Journal of Management Control (2019) 30:131–152

https://doi.org/10.1007/s00187-019-00281-0

ORIGINAL PAPER

Effective accounting processes: the role of formal

and informal controls

Thomas Gackstatter1 · Benedikt Müller-Stewens1 · Klaus Möller1

Published online: 2 May 2019

© Springer-Verlag GmbH Germany, part of Springer Nature 2019

Abstract
Optimization efforts are increasingly applied to finance departments in organizations,
particularly to routinized accounting processes. Mixed satisfaction levels related to per-
formance 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 consid-
ers 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 for-
mal 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 work-
ing environment has a positive impact on information quality. Yet, the positive effect
of process controls deteriorates when applied in combination with a positive work-
ing 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.

Keywords Accounting · Management controls · Formal controls · Informal controls ·

Control combinations

1 Introduction

Finance departments in organizations have been undergoing substantial changes. Effi-

ciency and optimization considerations are increasingly being applied (Herbert and

B Thomas Gackstatter
thomas.gackstatter@unisg.ch

1 Institute of Accounting, Control and Auditing, University of St. Gallen, Tigerbergstrasse 9, 9000 St.
Gallen, Switzerland

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Seal 2012). Yet, this newfound interest in the optimization of business and support
processes has revealed mixed satisfaction with these processes’ cost levels and, par-
ticularly relevant here, also quality levels (e.g., Janssen and Joha 2006). Taking in
a control-theory perspective, the exercise of management controls can help mitigate
performance issues with organizational processes. However, there is limited empirical
evidence that addresses controls in the context of supportive and transactional busi-
ness processes. While Auzair and Langfield-Smith (2005) studied the implementation
of control types in different service settings, empirical evidence on their effective-
ness remains limited posing the question of effective control setups in a transactional
business process environment (see also Christ et al. 2015).
Our paper builds on three focus areas. First, our research context is the accounting
function in finance departments of organizations. The demand on accounting depart-
ments to produce timely and useful information in their diverse setups will likely
remain high, particularly given the rising expectations that accompany the prolifer-
ation of digitalization and automation. In organizations, the quality of accounting
information is crucial. Accounting information not only needs to fulfil compliance
requirements; also, many operational and strategic management decisions are based
on information that is produced in the accounting function. Further, the accounting
function and its processes have certain characteristics. For instance, processes are
interdependent and show high levels of standardization. Given these characteristics,
traditional control theory and recent scholarly evidence propose the employment of
specific management controls.
Management controls form a second focus area. We acknowledge that performance
in organizational units also depends on the applied management controls. Further,
given the general scarcity of empirical findings on controls in transactional task envi-
ronments such as accounting functions, we explore the effectiveness of certain control
types. In line with Abernethy and Chua (1996), we understand management controls as
all mechanisms that managers can employ to steer behaviors and reach organizational
objectives. We also address control conceptualizations via Tannenbaum (1962) and
Merchant and Van der Stede (2007), who stressed the relevance of human resources
as well as interpersonal relationships in organizations and noted that it is people in
organizations who do the work to achieve organizational goals. We understand that
controls that target the behaviors of people do not necessarily have to be formally
codified in order to be effective. Here, we primarily distinguish between formal and
informal controls. Addressing different views and elements of control, we take a holis-
tic understanding of management controls (see Strauß and Zecher 2013).
Analyzing the effects of certain formal and informal management controls specif-
ically in the accounting function seems promising to us to generate additional
knowledge, for two reasons. First, the accounting function includes a high share of
transactional routine tasks. For such tasks, control theory prescribes applying formal
control structures, as found in process and output controls (Jaworski 1988; Ouchi and
Maguire 1975). Thus, we analyze the effects of formal process and output controls on
information quality, a crucial performance aspect, in the accounting function. Second,
most of the research has focused on the routinized characteristics by examining the
impacts of formal controls, while neglecting informal controls (Cardinal et al. 2017; De
Jong et al. 2014). Informal controls can positively affect performance and, therefore,

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function as effective control levers for management (De Jong et al. 2014). Like formal
controls, informal controls influence employee behaviors. Although informal controls
may not be formally stated or pre-specified, managers can still purposefully choose
to steer and induce them (Cardinal et al. 2017). In particular, Modell (1996) suggests
considering motivational aspects even in transactional contexts to achieve goal coher-
ence and norm alignment. This is in line with more recent notions that companies
must keep their workforces motivated and empowered, particularly concerning fairly
routine and transactional accounting tasks (ACCA 2002; Herbert 2009). Thus, we ana-
lyze the effects of a work environment that induces employee identification with their
employer. Besides the enabling informal control of an identification-inducing work
environment, we analyze the effects of another informal control type in the accounting
function that builds on interpersonal influence. However, this second control type is
more constraining. The alignment of organizational objectives and individual behav-
iors can be achieved through the establishment of informal control mechanisms that
ensure high conformance with established rules. This notion is in line with control
conceptualizations proposed by Tannenbaum (1962). With more recent research atten-
tion, peer pressure is such a control mechanism to achieve norm conformity among
employees and to accelerate team efforts (Cardinal et al. 2004; De Jong et al. 2014).
As a third focus area, we examine combined effects of formal and informal control
mechanisms, taking up prior evidence that management controls are most effective in
combination and in certain contexts (Anthony 1952; Malmi and Brown 2008). Adding
to Malmi and Brown (2008), we assess whether different combinations of formal and
informal controls can be effective in the accounting function.
We tested the research model in a cross-sectional survey setting among 59 senior
finance and accounting managers in large companies across Germany, Austria, and
Switzerland. Our results show that process controls and a positive work environment
both directly positively affect information quality while output controls and peer pres-
sure do not. However, peer pressure significantly accentuates the effect of process
controls on information quality, while a positive working environment shows a nega-
tive effect if combined with process controls. We contribute in two dimensions to the
management control literature. First, we add to control theory (Modell 1996; Ouchi
and Maguire 1975) by showing that not all formal controls that are deemed to be
effective in transactional and routinized accounting contexts lead to higher informa-
tion quality in our research context. According to our results, applying high levels
of output controls does not seem to increase information quality. The effectiveness
of process controls may render output controls redundant and ineffective. We also
show that informal controls (i.e. a positive work environment) can drive information
quality in the accounting function. Second, examining combined effects of formal
and informal controls adds to the analysis of isolated considerations (Bedford et al.
2016). Thus, we contribute to the research that highlighted the usefulness of research
into the interplay between controls in general (Abernethy and Brownell 1997; Malmi
and Brown 2008), particularly between formal and informal controls (De Jong et al.
2014; Modell 1996). We find that informal controls can be effective on a stand-alone
basis, can exert additional effects on formal controls, and can be effective solely in
combination with certain formal controls. While process controls in combination with
peer pressure positively influence information quality, we find that process controls

