or embraces risk. These processes can be seen
to sit at the core of the processes around organizational effectiveness.
Extending our perspective somewhat further, our focus on uncertainty as a more general 111
representation of risk (where the probabilities are unknown) is to recognize the importance of
moving away from mechanistic, probabilistic solutions to managerial problems that will not
offer the insight we seek to those complex, dynamic problems that are at the core of the issues
around organizational effectiveness. We will use uncertainty specifically to indicate that we
refer to the situation where probabilities of outcomes are not available or, indeed, useful.
However, it should also be noted that even where risk is used, that any such determinations of
probability are invariably shrouded in uncertainty within complex socio-technical systems.
The differentiation in terms allows us to identify the magnitude of the difficulty that
managers face in that, even if they do have probability assessments of outcomes of
managerial decisions available, they are impractical to apply, short-lived in their usefulness,
and do not convey information signals that are helpful to whole-organizational purpose where
heterogeneous actors do not interpret probabilistic decisions in an agreed manner. Risk also
shapes the perception we have of the temporal properties of the firm. Specifically, because risk
is ostensibly framed as a future event, any debate about risk management therefore becomes
empty without specifying the dynamic properties of the firm and its information transactions.
There are three stages to developing the proposed framework within which we can
understand the role of accounting technologies as they interact with risk. First, we seek to
define the nature of the firm and its environment in which risk can be contextualized and
help define the object of attention where there is a management problem to be addressed.
Second, we specify the role of accounting as a risk management technology and explain how
firm structure and task complexity determine firm capacity to manage risk. And third,
we elaborate why transaction cost economics (TCE) – a cornerstone of the theory of the
firm – requires a specification of a learning technology to enable firms to adapt accounting
technologies to manage risk. These elements have important consequences for the
effectiveness of financial risk management processes within organizations and highlight the
role that expert judgements can play in such calculative practices.

The nature of the firm and the genesis of risk

From a TCE perspective, the “firm” is viewed as a superior product or service delivery
mechanism because it has comparative strength compared with that of the market (Coase,
1937)[2]. This explains why firms exist as a mechanism to conduct business and also offers an
explanation of how comparative advantage is made effective for the firm which enables an
insight as to how risk may be conceptualized and managed. Our perspective at this point is an
economics one although our motivation is to offer a synthesis of a number of approaches that
attempt to assess the functional effectiveness of accounting technologies in managing risk
that would enable practical implications to emerge. The economics approach to understanding
how organizations function is divided along two broad lines: the first approach uses utility
maximizing individuals collected together in an organization for delivering a product or
service which is most efficiently set up as a firm. An important aspect of this approach is to
ensure that such utility maximizing individuals serve a common and a goal-congruent
purpose. This is the famous aggregation problem and is routinely addressed through
incentive structures. The second approach is the TCE approach which sees organizations
arising because they are more efficient to form as a collective, firm-based organizational form
than rely on inefficient or even unavailable market structures. The nature of the efficiency
JOEPP perspective, however, is specific and requires a distinction, or boundary, between the firm and
5,2 the market place in order for the firm to identify its comparative strength, and also recognize
hybrid arrangements (arrangements such as joint ventures, for example) whereby apparently
separate organizational phenomena challenge the notion of boundaries (Miller et al., 2008). It is
the comparative advantage which is important rather than optimized advantage since the
existence of the firm does not rely on maximized utilities (Williamson, 1975, 1985, 1993).
112 Such an approach provides a large canvas on which to develop a conceptualisation of the firm
as both an effective and efficient entity that leaves open a door to a number of different
traditions and perspectives on how within-firm activities are described. This is particularly
evident in the response to the “aggregation problem.” The aggregation or action theory
problem addresses how to describe the processes within firms once we have identified that the
firm is different from the market and has a reason to exist. A within-firm behavior has to be
motivated that links how individuals operate with attributes of the firm. This could include
standard economic utility maximizing behavior motivated by incentives or any of the plethora
of explanations of behavior that are to be found in the organization and management
literature including routines, rules, habits, and dysfunctionality of all types.
The approach to solving the aggregation problem has not exclusively been an economic
one and this leaves open the possibility of a synthesis.
Just what advantages are being gained by forming a firm? A key advantage arises because
of the effective resolution of market uncertainty concerning limitations on contractibility in the
market. Limitations on contractibility feature, for example, in the inability (impossibility) of
completely specifying contract outcomes between the firm and its counterparts outside the firm
over the transactions it undertakes. Uncertainty may be reflected in performance measures
which determine contract completion to trigger payments, for example. There is therefore a risk
residing in disputes over performance measurement and contract completion which could then
be resolved by the firm embracing the contracted activities by undertaking them within
the firm (Maness and Wiggens, 2013). Thus the existence of the firm is a response to risk.
For Dahlman (1979), the firm reduces search costs, bargaining and decision costs, and
monitoring and enforcement of contracts[3]. Of these transactions, their frequency matters
because then substantial savings are made; uncertainty in transactional outcome is reduced
because more of the factors that give rise to uncertainty are embraced inside the firm (delivery
times, quality control, guarantees); and the poor incentives are eliminated which arise from asset
specificity (the extent to which the firm has significant dependence on an outside particular
technology, service or process) where the risk of opportunism is significant because of the
dependence of the asset-buyer to the asset seller’s goodwill in maintaining supply (Williamson,
1993; Freeman, 1999; Klein, 2010). These relationships also raise issues relating to knowledge
and expertise in making decisions around these processes, especially for low frequency events.

