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Determinants of separating management accounting from financial accounting in SMEs and Family Firms - evidence from Poland and Germany

Abstract While implementing management accounting, which is basically a discretionary managerial decision, little is known about the impact of the firm's size and ownership on such decisions. Additionally, another important factor for Small and Medium-sized Enterprises (SMEs) is the scarcity of resources which exerts organizational pressure. Our study focuses on Poland and Germany because we assume isomorphism of Polish firms and the intense influence of Ger man accounting systems in Poland. Our results indicate a strong impact of organizational pressure and only a modest impact of other factors on accounting decisions. The study reveals similar accounting structures between these two countries. Keywords: financial accounting, management accounting, Germany, Poland, separation JEL Codes: M19, M41 Introduction Accounting is the most important information system in firms, regardless of size or type of business activity or its legal form. Accounting differentiates into fi nancial accounting and management accounting. While financial accounting is mandatory and subject to national and international regulations, management ac counting is a system that is voluntary and depends on the complexity of business (Ikheimo/Taipaleenmki 2010) as well as managerial decisions. The relation between management accounting and financial accounting is often discussed under the topic of convergence (Brandau et al. 2017). The conver gence of accounting is seen from the perspective of large and listed firms which adopt International Financial Reporting Standards (IFRS) and explained by goal congruence and isomorphism. Empirical evidence suggests that the majority of these larger firms now adopt a so-called integrated or convergent accounting system that restrains from differences between management accounting and fi nancial accounting (f.e. Engelen/Pelger 2014). 1. * Received: 20.04.2020, accepted: 29.07.2020, 1 revision. ** Robert Rieg, Prof. Dr., Professor of management accounting and control, Aalen University. Email: r..g@hs-aalen.de. Main research interests: Roles of management accoun tants, Structure and systems of management control, Digitalization. Ewelina Zarzycka, Dr., Associate Professor, University of Lodz, Faculty of Management. Email: e..a@uni.lodz.pl. Main research interests: Cost accounting, Manage ment accounting, Accounting education. Justyna Dobroszek, Dr., Associate Professor , University of Lodz, Faculty of Management. Email: j..k@uni.lodz.pl. Main research interests: Management accounting, Management accounting in logistics and supply chain management, Accounting education. 214 Determinants of separating management accounting from financial accounting JEEMS, 26 (2) 2021, 214 - 242 DOI: 10.5771/0949-6181-2021-2-214 However, the majority of firms in most countries and also in Germany and Poland are not listed, do not report based on IFRS and do not qualify as large in terms of the number of employees, sales or balance sheet total. Therefore, it is not clear if the extant research on the relationship between management ac counting and financial accounting can be generalized to small and medium-sized enterprises (SMEs) or family firms . We argue that in SMEs and family firms, the structure of accounting systems is determined by different causes and cannot be explained by the existing literature. In particular the intertwined nature of family and firm distinguishes family firms from other organizations as the fami ly members are closely related to the firm and may influence decision making in the company. Their choices are induced by the desire to maintain and increase the family`s socioemotional wealth (SEW) and control which sometimes ex clude efficiency and economic considerations (Gomez-Mejia et al. 2011). Previ ous research has shown that family firms rely more often on informal controls and less on management accounting information (Hiebl 2013a; Hiebl et al. 2015). However, there are also important contingent variables that moderate the influences on accounting choices: examples are firm size, business location, or scarcity of resources which leads to organizational pressure. Research is scarce in understanding decisions of this majority of firms, which are often family firms and SMEs, for separating management accounting from financial account ing. Although management accounting and financial accounting systems differ be tween countries (Nilsson/Stockenstrand 2015), intensive business relations, as well as coercive and mimetic isomorphism, may result in transferring account ing practices between countries (Granlund/Lukka 1998). Especially subsidiaries operating in developing countries copy practices from their parent companies (Tsamenyi et