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combined with a strong use of an identification-inducing work environment may neg-

atively affect the information quality. This could be an indication that the two control
types may not be effective if applied strongly in parallel. Our data provides evidence
that informal controls that focus on employees should not be treated separately to
controls such as formal controls that focus on tasks and processes. Thus, we find that
formal and informal controls can depend on one another to be effective.
The remainder of this paper is organized as follows: In Sect. 2, we review the
literature. In Sect. 3, we provide information about the research design. In Sects. 4
and 5, we present the structural equation model results and discuss them. In Sect. 5,
we conclude and consider limitations and future research directions.

2 Conceptual framework

2.1 Formal and informal controls in the context of accounting processes

Accounting tasks1 typically comprise a specific set of tasks that are interrelated and
thus interdependent (Everaert et al. 2010). Most accounting activities are jobs with a
high share of transactional (i.e. frequent and repetitive) routine tasks. Transactional
routine jobs have a set of straightforward outputs and are typically standardized (Ever-
aert et al. 2010). Certain sequences of accounting processes can be selected, decoupled
from the overall process, and shifted to other organizational units or to external service
suppliers. Thus, these processes can be considered commodity services. Standardized
processes allow for coherence and systematic coordination that minimize errors and
improve performance; standardization is a key requirement for positive accounting
process performance (Davenport 2005; Wüllenweber et al. 2008). Despite ongoing
automatization efforts, the accounting function comprises different sub-processes
many of which will continue to require coordination and the management of inter-
faces. This results in a high level of interrelatedness and also people-intensity—e.g.,
when valuing assets involving management discretion and subsequently feeding the
information into financial statements (Brouthers and Brouthers 2003; Everaert et al.
2010). The high reliance on people and their interactions gives accounting activities
also a social context. Therefore, management controls in the accounting context need
to address both dimensions: a task-oriented technical and a people-oriented social
dimension. The differentiation between formal and informal controls addresses both
dimensions. Formal controls address the task or the performance of processes. Infor-
mal controls, on the other hand, are typically employee-oriented (Jaworski 1988). The
differentiation between formal and informal controls is prominent (e.g., Cardinal et al.
2004; Smith et al. 1995). Also, all companies apply formal and informal controls, in
varying degrees (Langfield-Smith and Smith 2003).

1 The accounting function is responsible for processing and consolidating financial information. Financial
statements are prepared at interim and year-end balance sheet dates (Everaert et al. 2010). Functionally,
tasks in the accounting function include accounts payable and receivable, invoicing, payroll accounting,
fixed asset accounting, and intangibles accounting, among others.

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Management
control types

Formal controls Informal controls

Output controls Process controls Work environment Peer pressure

Fig. 1 Overview of the management controls under study

2.1.1 Formal controls

In line with Gencturk and Aulakh (1995), we define formal controls as conscious
mechanisms that company managers design and establish to induce behaviors that
lead to the achievement of organizational goals. Within formal controls, we rely on
the differentiation by Ouchi (1979) or Ouchi and Maguire (1975), who distinguish
between two formal control types: process controls and output controls (see Fig. 1).2
Process and output controls differ fundamentally concerning the timing of manage-
ment intervention (Jaworski et al. 1993; Ouchi and Maguire 1975). While process
controls seek to monitor and influence the procedures during process delivery through
process adherence, output controls focus directly on defining and monitoring intended
outcome levels (Bello and Gilliland 1997; Ouchi and Maguire 1975). Because many
accounting processes such as payroll accounting or payables and receivables process-
ing are transactional routine processes whose outputs can easily be measured, control
theory suggests applying formal control mechanisms (Bello and Gilliland 1997; Ouchi
1979; Ouchi and Maguire 1975).

2.1.2 Informal controls

Although Auzair and Langfield-Smith (2005) found that while, in transactional con-
texts, companies tend to rely on bureaucratic controls that resemble formal controls,
they may choose to exert informal controls besides formal controls (see Dekker 2004).
Companies that exert informal controls can achieve better performance outcomes, as
earlier research has shown in various contexts and approaches (Jaworski et al. 1993;
Ylinen and Gullkvist 2014). The behavioral orientation found in informal controls
addresses social processes. Informal controls are usually hard to design explicitly

2 We exclude input controls, analyzed by for instance Cardinal (2001). This is so because we focus on
those controls that are directed at the management of task activities and their outcomes, given a company’s
existing resources. For this control purpose, process controls and output controls are of relevance (Cardinal
et al. 2004).