Governance, accounting and risk management

Central to the relationships between governance, accounting and risk is the provision and
management of firm-related information and the processes by which meaning is extracted
from it. If the firm is viewed in terms of a collection of resources and the management
problem is to organize processes to exploit the resources for organizational benefit, we see
that the transaction cost approach offers both the necessary perspective and the ability to
highlight the entry point where risk becomes significant. In understanding how accounting
systems influence risk management, the starting point is, therefore, the view of the firm as a
coordinating (governance) mechanism for information provision to individuals. The
objective is that information has to be targeted to those individual(s), teams, departments,
etc., to enable them to undertake the tasks and transactions they are responsible for.
Effective information provision supports the efficient operation of the transaction or task
and a key task concerns the management of risk. However, there is a further step in this
process which relates to the extraction of meaning from that information and for which Risk and
expert judgement is required as a means of interpreting the various calculative practices organizational
that are used to assess risk. Expertise is also a key element in the interpretation of effectiveness
uncertainty and indeterminacy within the overall process.
For an “optimized” firm’s governance structure, information will not be mis-directed in
the firm according to Williamson (1991) because the nature of the transactions which are
internalized within the firm are assumed to be aligned to the firm’s governance structures. 113
Moreover, the mode of governance is most efficiently designed to reduce conflict (over
contracts, for example) and will not be one that is replicable in the market place (Williamson
2000). With governance reflecting transactions where costs savings can be achieved, it is
likely that complex, integrated forms of governance will arise to match complex
transactions, in accordance with Ashby’s Law of Requisite variety where complexity in the
system has to be matched by complexity within the controls that are in place to govern it.
Simpler forms of governance are more likely to reflect the transactions that could take place
in the market such as those with low asset specificity. A key implication of this is that
within-firm transactions are likely to feature higher levels of calculable risk than similar
transactions in the market place simply because the risks should be known and will have
been internalized within the organizational structure as part of the transaction economies
that explain the existence of the firm. Internalized risk transactions place the firm in a better
position to monitor and manage risk because greater meaning can be extracted from the
information that is available to decision makers and the levels of uncertainty are much
reduced. It would not be unsafe to say that, in such contexts, risk management might be
effectively seen as the raison d’etre of the firm.
One key aspect of an organization’s governance structure relates to the processes of
accounting and one of its key roles within the firm is to address incomplete contractual
problems that generate positive transaction costs that the formation of a firm (as a legal and
economic entity) would save. Specifically, contracts between external parties are incomplete
because a complete mapping of all contingencies and the associated meanings that can be
extracted from available information that are likely to affect the performance of the contract is
unlikely (Simon, 1957). Consequently, communicating the terms of the contract to reach a
common understanding in such circumstances is difficult (Hart, 1995) and, unsurprisingly,
enforcing such contracts is both costly and unpredictable in a situation where there is a lack of
common understanding between contracting parties (Macher and Richman, 2008). Accounting
within the firm takes on the role of signaling and communicating internalized contract
conditions using price signals that are not market prices but which are quasi-market prices.
However, incomplete contracting by itself is not enough to stop optimal contracting (Maskin
and Tirole, 1999; Tirole, 1999) and hence, for TCE to offer an explanation for the existence of
the firm, the uncertainty that TCE refers to has to be wider than conventionally thought-about
and embrace efficiencies of governance structures, including accounting (Hallberg (2015), and
to detail how conceptualisations of risk are reflected in the accounting signals deployed within
the organization as one aspect of efficient contracting. Specifically, firms operating under
uncertainty exhibit organizational decision making that unavoidably feature an element of
trial and error. In this context, managers update cognitive representations of the environment
(Tarko, 2013) and revisions to governance and accounting mechanisms take place as an
adaptation to trial and error and the management of risk. This raises questions about the
relative roles that heuristics can play in shaping those processes. We will explore this below
but recognize at this point that learning, adaptation, and risk management are symbiotic and
provide important elements of understanding around which the effectiveness of accounting as
a risk management tool may be assessed.
If the firm adapts its governance and accounting technologies as a risk mitigation device
then new accounting signals at “quasi prices” emerge and these are conveyed to those charged
JOEPP with the responsibility to respond to them. But, what of the receipt of those signals?
5,2 Aggregation and the provision of direction regarding action in response to the information
signals provided is the key managerial problem in this context. It is here that the extraction of
meaning from that information becomes a key element in the processes of determining
effectiveness. In the market, full information reflected in prices will produce efficient outcomes.
But the provision of information within organizations is often associated with trade-offs over
114 issues such as within-firm disputes for resources, for example, and hence there is unlikely to
be information-equivalence between the market and inside the firm. In fact, we can quite
clearly state that there will be no exact equivalence otherwise there would be no point in
internalizing the transaction within the firm if it could be done equivalently in the market.
Additionally, the provision of information is not guaranteed to be available when required
because information is not available instantaneously and the interpretation and use of
information may not be optimal (Freeman, 1999). The major problem for accounting
managers, then, revolves around monitoring and control. If accounting technologies are about
information provision then we can immediately see the objective in using accounting is to
manage organizations through the provision of information. Specifically, a transactions cost
explanation for the existence of the firm relies on efficiency and effectiveness of standardizing
accounting technologies that support information provision to produce savings from repeat
transactions. Internalizing accounting technologies through efficient information provision
avoids holdup (haggling) costs that would be experienced with external parties since
well-structured internal incentives mitigate against rent-seeking behavior. Once internalized,
the rent accrues to the firm and disputes over rent appropriation theoretically disappear
(Williamson, 1975). Uncertainty increases the scope for haggling and, hence, the
internalization of these transactions within the firm will reduce both (Williamson, 1985). In
essence, when accounting is efficient and when the processes involved in the extraction of
meaning from information are optimized, the various calculative practices can help to reduce
risk. We now turn to see how this is brought about.