al. 2008; Acquaah 2013;). We posit that the territorial proximity to Germany affects the level of trade and cooperation between German companies and companies from neighbouring countries in Central and Eastern Europe, as many subsidiaries of German companies are located in this region. Thus, the economic relationship with Germany will have an impact on accounting practices in neighbouring countries such as Poland (Szychta 2018). The coercive and mimetic isomorphism (DiMaggio/Powell 1983) suggests that harmonization is not only a topic of firms in German-speaking countries but also in countries influenced by the accounting systems of German firms, which to date has not been intensively discussed in the literature. To address the above-mentioned gaps in the literature, we have collected sample data through questionnaire surveys on the structure of management accounting and financial accounting in two countries: Germany and Poland. Comparing the results of the two countries is helpful for cross-validation, thus increasing the validity of the research, and it also helps understanding if determinants of ac counting structure are the same between different countries. Therefore, our study Determinants of separating management accounting from financial accounting 215 aims to answer the research question: What are the contingencies of separating management accounting and financial accounting for SMEs, including family businesses, in Germany and Poland and are the differences between the coun tries substantial? The data obtained were analysed using advanced statistical methods. In empiri cal research, we employed Bayesian quantile regressions (Dries/van den Poel 2017). To understand the impacts of country differences on the results we esti mated two quantile regressions, one with the control variable for the German sample and one with the control variable for the Polish sample. Additional anal yses of interaction effects complemented the study. This paper adds to our understanding of accounting of family firms and SMEs and their specific situations as well as peculiarities for decisions regarding struc turing accounting systems (Dello Sbarba/Marelli 2018). It also contributes to the literature in providing evidence in support of socioemotional wealth showing that SMEs and family-owned firms are not small "large firms" under different ownership, also with respect to accounting systems (Gomez-Mejia et al. 2011). We have added the missing element on the importance of organizational pres sure for decisions on separating management accounting and financial account ing (Mitchell/Reid 2000; Gomez-Mejia et al. 2011; Lopez /Hiebl 2015). More over, we have shed additional light on the comparative aspects of accounting choices in companies from well-developed and less well-developed countries in Europe (Granlund/Lukka 1998; Bloom et al. 2012; Endenich et al. 2016). We have shown that the main structures of accounting and ownership are the same in Germany and Poland, thereby adding knowledge regarding the impact of iso morphism on accounting systems (DiMaggio/Powell 1983; Granlund/Lukka 1998). As a consequence, our study may be particularly interesting for practitioners in order to take a proactive approach in developing an accounting system for SMEs and in using management accounting practices and information in family busi nesses (Hiebl 2013a). Finally, we have identified some avenues that may be in sightful for other researchers, as more comparative studies are needed to further understand harmonization and its contingencies in different countries. The paper is structured as follows: The second section reviews relevant litera ture, defines the research gap, and develops hypotheses. The third section de scribes research methods and sampling followed by the fourth section which de tails the results. The last section discusses the results and concludes the paper. 216 Robert Rieg, Ewelina Zarzycka, Justyna Dobroszek Related Research and Hypotheses development Separating management accounting and financial accounting Typically, management accounting and financial accounting focus on different purposes and address different users, namely that management accounting is used by managers and financial accounting is used by owners as well as by po tential investors (Ikheimo/Taipaleenmki 2010). Management accounting emerged because financial accounting cannot provide the necessary information for managerial decision-making. Financial accounting provides tax-oriented fi nancial information which is of little use to management and decision-making (Ikheimo/Taipaleenmki 2010). The separation of the two concepts occurred especially in German-speaking countries where management accounting (under the name "Controlling") is associated with cost accounting and management control and does not include financial reporting (Ewert/Wagenhofer 2009; Friedl et al. 2009).