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(Jaworski et al. 1993; Ylinen and Gullkvist 2014). Nonetheless, they can still be
intended and directly influenced by managers (Cardinal et al. 2017). This is in line with
Smith et al. (1995), who note that informal controls are initiated by managers. They
rely on behavioral influences, and not necessarily on contractual obligations (Smith
et al. 1995). A better understanding of their performance implications would provide
managers knowledge on important control levers (De Jong et al. 2014). Among the
different informal controls, managers can rely on values, culture, or norms to achieve
commitment among employees or to steer employee orientations (Daft and Macin-
tosh 1984; Ouchi 1979). In this research context, we focused on two forms of informal
control: an identification-inducing work environment and peer pressure.
Among the different informal control types, some controls are directed towards
an organization’s culture, rituals or norms of interaction (Jaworski 1988; Meyer and
Rowan 1977). Their suitability for transactional processes is discussed ambiguously:
On the one hand, they are associated less with transactional tasks than with non-
routine work environments (Auzair and Langfield-Smith 2005; Jaworski 1988). On
the other hand, more recent scholarly research and practitioner literature both posit
that, particularly in transactional and routinized accounting environments, informal
mechanisms that induce high motivational levels are effective control mechanisms
(ACCA 2002; Herbert 2009; Modell 1996). Specifically, the work environment can
create a place of identification for employees. Positive work environments seek to
achieve goal congruence in ways that align organizational and personal goals (Hall
et al. 1970). Through a positive work environment, managers can further seek to get
employees take pride in their work (Buchanan 1974). If not already freely developed,
a motivation-inducing and identification-inducing work environment as a form of
informal control can also be instituted in a directed way by managers.
Peer pressure is the approach of addressing and influencing behaviors by openly
communicating non-compliance with behavioral standards or disapproval with unde-
sired behaviors (Druskat and Kayes 2000). While many controls seek to establish
norms and standards, peer pressure is an informal mechanism that drives norm con-
formity and enforces established standards (Cardinal et al. 2004; Feldman 1984).
While peer pressure may be effective on its own, it can specifically be effective in
combination with other controls it seeks to enforce (De Jong et al. 2014). It has been
analyzed by De Jong et al. (2014) in combination with norm intensity; they found
that peer pressure drives teams’ work efforts if combined with norms or provisions.
Management or team members can initiate and exercise peer pressure (De Jong et al.
2014).
The two sub-dimensions of informal controls can be considered as opposing cultural
mechanisms since a positive work environment is designed to motivate employees by
fostering identification and belonging (Buchanan 1974; Hall et al. 1970), while peer
pressure seeks to apply pressure by openly expressing disapproval in cases of non-
compliance. Figure 1 displays the management controls under study in our research
setting.
We conceptualize the performance of the accounting function in terms of informa-
tion quality. Information quality is defined as information that can be readily used by its
consumers and encompasses different dimensions (Huang et al. 1999). The demands
on information in finance departments of organizations are diverse. Information must

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Work
Peer pressure
environment

H3: +
H4: + H6: +

Process H1: + Information

controls quality

Output controls

Solid line: direct effect; dotted line: combined effect.

Fig. 2 Research model

be useful and should be produced timeously (Bruns and McKinnon 1993). Besides
usefulness and timeliness, the literature also refers to the reliability, and accuracy of
information as key properties (e.g., Artz et al. 2012; Goodhue 1995; Lee et al. 2002).
To assess the effectiveness of management controls, we examined their impacts on
information quality in the accounting function.

2.2 Hypothesis development

We will now draw on the theoretical development and develop six hypotheses. Four
hypotheses are related to the direct effect of controls (H1–H3, H6), whereas two
hypotheses are related to the combined effect of controls (H4, H5; see Fig. 2).

2.2.1 Formal controls (H1–H2)

Many accounting processes are among the most standardized processes in finance
departments of organizations and are often bundled in organizational units. Since
there is well-grounded knowledge on sequences and outputs of accounting processes,
control theory predicts that the application of formal control structures as found in
process and output controls are effective (Bello and Gilliland 1997; Ouchi 1979;
Ouchi and Maguire 1975). Process controls monitor process adherence in order to
influence and evoke desired behaviors in the process delivery and thus to achieve
desired process outcomes (Bello and Gilliland 1997; Ouchi 1979; Ouchi and Maguire
1975). Contractual precision, for instance via formally documented process maps
or in-process reporting requirements, ensures adherence to agreed-upon standards
during process delivery (Christ et al. 2015). Owing to the generally fairly standardized
character of accounting processes, we argue that enforcing process controls leads to
increased information quality.

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H1 Process controls lead to higher information quality of accounting processes.

Output controls are used when the outputs of accounting processes can be mea-
sured. They are employed to identify and reduce deviations from target levels and to
strive for goal achievement (Ouchi 1979). Measurable results characterize accounting
processes: Accounting processes often rely on service-level agreements (Aksin and
Masini 2008). For instance, performance metrics regarding reaction times, transaction
volumes processed per time unit, or error rates in transactions can be defined and
specified with fixed target values. Thus, performance in the accounting function can
be measured using different performance dimensions of accounting processes. Sup-
ported by the measurable character of the outputs of accounting process and the fact
that output controls improve job performance (Jaworski et al. 1993), we argue that a
high use of output controls increases information quality.

H2 Output controls lead to higher information quality of accounting processes.

Assessing the direct effect of formal controls is useful to understand their stand-
alone effects on information quality. However, only assessing the direct effects of
formal controls will likely fail to provide a full picture of their influence. This is in line
with the notion that the combined use of controls could be different from their stand-
alone effects (Bedford et al. 2016, Grabner and Moers 2013). Therefore, the following
section that introduces informal controls additionally includes considerations of the
combined effect of formal and informal controls on information quality.