The role of accounting as a risk management technology

We can now be more specific about how the TCE approach to understanding the firm allows
insight in the role of accounting and risk management. In the firm now established,
non-market transactions take place at non-market or quasi prices (Ball, 1989). Quasi prices are
used to set transfer prices, budgets, standard costs, and represent the core of the unadjusted
data presented in the financial statements. Thus, it is quasi prices that signal resource use and
resource allocation to undertake transactions within the firm. They represent in many
instances on the basis of a common understanding of purpose for most organizations,
including profit and non-profit orientated organizations. Accounting is, therefore,
an institutional (governance) technology deployed to underpin efficient transactions and
standard costs are seen as a key aspect of the accounting technology armory.
Each accounting technology is unique and between-firm comparisons of performance
based on accounting information is fraught with danger, in part because of the local rules
used in the extraction of meaning from information. Accounting technology is heterogenous
because each firm faces different circumstances. Diversity in contracting technologies is, in
fact, a condition of firm existence: a fact which also speaks to the multi-layered role of
accounting (Miller and Power, 2013). With differentiated products, factors of production,
markets, and customers, firms have to create organization (governance) forms and
contracting technologies to suit the circumstances they face. Because direct comparison is
not possible, there is no “best” contracting configuration and discussion of optimality in this
context misses the target. Standard costing[4] provides a good example. Standard costing
enables efficient methods of establishing quasi costs for products or services and each
standard costing method represents a unique accounting technology to the firm. Standard
costs assist in the determination of overhead allocation which is likely to be significant in Risk and
firms that have high asset specificity. Overheads exist because directly observing costs organizational
arising from a production process or transaction is difficult or costly compared to adopting effectiveness
broad allocation rules. Firms with high asset specificity – those most likely to benefit from
internalizing transactions – are likely to exhibit larger overhead allocations because the
specific asset’s use is spread over a variety of transaction types within the firm. The more
transactions types that are mapped in this way, the more unique is the accounting 115
technology to the firm and the more difficult it is to distinguish the direct costs incurred by
an individual transaction.
The relationships between accounting technologies and risk can be seen as leading to the
following propositions. For the firm using unique accounting technologies, operating over
high, asset-specific processes:
P1. Planning risks are increased: forecasting is more difficult in high asset-specific firms.
Specifically, budget performance in high asset-specific firms exhibit higher
inaccuracy (variances) than those firms with fewer asset-specific resources. This
would lead to the additional costs of explaining these variances and the logics that
underpin their calculation to external agencies and regulators as well as the potential
errors involved in any calculative process around risk.
P2. Identifying risks is harder because the uncertainty within the processes is increased:
asset specificity can be measured as the span (level of asset-type aggregation) of the
cost pool. Specifically, those firms with high asset specificity will have fewer cost
drivers as a proportion of transaction types. Fewer cost drivers imply lower
resolution of risk identification[5]. Put another way, fewer cost drivers allow for the
extraction of meaning from information and particularly around cause and effect
relationships between elements of the system.
P3. Understanding risk impact is made more difficult: individual cost variances are
likely to be higher in rapidly changing environments and are higher for those firms
that are more asset specific. Within this context, the potential for emergence within
the process could be seen to increase (due to the increased number of potential
interactions) and this would impact on cause and effect relationships.
In P1, with overheads being used as a proxy for hard to observed costs, there will be greater
estimation of costs which would otherwise be subject to estimation error if calculated
separately – that is, there will be a reduction in the difficulties associated with the need to
extract meaning from that information and the uncertainty in that process will be reduced. In
P2, the signals that management rely on from the firm’s accounting technologies are likely to
be more approximate in high asset-specific configured firms since uncovering the direct
relationship between cost drivers and transactions types will mean that accounting signals
embedded in the cost drivers will inevitably be conflated over a number of transactions,
thereby creating problems in the extraction of meaning. In P3, higher asset-specific firms are
likely to lack detail in identifying individual cost targets and hence the impact within the firm
will be harder to determine. Overall, high asset-specific firms are harder to manage than those
firms with lower asset specificity. This is intuitively reasonable: there are fewer transactions
in less complex organizations (because there are more transactions undertaken in the market),
there is less effort and cost expended in estimating overheads, and there is less time spent in
revising budgets and interpreting outcomes. This does not mean that accounting does not
contribute to the effective management of the organization, but rather, it reflects the fact that
there is a significant role for accounting to play in the determination of meaning from
information and attention has to be paid by management to the design of accounting
technologies if they are to be effective in the management of risk.
JOEPP Measurement risk and transactions’ complexity
5,2 Accounting signals that convey information to management are representations of an
underlying activity or task. The accounting signal itself is not what is being managed since
the use of accounting technologies is an attempt by management to measure what is
required to be managed. Management has a role to play in the extraction of meaning from
that information and herein lies a challenge to organizational effectiveness. If the
116 information is presented in a highly codified manner, then management may not be able to
extract meaning effectively. The language used by those who encode the signals (as a
message) needs to be decipherable by those who receive it. If not, then the uncertainty
present within that information will increase. This also requires a clear articulation of the
rules used to both encode and decode that information in a way that reduces ambiguity
within the meaning. The information and data feeding into accounting technologies that
support management attention might feature activity reports relating to hours worked,
units produced, units stored, customer analyses, asset maintenance, receivables and
payables controls, product quality measures, unit sales and returns, and so on. The
management problem, therefore, is to establish meaning through measurement and
monitoring of activities and tasks that throw light on the object of attention.
