Management accounting systems in financial institutions in Malaysia : influencing factors, organizational performance and risk management

Abstract

The function of management accounting systems (MAS) in an organization has evolved from the traditional cost determination and financial control role to a more sophisticated role of value creation through the effective use of resources. Financial institutions are experiencing rapid transformation due to financial liberalization, rapid advancement in technology, intense market competition, and the emergence of increasingly innovative products and distribution channels. To remain competitive, they need sophisticated MAS information for informed decision making and to create value for the long term success and survival of the organization. Due to the lack of management accounting research for financial services, this study investigates the factors influencing MAS sophistication among financial institutions in Malaysia and examines whether it leads to enhanced organizational performance. Sophistication of MAS is viewed in a broader aspect by focusing on the four dimensions of MAS information – scope, timeliness, integration and aggregation. In addition, since financial institutions are essentially in the business of managing risks, this study also explores the relationship between enterprise risk management (ERM) and MAS. In ERM, performance management, which is the most important role of MAS, is integrated with risk management. With the existence of a dual banking system in Malaysia, it is also important to explore the difference between MAS of Islamic Financial Institutions (IFIs) and that of conventional financial institutions. Based on the contingency theory framework, this study adopts an explanatory sequential mixed method approach that was conducted in two stages. In the first stage a survey was conducted on the banking and insurance companies listed on the Central Bank of Malaysia website, with the chief financial officers (CFO) as the respondents. In the second stage, post-survey semi-structured interviews were conducted with selected respondents. Based on multiple regression analysis, the results indicate that perceived intensity of market competition and technological advancement influence MAS sophistication. The results provide support of a direct relationship between MAS and organizational performance and show some support for the mediating role of MAS between contextual variables and performance. The post-survey interviews further support the results. The findings from the survey and the post-survey interviews also show that MAS and risk management complement each other. However, there was not enough evidence to support the role of risk management in enhancing the relationship between MAS and organizational performance. The post-survey interviews provide some insights into this issue. The findings further show that IFIs use more sophisticated MAS than conventional financial institutions. Overall, this study demonstrates the importance of MAS sophistication for coping with the intensity of market competition and of rapid technological advancement in financial institutions to achieve better performance. In addition, the study also provides evidence of the importance of MAS and risk management as integral management tools for corporate performance management. Finally, as IFIs have to adhere to the SharÊÑah compliance framework they require more sophisticated MAS to manage their organizations effectively. The findings contribute to financial institutions and regulators as well as towards testing a comprehensive contingency model that includes multiple contingent factors, multiple elements of accounting systems, and multiple outcome variables.