2.2.2 Peer pressure and information quality (H3-H5)

Peer pressure is an informal mechanism to address and influence behaviors character-

ized by openly communicating disapproval about undesired behaviors (Druskat and
Kayes 2000). By applying peer pressure that enforces standards and provisions via
open feedback, managers seek to improve norm conformity and ultimately produc-
tivity (Cardinal et al. 2004; Feldman 1984; Kennedy and Widener 2008). Thus, peer
pressure is a form of feedback culture. Rosen et al. (2006) showed that many forms
of feedback culture can positively affect job performance. In the standardized con-
text of accounting processes, we argue that induced conformity with processes drives
performance.

H3 Peer pressure positively affects the information quality of accounting processes.

Further, De Jong et al. (2014) show that peer pressure is most effective if combined
with other forms of control. They provide evidence that their combined use exceeds the
effects of both stand-alone constituents. In consequence, we argue that the predominant
control types in the accounting function, formal controls, are more effective if applied
in combination with peer pressure. While formal controls focus on the tasks and process
steps that need to be carried out according to rules and guidelines, peer pressure can
additionally enforce goal achievement in that it targets another dimension. Unlike the
formal controls under study that make the tasks and process steps the primary subjects
of control, peer pressure enforces rule obedience by primarily targeting the employees

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that are in charge of the activities and tasks. We argue that peer pressure has the capacity
to amplify the positive effects of formal controls when applied in combination. Thus,
we formally hypothesize that process controls in combination with peer pressure and
output controls in combination with peer pressure lead to better information quality
of accounting processes.

H4 Peer pressure in combination with process controls positively affects the informa-
tion quality of accounting processes.

H5 Peer pressure in combination with output controls positively affects the informa-
tion quality of accounting processes.

2.2.3 A positive work environment (H6)

Both recent research and the practitioner literature posit that, particularly in transac-
tional accounting environments, mechanisms that induce high motivational levels are
of relevance (ACCA 2002; Herbert 2009). A positive work environment is induced to
drive identification and empowerment among employees. These work environments
seek goal congruence, to align organizational and personal goals (Hall et al. 1970).
Organizational identification has been positively associated with job performance
(Carmeli et al. 2007). Further, management seeks to get employees to take pride in their
work (Buchanan 1974) and to motivate them to work in the predetermined direction. An
identification-inducing work environment has been shown to be a significant driver of
job satisfaction (Jaworski et al. 1993), which itself is a determinant of job performance
(Judge et al. 2001). We argue that an identification-inducing work environment makes
employees in the accounting function work harder (Riketta 2005). This leads to better
job performance and, therefore, to a higher information quality in the accounting func-
tion. Thus, we hypothesize that positive, identification-inducing work environments
lead to a higher information quality of accounting processes. Jaworski et al. (1993)
do not analyze or discuss the effect of a positive working environment in combination
with process or output controls. Instead, they analyze their impacts separately. We also
do not expect additional effects that would materialize as a result of a combined use
of formal controls and a positive working environment. While we hypothesize that
peer pressure is an enforcement mechanism that amplifies other forms of control in
a combined application, we do not hypothesize that an identification-inducing work-
ing environment has an analogous amplifying effect but only a stand-alone effect.
We argue that the effects of the formal controls under study materialize regardless
of the instituted working environment and, therefore, understand that their effects
are unrelated. Thus, we formed no specific hypotheses on a combined effect of an
identification-inducing work environment.

H6 A positive work environment leads to higher information quality in accounting

processes.

The described hypotheses translate into the following research model as depicted
in Fig. 2. The model tests how controls and control combinations explain information
quality in the accounting function.

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3 Research design

3.1 Data collection and methodology

Following an analysis of the literature, the research team conducted three interviews
with corporate representatives of large German and Swiss companies in a senior
position in a controlling-related or accounting-related field. Literature analysis and
practical validation efforts were followed by the construction of the survey instru-
ments. The survey was pre-tested and further developed. We took a company list from
Amadeus that featured the largest firms in the DACH region (Germany, Austria, and
Switzerland) taking sales revenues as a starting point, complemented by further com-
panies. This methodology resulted in a sample size of 449 companies across the three
countries. The survey was distributed among senior finance and accounting managers.
We approached them via initial telephonic requests and a subsequent invitation to
the study per e-mail. The survey took place via an online platform. We collected the
survey data over 6 months. We sent out reminders to enhance the number of complete
questionnaires. No differences between early and late answers that came in follow-
ing our reminder e-mails were detected regarding the analyzed variables. Among
the participants we approached, 59 ultimately completed the questionnaire, yielding
a 13% response rate. About two-thirds of the completed questionnaires came from
Swiss companies. The average number of employees of participating companies was
19,700, with mean annual sales revenues of e5.9 billion. At about one-quarter of our
sample, the largest share of participating companies fell under the sector of indus-
trials, according to Reuters company classification. Regarding respondent positions,
one-quarter of participants indicated that they were their company’s CFO.
To understand the context of this research, we considered three hierarchic layers in
corporate accounting functions. On an upper level, the accounting function is usually
headed by an accounting head, or a finance head that assumes the role of an accounting
head. Below this top level, there typically is a middle management level with a spe-
cific responsibility in the accounting function, for instance, a head of consolidation,
accounts payable, accounts receivable, inter-company transactions, or reporting. The
third level we considered was the employee level. Employees are responsible for car-
rying out specific tasks and are supervised by their respective second-level managers.
The management controls that are subject of this study were in place to control and
manage behaviors on an employee level. The functional management in our second
level was in charge of enforcing these controls. The questionnaire was answered by
managers on the first level.

3.2 Measures

We took most of our survey measures and adapted them from the established literature,
developing others to ask for specific peculiarities of controls in the accounting function.
The amount of missing data was very limited (only 3 of 1121 answered items missing).
We used the mean imputation approach to treat missing data items (Hair et al. 1998).
In the following, we provide an overview of the items and scales.

