Accounting, Organizations and Society 38 (2013) 407–419

Contents lists available at ScienceDirect

Accounting, Organizations and Society

journal homepage: www.elsevier.com/locate/aos

Management control as a system or a package? Conceptual

and empirical issues
Isabella Grabner, Frank Moers ⇑
Maastricht University School of Business and Economics, European Centre for Corporate Engagement (ECCE), The Netherlands

a b s t r a c t

Despite the trend in investigating combinations of MC practices that form packages or sys-
tems, there is ambiguity about what is meant by a ‘‘control package’’ or ‘‘control system’’.
In this paper, we address questions related to MC as a package and as a system, both from a
conceptual and empirical perspective. The purpose of our study is to clarify a number of
issues, so as to guide future research in this area. We do not claim to have all the answers.
Rather we make a number of assumptions explicit to show when it is important to address
multiple MC practices simultaneously, why this is the case, and what the empirical impli-
cations are. Our research directly relates to the systems approach to contingency theory
and the literature’s struggle to clearly define its most fundamental concept, i.e., ‘‘internal
consistency’’. Our analysis provides a formal definition of ‘‘internal consistency’’ and shows
how it can be used to conceptualize MC systems, thereby giving contingency theorists the
necessary ingredient to move forward.
Ó 2013 Elsevier Ltd. All rights reserved.

Introduction independently of other MC practices and it is this indepen-

Contingency theory has a long tradition in management
accounting research. Historically Management Control
(MC) was studied, in the main, by examining single MC
practices related to budgets, performance measures, incen-
tives, etc.1 As is typically the case with any significant
stream of research, critical reviews of this contingency liter-
ature have emerged over the last decades (e.g., Chapman,
1997; Chenhall, 2003; Fisher, 1995; Hartmann & Moers,
1999; Otley, 1980). One of the major criticisms that has been
put forward relates to the literature’s reductionist approach.
Reductionism assumes that MC practices can be examined
⇑ Corresponding author. Address: Maastricht University School of
Business and Economics, Department of Accounting & Information
Management, P.O. Box 616, 6200 MD Maastricht, The Netherlands. Tel.:
+31 433883753.
E-mail addresses: i.grabner@maastrichtuniversity.nl (I. Grabner),
f.moers@maastrichtuniversity.nl (F. Moers).
1
Examples of MC practices that are related to budgets, performance
measures, and incentives are the interactive use of financial budgets, the
use of subjective performance evaluation, and the extent of variable pay,
respectively.
dence assumption that has been heavily criticized. As a re-
sponse, theorists have put forward the systems approach
to contingency theory and empiricists have begun to exam-
ine combinations of MC practices that form packages or
systems.
Despite the similarity of these responses, they have
developed into two literature streams that are quite inde-
pendent of each other, leading to the current status of the
broader MC literature in which there is ambiguity about
what is meant by a ‘‘package’’ or ‘‘system’’. In this paper,
we address questions related to MC as a package and as a
system, both from a conceptual and empirical perspective.
The purpose of our paper is to clarify a number of issues, so
as to guide future research in this area. We do not claim to
have all the answers. Rather we make a number of assump-
tions explicit to show when it is important to address
multiple MC practices simultaneously, why this is the case,
and what the empirical implications are.
In their seminal paper, Drazin and Van de Ven (1985, p.
521) state that the systems approach to contingency
theory maintains that organizational design involves two
basic choices: (1) selecting MC practices that match the

0361-3682/$ - see front matter Ó 2013 Elsevier Ltd. All rights reserved.
http://dx.doi.org/10.1016/j.aos.2013.09.002
408 I. Grabner, F. Moers / Accounting, Organizations and Society 38 (2013) 407–419
set of contingencies facing the organization, and (2) assur-
ing that the MC practices are internally consistent. We ar-
gue that the problem with this approach is its lack of a
definition of ‘‘internally consistent’’. To address this prob-
lem, we first separate two views of MC, i.e., MC as a pack-
age and MC as a system, based on whether the MC
practices are interdependent, and we provide two distinct
working definitions for these views. In particular, we pro-
pose that MC practices form a system if the MC practices
are interdependent and the design choices take these
interdependencies into account. In contrast, MC as a pack-
age represents the complete set of control practices in
place, regardless of whether the MC practices are interde-
pendent and/or the design choices take interdependencies
into account. This implies that the MC package can be com-
posed of a set of MC systems and/or of a set of independent
MC practices addressing unrelated control problems. Based
on these definitions, we subsequently point out that, if the
purpose of a study is to examine relationships among MC
practices, then the view of MC as a package is ill-suited
as a starting point. To examine interdependencies it is nec-
essary to take a MC as a system perspective. This also im-
plies that to investigate MC as a package – and aiming to go
beyond mere descriptions of observed MC clusters – it is
crucial to first understand the various MC systems within
the package.
The conclusion that MC as a system is the correct per-
spective to examine multiple MC practices raises the fun-
damental question of what theory is useful from this
perspective in order to put structure on what is meant by
‘‘internally consistent’’. We propose that complementarity
theory is suitable to address issues related to MC as a sys-
tem because the theory explicitly addresses how a decision
maker tries to maximize ‘‘performance’’ by (simulta-
neously) deciding on multiple choice variables. This obser-
vation per se is not new. In their paper on the disciplinary
constraints on the advancement of knowledge, Merchant,
Van der Stede, and Zheng (2003) hint at similarities be-
tween the concepts of fit and complementarity and pro-
pose potential synergies of the economics and the
accounting literatures when it comes to explaining the
concept of fit. As Milgrom and Roberts (1995, p. 180) ar-
gue: ‘‘the ideas of complementarities [. . .] give substance
to previously elusive notions such as ‘fit’ or ‘systems ef-
fects’’’. However, it is important to note at this point that
‘‘fit’’ in contingency theory relates to how MC practices
fit with context, while ‘‘fit’’ in complementarity theory re-
lates to how MC practices fit with each other. As such,
complementarity theory does not give more substance to
the common view of contingency fit. Rather, complemen-
tarity theory gives more substance to what a system is
and thus also to how a system fits with context, both of
which are the core components of the systems fit to con-
tingency theory.
Using complementarity theory, we provide a simple
formal analysis of MC design to illustrate the decision mak-
ing process when confronted with having to decide on
multiple MC practices. We use a general framework that
allows us to vary some of the underlying assumptions
and illustrate the consequences of different theoretical
perspectives, i.e., the reductionist approach and the
systems approach. Given the importance of interdepen-
dence for understanding ‘‘internally consistent’’, we pro-
vide a formal definition of interdependence between MC
practices and the two types of interdependencies that ex-
ist, i.e., complements and substitutes. In general terms,
interdependence implies that the value of one MC practice
depends on the use of another MC practice, and vice versa.
It thus not only provides a formalization of when and why
the reductionist approach can be problematic, but also
what ‘‘internally consistent’’ captures.
Although our use of complementarity theory to define
‘‘internally consistent’’ is new, the theory and insights are
obviously not new and have been used in previous MC
studies. However, an analysis of these previous studies
shows that there is no consistent interpretation of interde-
pendence, and the terms complements and substitutes
have been used for conceptualizing relations between con-
trol practices other than interdependence as well.2 Thus,
despite the researchers’ awareness of the literature on com-
plementarity theory, these results further underscore the
need for creating a clear understanding of what is meant
by interdependence and when to use the terms ‘‘comple-
ments’’ and ‘‘substitutes’’.
When we move from the theory to empirics we show
that the conceptual issues naturally extend to the empiri-
cal setting. We revisit the general theoretical framework
to show the empirical consequences of varying some of
the underlying assumptions. We further discuss two differ-
ent empirical strategies aimed at examining interdepen-
dencies among MC practices, as well as the cost and
benefits of these strategies. The difference between the
methods resembles the difference between a contingency
approach to fit, i.e., examining the performance effects of
a combination of a MC practice and context, and a congru-
ence approach to fit, i.e., examining the association be-
tween a MC practice and context. In this case, the
‘‘contingency’’ approach examines the performance effects
of a combination of MC practices, while the ‘‘congruence’’
approach examines the association between MC practices.
