Aligning Industrial Relations Risk, Budgetary Participation, and Budgeting Measures of Performance: Impact on Managerial Performance

Abstract

While previous contingency studies in managerial accounting conceived environmental or contextual factors as affecting control systems design such as budgeting in terms of markets, technology, or task environment, not much prior empirical research considered the industrial relations environment as an important contextual factor affecting the design and functioning of organizational control systems. In this study, industrial relations is a type of organizational risk arising from industrial relations related actions such as employee work stoppages, actions of trade union officials, conflicts between trade unions, and linkage of trade unions with national political parties, which could be expected to play a significant role in an organization's control systems design and use. Using Lawrence and Lorsch's (1967) contingency theory of Organizations and Environment, we extend the contingency management accounting research literature by empirically assessing the performance consequences of the fit or alignment between industrial relations risk, budgetary participation, and budgetary measures of performance. More specifically, drawing from Drazin and Van de Ven's (1985) Alternative Forms of Fit in Contingency Theory this paper seeks to achieve two goals. First, we examine whether greater use of budgetary information for performance evaluation is likely to be dependent on the positive association between industrial relations risks and budgetary participation. Second, we assess whether managerial performance enhances when there is an alignment or fit between industrial relations risk, budgetary participation, and budget use. The results from a sample of 55 Australian coal mining companies provide strong support for the hypotheses developed. The results suggest that managerial performance improves with increasing use of budgets in performance evaluation under increased industrial relations risk only when there is a provision for high levels of employee budgetary participation. This study adds to the limited knowledge of the interaction of accounting and industrial relations in organizations.