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3.2.1 Formal controls

We conceptualized formal controls in terms of process controls and output controls.

To operationalize process controls, we used four items reflecting different modes of
setting and monitoring procedures (Jaworski et al. 1993, p. 68). We asked the respon-
dents to indicate, along a five-point Likert scale (from 1  strongly disagree to 5 
strongly agree), whether (1) the extent to which established procedures are followed is
monitored, whether (2) procedures used to accomplish tasks are constantly evaluated,
whether (3) procedures are modified when the desired results are not obtained, and
whether (4) the user organization provides constant feedback to the service organiza-
tion/department on how the performance goals are accomplished.
We measured output controls using a self-developed five-item scale on the
institutionalization and tracking of service levels regarding different dimensions.
Specifically, the scale asked respondents to what extent different output dimensions are
tracked by managers. The different topics reflect insights gained in literature research
and qualitative interviews with accounting or finance managers that preceded the sur-
vey. We asked the respondents to indicate, along a five-point scale (from 1  not
tracked at all to 5  fully tracked) whether service levels are tracked by management
regarding (1) actual costs versus budget, (2) volume of transactions processed per time
unit, (3) error rates in total transactions, (4) reaction times for transaction requests,
and (5) the information users’ satisfaction levels.

3.2.2 Informal controls

We assessed informal controls by relying on the two dimensions work environment

and peer pressure. The work environment measure sought to capture whether (1) the
work atmosphere encourages the employees who carry out tasks and services to feel
part of the organization, or whether (2) the work atmosphere encourages employees
who carry out tasks to take pride in their work (Buchanan 1974, p. 539; Jaworski et al.
1993, p. 68). We also took and adapted the peer pressure sub-construct from the litera-
ture (De Jong et al. 2014, p. 1718). It comprises four items that asked the respondents
to indicate whether (1) dissatisfaction is expressed openly if accounting processes are
performed inappropriately, whether (2) the service provider of accounting activities is
confronted directly if processes are carried out unprofessionally, whether (3) the com-
pany it lets accounting service providers know if they do something that is considered
unacceptable, and whether (4) the company does not hesitate to tell the accounting
service provider to shape up if processes are not performed to the satisfaction of the
performance expectations. Along a five-point-Likert scale, we asked the respondents
to indicate (from 1  strongly disagree to 5  strongly agree) the extent to which
they agreed with the given statements for both sub-categories. We measured all the
antecedent constructs relating to management controls as reflective constructs.

3.2.3 Information quality

We measured the information quality of accounting activities using different dimen-

sions we adapted from the literature. The dimensions can be considered as constituting

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sub-dimensions and thus as a formative operationalization of an information quality

construct (Petter et al. 2007; Nitzl and Chin 2017). They related to the accuracy, timeli-
ness, usefulness, and reliability of information. Adapted and developed from Lee et al.
(2002), we asked the respondents to indicate (on a scale from 1  strongly disagree
to 5  strongly agree) whether (1) in the accounting function, there is low satisfac-
tion with information accuracy (reversed item). Concerning information timeliness,
we asked the respondents to indicate (on a scale from 1  strongly disagree to 5 
strongly agree) whether (2) requested information arrives immediately upon request
(Bouwens and Abernethy 2000). Concerning information usefulness, the question-
naire asked respondents, on the same scale, whether (3) the accounting information
provided is useful to its destined users’ work (Lee et al. 2002, p. 144). To test for
information reliability, we asked the respondents (on a scale from 1  strongly dis-
agree to 5  strongly agree) whether (4) information produced in accounting activities
represents what it purports to represent (Artz et al. 2012).

3.2.4 Control variables

We consider three control variables. We control for the gender of the survey participants
as well as for the company size in terms of revenues and the number of employees.
We test whether the control variables have a significant relation with the dependent
variable of information quality.

4 Analysis and results

4.1 Model specification

For the analysis of the research model, we employed the partial least squares path
modeling method to structural equation modeling (PLS SEM) using SmartPLS 3.2.6
(Ringle et al. 2015). We analyzed the outer and the inner model. All four constructs
relating to management controls consist of reflective indicators. The outcome construct
of information quality was formative and was constituted by different dimensions of
information quality. We chose SmartPLS owing to our rather small sample size as well
as to be able to test reflective and formative measures (Nitzl 2016; Rigdon et al. 2017).

4.2 Outer model

We will now deal with the analysis of indicator reliability, internal consistency, conver-
gent validity, and discriminant validity of the reflective constructs used in the research
model. We will also present findings relating to the formative construct’s validity (Hair
et al. 2014; Henseler et al. 2009).
Indicator reliabilities Outer loadings must be greater than 0.7 (Hair et al. 2014) or
0.6 (Birkinshaw et al. 1995). However, if loadings fall between 0.4 and 0.7, it should be
individually assessed whether indicators are removed or not (Hair et al. 2014). Table 1
shows descriptive statistics, loadings of items on their constructs, and cross-loadings

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Effective accounting processes: the role of formal and… 143

Table 1 Descriptive statistics, loadings, cross-loadings

Cross-loadings

Min Max Mean S.D. (1) (2) (3) (4) (5)