More importantly, we show that, at the conceptual level,
both approaches rely on the same type of ‘‘systems fit’’.
We end our paper with providing explicit guidelines for fu-
ture research that aims to examine the design of MC
systems.
2
We analyzed the line of argumentation in MC studies that rely on the
terms complements and substitutes published during the period 2000–
2012 in the following seven accounting journals (in alphabetical order):
Accounting, Organizations and Society, Contemporary Accounting Research,
Journal of Accounting and Economics, Journal of Accounting Research, Journal
of Management Accounting Research, Management Accounting Research, and
The Accounting Review. Besides the conceptualization of a reciprocal
relationship between control practices proposed by Milgrom and Roberts
(1995), the terms have also been used in arguments related to (1) a
unidirectional relation between MC practices that are sequential control
choices (e.g., Indejejikian and Matêjka, 2012), (2) a relation between a MC
practice and an element of the control environment that is not a choice
(e.g., Dekker, 2004), and (3) a holistic view on MC in which no relation
between MC practices is taken into account, i.e., MC as a package (e.g.,
Widener, 2004). While we do not argue that these alternative views are
incorrect by themselves, they have nothing to do with interdependence of
MC practices and MC systems. We elaborate on this issue in Section
‘Implications and guidelines for future research’.
 I. Grabner, F. Moers / Accounting, Organizations and Society 38 (2013) 407–419
Our paper contributes to the literature in several ways.
The first contribution is relatively straightforward. If exam-
ining multiple MC practices at the same time is relevant
and important, which we believe to be the case, then
understanding when it is important to address multiple
MC practices simultaneously, why this is the case, and
what the empirical implications are, is fundamental. We
not only provide answers to these questions, but also pro-
vide guidelines for future research in this area. Second,
while the systems approach has clearly identified the prob-
lem with the reductionist approach, it has itself been
unsuccessful in addressing the problem. Drazin and Van
de Ven (1985, pp. 521–522) state that
‘‘the tasks for theorists and researchers adopting the
systems definition of fit are [. . .] to understand which
patterns of organizational structure and process are
internally consistent and inconsistent’’.
Given that the literature has made no attempt to explic-
itly define ‘‘internal consistency’’, progress has been slow
at best. Management control research, and contingency re-
search in particular, has more than other areas been highly
self-reflective with ongoing debate and commentary on
how to improve the field (e.g., Bisbe, Batista-Foguet, &
Chenhall, 2007; Chenhall, 2003; Chenhall & Moers, 2007;
Fisher, 1995; Hartmann & Moers, 1999; Luft & Shields,
2003; Otley, 1980; Van der Stede, Young, & Chen, 2005).
Our study follows in this tradition. In particular, our anal-
ysis provides a formal definition of ‘‘internal consistency’’
and shows how it can be used to conceptualize MC sys-
tems, thereby giving contingency theorists the necessary
ingredient to move forward.
The remainder of this paper is structured as follows. In
Section ‘What is a MC system or package?’, we discuss two
views of MC, i.e., MC as a package and MC as a system and
provide two distinct working definitions for these views. In
Section ‘Formal analysis of MC design’, we present our gen-
eral theoretical framework and provide a formal analysis of
MC design, while in Section ‘From theory to empirics’ we
translate this framework to the empirical setting. In Sec-
tion ‘Implications and guidelines for future research’, we
provide explicit guidelines for future research and we con-
clude in Section ‘Conclusion’.
What is a MC system or package?
When examining MC as a system or as a package, the
first essential question is what is meant by these terms.
Numerous hints at this have been made in the accounting
literature, albeit lacking clarity and consistency. From our
reading of the literature, these terms have often been used
interchangeably. However, some authors suggest signifi-
cant differences between the two concepts. In this section,
we develop two working definitions of MC as a system ver-
sus a package based on the type of relation that exists be-
tween MC practices.
The existence and importance of MC interdependencies
has been raised multiple times in the literature. In his sem-
inal paper, Otley (1980, p. 421) states ‘‘. . .what constitutes
an appropriate AIS will be influenced [. . .] by the other
409
control processes that are complementary to the AIS’’. This
statement indicates that the usefulness of one MC practice
depends on what other MC practices are in use. Thus, if an
organization does not take the interdependence among MC
practices into account, it will forego some benefits or incur
some unnecessary costs. Alternatively, if an organization
does take it into account, then the choice of one MC prac-
tice is related to the choice of other MC practices. Related
to this latter case, Chenhall (2003, p. 131) raises the con-
cern that:
‘‘. . .if specific accounting controls are systematically
linked with other organizational controls, studies that
exclude or do not control for these elements within
the research method may report spurious findings’’.
This statement indicates that whether or not MC prac-
tices are related to each other does not only have concep-
tual implications but also empirical implications. In the
context of the contingency literature discussed by Chenhall
(2003), it specifically implies that an observed relationship
between a contextual variable and one MC practice can be
spurious due to the contextual variable being related to a
second MC practice that is related to the first. We elaborate
on such issues later in the paper in more detail.
The papers by Otley (1980) and Chenhall (2003) are just
two examples where a hint at a system is made in terms of
relationships among MC practices. Both quotes emphasize
the importance of accounting for potential interdepen-
dence between MC practices for management control to
be most effective. We therefore propose that MC practices
form a system if these practices are interdependent and
the design choice has taken the interdependencies into
account.
A somewhat different view seen in the literature is the
conceptualization of MC as a package. In a recent paper,
Malmi and Brown (2008) directly confront the question
of what is conceptually meant by a MC package by provid-
ing a ‘‘conceptual typology’’. In essence, Malmi and Brown
(2008) assume that there is a MC package because we ob-
serve, in real-life, that organizations have multiple MC
practices in place at the same time. They state that: ‘‘As a
general conception, a management control systems (MCS)
package is a collection or set of controls and control sys-
tems.’’ (Malmi & Brown, 2008, Footnote 1). Their typology
therefore provides a (non-exhaustive) list of MC practices
that can be included in a package, each of them grouped
in a particular category, to guide future research. This per-
spective on management control does not rely on a partic-
ular theory that accounts for possible interdependencies
between control choices because the aim is to provide a
more holistic view of the MC practices in place, not inter-
dependence among them.
The difference between a system of control choices and
the notion of a control package is best described by Ferreira
and Otley (2009, p. 276), who state that
‘‘. . . it should be noted that it is not assumed that an
extant PMS will be coherent. Otley (1980) discussed
control ‘packages’ rather than control ‘systems’ because
he had found that they tended to be composed of sets of
loosely coupled elements. These were often designed
410 I. Grabner, F. Moers / Accounting, Organizations and Society 38 (2013) 407–419
and implemented by different people, in different parts
of an organization, at different times’’.
From this it becomes apparent that the notion of MC as
a package cannot be used interchangeably with the notion
of MC as a system, as the latter assumes conscious deci-
sions on the design of interdependent controls. In line with
Malmi and Brown (2008), we propose to view the MC
package of a given organization as containing the complete
set of MC practices in place, thus mirroring the organiza-
tion’s control environment. This implies that the MC pack-
age can be composed of a set of MC systems and/or of a set
of independent MC practices addressing unrelated control
problems.3
Using the proposed definitions of MC system and MC
package, it also becomes apparent that once the aim is to
investigate interdependencies between MC practices, the
MC as a package perspective is ill-suited to start addressing
such issues. To examine interdependencies it is necessary
to take a MC as a system perspective. Furthermore, this
perspective matches the maintained assumption of the
systems approach to contingency theory that organiza-
tional design choices involve selecting multiple MC prac-
tices and assuring that these are internally consistent.
