50 ACCOUNTING FOR MANAGERS
expanded the notion of management control to incorporate non-financial perfor-
mance measurement and a strategic perspective that monitors the behaviour of
other organizations in pursuit of competitive advantage. This description of man-
agement control systems implies a cybernetic system of control, with feedforward
and feedback processes that influence behaviour.
There are certain assumptions underlying the cybernetic model that are based on
what is called a rational or economicparadigm,orviewoftheworld.Rationalmeans
following reasoning as opposed to experience or observation (which is called
empiricism). The traditional approach to decision-making for management control
and management accounting has been from aneconomically rationalperspective.
Under this perspective alternatives can be evaluated and decisions computed as a
result of preferences.
March and Simon (1958) laid the basis for economic theories of the firm in
distinguishing the neoclassical assumption that economic decisions were made
by perfectly rational actors possessing relatively complete information aimed at
maximizingwithsatisficingbehaviour. Satisficing was based onbounded rationality:
actors with general goals searching for whatever solution more or less attained
those goals. March and Simon used the example of searching a haystack for the
sharpest needle (maximizing) versus searching for a needle sharp enough to sew
with (satisficing). March and Simon’s notion of bounded rationality recognized
that decision-makers have limited information and limited ability to process that
information in an uncertain and complex environment.
Scott (1998) described three perspectives on organizations: as rational systems,
natural systems and open systems. Therational perspectiveis based largely on clas-
sical management theory, which sees organizations as ‘purposeful collectivities’,
i.e. the actions of participants are co-ordinated to achieve defined goals. Organiza-
tions are highly formalized with rules governing behaviour and roles determined
independent of the attributes of the people occupying those roles. Scott argued that
Taylor’s scientific management, Fayol’s administrative theory, Weber’s bureau-
cracy and Simon’s theory of administrative behaviour are all examples of rational
systems. Rational systems are predicated on the division of labour and special-
ization of tasks, reducing transaction costs, efficiently processing information and
monitoring the work of agents.
Within the rational perspective, accounting has been dominated by the notion of
contract, which is reflected in two theories: agency and transaction cost economics.
Agency theory(see Chapter 6) focuses on the contractual relationship between the
owners and managers and on the cost of the information needed by owners to
monitor contractual performance. The cost of information is also an important
aspect oftransaction cost economics(see Chapter 13), which considers whether
transactions should take place in the marketplace or in an organizational hierarchy.
The rational perspective and the notion of contract will determine how orga-
nizational structures, and in particular the management accounting and control
systems used by organizations, are viewed. However, different perspectives will
suggest different interpretations of events, grounded in the different ways in
which the preparers and users of accounting information may see the world. This
is expanded in Chapter 5.