(1) Information quality 1 1 5 3.88 0.96 0.79 0.46 0.05 0.20 0.46
Information quality 2 1 5 3.58 1.01 0.67 0.44 0.13 0.21 0.33
Information quality 3 1 5 3.90 0.90 0.71 0.36 0.18 0.18 0.50
Information quality 4 1 5 3.83 0.85 0.81 0.52 0.33 0.15 0.43
(2) Process control 1 1 5 3.83 0.96 0.41 0.64 0.23 0.09 0.16
Process control 2 1 5 3.50 0.94 0.38 0.80 0.33 0.26 0.29
Process control 3 1 5 3.88 0.98 0.54 0.82 0.11 0.24 0.39
Process control 4 1 5 3.31 1.00 0.52 0.74 0.45 0.21 0.29
(3) Output control 1 1 5 3.63 1.12 0.27 0.31 0.74 0.12 0.13
Output control 2 1 5 2.71 1.14 0.04 0.06 0.61 0.02 0.22
Output control 3 1 5 2.69 1.27 0.14 0.28 0.83 0.12 0.15
Output control 4 1 5 2.85 1.31 0.18 0.26 0.83 0.30 0.25
Output control 5 1 5 2.83 1.15 0.16 0.33 0.76 0.10 0.18
(4) Peer pressure 1 1 5 3.64 0.90 0.06 0.15 0.24 0.76 0.19
Peer pressure 2 1 5 3.83 0.83 0.17 0.30 0.21 0.88 0.27
Peer pressure 3 2 5 3.97 0.82 0.29 0.23 0.14 0.94 0.29
Peer pressure 4 2 5 3.92 0.74 0.02 0.14 0.16 0.75 0.21
(5) Work environment 1 2 5 3.85 0.92 0.47 0.32 0.16 0.16 0.92
Work environment 2 2 5 3.58 0.94 0.53 0.39 0.25 0.38 0.94
Cross-loading values are taken from the analysis of Model A (see Table 4)
Loadings > 0.6 are bolded

Table 2 Descriptive statistics, correlations, convergent validity, and discriminant validity

Correlations (n  59)

Mean S. D. CR AVE (1) (2) (3) (4) (5)

(1) Information quality 3.79 0.71 – – 1.00

(2) Process controls 3.63 0.73 0.84 0.57 0.63 1.00
(3) Output controls 2.94 0.94 0.87 0.58 0.25 0.37 1.00
(4) Peer pressure 3.84 0.72 0.90 0.70 0.24 0.27 0.20 1.00
(5) Work environment 3.71 0.87 0.93 0.86 0.54 0.39 0.23 0.30 1.00
The CR and AVE values rely on Model A (see Table 4)
SQRT square root, S.D. standard deviation, CR composite reliability, AVE average variance extracted

of items on other constructs. All items within the reflective variables showed sufficient
loadings.
Internal consistency Composite reliabilities should be above 0.7 (Hair et al. 2014).
All composite reliabilities showed values higher than 0.84, meeting internal consis-
tency requirements (see Table 2). Hair et al. (2014) state that, in PLS-SEM research,
composite reliabilities are better indicators of internal consistency than Cronbach’s
Alphas.

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144 T. Gackstatter et al.

Convergent validity Average variance extracted (AVE) should be higher than 0.5
(Bagozzi and Yi 1998). AVE values of the reflective constructs were 0.57 and higher
(see Table 2). Thus, constructs showed sufficient convergent validity.
Discriminant validity A sufficient discriminant validity signals a minimum level if
distinction between constructs. The literature offers different options to ensure suf-
ficient discriminant validity (Hair et al. 2014). First, all single indicators’ loadings
should be higher on their respective constructs than their cross-loadings on other con-
structs. We met this criterion in our research model (see Table 1). Another way to
prove sufficient discriminant validity is the heterotrait-monotrait ratio of correlations
(HTMT ratio). We used the HTMT.85 ratio as proposed by Henseler et al. (2015) to
test whether the correlation of indicators between constructs are below the cutoff.
Because all correlations of reflective constructs showed values of less than 0.47, we
have sufficient discriminant validity.
Common method bias Because our data has been self-reported and collected using
one questionnaire, results could be subjected to common method bias. In the light of
Podsakoff et al. (2003, 2012) we took ex-ante and ex-post measures to limit and rule
out common method bias. Before sending out the survey, we pretested the question-
naire to ensure a common understanding. We informed participants in a cover letter
about the context of our research without giving hints to our research model. We also
assured participants anonymity and asked for their best estimates. Additionally, in the
questionnaire, we did not put our constructs in a systematic order that would reveal our
research model. Having collected the dataset, we performed Harman’s single-factor
test (Podsakoff et al. 2003). Using an exploratory factor analysis (unrotated principal
component analysis), five factors with an eigenvalue greater than one emerged. With
29% of variance explained, the factor with the highest explained variance accounts
for less than the majority of variance. Given these procedures and findings, we mini-
mize the risk of common method bias. Further, we performed common method testing
procedures as proposed by Kock (2015). Thus, we assessed variance inflation factors
(VIFs) on a factor level and simulated each factor as the dependent variable to be
explained by the remaining variables. This resulted in a maximum VIF value of 1.72.
Since this is below the threshold of 3.3, we do not have evidence of common method
bias (Kock 2015).
Besides the reflective constructs, our model also included a formative construct
relating to information quality. The outer weights of two items were insignificant.
The remaining two items were significant with p values below 0.05. Nevertheless, the
insignificant items related to information accuracy and reliability were kept because
they are defining elements of the formative construct. Further, we performed a VIF
analysis of the formative information quality construct so as to exclude multicollinear-
ity. As Table 3 indicates, all four items showed VIF values of less than 2.4. Thus, they
were below the threshold of 3.3 (Diamantopoulos and Siguaw 2006).

4.3 Inner model

We used bootstrapping methodology with 5,000 drawings to test the significance of the
paths of the PLS-SEM inner model. Here, we selected the option of no sign changes
and the bias-corrected (BCa) bootstrapping procedure. We had to reject two hypotheses

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Effective accounting processes: the role of formal and… 145

Table 3 Validity statistics of formative construct

Items of formative Outer weight p value VIF

Information quality construct

(1) Accuracy 0.285 0.230 1.626

(2) Timeliness 0.400 0.033 1.200
(3) Usefulness 0.592 0.016 2.063
(4) Reliability 0.037 0.909 2.375

Work
Peer pressure
environment

H3: + ; 0.043
H4: + ; 0.246* H6: + ; 0.255**

Process H1: + ; 0.407*** Information

controls quality

Output controls

Notes: * p < 0.10, ** p < 0.05, *** p < 0.01 (all two-tailed), n = 59; statistics are based on Table 4, Model B.
Solid line: direct effect; dotted line: combined effect.