To address issues related to MC as a system, i.e., inter-
dependence/internal consistency, we rely on complemen-
tarity theory because this theory explicitly addresses how
a decision maker tries to maximize ‘‘performance’’ by
simultaneously deciding on multiple choice variables. This
choice follows Merchant et al.’s (2003) call to exploit
synergies between the economics and accounting litera-
tures when it comes to explaining the concept of fit. In
the next section, we therefore build on complementarity
theory to provide insights into the decision making process
when confronted with having to decide on multiple MC
variables.4
Formal analysis of MC design
We provide a simple formal analysis of MC design to
illustrate several issues related to the choice of multiple
MC practices. We provide a general framework that allows
us to illustrate different theoretical perspectives by making
specific assumptions within this framework. By doing this,
we make it explicit what assumptions some theories or
perspectives rely on and to what extent these assumptions
are incompatible. We keep all our formal characterizations
3
It is possible that a set of interdependent MC practices are designed
taking these interdependencies into account, and thus form a MC system,
but that at a later stage MC practices are added without taking any
interdependencies into account. The MC system then gets embedded
within a broader set of MC practices that are a MC package. If the latter
practices get redesigned to ‘‘connect’’ with the former, the broader set of
MC practices move back into a system configuration. This trial and error
approach to design is likely to occur in practice. We thank an anonymous
reviewer for pointing this out. Such a trial and error approach to design
further has an impact on the researcher’s choice of empirical strategy,
which we discuss in Section ‘From theory to empirics’.
4
We note that our goal is not to provide a comprehensive discussion of
complementarity theory, but rather to apply the insights from this theory
to the issue of MC as a system. We particularly refer the reader to Milgrom
and Roberts (1990, 1995) for more details about complementarity theory.
and derivations simple, but nevertheless explain them in
detail.
Assume that a decision maker, say a top executive of an
organization, is confronted with the following decision
(maximization) problem:
Max pðx; z; pÞ ¼ Max Vðx; zÞ  pT x ð1Þ
x x
where pðx; z; pÞ represents the net-benefits to the decision
maker, which solely for convenience we label ‘‘profit’’ in
the remainder of the text; Vðx; zÞ is the pay-off (produc-
tion) function relevant to the decision maker; x is a vector
of MC (choice) practices; z is a vector of contextual (prede-
termined) variables; and p is a vector of the ‘‘cost per unit’’
of x, which represents the separate costs of adopting each
MC practice.5
Thus, the decision maker aims to maximize p by mak-
ing decisions about x, which are under his control, given
z and p, which are predetermined. For now we interpret
z as a vector of organization characteristics, but this vector
can contain any variable that is predetermined from the
perspective of making decisions about x. Maximization of
the objective function specified in Eq. (1) results in the
following:
V x ðx ; zÞ ¼ p ð2Þ
where the subscript refers to the (first) derivative of VðÞ to
x and the superscript ‘‘*’’ reflects the optimal decision. Eq.
(2) says nothing more than that the decision maker will
make design choices such that the marginal revenues
equal marginal costs, thus choosing a level of a particular
MC practice where the marginal returns of that practice
equal the marginal adoption cost of that practice.
Instead of characterizing the optimal MC design choices
in a more detailed fashion, we discuss two design ap-
proaches, each of which makes different assumptions
about Eq. (1). The two design approaches that we formally
analyze are the two different approaches to contingency
theory, i.e., the reductionist approach and the systems ap-
proach. Of importance to the subsequent section is the fol-
lowing general characterization:
@p
¼ V xi ðx; zÞ  pi ð3Þ
@xi
Eq. (3) reflects the impact of a change in MC practice xi
on profit and shows that the value of this MC practice is
potentially affected by all MC practices, including itself
(non-linearity), by the contextual variables, and the sepa-
rate adoption costs. In the following scenarios, we assume
away non-linearities of xi itself, as it is not pertinent to our
discussion. The notation we use for a vector that contains
all MC practices except for xi is xi . Eq. (3) further shows
that any interdependence between MC practices is cap-
tured by the pay-off function VðÞ. While the costs of
adopting a particular practice clearly affect adoption, these
costs are separate and do not affect productivity. Therefore,
the adoption costs of MC practices do not play a role in
determining whether these practices are interdependent.
5
Adoption should be interpreted broadly here, in the sense that it not
only captures presence (vs. absence), but also higher (vs. lower) values.
 I. Grabner, F. Moers / Accounting, Organizations and Society 38 (2013) 407–419
The reductionist approach to design
The reductionist approach assumes that the anatomy of
management control within the organization can be
decomposed into individual MC practices that can be
examined in isolation. Formally, this implies that the
reductionist approach assumes that Eq. (1) is characterized
in a way such that the following holds:
@2p
¼0
@xi @xj–i
That is, it assumes that the value of any MC practice
does not depend on the use of any of the other MC prac-
tices. Given the contingency nature, it further assumes that
@2p
–0 8i; 9k
@xi @zk
i.e., the value of each MC practice is affected by at least one
contextual factor. Thus, the value of each MC practice only
depends on the contextual variables and the separate
adoption costs, i.e.,
@p
¼ V xi ðzÞ  pi
@xi
The reductionist approach thus assumes that the bene-
fits of each individual MC practice (and thus the choice) are
only affected by contextual factors. Eq. (6) further implies
that the reductionist approach allows each MC practice
to be affected by multiple contextual variables, and the
same contextual variable can affect the choice of multiple
MC practices. That is, even though historically empirical
research following the reductionist approach has exam-
ined only one MC practice and one contextual factor at a
time, this is not a restriction imposed by the approach.
The systems approach to design
The systems approach maintains that the decision ma-
ker needs to make two design choices: (1) selecting MC
practices that match the set of contingencies facing the
organization, and (2) assuring that the MC practices are
internally consistent (e.g., Drazin & Van de Ven, 1985). In
terms of our framework, this formally implies that the sys-
tems approach assumes that Eq. (1) is characterized in a
way such that the following holds:
@2p @2p
– 0 8i; 9k and – 0 8i; 9j
@xi @zk @xi @xj–i
That is, it assumes that the value of each MC practice is
affected by at least one contextual factor – the first part/first
design choice – as well as that the value of each MC practice
depends on the use of at least one other MC practice (and
vice versa) – the second part/second design choice. Note that
the second part is required because ‘‘internal consistency’’
cannot have any substance when MC practiczes are inde-
pendent. As a result, the value of a MC practice, according
to the systems approach, is characterized by:
@p
¼ V xi ðxi ; zÞ  pi
@xi
411
which implies that the choice of a MC practice depends on
contextual factors and separate adoption costs, as well as
the use of other MC practices.
Conceptual implications of different approaches
The previous two approaches cover two typical views
on MC design that form the implicit or explicit basis for
developing hypotheses about this design. Given the trend
in examining multiple MC practices within one study, it
ð4Þ
is important to understand whether or not this is critical
for theory testing purposes or just a ‘‘courtesy’’ of the re-
searcher to broaden the paper. A comparison between
the assumptions underlying the reductionist approach
and the systems approach reveals the (obvious) criterion.
That is, it depends on the researcher’s assumption about
ð5Þ
@2p
ð9Þ
@xi @xj–i
This cross-partial captures, in one equation, the key
criticism on the reductionist approach. That is, the reduc-
tionist approach assumes that MC practices are indepen-
ð6Þ dent, in which case the cross-partial is zero, while the
systems approach addresses this ‘‘problem’’ by assuming
that there is interdependence, in which case the cross-par-
tial is non-zero.
Despite the fundamental nature of Eq. (9), this issue is
only positioned as the ‘‘second choice’’ of the systems ap-
proach. Although the ordering of the choices might not re-
flect an intended ordering of importance, subsequent
research using the systems approach has focused on exam-
ining how different clusters of MC practices are associated
with contextual factors (e.g., Chenhall & Langfield-Smith,
1998; Gerdin, 2005; Moores & Yuen, 2001). It has thus ad-
dressed the first question of the systems approach of how
the selection of (clusters of) MC practices is associated
with (clusters of) contextual factors, but it has not explic-
itly addressed the second question of why these MC prac-
tices should be adopted together, i.e., why they are
‘‘internally consistent’’. Given that it is critical to take into
account multiple MC practices only when these MC prac-
tices are interdependent, the first question that researchers
need to address is whether or not this is the case. To pro-
vide guidance, we conclude this section with summarizing
what the formal definition of interdependence is and what
types of interdependencies can exist.