The risk profile of these activities is, in turn, related to task complexity. A task is complex
when a most efficient course of action is hard to determine (Prendergast, 2002) and which makes
its outcome uncertain. For accounting managers, an additional layer of risk is added to the
information they need to incorporate into accounting reports. The uncertainty residing in tasks
arises from three key areas: first, the lack of transparency between the input of effort as it relates
to the output of results arising from a task; second, the existence of alternatives to a complex
task where different staff members may choose different tasks to achieve the same objective;
and, third, the achievement of an objective may require a portfolio of tasks and the relationship
between them may have uncertain consequences (Bonner, 1994; Holmström and Milgrom, 1991;
Stuart and Prawitt, 2012; Tan and Kao, 1999). This additional noise in the system and the
number of steps needed to decode the message has the potential to create uncertainty and the
response to this uncertainty produces some second-order effects in terms of management
performance measures becoming uncertain and incentives undermined. The result is that
risk-taking behaviors may be altered so that risky tasks with higher payoffs (shorter times to
completion, fewer resources required) are more likely to be avoided because they appear more
uncertain than they are as a result of additional noise; and the pressure to act turns the focus of
monitoring input measures rather than output measures and objective achievement. Such tasks
are likely to be brought in-house, and it is a relatively straightforward step to see that complex
tasks will go hand in hand with firms with high asset specificity. One is not a cause of the other;
rather complex tasks are a feature of high asset specificity (Bai et al., 2010).
More complex transactions are likely to be brought in-house because of their
transactional complexity. The specific motivation for doing so resides in the problem of not
being able to define contract outcomes with a degree of sufficient certainty and hence the
problem of incomplete contracts again arises. In such a situation costly ex post renegotiation
of contracts represents a risk which is avoided when the transaction is brought in-house.
The task complexity, per se, is not avoided; only the ex post renegotiation costs are avoided
but the issue of the consequences of task complexity, once brought in-house, emerge in
different ways in presenting management with a noisier environment where, for
accountants, measurement and monitoring become problematic. The results of bringing in a
complex transaction in-house are by no means certain of itself because the concept of
“bringing-in” implies a fairly clear distinction between “outside” and “inside.” This is the
essence of the problem of the definition of the firm first postulated by Coase (1937). It also,
however, raises the issues of how firms respond to risk on the “outside” impacting on the
firm “inside” and the challenges that it implies for organizational control.
Complex firms, learning technologies, and adaptation Risk and
It is hard to specifically define the boundary of a complex firm involved in a range of organizational
complex tasks. That means the nature of the transactions costs that separate the firm from effectiveness
the market are hard, if not impossible to clearly specify. The construction of a conceptual
model, residing within and as part of a system, relies on judgement and not clear definition
(Cilliers, 2005). The recognition of contextualization then specifies one of the management
problems to address, which is to produce a coherent partitioning so that management can 117
begin work on measuring and monitoring firm operations (Chu et al., 2003). If complex
systems are defined not by the number of connections that a firm has with its environment
but by their qualities – nonlinearity, emergence, self-organization, scalability, adaptation
– then the imperative becomes to characterize the transactions as one of the linking firm
activity and behaviors to its environment. This is done in order to approach the
conceptualizing of the firm and its related risks as a means of producing effective
approaches to management. This becomes possible when conceptualizing the firm
as a transactions cost minimizing (Coase, 1937; Williamson, 1981) entity within which
complex transactions define what the firm does, by whom, with what resources, and under
which constraints.
Uncertainty has a role to play within this process in that it emerges from organizational
heterogeneity, potentiality and otherness by creating space for emergent and undirected (not
managed) activities (Tekathen and Dechow, 2013; Brookfield and Fischbacher-Smith, 2014).
Conceptualizing and responding to risk in IT projects (Brookfield and Fischbacher-Smith,
2014). The existence of the firm is motivated in TCE as a means to avoid opportunism from
counterparties to a contract that seek to makes gains from misleading, distorting, disguising,
and obfuscating information in an overall attempt to confuse and make gains. Managers
might seek to behave in a rational manner in terms of their decision making but there is no
guarantee of it and there is every reason to believe that within-firm behavior features the
opportunism and resulting non-maximizing behavior as described earlier.