Fig. 3 Research model B with statistical results

(see Fig. 3). Table 4 presents path coefficients and significance levels resulting from the
applied bootstrapping procedure. We included different deviations from our research
model. Model A assessed the direct effects of controls on information quality on a
stand-alone basis. Model B modeled standalone effects of management controls as
well as the effects of control combinations. To calculate the combined effects, we
selected the two-stage calculation approach with standardized product terms. Since
the combined effects are treated as separate model variables, more paths led to the
variable of information quality. This resulted in higher adjusted R2 scores for Model
B. To test the model’s validity, we relied on statistics relating to Model A. Since some
hypotheses relied on effects of control combinations, we took Model B as a reference
model for the corresponding path coefficients. Hereafter, the results of the hypotheses
related to the direct effects of controls (H1-H3, H6) will be presented, followed by the
results related to the combined effects of controls.
H1 posited that process controls lead to a higher information quality level. The
results indicate a significant effect (β of 0.407, p value of 0.001). Thus, H1 was
not rejected. H2 proposed that output controls lead to higher information quality in
accounting processes. Our data did not indicate a significant effect (β of 0.078, p value

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146 T. Gackstatter et al.

Table 4 Path coefficients, levels of significance, and adjusted R2 scores of research model variants

Model → A B C
Path coefficient (p Path coefficient (p Path coefficient (p
value) value) value)
Path ↓ Hyp. effect Only standalone All effects on Stand-alone effects
effects information quality and control
variables

Direct effects
Process H1: + 0.488 (0.000)*** 0.407 (0.001)*** 0.505 (0.000)***
controls → Information
quality
Output H2: + 0.005 (0.963) 0.078 (0.538) 0.005 (0.970)
controls → Information
quality
Work environ- H6: + 0.346 (0.004)*** 0.255 (0.047)** 0.367 (0.011)**
ment → Information
quality
Peer H3: + 0.003 (0.986) 0.043 (0.802) − 0.014 (0.933)
pressure → Information
quality
Combined effects
Process controls * peer H4: + 0.246 (0.099)*
pressure → Information
quality
Output controls * peer H5: + − 0.185 (0.245)
pressure → Information
quality
Process controls * work − 0.196 (0.095)*
environ-
ment → Information
quality
Output controls * work − 0.030 (0.791)
environ-
ment → Information
quality
Control variables
Gender − 0.059 (0.710)
Number of employees − 0.057 (0.506)
Revenues 0.089 (0.475)
Adj. R2
for dependent 0.456 0.537 0.442
variable

We do not perform our analysis of control variables on Model B because Information quality would have too many
incoming links. The insignificant control variables do not seem to distort the effects of the remaining variables
*p < 0.10; **p < 0.05; ***p < 0.01 (all two-tailed), n  59; H  hypothesis

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Effective accounting processes: the role of formal and… 147

of 0.538). For this reason, H2 had to be rejected. H3 posited that peer pressure leads
to higher information quality in accounting processes. Our data shows an insignificant
effect (β of 0.043, p value of 0.802). Thus, H3 had to be rejected. H6 posited a positive
effect of an identification-inducing work environment on information quality. Given
the significant effect (β of 0.255, p value of 0.047), H6 was not rejected.
H4 proposed that process controls in combination with peer pressure positively
affect information quality. The results showed a significant effect (β of 0.246, p value
of 0.099). Thus, H4 was not rejected. H5 proposed that output controls in combination
with peer pressure positively affect information quality. Against our argumentation,
this effect came in as insignificant (β of − 0.185, p value of 0.245). Accordingly, H5
was rejected.
With regard to our control variables, all three variables that we controlled for do
not have a significant relation with information quality (see Model C in Table 4). As
a notable finding beyond our hypotheses, the combination of process controls and a
positive work environment revealed a negative impact on information quality. We will
discuss this in the next section. Figure 3 displays the research model’s path coefficients
and p values. The statistical results for the research model (as shown in Fig. 3) were
taken from Model B’s results.

5 Conclusion

5.1 Discussion and contribution

While there has been a great deal of research into different control types and their
effects, knowledge about their application levels but also their effectiveness and com-
binations is far from complete, and must consider the specific contexts (Merchant and
Van der Stede 2007). Concerning the effectiveness of controls, the literature has accu-
mulated little empirical evidence on appropriate control mechanisms in accounting
processes. Auzair and Langfield-Smith (2005) were able to show usage patterns of
formal controls along different service process types. They do not provide evidence
on the effectiveness of the controls. Motivated by the ambiguity in sourcing decisions,
Christ et al. (2015) also addressed the research gap related to the effectiveness of con-
trols in the context of accounting processes. They formulate hypotheses on this matter
but do so from an inter-company perspective. In contrast, we collected and analyzed
an empirical dataset to assess the effectiveness of controls in the accounting function.
We contribute to the management control literature along three dimensions.
First, we gained specific insights on the effectiveness of formal controls in account-
ing processes. Although accounting processes show high levels of performance
measurability, which is indicated by the general use of service-level agreements, we
find that output controls had an insignificant effect on information quality. This con-
tradicts traditional control theory (Ouchi 1979). The mere existence of formalized
service and quality levels does not seem to lead to improved quality levels. Ex post
interviews with participants revealed that detailed service-level agreements and for-
malized output controls were often in place. Some participants referred to them as
gentlemen’s agreements. Yet, these output controls were often not strictly enforced.