ð7Þ
@2p @2V
Definition of interdependence : ¼ –0
@xi @xj–i @xi @xj–i
ð10Þ
That is, the value of one MC practice depends on the use
of (some) other MC practice, which is captured by the pay-
off (production) function. Note that interdependence is
symmetric, i.e., if the value of xi depends on xj–i, then the
value of xj–i also depends on xi. Further note that interde-
pendence is a pairwise relationship. The sign of Eq. (10)
subsequently indicates what type of interdependence
ð8Þ exists.
412 I. Grabner, F. Moers / Accounting, Organizations and Society 38 (2013) 407–419

@2p @2V Given this specification, interdependence is reflected by

Definition of complements : ¼ >0 ð11Þ
@xi @xj–i @xi @xj–i 2
@ p @2V
¼ ¼ bx1 x2 ð17Þ
MC practices are complements when the benefits of one @x1 @x2 @x1 @x2
MC practice increase with the use of (some) other MC prac-
The optimal decisions resulting from Eq. (16), i.e., the
tice (and vice versa).6
optimal x1 and x2, are characterized by
@2p @2V
Definition of substitutes : ¼ <0 ð12Þ bx1 bx1 x2  bz1 x1 bz x
@xi @xj–i @xi @xj–i x1 ¼ þ x þ z1 þ 2 1 z2 ð18Þ
p1 p1 2 p1 p1
MC practices are substitutes when the benefits of one
MC practice decrease with the use of (some) other MC bx2 bx1 x2  bz1 x2 bz x
practice (and vice versa).
x2 ¼ þ x þ z1 þ 2 2 z2 ð19Þ
p2 p2 1 p2 p2
These equations show that, if bx1 x2 is not equal to zero,
From theory to empirics
then the MC practices affect each other and the effects
are identical in direction (sign), though not necessarily in
In the previous section we discussed the core concep-
magnitude (as this depends on the separate adoption costs
tual difference between two design approaches, focusing
of each MC practice). We can now use the above equations
on interdependence. We now turn to the empirics and
to illustrate the empirical implications and (potential)
show that this difference naturally has empirical conse-
problems, in terms of Type I and/or Type II errors, of using
quences. We further discuss different empirical strategies
either a reductionist approach or a systems approach.
aimed at examining interdependence.
We first analyze a setting in which the assumption of
the reductionist approach is valid, i.e., bx1 x2 ¼ 0. In that
Empirical implications
case, Eqs. (18) and (19) become
To make things more tangible, we now position our dis- bx1 bz1 x1 bz x
cussion in an empirical context by putting more structure x1 ¼ þ z1 þ 2 1 z2 ð20Þ
p1 p1 p1
on our general theoretical framework. Remember that
our general framework is built on Eq. (1), i.e., bx2 bz1 x2 bz x
x2 ¼ þ z1 þ 2 2 z2 ð21Þ
Max pðx; z; pÞ ¼ Max Vðx; zÞ  p x T
ð13Þ p2 p2 p2
x x
That is, if the MC practices are independent, then the
We impose specific functions for the pay-off function
‘‘regression coefficients’’ related to the design of x1 (x2) re-
Vðx; zÞ and the cost function pT x. In particular, we assume
flect cost-benefit trade-offs associated only with the use of
that the decision maker is confronted with making deci-
x1 (x2). In this case, a study that empirically examines, for
sions about two MC practices, x1 and x2, given two contex-
example, x1 in isolation is as informative about the design
tual factors, z1 and z2, and that the pay-off function has the
of x1 as a study that examines both x1 and x2. The anatomy
following form:
of management control within the organization can thus
Vðx; zÞ ¼ b0 þ bx1 x1 þ bx2 x2 þ bx1 x2 x1 x2 þ bz1 x1 z1 x1 be decomposed into individual MC practices that can be
examined in isolation. This expands the point made in
þ bz2 x1 z2 x1 þ bz1 x2 z1 x2 þ bz2 x2 z2 x2 ð14Þ
Section ‘The reductionist approach to design’ that, if the
where the subscripts on the coefficients refer to the ‘‘vari- reductionist approach is valid, it is neither conceptually
able’’ to which it relates. Eq. (14) captures the pay-off effects nor empirically necessary to examine multiple MC
of different combinations of x1 and x2, and the degree to practices.
which the pay-off of x1 (x2) depends on z1 and z2. We assume The implication that it is ‘‘not necessary’’ to examine
that the cost function has the following form: multiple MC practices does not imply that one cannot do
p1 2 p2 2 this when the reductions approach is valid. Problems,
pT x ¼ x þ x ð15Þ however, occur when researchers rely on a systems ap-
2 1 2 2
proach in a setting in which the reductionist approach is
The decision maker thus maximizes the following valid. Even when bx1 x2 ¼ 0, the empirical results associated
objective function with multiple MC practices can be misinterpreted as pro-
Max pðx; z; pÞ ¼ Max b0 þ bx1 x1 þ bx2 x2 þ bx1 x2 x1 x2 viding evidence of interdependence. For example, assume
x x ;x1 2 that bz1 x1 > 0, bz2 x1 > 0, bz1 x2 < 0, and bz2 x2 < 0, i.e., assume
þ bz1 x1 z1 x1 þ bz2 x1 z2 x1 þ bz1 x2 z1 x2 that the value of x1 (x2) increases (decreases) with higher
p p  values of z1 and z2. In that case, a number of empirical anal-
þ bz2 x2 z2 x2  1 x21 þ 2 x22 ð16Þ yses will show the following results: (1) the cross-sectional
2 2
correlation qðx1 ; x2 Þ is negative, (2) there are clusters of
High/Low and Low/High x1–x2 combinations, and (3) in
6
explaining the MC practices, the regression coefficients
Strictly speaking, in complementarity theory, complements are defined
by a non-negative cross-partial rather than a strictly positive one. We use a
on the contextual factors have opposite signs for the two
stricter requirement here to emphasize the difference between indepen- MC practices. All these results might be interpreted as
dence and interdependence. evidence of a substitution effect. It should be clear,
 I. Grabner, F. Moers / Accounting, Organizations and Society 38 (2013) 407–419
however, that such an interpretation represents a Type I
error, as any cross-sectional relationship between x1 and
x2 is solely driven by their joint contextual determinants.
In empirical terms, the results are driven by a correlated
omitted variable problem and in particular by not ade-
quately controlling for contextual factors.
This correlated omitted variable problem is obviously
not restricted to relying on a systems approach in a valid
reductionist setting. The opposite holds as well. For exam-
ple, assume now that the systems approach to design is va-
lid, i.e., bx1 x2 –0, but that the researcher uses a reductionist
approach and examines x1 in isolation. From Eqs. (18) and
(19) it should be clear that, given that x2 is affected by z1
and z2, and bx1 x2 –0, omitting x2 from Eq. (18) will bias
the coefficients bz1 x1 and bz2 x1 (see Chenhall & Moers,
2007 for a detailed discussion of the omitted variable prob-
lem). This can lead to the extreme case where the value of
x1 is not affected by z1, i.e., the real bz1 x1 ¼ 0, but the empir-
ical analysis reveals a significant association between x1
and z1. Thus, in a cross-section there will be an association
between x1 and z1 despite the fact that z1 is not a relevant
contextual factor for x1 per se (there is only an indirect ef-
fect via the interdependence between x1 and x2). This for-
malizes Chenhall’s (2003) point mentioned earlier that, if
two MC practices are ‘‘systematically linked’’, i.e., interde-
pendent, then not controlling for this interdependence can
trigger spurious findings (Type I error).
The problem of ‘‘finding things that are not there’’, i.e.,
Type I errors, is not the only problem associated with mak-
ing incorrect assumptions and/or designing incorrect
empirical tests. For example, Type II errorsh can occur when i
the sign of bx1 x2 is opposite to the sign of bzi x1  bzi x2 , i.e.,
when contextual factors have opposite (identical) direc-
tional effects on MC practices that are complements (sub-
stitutes).