In economics terms, non-maximizing behavior is explained in terms of bounded
rationality (Simon, 1957) which supplants “economic man” with a contractual one that seeks
to minimize transactions costs. A “competent” individual emerges who optimizes
conditionally and which leaves open the possibility of habits, rules, and possibly
“non-rational behaviour” when conventions and other behavioral limitations are admitted to
the analysis. In addition, the relationships between system I (schema) and system II (rational
processes) elements also generate problems around decision making (Kahnneman). Thus,
“organizational capabilities” (Foster, 2000) is a way, in economics terms, to recognize
optimizing behavior rather than maximizing the effectiveness of that behavior. It is the
uncertainty that emanates from the environment and within-firm, non-rational behavior that
motivates organizational learning as one response to risk to enable firms to coordinate their
activities in the face of uncertainty. One of the key transaction cost benefits of creating a
firm is that this learning is best done within the ambit of an organization where the
coordination to achieve an organizational purpose and its associated processes of learning
can take place. It is critical, therefore, to appreciate that uncertainty generates the stimulus
for learning and that learning in a complex environment gives dynamic motivation for the
creation of the firm. That is to say, TCE is not merely a static device to explain the existence
of the firm but a fully dynamic articulation of organizational purpose when it responds to a
risk environment. The major criticism of TCE, as noted by Vosselman and Van der Meer-
Kooistra (2006), is that the control perspective offered by TCE can adequately describe
process patterns but is insufficient to describe process development, because it cannot offer
an opinion on analyzing control structures with agents operating in processes of
organizational change (also, Vosselman, 2012). This has to be addressed if learning
transaction technologies are best done within the firm in a coordinated and competency
JOEPP driven manner (Foss, 1996) rather than in a market place where non-rational and
5,2 opportunistic behaviors exist, alter and re-form, and impose costs on the firm. Risk
management is a particular type of rationality, the purpose of which is to make the future
“manageable” and calculable by means of intervention with a set of available tools and
technologies (Miller et al., 2008) which, in our case, are accounting technologies[6].
Complexity also reveals avenues for managing risk within systems and this approach has
118 a long period of tenure within academic research (Stacey et al., 2002; Johnson, 2006, Stacey and
Griffin, 2006; Bonabeau, 2007; Sommer et al., 2008; Power, 2009; Maguire and McKelvey, 2010;
Renn et al., 2011; Gharajedaghi, 2011; Blomme, 2012; De Toni and De Zan, 2016).
The robustness of a system relies on a degree of internal diversity and redundancy to enable
the firm, as a system, to adapt to new circumstances it faces (The Law of Requisite Variety,
Ashby, 1956). For risk management purposes within a firm, we need to be more specific about
what variety is needed, in what resources, and for which processes. The literature on risk
management in the context of enterprise risk management has long recognized that
risk management is likely to be “an assemblage of practices” (Mikes, 2009, p. 20) but this does
not really identify the richness of interactions between practices and what is needed to
support the sustainability of the firm in the face of risk. Adaptability is key to sustainability
and the objective for risk management, in the systems sense described by Ashby, is to
recognize the degree of variety that allows the system to remain unchanged (to maintain its
homeostasis) in the face of external risk challenges. There is, however, an additional
perspective, largely emerging from the organizational learning literature that seeks to explain
how organizations adapt and evolve rather than maintain status.
We have sought to conceptualize accounting as a measurement and monitoring tool that
enables the implementation of strategy and the monitoring of outcomes. One view is to see
accounting as a regulating device, in the sense of Ashby, but this presumes that accounting
technologies are a closed system within the firm which are immune to the other within-firm
systems it seeks to regulate. This is unlikely for well-known reasons concerning human
behavior not being congruent with organizational objectives. If rules and monitoring
systems are subverted, what role – then – does accounting play? And can it be effective?
Does accounting actually monitor and direct or is it just another component of a complex
adaptive system that co-evolves with other within-firm components?
In a complex environment, the effectiveness of an organization has a number of
dimensions. In particular, it may be that robustness of the organization is most important
when viewed as its capability to maintain functionality in the face of environmental changes
(Bednar, 2008). Thus, the link between the inside and the outside of the organization is
significantly extended in terms of what is meant by effectiveness. In this context, managers
must look not just outside the organization but seek to anticipate what dynamic forces are at
play in relation to the emergence of risk. The approach to understanding the risk environment
becomes a harder challenge for the manager in terms of designing systems – including
accounting systems – to mitigate these risks (Otley, 2016). There is a risk, in itself, that the
formalization and compartmentalization of “risk management” processes (e.g. Committee of
Sponsoring Organizations of the Treadway Commission 2004, 2007, 2017; International
Organization for Standardization, 2009) potentially diminishes the perspective that managers
should take in trying to understand uncertainty which is likely to “reside beyond the
formalised practices of risk management” (Miller et al. 2008, p. 944).
The “model” of the business, or schemas should recognize in a complex environment, the
need for understanding by managers of the perception of schemes, their role in it, and how
they can be used to anticipate the results of their actions (Blomme, 2012). Such schemas are
widely drawn and encompass broader definitions of models that include rules, routines, and
other informal organizational features which enable managers to make sense of their
risk management problem (Axelrod and Cohen, 1999; Stacey, 1996; Stacey et al., 2002;
Sammut-Bonnici and Wensley, 2002). Routines turn out to be an important means of Risk and
understanding transactions and how they change. If transactions are repetitive – which organizational
they will be to allow some economies of forming the firm in the first place – then routines effectiveness
may indeed be another way of expressing how transactions form, what shape they take, and
how they change. Routines arise from repetitive transactions and are able to change as they
co-evolve in a complex environment which recognizes the importance of social structures,
business processes, agents and resources (Pentland and Feldman, 2005). 119
Effectiveness and accounting systems
The meaning of effectiveness needs to be extended in a complex environment and a
clarification attempted of the role of accounting technologies in contributing to
“effectiveness” and risk mitigation. In a dynamic environment, the key problem is not
about maximizing profits but about achieving an equilibrium that is optimum, conditioned
on its environment. That is, it is about guiding the organization to a state where desirable
outcomes are re-produced from the transactions undertaken that motivated the formation of
the firm in the first instance. Thus, the problem moves from defining outcomes in a static
environment (setting accounting based, budget targets) to one where the process of
achieving equilibrium is paramount. Accounting does not necessarily fail in these instances
where graduated targets can be incorporated into plans for organizational management in a
changing environment.