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The ineffectiveness of output controls could also be evidence that only measuring
final performance or work outputs is too late a control mechanism, because it gives
managers no possibility to intervene in time. This kind of intervention would only
be possible in the case of process controls. Another explanation could be the aspect
of perceived supervision. The existence of strong process controls could put pressure
on employees to more rigorously adhere to defined process procedures and standards.
This pressure is potentially not present in the case of output controls. In contrast to out-
put controls, process controls have a positive standalone effect on information quality.
This is in line with prior theorizing that encourages process controls in the context
of transactional routine processes such as accounting processes (Christ et al. 2015).
In sum, we contribute to the literature by taking a first step to understanding the role
of formal controls in rather transactional and standardized task environments such as
accounting processes in finance departments.
Second, complementing control theory that generally proposes applying formal
controls for transactional and routinized processes with measurable outcomes (Mod-
ell 1996; Ouchi and Maguire 1975), we have broadened the scope and shown that
informal controls also have an impact on performance outcomes. While a positive
work environment drives information quality as a standalone control, peer pressure
did not exhibit a similar standalone effect. Our results on the different functionalities
of peer pressure and an identification-inducing work environment narrow the knowl-
edge gap associated with informal controls and the implications of their application
(Malmi and Brown 2008). At the same time, illustrating the role of informal controls
is a key contribution for practitioners, because we have provided evidence of the previ-
ously unfounded hypothesis that mechanisms that foster motivation and identification
(e.g., a positive work environment) are relevant in accounting processes (ACCA 2002;
Herbert 2009). While Modell (1996) argued that motivation-inducing controls are par-
ticularly effective in the absence of measurable results, we could show that they are
nonetheless effective also in accounting processes that show a high measurability of
outputs.
Third, we found significant effects when formal controls are employed in com-
bination with informal controls. This supports Bedford et al. (2016), who posited
that empirical evidence regarding the combination of controls is necessary, because
insights into the isolated or stand-alone effects of controls could be fundamentally
different from the use of controls in combination. Specifically, we found that high
peer pressure levels accentuate the effect of process controls on information quality.
Here, peer pressure enforces adherence to formalized process routines and acts as an
amplifier of process controls in their impacts on information quality. This confirms De
Jong et al. (2014), who could show the possibility of an effective interplay between
peer pressure and norms.
Further, the evidence indicated that process controls lead to lower information
quality if combined with a positive work environment, although process controls and
an identification-inducing work environment each have an isolated positive effect on
information quality. This suggests that creating a culture of empowerment and iden-
tification potentially does not fully harmonize with strictly monitored and enforced
process standards. A reason for the negative combinatory effect could be that a pos-
itive work environment based on empowerment requires certain autonomy and trust

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Effective accounting processes: the role of formal and… 149

whereas process controls result in closely monitored operations with lower freedom
for employees. This would add to the assertion by Modell (1996), who claimed that
informal controls are particularly effective in the absence of measurable results found
in accounting processes. On the one hand, our data hints at a substitutive effect between
formal conformity-inducing process controls and informal enabling controls, rather
than a complementary effect. This seems so because the benefits of one control type,
process controls, diminish, once another control type, a positive working environment,
is instituted at the same time (see Grabner and Moers 2013). Thereby, the results indi-
cate that controls that are generally associated with performance benefits can also lead
to lower performance if they are not compatible with the remaining control set.
Therefore, we contribute to Malmi and Brown (2008) and the literature related to
management control combinations by showing that formal controls in the accounting
function have different effects on information quality if combined with informal con-
trols. Further adding to the control combination literature (Grabner and Moers 2013;
Malmi and Brown 2008), our data hints at certain substitutive and complementary
effects of the analyzed controls.

5.2 Limitations

As is typical with empirical studies, this study has potential limitations. First, we
purposefully pursued three target countries, because we sought to address senior
managers. Our respondent number (n  59) would have been hard to attain if
we had considered only one country. Because we focused on participants from
German-speaking Europe, we cannot exclude that results might look different in other
territories. Also, a latent risk of cognitive bias in the responses (i.e. social desirability
and self-reporting) may be perceived as a limitation (Holzbach 1978).

5.3 Future research

The study results provide guidance for future research. First, by examining control
mechanisms in the accounting function—which forms part of the CFO task uni-
verse—we raise promising questions about appropriate control mechanisms for other
activities in finance departments. Given the different characteristics and context associ-
ated with controlling processes, more detailed insights into useful control mechanisms
for controlling tasks are helpful, both regarding formal and informal control dimen-
sions (see Christ et al. 2015). Specifically, when confronted with the results of our
analysis, respondents indicated particular interest in further dimensions of informal
controls that induce motivation and identification. Second, thus far, the research has
provided no meaningful evidence on an efficient and effective use of controls. Besides
information quality, researchers could analyze the efficient use of management con-
trols. Here, the cost implications of management controls would be a useful additional
outcome variable to assess the efficiency of instituted controls. To our best knowledge,
this has not been done before. This follows the notion that all management controls
use resources (Merchant and Van der Stede 2007; Widener 2007). Third, our research
has shown significant effects of control combinations. Future research may explore

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150 T. Gackstatter et al.

organizational setups that facilitate the effective use of formal and informal controls.
Of particular interest in this regard is the capacity of formal and informal controls to
effectively substitute or complement one another.

Acknowledgements We thank reviewers and participants of the 14th Annual Conference for Management
Accounting Research (ACMAR) in Vallendar, Germany, in March 2017 as well as reviewers and participants
of the 9th Conference of Performance Measurement and Management Control (PMMC) in Nice, France, in
September 2017 for their valuable feedback. We further thank participants of the ACA Research Seminar
Series at the University of St. Gallen for their helpful ideas and comments.

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