  In that case, the cross-sectional correlation
q x1 ; x2 will be biased towards zero and thus underesti-
mate the ‘‘true’’ interdependence captured by bx1 x2 . This
indicates that not adequately controlling for contextual
factors is as problematic as not adequately controlling for
interdependencies.
Empirical strategies
Now that we know what the empirical consequences of
different (theoretical) assumptions are and how some
empirical observations are not informative for theory-test-
ing purposes, the next question is obviously: what empir-
ical strategy will be informative about bx1 x2 and can thus be
employed to test for interdependence? In essence, there
are two ways to proceed; one is to focus on the pay-off
function VðÞ in Eq. (1) and one is to focus on the choices
that result from the maximization of the profit function
pðÞ. We briefly discuss each of the two methods and refer
the reader to Arora and Gambardella (1990), Arora (1996)
and Athey and Stern (1998) for more detailed discussions.
As will become clear, the two methods resemble Drazin
and Van de Ven’s (1985) distinction between a ‘‘contin-
gency’’ approach to fit, i.e., examining the outcome of a
combination of MC practices, and a ‘‘congruence’’ approach
to fit, i.e., examining an association between MC practices.
More importantly, given that the strength of each method
413
is typically negatively related to the strength of the other
method (Aral, Brynjolfsson, & Wy, 2012), it further pro-
vides guidance as to which method is preferred and when.
Estimating pay-off (production) function
If the focus is on the pay-off function VðÞ, then an at-
tempt is made to directly estimate bx1 x2 by designing an
empirical equation that mimics the pay-off function. Typi-
cally the regression equation will look something like
Performance ¼ b0 þ b1 x1 þ b2 x2 þ b3 x1 x2 þ b4 z1 x1
þ b5 z2 x1 þ b6 z1 x2 þ b7 z2 x2 þ e ð22Þ
where b3 is the estimate of bx1 x2 . Essentially, the equation
examines whether or not the MC practices are more or less
productive when adopted in tandem. The equation is fur-
ther consistent with a contingency approach to fit in which
performance is explained by different pairs of design and
context.
To apply this method, a number of issues have to be
explicitly considered. First, the measure of ‘‘Performance’’
on the left-hand-side (LHS) of the equation should be di-
rectly related to the decision process. The decision maker
decides on MC practices from the perspective of maximiz-
ing performance related to a particular management con-
trol problem. More to the point, the measure of
performance should be directly related to the pay-off func-
tion VðÞ instead of the profit function pðÞ because interde-
pendence is captured by VðÞ and using a broader measure
of performance adds (potentially systematic) error in a
cross-sectional analysis. As a result, the typical measures
of performance used in management control studies such
as subunit performance seem to be ill-suited when esti-
mating Eq. (22).
Second, there is a problem when using this method to
examine more than two MC practices. That is, if more than
two MC practices are examined, then the number of two-
way interactions increases and, depending on the theory,
might require three-way interactions (see e.g., Aral et al.,
2012). Although this is not a hurdle for any statistical/
econometrics software, it does trigger the problem of inter-
preting higher-order interactions (see e.g., Hartmann &
Moers, 1999).
Last but not least, given that the purpose is to examine
what combinations of x1 and x2 are most productive, all
combinations should in principle be empirically observed
for b3 to be an estimate of bx1 x2 . This implies that, in testing
for interdependence, the method’s underlying assumption
is that some organizations do not make decisions based on
this interdependence, resulting in suboptimal control
choices (and thus also cross-sectional variation in perfor-
mance). The ‘‘pay-off function’’ (‘‘contingency’’) approach
is therefore most suited (1) when it is more likely that
(some) decision makers have a lack of understanding of
the interdependence and are thus still experimenting with
particular MC practices, and/or (2) when an argument can
be made that (some) decision makers have a lack of incen-
tive to take the interdependencies into account.
414 I. Grabner, F. Moers / Accounting, Organizations and Society 38 (2013) 407–419
Estimating demand functions
If the focus is on the choices made by the decision maker
(revealed preferences), then the empirical test is aimed at
examining whether or not the MC practices are adopted
jointly, which implies that these choices covary. Our discus-
sion in Section ‘Empirical implications’ shows that simply
interpreting the cross-sectional correlation qðx1 ; x2 Þ is not
informative about interdependencies between MC practices
because this correlation might be biased upwards or down-
wards due to joint determinants. Fortunately, the observa-
tion that this correlation is potentially biased due to such
contextual factors also hints at a solution. In particular,
Arora and Gambardella (1990) formally show that, if choice
variables are interdependent, then these variables will
covary conditional on a set of ‘‘firm characteristics’’. In our
set-up this implies that, if bx1 x2 is positive (negative), then
the conditional covariance E½ðx1  Eðx1 jzÞÞ  ðx2  Eðx2 jzÞÞjz
will also be positive (negative).
To apply this method, we need an estimate of Eðxi jzÞ
and thus need to estimate the demand function xi ðzÞ. That
is, we need to regress each MC practice on a set of contex-
tual factors, which reflects the ‘‘demand’’ for each of the
MC practices that is driven by the contextual factors. The
residuals of these regressions are estimates of
ðxi  Eðxi jzÞÞ and the pair-wise correlation between the
residuals of two MC practices thus an estimate of (the sign
of) bx1 x2 .7
As with estimating the pay-off function, estimating de-
mand functions requires some careful considerations. First
and foremost is the choice of contextual variables on which
to condition the covariance. In a setting with only two rel-
evant MC practices, the covariance needs to be conditioned
on all joint determinants, i.e., all contextual variables that
affect the value of both MC practices. If more than two
MC practices are (theoretically) relevant, the covariance
between two choices needs to be conditioned on all con-
textual variables that are observable, irrespective of
whether they are joint determinants for a particular pair
of MC practices. Unobserved heterogeneity obviously re-
mains a potential concern here (see for a detailed discus-
sion of this, Athey & Stern, 1998).
A second consideration is the optimality of choices. The
method does not assume that just any preferences are re-
vealed but that the revealed preferences are (more or less)
consistent with the optimal decisions that follow from
maximizing the profit function. This is identical to the
assumption underlying the congruence approach to fit.
The ‘‘demand function’’ (‘‘congruence’’) approach is there-
fore best applied to problems where the interdependence
between MC practices is well-understood and/or there is
no reason to believe that decision makers have incentives
to ignore the interdependencies.
In sum, the pay-off function (contingency) approach
and the demand function (congruence) approach are two
distinct ways to examine interdependencies. The assump-
tions about optimality underlying each method are
7
For applications in the accounting literature, see Evans et al. (2010) and
Indjejikian and Matêjka (2012).
basically each other’s mirror image, which implies that, if
one method becomes more suited to examine a certain set-
ting, then the other method becomes less suited to exam-
ine that setting. Despite this difference, it is important to
note that both methods, and thus also the contingency
and congruence approach to fit, result from the exact same
theoretical framework and thus do not differ in their con-
ceptualization of fit. As a result, applying this framework to
empirically examine interdependencies does not require
the assumption that managers actually make optimal deci-
sions. What is required is a theory that predicts ‘‘optimal’’
decisions and thus also predicts the consequences of man-
agers deviating from these decisions.
Implications and guidelines for future research
The assumptions of MC interdependence carry some
important implications for future research on management
control system design. In this section, we put forward
some important questions that researchers aiming to
investigate MC interdependencies need to address upfront,
and discuss potential pitfalls if not taken into
consideration.
Question 1: What is the control problem I want to address?
Given that a set of controls implemented always reflects
the underlying control problem it tries to resolve, it is crucial
to first define the control problem that should be addressed
by a particular combination of controls. Control mecha-
nisms can be complements in order to solve a control
problem that is prevalent in one context, and substitutes
to deal with another control problem in a different context.
Question 2: What are the specific MC practices I want to
analyze?