The level at which accounting technologies seek to impact on organizational
effectiveness matters. Conventionally, accounting follows organizational hierarchy in
terms of planning, budgeting, monitoring and control. This vertical perspective has ignored
the shared and joint lateral relations that form a large part of organizational activity
(Hopwood, 1996). In a complex environment, there is not a two-dimensional plane on which
the firm operates but a multidimensional hyper-plane within which the firm functions as one
part of a multi-actor, multi-level play. For the firm itself, this perspective requires that all the
attributes of the firm and its environment including resources, processes, rules, and rational
and non-rational behavior are recognized. If we accept that complex firms do not
“maximise” but find a conditional optimum, then we have to ask on what conditions is the
optimum specified. In broad terms the conditions are reflected in the environment. The
conditional optimum requires learning about the environment and how to respond to it.
Page (2008) makes the distinction between direct rules and meta rules whereby direct rules
are the norms that managers employ to undertake tasks and meta rules are the actions of
choosing which rule to deploy, and of learning and adaptation to new rules. Adaptation
arises because new circumstances are faced by the organization and also because not all
managers respond “optimally” to a new set of circumstances. This might be because of
simple mistakes or because of non-rational behavior. Either way, the organization faces a
diversity of behavior which represents a challenge for accounting technologies that seek to
inform and enforce an “organizational perspective” to promote an “organizational purpose.”

Conclusions
This paper has centered on the role of information provision as key accounting technology
that would help in the effective mitigation of risk. In this respect, accounting and its role in
information provision assists with the goal congruency (the aggregation problem) and of
directing resources and tasks to achieve organizational purpose. When accounting
information provision is organized in a way that allows meaning to be extracted, then risk is
reduced because it is in the nature of the organization of the firm that it is, in itself, a
risk-reducing technology (but only if it is effectively managed as such). One way this is
achieved is through the recognition of the importance of governance and supervision
JOEPP structures and how information flows through these structures. Accounting and governance
5,2 structures are related because the former is a reflection of the intentions of the latter.
However, contextualization is important and managers must have a view to how the firm
responds and adapts to the external pressures it faces. This confronts management with a
continued learning requirement to help shape both organizational structures and processes
to determine how information resources are to be deployed through accounting
120 technologies. The setting of standard costs and the understanding of the role of overhead
allocations turns out to be important in complex organizations. Managers need to be aware
of the perception of signals and the risk surrounding heterogeneity of perceptions when
using accounting signals. In this sense, the focus for managers should be on both the formal
and informal mechanisms that are at work within the firm and particularly so with respect
to the informal routines that are used in relation to accounting technologies. It is the use of
routines that gives flexibility to the organization and creates its adaptability and
robustness. If accounting is going to support effective organizational risk management then
an understanding of how accounting technologies interact and co-evolve with routines will
be essential.

Notes
1. “Organization” and “firm” will be used interchangeably throughout the article and is not meant to
imply a particular industry or service. The term “firm” is from the standard phrase “Theory of the
firm” which might appear somewhat dated but its use, here, is to recognize the important
framework from which principles and practice emerge.
2. Coase (1937) is the original paper that identified this particular perspective on how a business is
defined. Other works have developed the idea and the reach of its principles have extended ever
since.
3. This is a key point: legalistic enforcement of contracts arising from external relationships are
avoided when brought “in-house” as part of the activities that help define the “firm.”
4. Standard costing is a method of accumulating the costs of production as a product is built or
service delivered. A standard cost is the firm’s estimate of costs of production during each stage of
production. As the firm has internalized the production because of transaction cost efficiencies, the
prices used in calculating standard costs cannot be market prices since the production process is
not replicated in the market place because of the advantages of internalizing the process. Hence
standard costing is an accounting technology that derives from the configuration and processes of
the organization. Standard costs are not ‘helicoptered-in’ from outside of the firm and used inside
the firm, at least not logically or efficiently.
5. Cost drivers are an accounting technology used to understand how overheads are generated.
Generally, the more resolution a firm has about what generates overheads the more information
management has about the operations of the firm and the less likely they are to be mismanaged.
6. It is only right to record that “manageability and calculability” of risk is not a universal view.
Power (2004), for example, is one of the most noteworthy commentators who have exposed some of
the profound difficulties of attempting to ‘manage risk’. As he so aptly puts it: “Risk management
organizes what cannot be organized, because individuals, corporations and governments have
little choice but to do so. The risk management of everything holds out the promise of
manageability in new areas. But it also implies a new way of allocating responsibility for decisions
which must be made in potentially undecidable situations” p. 10.

References
Ashby, W.R. (1956), An Introduction to Cybernetics, Chapman and Hall, London.
Axelrod, R. and Cohen, M.D. (1999), Harnessing Complexity, The Free Press, New York, NY.
Bai, G., Coronado, F. and Krishnan, R. (2010), “The role of performance measure noise in mediating the Risk and
relation between task complexity and outsourcing”, Journal of Management Accounting organizational
Research, Vol. 22 No. 1, pp. 75-102.
effectiveness
Ball, R. (1989), “The firm as a specialist contracting intermediary: application to accounting and
auditing”, Chicago Booth Research Papers, available at: http://faculty.chicagobooth.edu/ray.ball/
research/papers/the%20firm%20as%20a%20specialist%20contracting%20intermediary.pdf
(accessed May 14, 2017).
Bednar, J. (2008), The Robust Federation: Principles of Design, Cambridge University Press, Cambridge.