Discussion and conclusion The separation of management accounting and financial accounting describes the degree of differentiation between management accounting and financial ac counting (see: Weienberger/Angelkort 2011; Taipaleenmki/Ikheimo 2013). While the research to date has focused on large and listed firms often reporting according to IFRS standards, we argue that for smaller and family-owned firms the situation is different and not yet well researched. The study at hand focuses on Germany, where the discussion on harmonization is lively and longstanding, as well as Poland which is a country under the influence of German accounting practices. Our study results show that firm size and familiness do not affect the separation of management accounting and financial accounting directly. This finding is not in line with previous SEW studies that showed the importance of distinct fea tures of family firms for accounting choices and managerial decisions resulting from the desire to preserve socioemotional wealth and maintain control. Accord ing to the aformentioned studies, intentions to maintain family control (Songini et al. 2013) and preserve socioemotional wealth (Gomez-Mejia et al. 2011), apart from the size and complexity of the organizations, impede the use of for mal control mechanisms (Moores/Mula 2000; Hiebl et al. 2015), and thus reduce the use of management accounting. Moreover, our study shows that an increase in firm size does not inevitably lead to a higher use of formal accounting infor mation (Chenhall 2003; Otley 2016), and therefore an increase in separating both accounting systems. Focusing only on aspects of family features and size are in our opinion insufficient to comprise the essence of harmonization (Prencipe et al. 2014). Taking into consideration organizational pressure on firms appears to be an ef fective way to answer the research question. The study demonstrates the strong effect of organizational pressure on harmonization in both countries. It seems that practical considerations and organizational constraints play a significant role in designing accounting structures. This supports the notion that organizational pressure affects the separation of both management accounting and financial ac Table 5: 5. Determinants of separating management accounting from financial accounting 235 counting systems in organizations (Granlund/Lukka 1998). Interestingly, we found that this effect is reduced when family ownership increases. As a result, firms with higher family impact and in a situation of economic pressure differ entiate their accounting systems more, which is in line with socioemotional wealth theory (Gomez-Mejia et al. 2011). Summarising, the evidence supports only the impact of economic pressure on harmonization (H3) directly and the ef fects of family influence and size only for interactions of these variables. Regarding the control variables, age exerts a negative impact for firms with low er separation (Moores/Mula 2000; Speckbacher/Wentges 2012), while IFRS im pacts separation positively, contrary to what is predicted in the literature (Weienberger/Angelkort 2011; Taipaleenmki/Ikheimo 2013; Endenich et al. 2016). Yet these studies focused on large, listed firms where convergence due to IFRS increases while our study focuses on smaller firms where applying IFRS might lead to larger deviations between financial accounting and managerial ac counting due to different information needs (Hemmer/Labro 2008). Regarding comparative accounting research, we found no substantial differences between the two countries in our study, which is similar to Bloom et al. (2012) and which allows a comparison on similar grounds. German firms seem to have on average slightly less separated accounting but the coefficients in the respec tive regression equations do not differ strongly. The small differences between the two countries result in our opinion from isomorphism (DiMaggio/Powell 1983). The identified similarities are not only due to a common accounting lan guage used by companies, but they result from proximity, strength and type of business ties between German and Polish firms (Granlund/Lukka 1998; Tsamenyi et al. 2008; Acquaah 2013). This study contributes to the extant knowledge of accounting in family firms and SMEs and their specific situations as well as decisions about their structure of accounting systems (Dello Sbarba/Marelli 2018). The paper widens SEW per spective studying the contingencies that significantly differentiates the account ing systems of SMEs and family-owned firms. Thus, its findings improve our understanding of accounting systems in such firms (Angelkort 2010; Weien berger/Angelkort 2011; Senftlechner/Hiebl 2015). We have added a missing ele ment through the importance of organizational pressure for the separation of management accounting and financial accounting (Mitchell/Reid 2000; GomezMejia et al. 2011; Lopez /Hiebl 2015). Moreover, we have shed additional light on the comparative aspects of accounting choices in companies operating in well-developed and less well-developed countries in Europe (Granlund/Lukka 1998; Bloom et al. 2012; Endenich et al. 2016). We have also shown that the main structures of accounting and ownership are the same in Germany and Poland. Consequently, we have added knowledge about the impact of isomor phism on accounting systems (Granlund/Lukka 1998; Tsamenyi et al. 2008; Ac 236 Robert Rieg, Ewelina Zarzycka, Justyna Dobroszek quaah 2013). From a methodological point of view, this study represents an ex ample of using a Bayesian approach which is more convincing and reliable than NHST (Wasserstein/Lazar 2016; Wasserstein et al. 2019). Finally, our study may have implications for practitioners developing accounting systems in SMEs and for use of management accounting practices and information in family firms (Hiebl 2013a). One limitation of our study is the sample size. Replication with more data could enable the generalization of the results and a meta-analytic combination of study results. Following Hiebl et al. (2015), we employed the FPEC-P scale. This is a sub-scale of the measurement concept of Klein et al. (2005), which consists of dimensions of power, experience, and culture. However, it does not measure all aspects of family influence that may have more of an impact on accounting. Therefore, to get a complete picture of the family's influence on accounting, oth er aspects of familiness should also be considered. Furthermore, an interesting direction for future research would be to understand concrete situations regard ing harmonization via long-term field studies conducted in SMEs and family firms.