Not only the control problem needs to be specified in
detail, also the MC practices have to be clearly defined. In
particular, the practices cannot be defined at a too aggre-
gate level, since this reduces the inferences that can be
drawn. For example, studies that examine whether ‘‘the re-
sults control system’’ is used diagnostically and interac-
tively at the same time are not informative about
whether the same and/or different practices within this
‘‘system’’ are used in complementary ways. Finding a posi-
tive relationship between the interactive and diagnostic
use of results controls might be interpreted as evidence
of complementarity. However, such an interpretation con-
tradicts Simons’ seminal field research on which the levers
of control (LOC) framework is based because it ignores the
individual practices that make up the control system. In his
description of Johnson & Johnson, it becomes apparent that
in order to be able to use budgets interactively, as part of
the results control system, and elicit local (private) infor-
mation from middle management, it is essential that these
budgets are not used to reward these managers at the
same time, since otherwise they would have an incentive
to withhold their information or bias it (Simons, 1987).
In other words, the benefit of using budgets interactively
 I. Grabner, F. Moers / Accounting, Organizations and Society 38 (2013) 407–419
decreases with using budgets diagnostically (and vice ver-
sa), i.e., they are substitutes. Furthermore, the benefit of
using budgets interactively increases with using subjectiv-
ity in rewards as part of the results control system (and
vice versa), i.e., they are complements. Examining MC
practices at a too aggregated level, as is typically done in
LOC studies, results in overlooking these subtleties in MC
design.
Question 3: Does increasing (decreasing) one MC practice not
prohibit increasing (decreasing) any other MC practice, i.e.,
are they really choices?
Investigating whether MC practices are complements
(substitutes) in solving a particular control problem re-
quires that the designer of the MCS can freely decide about
the adoption of a particular MC practice. Some MC prac-
tices, however, are regulated by law, in which case the
decision maker has no option other than to adopt these
practices (for example, standardization of procedures in
hospitals). In that case, these practices are exogenously
imposed and thus predetermined variables (in terms of
our model, this implies that these MC practices are not part
of x, but part of z).
A somewhat different example of elements of the con-
trol environment that are not true choices can be found
in the literature on the control of inter-organizational
relationships. This literature is among other things con-
cerned with the relationship between trust and control
(see for example Dekker, 2004, 2008; Emsley & Kidon,
2007; Tomkins, 2001). As Dekker (2004, p. 33) argues:
‘‘A much-debated question in the IOR literature is the
relationship between formal control mechanisms and
trust; i.e. whether (goodwill) trust is a substitute or a
complement for formal control mechanisms in the
management of appropriation concerns. [. . .] A substi-
tutive relationship suggests that trust and formal con-
trol are inversely related; more trust results in less
use of formal control mechanisms and vice versa.’’
Although a particular MC practice might be associated
with trust, the decision maker cannot directly decide on
trust, i.e., trust itself is not a real choice. For example, if
contingencies change the optimal level of formal control,
managers can neither ‘‘abandon’’ the trust of their employ-
ees nor ‘‘adopt’’ it. The only thing that might happen is that
the control choice subsequently impacts employees’ trust.
The following citation from Dekker (2004, pp. 33–34) con-
firms that it is this association that is actually being argued
for rather than interdependent choices:
‘‘When, for instance, a firm has a reputation for being
trustworthy, its partners may choose to use less formal
control mechanisms compared to a firm with a less
favorable reputation. [. . .] Extensive use of formal con-
trol suggests a lack of belief in one’s goodwill or compe-
tence and therefore results in a damaging effect on
relational trust’’.
From a research perspective this implies that variables
such as trust are not part of the MC choices x, but rather
part of the predetermined factors z or part of the control
415
problem to be addressed.8 The observation that MC prac-
tices can be affected by and/or can affect trust clearly raises
important conceptual and empirical issues. However, the
implication here is that complementarity theory and the no-
tion of complements and substitutes, as defined by Milgrom
and Roberts (1990, 1995), are not applicable to these prob-
lems, and should thus be avoided.
Question 4: How and why do the returns of one MC practice
depend on the use of other MC practices and vice versa?
After having identified the control problem and specific
MC practices, and established that these practices are real
choices, the most fundamental question is raised. That is, if
research explicitly aims at investigating MC interdepen-
dencies, a crucial aspect is to clearly present a theory as
to why and how the benefits of using one MC practice
are related to the use of another, and vice versa. One exam-
ple in the literature is Evans, Kim, Nagarajan, and Patro
(2010), who build their arguments regarding the interrela-
tion of financial and non-financial measures on the eco-
nomic definition of complementarity. As Evans et al.
(2010, p. 38) argue:
‘‘Paying physicians based solely on their financial pro-
ductivity, however, may discourage physicians from
participating in important non-revenue-generating
activities, such as quality management or cost control
(Latham Consulting Group, 1990). Further, when pro-
ductivity control is not accompanied with proper con-
trol procedures for cost containment, it could lead to
overuse of resources with no increase in quality. The
professional health care literature expresses similar
concerns (Latham Consulting Group, 1990; Rodeghero,
2001). Rodeghero (2001, 156) observes that ‘‘only when
effective resource management and quality assurance
programs are in place can productivity-based pay plans
ensure the appropriate rewards for the right practice
behaviors.’’ These arguments suggest that the benefits
from using productivity-based performance measures
will be larger when they are used in conjunction with
nonfinancial performance measures than when they
are used in isolation.’’
Another example is Abernethy, Bouwens, and Van Lent
(2004, p. 546), who investigate the interdependence be-
tween decentralization and the use of performance mea-
sures. In particular, they state that
‘‘. . .the two choices are tightly coupled. Jensen (2001)
argues that corporate management will only decentral-
ize when it can implement a performance measurement
system that captures decision rights allocated to divi-
sion managers. DSMs are designed to summarize the
decisions over which a divisional manager has responsi-
bility. They provide corporate management with the
possibility to assess the contribution of the division to
firm value and to determine if divisional managers are
8
For example, it could be the objective of the decision maker to simply
maximize trust.
416 I. Grabner, F. Moers / Accounting, Organizations and Society 38 (2013) 407–419

using decision rights optimally (Solomons, 1965; Zim- evaluation (Kaplan, 1983). The MCS is a system com-
merman, 1997).’’ posed of complementary components (Milgrom & Rob-
erts, 1995; Otley, 1994). This study includes personnel
Other papers investigate multiple controls but explicitly
controls, traditional results controls, and nontraditional
argue that there is a sequence in the choices of these con-
results controls [. . .]. Thus, this study provides a broader
trols. For example, Indejejikian and Matějka (2012) argue
investigation into the design of the MCS’’.
that accounting and operational centralization are comple-
ments, but also argue that the level of operational central-
Although this argumentation suggests interdependen-
ization determines the degree of accounting centralization.
cies between complementary MC practices, the hypothe-
Specifically, Indejejikian and Matějka (2012, p. 275) state
sis development solely focuses on the effects of a set of
that
contextual variables on each MC practice separately.
‘‘operational decentralization is the most fundamental Conceptually, such an argumentation matches the
choice among the decision variables considered in this assumption underlying the reductionist approach, which
study and is determined only by exogenous characteris- implies that (1) complementarity theory and interdepen-
tics of a BU’s environment. That is, we assume that dence are not applicable, and (2) it is a ‘‘courtesy’’, not a
operational decentralization is predetermined at the necessity to investigate multiple control practices at the
time a firm considers the extent of accounting same time.
decentralization’’. In sum, if control practices are considered to be deter-
mined sequentially or independently of each other, com-
In a similar vein, Widener (2007, p. 761) posits that the
plementarity theory is not suitable to address these
four levers of control are complementary, but states that
problems. Also in these cases, the use of the terminology
the belief system is the starting point. She, for example,
proposed by Milgrom and Roberts (1990, 1995) is mislead-
states
ing, and should be avoided. If control practices are, how-
‘‘once the firm’s strategy has been clarified and commu- ever, assumed to be interdependent, it is crucial to
nicated through the mission and vision contained in its develop a theory as to why and how the benefits of using
beliefs system, top managers will realize where poten- one MC practice are related to the use of another, and vice
tial threats and opportunities may reside and can versa.
implement an interactive system’’.
