Effective accounting processes: the role of formal and informal controls

Abstract

Optimization efforts are increasingly applied to finance departments in organizations, particularly to routinized accounting processes. Mixed satisfaction levels related to performance outcomes hint at control issues in finance departments. Accounting activities are characterized by well understood task environments that are addressed by formal controls. Yet, these activities are also interrelated and people-intensive, which might require other controls complementing formal ones. While current evidence considers merely the role of formal controls, we examine the effect of formal and informal controls as well as their combined effects in accounting processes. Regarding formal controls, results from a cross-sectional survey indicate that process controls have a positive direct effect on information quality while we cannot show any effect for output controls. Among the informal controls, peer pressure accentuates the effect of process controls if the controls are combined. Third, an identification-inducing working environment has a positive impact on information quality. Yet, the positive effect of process controls deteriorates when applied in combination with a positive working environment. This contributes to the literature on at least two dimensions: First, we underline the role of informal controls in accounting processes; second, our data hints at complementary and substitutive effects of formal and informal controls in the accounting function.