121
Blomme, R.J. (2012), “Leadership, complex adaptive systems, and equivocality: the role of managers in
emergent change”, Organization Management Journal, Vol. 9 No. 1, pp. 4-19.
Bonabeau (2007), “Understanding and managing complexity risk”, MIT Sloan Management Review,
Vol. 48 No. 4, pp. 62-68.
Bonner, S. (1994), “A model of the effects of audit task complexity”, Accounting, Organizations and
Society, Vol. 19 No. 3, pp. 213-234.
Brookfield, D. and Fischbacher-Smith, D. (2014), “Conceptualising and responding to risk in IT
projects”, Risk Management, Vol. 16 No. 3, pp. 195-230.
Chu, D., Stran, R. and Fjellan, R. (2003), “Theories of complexity: common denominators of complex
systems”, Complexity, Vol. 8 No. 3, pp. 19-30.
Cilliers, P. (2005), “Complexity, deconstruction and relativism”, Theory, Culture & Society, Vol. 22 No. 5,
pp. 255-267.
Coase, R.H. (1937), “The nature of the firm”, Economica, Vol. 4 No. 16, pp. 386-405.
Committee of Sponsoring Organizations of the Treadway Commission (2004), “Enterprise risk
management framework”, available at: www.coso.org/documents/COSO (accessed May 14, 2017).
Committee of Sponsoring Organizations of the Treadway Commission (2007), “Internal control – integrated
framework: guidance on monitoring internal control systems”, available at: www.coso.org/
Documents/COSO_Guidance_On_Monitoring_Intro_online1_002.pdf (accessed May 14, 2017).
Committee of Sponsoring Organizations of the Treadway Commission (2017), “Enterprise risk
management – integrating with strategy and performance”, available at: www.coso.org/
Documents/2017-COSO-ERM-Integrating-with-Strategy-and-Performance-Executive-Summary.
pdf (accessed March 8, 2018).
Dahlman, C.J. (1979), “The problem of externality”, Journal of Law and Economics, Vol. 22 No. 1,
pp. 141-162.
De Toni, A.F. and De Zan, G. (2016), “The complexity dilemma”, Emergence: Complexity and
Organization, Vol. 18 Nos 3/4, pp. 1-8.
Foss, N.J. (1996), Towards a Competency Theory of the Firm, Routledge, London.
Foster, J. (2000), “Is there a role for transaction cost economics if we view firms as complex adaptive
systems?”, Contemporary Economic Policy, Vol. 18 No. 4, pp. 369-385.
Freeman, J. (1999), “Efficiency and rationality in organizations”, Administrative Science Quarterly,
Vol. 44 No. 1, pp. 163-175.
Gharajedaghi, J. (2011), Systems Thinking: Managing Chaos and Complexity: A Platform for Designing
Business Architecture, 3rd ed., Elsevier, Amsterdam.
Hallberg, N.L. (2015), “Uncertainty, judgement and the theory of the firm”, Journal of Institutional
Economics, Vol. 11 No. 3, pp. 623-650.
Hart, O. (1995), Firms Contracts and Financial Structure, Clarendon Press, Oxford.
Holmström, B. and Milgrom, P. (1991), “Multitask principal-agent analysis: incentive contracts, asset
ownership, and job design”, Journal of Law, Economics and Organization, Vol. 7, Special issue,
pp. 24-52.
Hopwood, A.G. (1996), “Looking across rather than up and down: on the need to explore the lateral
processing of information”, Accounting, Organizations and Society, Vol. 21 No. 6, pp. 589-590.
JOEPP International Organization for Standardization (2009), “Risk management – principles and guidelines”,
5,2 International Organization for Standardization, Geneva.
Johnson, J. (2006), “Can complexity help us better to understand risk?”, Risk Management, Vol. 8 No. 4,
pp. 227-267.
Klein, B. (2010), “Asset specificity and holdups”, in Klein, P.G. and Sykuta, M.E. (Eds), The Elgar
Companion to Transaction Cost Economics, Edward Elgar, Aldershot, pp. 120-126.
122 Macher, J.T. and Richman, B.D. (2008), “Transaction cost economics: an assessment of empirical
research in the social sciences”, Business and Politics, Vol. 10 No. 1, pp. 1-92.
Maguire, S. and McKelvey, B. (2010), “Complexity and management: moving from fad to firm
foundations”, Emergence, Vol. 1 No. 2, pp. 19-61.
Maness, R. and Wiggens, S.N. (2013), “The evolving modern theory of the firm”, The Oxford Handbook
of Managerial Economics, Oxford Handbooks, pp. 1-29, doi: 10.1093/oxfordhb/97801
99782956.013.0020.
Maskin, E. and Tirole, J. (1999), “Unforeseen contingencies and incomplete contracts”, Review of
Economic Studies, Vol. 66 No. 1, pp. 83-114.
Mikes, A. (2009), “Risk management and calculative cultures”, Management Accounting Research,
Vol. 20 No. 1, pp. 18-40.
Miller, P., Kurunmaki, L. and O’Leary, T. (2008), “Accounting, hybrids and the management of risk”,
Accounting, Organizations and Society, Vol. 33 No. 7, pp. 942-967.
Miller, P. and Power, M. (2013), “Accounting, organizing and economizing: connecting accounting
research and organization theory”, Academy of Management Annals, Vol. 7 No. 1, pp. 557-603.
Otley, D. (2016), “The contingency theory of management accounting and control: 1980-2014”,
Management Accounting Research, Vol. 31 No. 1, pp. 45-62.