Question 5: What causes the optimal system solution to move
Both these quotes unambiguously indicate that the as-
around, i.e., what causes the optimal MC system to vary in a
sumed relationship between two (or more) MC practices
cross-section and/or over time?
is one of unidirectionality. The assumption about a unidi-
rectional relationship between MC choices, however, hides
While interdependence implies that optimal MC
an even more critical assumption. For example, while oper-
practices covary, an important question is whether such
ational decentralization is a real choice and affects the re-
behavior is observable in an empirical setting. Since, if
turns of another real choice (accounting decentralization),
there is only one optimal solution applicable to all firms
it is assumed that the returns to operational decentraliza-
all the time, the empiricists is stuck with observing only
tion do not depend on accounting decentralization and/
one particular system. The researcher therefore needs to
or that the decision maker cannot respond to any
address why there is variation in firms’ adoption of inter-
(inter)dependence. The assumption that the returns of
dependent practices in a cross-section and/or over time.
one MC choice depend on another MC choice but not vice
We discuss three different causes of variation in the opti-
versa is not only inconsistent with complementarity, it is
mal MC system, which are related to the cost function
also impossible once both are considered as choices.9 The
and the pay-off function.
critical, hidden assumption is thus that a real choice is trea-
ted as not being a real choice, in which case we are back at
Question 5a: Is there variation in the separate adoption costs
Question 3. The main difference with the discussion related
of the MC practices?
to Question 3 is that now the researcher has the difficult task
of substantiating why a MC practice that was once a choice
If two MC practices are complements and the sepa-
cannot be revisited when other MC practices change. In sum,
rate adoption costs of these practices are zero, then the
once unidirectionality is conceptually assumed, it is neither
optimal decision for all firms is to jointly adopt both
possible to apply complementarity theory nor relevant to
practices and there is thus no variation in MC systems.
empirically test for interdependence.
For there to be variation in MC systems, there should
Finally, another set of papers refer to MC as interrelated
be variation in the adoption costs of at least one MC
systems, but does not explicitly take interdependencies
practice across firms at one point in time (cross-sectional
between controls into account. For example, Widener
analysis) and/or over time (longitudinal analysis). That is,
(2004, p. 308) states that
the separate adoption costs of at least one MC practice
‘‘the purpose of the MCS is to provide information that should be higher for some firms than for others and/or
is useful in decision-making, planning, control, and should change over time. Although it is not necessary
to measure these costs, it is important to provide a plau-
sible argument for why there would be variation in these
@2 p @2 p @2 p 2
9
If @x1 @x2 –0; then @x2 @x1 –0; since @x1 @x2
p .
¼ @x@2 @x1
costs.
 I. Grabner, F. Moers / Accounting, Organizations and Society 38 (2013) 407–419
Question 5b: What are the exogenous variables that affect the
marginal returns of individual MC practices? That is, what are
the practice-specific contextual factors?
The need for control variables is relevant in any type of
research, and not a particularity of research on MC interde-
pendencies. However, this point cannot be made too often,
since it is obviously crucial to control for the (joint) deter-
minants of MC choices. Ignoring (joint) determinants in the
analysis of interdependence significantly reduces the infer-
ences that can be drawn about MC design. Such studies
cannot draw inferences about interdependence, but only
about ‘‘clustering’’ of controls or a loosely-coupled control
package. Joint movement (i.e., correlation) can be induced
by contextual factors that affect all control choices. For
example, let’s say that task uncertainty affects both the
use of selection procedures and the use of non-financial
performance measures. This implies that an increase in
uncertainty will lead to higher use of both types of control.
In a cross-section, we would observe a positive correlation,
indicating joint movement of the control choices. This cor-
relation, however, does not necessarily mean that the two
MC practices are complements (see also the discussion in
Section ‘Empirical implications’).
Question 5c: What are the exogenous variables that affect the
marginal returns of combinations of MC practices? That is,
what are the system-specific contextual factors?
So far we have characterized the contextual factors z as
impacting the value of individual MC practices. There is,
however, no reason to believe that such a ‘‘contingency
theory’’ type of assumption is only applicable to individual
MC practices. On the contrary, it seems at least as plausible
that contextual factors also affect the degree of interdepen-
dence among MC practices. This implies that some MC
practices might be, say, complements in one context but
independent in another context, potentially because these
contexts trigger different control problems. Formally, this
implies that Eq. (10) should be rewritten into
@2p @2V
¼ ¼ V xi xj–i ðzÞ
@xi @xj–i @xi @xj–i
in which case the vector z captures system-specific contex-
tual factors.
An opportunity for future research is therefore to ex-
tend the view of contextual factors being only practice-
specific to (some of) these factors being system-specific.
What we are not saying is that we now should blindly as-
sume that contextual factors are system-specific. Clearly
there should be a theoretical argument for why a specific
contextual factor affects the degree of interdependence
among multiple MC practices. What we are saying is that
such a theoretical perspective might better explain the
‘‘combinations’’ of MC practices we observe and/or recon-
cile some ‘‘inconsistent’’ findings related to relationships
between a contextual factor and an individual MC practice.
In addition, Cassiman and Veugelers (2006) suggest that it
might be more important to understand under what condi-
417
tions certain practices are interdependent than determin-
ing whether they are interdependent per se.
Question 6: What assumptions about optimality are made?
As discussed before, the contingency and congruence
approach are two distinct ways to examine interdependen-
cies. In both cases, the researcher needs a theory that pre-
dicts interdependence and thus also predicts the
consequences of managers deviating from the ‘‘optimal
decisions’’ triggered by this interdependence. The decision
of which approach to follow depends on the assumptions
about optimality that the researcher makes. If it can be rea-
sonably assumed that managers are still experimenting
with the use of multiple MC practices and are thus likely
to not make optimal decisions, the contingency approach
is suitable, i.e., estimating pay-off functions. If, however,
the researcher aims at investigating the interdependence
of established control practices whose interrelation is well
understood, following a congruence approach is most
appropriate, i.e., estimating demand functions.
A possible extension regarding the assumption of opti-
mality is to assume multiple decision makers. Assume for
example that two MC practices x1 and x2 are complements
from an organization performance perspective but that the
decision rights with respect to each of these practices re-
side with two different managers. If these managers do
not coordinate their decisions, potentially because of the
incentives they are provided with, they will ignore the
complementarity when making their decisions. The result
of this is that, what should be a system of interdependent
MC practices is potentially observed as a package of inde-
pendent MC practices. More importantly, the theory that
predicts the complementarity between these two MC prac-
tices also predicts the negative consequences of this lack of
coordination. An opportunity for future research is there-
fore to identify under what conditions the assumption of
one decision maker is important but unlikely to hold, and
examine the consequences of ignoring interdependencies
(see e.g., Siggelkow, 2002).
In summary, the following check-list needs to be com-
pleted before examining issues related to MC
interdependencies:
ð23Þ
1. What is the control problem I want to analyze?
2. What are the specific control practices I want to investi-
gate, and can I order each MC practice in a meaningful
way?
3. Does increasing (decreasing) one MC practice not
prohibit increasing (decreasing) any other MC practice,
i.e., are they really choices?
4. How and why do the returns of one MC practice depend
on the use of other MC practices and vice versa, i.e., what
does the pay-off/production function look like and why?
5. What causes the optimal MC system to vary in a cross-
section and/or over time?
a. Is there variation in the separate adoption costs of
the MC practices?
b. What are the practice-specific contextual factors?
c. What are the system-specific contextual factors?
6. What assumptions about optimality do I make?
418 I. Grabner, F. Moers / Accounting, Organizations and Society 38 (2013) 407–419
Conclusion
The reductionist approach to contingency theory has
been heavily criticized for valid reasons, but at the same
time the systems approach has not been able to deliver
the pledged ‘‘solutions’’. The predominant criticism regard-
ing the systems approach is that it has not yet succeeded in
advancing our knowledge on the configuration of multiple
control practices. The few studies relying on the systems
approach have reacted to the deficiencies of the reduction-
ist approach by trying to depict the entire control environ-
ment of the organization by identifying clusters of control
practices. However, there is a lack of convincing theories as
to why some control configurations might be observed
and/or be more successful than others. While the reduc-
tionist approach can be criticized for not being ambitious
enough, the systems approach struggles with being too
ambitious.