Page, S.E. (2008), “Uncertainty, difficulty and complexity”, Journal of Theoretical Politics, Vol. 20 No. 2,
pp. 115-149.
Pentland, B.T. and Feldman, M.S. (2005), “Organisational routines as a unit of analysis”, Industrial and
Corporate Change, Vol. 14 No. 5, pp. 793-815.
Power, M. (2004), “The risk management of everything: rethinking the politics of uncertainty. Demos”,
available at: www.demos.co.uk/files/riskmanagementofeverything.pdf (accessed March 8, 2018).
Power, M. (2009), “The risk management of nothing”, Accounting, Organizations and Society, Vol. 34
Nos 6/7, pp. 849-855.
Prendergast, C. (2002), “The tenuous tradeoff between risk and incentives”, Journal of Political
Economy, Vol. 110 No. 5, pp. 1071-1102.
Renn, O., Klinke, A. and van Asselt, M. (2011), “Coping with complexity, uncertainty and ambiguity in
risk governance: a synthesis”, AMBIO, Vol. 40 No. 2, pp. 231-246.
Sammut-Bonnici, T. and Wensley, R. (2002), “Darwinism, probability and complexity: market-based
organisational transformation and change explained through the theories of evolution”,
International Journal of Management Reviews, Vol. 4 No. 3, pp. 291-315.
Simon, H. (1957), Administrative Behavior, 2nd ed., The Free Press, New York, NY.
Sommer, S.C., Loch, C.H. and Dong, J. (2008), “Managing complexity and unforeseeable uncertainty in
companies: an empirical study”, Organization Science, Vol. 20 No. 1, pp. 118-133.
Stacey, R.D. (1996), Complexity and Creativity in Organizations, Berrt-Koehler Publishers,
San Francisco, CA.
Stacey, R.D. and Griffin, D. (2006), Complexity and the experience of managing public sector
organizations, Routledge, London.
Stacey, R.D., Griffin, D. and Shaw, P. (2002), Complexity and Management: Fad or Radical Challenge to
Systems Thinking, Routledge, London.
Stuart, I.C. and Prawitt, D.F. (2012), “Firm-level formalization and auditor performance on complex
tasks”, Behavioral Research in Accounting, Vol. 24 No. 2, pp. 193-210.
Tan, H.T. and Kao, A. (1999), “Accountability effects on auditors’ performance: the influence of Risk and
knowledge, problem-solving ability, and task complexity”, Journal of Accounting Research, organizational
Vol. 37 No. 11, pp. 1-15.
Tarko, V. (2013), “Can probability theory deal with entrepreneurship”, The Review of Austrian
effectiveness
Economics, Vol. 26 No. 3, pp. 329-345.
Tekathen, M. and Dechow, N. (2013), “Enterprise risk management and continuous re-alignment in the
pursuit of accountability: a German case”, Management Accounting Research, Vol. 24 No. 2,
pp. 100-121.
123
Tirole, J. (1999), “Incomplete contracts: where do we stand?”, Econometrica, Vol. 67 No. 4, pp. 741-781.
Vosselman, E.G.J. (2012), “Approaching control in interfirm transactional relationships: contrasting
and connecting a transaction cost economics perspective with an actor‐network theory
perspective”, Research in Accounting & Management, Vol. 9 No. 1, pp. 4-20.
Vosselman, E.G.J. and Van der Meer-Kooistra, J. (2006), “Efficiency seeking behaviour in structuring
management control in interfirm relationships: an extended transaction cost economics
perspective”, Journal of Accounting & Organisational Change, Vol. 2 No. 2, pp. 123-143.
Williamson, O.E. (1975), Markets and Hierarchies: Analysis and Antitrust Implications, The Free Press,
New York, NY.
Williamson, O.E. (1981), “The economics of organization: the transaction cost approach”, American
Journal of Sociology, Vol. 87 No. 3, pp. 548-577.
Williamson, O.E. (1985), The Economic Institutions of Capitalism, The Free Press, New York, NY.
Williamson, O.E. (1991), “Comparative economic organization: the analysis of discrete structural
alternatives”, Administrative Science Quarterly, Vol. 36 No. 2, pp. 269-296.
Williamson, O.E. (1993), “Opportunism and its critics”, Managerial and Decision Economics, Vol. 14
No. 2, pp. 907-107.
Williamson, O.E. (2000), “The new institutional economics: taking stock, looking ahead”, Journal of
Economic Literature, Vol. 38 No. 3, pp. 595-613.

Further reading
ACCA (2012), “Rules for risk management: culture, behavior and the role of accountants”, Accountants
for Business, ACCA, London.
Huselid, M.A. (1995), “The impact of human resource management practices on turnover, productivity,
and corporate financial performance”, Academy of Management Journal, Vol. 38 No. 3, pp. 635-672.
Noordewier, T.G., John, G. and Nevin, J.R. (1990), “Performance outcomes of purchasing arrangements
in industrial buyer-vendor relationships”, Journal of Marketing, Vol. 54, pp. 80-93.
Page, S.E. (2012), “A complexity perspective on institutional design”, Politics, Philosophy and
Economics, Vol. 11 No. 1, pp. 5-25.
Williamson, O.H. (1996), The Mechanisms of Governance, Oxford University Press, New York, NY.

Corresponding author
David Brookfield can be contacted at: david.brookfield@liverpool.ac.uk

For instructions on how to order reprints of this article, please visit our website:
www.emeraldgrouppublishing.com/licensing/reprints.htm
Or contact us for further details: permissions@emeraldinsight.com