In this paper, we argue that to advance our knowledge
on management control systems, we need to take one step
at a time. That is, before we address the entire control envi-
ronment of the organization, i.e., the control package, we
first have to understand if and how certain control prac-
tices form control systems in order to solve a specific con-
trol problem. The systems approach to contingency theory
maintains that the organizational design involves two ba-
sic choices (Drazin and Van de Ven, p. 521): (1) selecting
MC practices that match the set of contingencies facing
the organization, and (2) assuring that the MC practices
are internally consistent. So far, studies have focused on
the first question, but avoided the second, in our opinion
even more important one. We argue that a major obstacle
to moving the systems approach forward is the lack of clar-
ity of what ‘‘internally consistent’’ means.
To address this problem, we propose that complemen-
tarity theory is suitable to put structure on what is meant
by ‘‘internally consistent’’ because the theory explicitly ad-
dresses how managers try to maximize ‘‘performance’’ by
simultaneously deciding on multiple choice variables. Gi-
ven the importance of interdependence for understanding
‘‘internally consistent’’, we provide a formal definition of
interdependence between MC practices and the two types
of interdependencies, i.e., complements and substitutes. In
general terms, interdependence implies that the value of
one MC practice depends on the use of another MC prac-
tice, and vice versa.
With this conceptualization of internal consistency in
mind, we discuss when it is important to address multiple
MC practices simultaneously, why this is the case, and what
the empirical implications are. We not only provide answers
to these questions, but also show that inadequately address-
ing these questions severely affects what we can learn. The
specific guidelines that we put forward should help in
overcoming this problem, thereby significantly improving
future research in this area. For contingency theory to devel-
op further, a bridge between the reductionist and the
systems approach needs to be build. By providing a defini-
tion of internal consistency, and proposing how it can be
used to conceptualize MC systems, we believe to have made
one important step in that direction.
Acknowledgements
The content of this paper has benefited from comments
from Chris Chapman, Rob Chenhall, Mike Shields (Editor),
two anonymous reviewers, and participants at the 2nd ER-
MAC Conference in Vienna, the 8th Accounting Research
Symposium in Madrid, the Research Workshop on ‘‘Perfor-
mance Management: From Strategy to Action’’ in Prague,
and the 8th EIASM Conference on New Directions in Man-
agement Accounting in Brussels.
References
Abernethy, M. A., Bouwens, J., & Van Lent, L. (2004). Determinants of
control system design in divisionalized firms. The Accounting Review,
70, 545–570.
Aral, S., Brynjolfsson, E., & Wy, L. (2012). Three-way complementarities:
Performance pay, human resource analytics, and information
technology. Management Science, 58(5), 913–931.
Arora, A. (1996). Testing for complementarities in reduced-form
regressions: A note. Economic Letters, 50(1), 51–55.
Arora, A., & Gambardella, A. (1990). Complementarity and external
linkages – The strategies of the large firms in biotechnology. Journal
of Industrial Economics, 38(4), 361–379.
Athey, S., & Stern, S. (1998). An empirical framework for testing theories
about complementarity in organizational design. Working paper,
NBER.
Bisbe, J., Batista-Foguet, J. M., & Chenhall, R. H. (2007). Defining
management accounting constructs: A methodological note on the
risks of conceptual misspecification. Accounting, Organizations and
Society, 32, 789–820.
Cassiman, B., & Veugelers, R. (2006). In search of complementarity in
innovation strategy: Internal R&D and external knowledge
acquisition. Management Science, 52(1), 68–82.
Chapman, C. S. (1997). Reflections on a contingent view of accounting.
Accounting, Organizations and Society, 22(2), 189–205.
Chenhall, R. H. (2003). Management control system design within its
organizational context: Findings from contingency-based research
and directions for the future. Accounting, Organizations and Society, 28,
127–168.
Chenhall, R. H., & Langfield-Smith, K. (1998). The relationship between
strategic priorities, management techniques and management
accounting: An empirical investigation using a systems approach.
Accounting, Organizations and Society, 23(3), 243–264.
Chenhall, R. H., & Moers, F. (2007). The issue of endogeneity within
theory-based, quantitative management accounting research.
European Accounting Review, 16(1), 173–195.
Dekker, H. C. (2004). Control of inter-organizational relationships:
Evidence on appropriation concerns and coordination requirements.
Accounting, Organizations and Society, 29, 27–49.
Dekker, H. C. (2008). Partner selection and governance design in interfirm
relationships. Accounting, Organizations and Society, 33, 915–941.
Drazin, R., & Van de Ven, A. H. (1985). Alternative forms of contingency fit.
Administrative Science Quarterly, 30, 514–539.
Emsley, D., & Kidon, F. (2007). The relationship between trust and control
in international joint ventures: Evidence from the airline industry.
Contemporary Accounting Research, 24(3), 829–858.
Evans, J. H., Kim, K., Nagarajan, N. J., & Patro, S. (2010). Nonfinancial
performance measures and physician compensation. Journal of
Management Accounting Research, 22, 31–56.
Ferreira, A., & Otley, D. (2009). The design and use of performance
management systems: An extended framework for analysis.
Management Accounting Research, 20, 263–282.
Fisher, J. (1995). Contingency-based research on management control
systems: Categorization by level of complexity. Journal of Accounting
Literature, 14, 24–53.
Gerdin, J. (2005). Management accounting system design in
manufacturing departments: An empirical investigation using a
multiple contingencies approach. Accounting, Organizations and
Society, 30, 99–126.
Hartmann, F. G. H., & Moers, F. (1999). Testing contingency hypotheses in
budgetary research: An evaluation of the use of moderated regression
analysis. Accounting, Organizations and Society, 24, 291–315.
 I. Grabner, F. Moers / Accounting, Organizations and Society 38 (2013) 407–419
Indejejikian, R., & Matějka, M. (2012). Accounting decentralization and
performance evaluation of business unit managers. The Accounting
Review, 87(1), 261–290.
Luft, J., & Shields, M. D. (2003). Mapping management accounting:
Graphics and guidelines for theory-consistent empirical research.
Accounting, Organizations and Society, 28, 169–249.
Malmi, T., & Brown, D. A. (2008). Management control systems as a
package – Opportunities, challenges and research directions.
Management Accounting Research, 19, 287–300.
Merchant, K. A., Van der Stede, W. A., & Zheng, L. (2003). Disciplinary
constraints on the advancement of knowledge: The case of
organizational incentive systems. Accounting, Organizations and
Society, 28, 251–286.
Milgrom, P., & Roberts, J. (1990). The economics of modern
manufacturing: Technology. strategy, and organizationg. American
Economic Review, 80(3), 511–528.
Milgrom, P., & Roberts, J. (1995). Complementarities and fit: Strategy,
structure, and organizational change in manufacturing. Journal of
Accounting and Economics, 19(2/3), 179–208.
Moores, K., & Yuen, S. (2001). Management accounting systems and
organizational configurations: A life-cycle perspective. Accounting,
Organizations and Society, 26, 351–389.
419
Otley, D. T. (1980). The contingency theory of management accounting:
Achievements and prognosis. Accounting, Organizations and Society,
5(4), 413–428.
Siggelkow, N. (2002). Misperceiving interactions among complements
and substitutes: Organizational consequences. Management Science,
48(7), 900–916.
Simons, R. (1987). Codman & Shurtleff, Inc.: Planning and control
systems: Harvard Business School Case 187-081.
Tomkins, C. (2001). Interdependencies, trust and information in
relationships, alliances and networks. Accounting, Organizations and
Society, 26, 161–191.
Van der Stede, W. A., Young, S. M., & Chen, C.-H. (2005). Assessing the
quality of evidence in empirical management accounting research:
The case of survey studies. Accounting, Organizations and Society, 30,
655–684.
Widener, S. K. (2004). An empirical investigation of the relationship
between the use of strategic human capital and the design of the
management control system. Accounting, Organizations and Society,
29, 377–399.
Widener, S. K. (2007). An empirical analysis of the levers of control.
Accounting, Organizations and Society, 32, 757–788.