Contemporary Perspectives in

Management Accounting

Public and Private

Organizations

Authors: Qurat ul ain

Supervisor: Jan Alpenberg
Semester: Fall 2020
Course code: 4FE180
Table of content
Q4. Management accounting information play an important role for
decision making in both public and private organizations. Make a
structured comparison regarding the differences between the types of
information, types of control, measurements etc. that is needed in each
type of organization to plan and evaluate performance.............................3
4.1 Public Sector vs Private Sector..............................................................3
4.1.1 Ownership........................................................................................3
4.1.2 Objective..........................................................................................3
4.1.3 Management....................................................................................3
4.1.4 Freedom of Management.................................................................3
4.1.5 Flexibility.........................................................................................3
4.1.6 Capital..............................................................................................4
4.2 Types of Information used in Public vs Private Sector..........................4
4.3 Types of Control used in Public vs Private Sector................................4
4.4 Measurement used in Public vs Private Sector......................................7
References.......................................................................................................8
Q4. Management accounting information play an important role
for decision making in both public and private organizations.
Make a structured comparison regarding the differences between
the types of information, types of control, measurements etc. that
is needed in each type of organization to plan and evaluate
performance.
4.1 Public Sector vs Private Sector
The public sector is a part of country's economy that is managed by the government, whether
it be the federal, state, or municipal levels. The term "private sector" refers to the area of a
country's economy that is owned and managed by private persons or businesses. Public
sector industries are, for instance, national bank, public universities, civil hospitals etc.
Private sector companies are for example, TVS Motors, TATA Steel, Habib Bank LTD,
Private educational institutes etc.

4.1.1 Ownership
All businesses held by people or groups in society are considered to be in the private sector.
Whereas, the public sector includes all businesses that are owned by state, federal, or both
governments.

4.1.2 Objective
Private businesses are primarily motivated by profit. As a result, they only engage in
economic activities that provide a consistent and regular return on capital.Public welfare and
serving the nation's citizens are the sector's key goals. Whereas, public enterprises, on the
other hand, are driven by a number of socio-economic and political goals. They carry out a
variety of tasks without much thought for profit.

4.1.3 Management
Its owners or their chosen representatives run an organization in the private sector. The
management is required to follow the rules established by the owners. However, because
policies can be changed or even abandoned depending on the demands of the specific
scenario, there is considerable room for initiative and dynamism. Whereas, public sector
businesses have less opportunity for initiative and dynamism because their management are
required to operate under the strict policy framework and regulations set by the government.

4.1.4 Freedom of Management

In a private company, the owners are in charge and have little influence from outside
organizations. Whereas, a public enterprise constantly deals with intervention from various
organizations, such as ministers, politicians, and bureaucrats. When regular operations of the
firm are interrupted, the operations frequently suffer.

4.1.5 Flexibility
A private company may readily carry out its rules in any circumstance. There aren't many
limits on its owners' ability to carry out the company's goals and policies. Whereas, a public
company, any change in goals and regulations must be approved by the government and its
agents, which occasionally results in missed opportunities.

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4.1.6 Capital
Private investors' and owners' resources are where private businesses obtain their funding.
They can raise capital through selling company shares or debentures, as well as by selling
goods or services, retained profit. Whereas, the government provides the entirety of a public
enterprise's capital, or at least 51% of it, using public funds. Such a business can never run
out of money because the government has access to an endless supply of funding sources,
including taxpayers and the sale of state assets.

4.2 Types of Information used in Public vs Private Sector

A substantial number of papers suggest that the reporting in this mentioned sector is less
documented as compared to private sector. Performance measurement is plagued by
unresolved issues with indicator definition, indicator quality, and indicator reporting. There
are problems with the public sector's shifting culture and the culture of performance
management, and many organizations have dealt with them in various ways. Further, the
purpose of performance measurement is to produce information that can be used to change
behaviours and thus improve performance (Lemieux-Charles et al., 2003). However, despite
the best intentions of governments to improve the quality of services through benchmarking,
measurement and quality systems, there are still unwanted side effects. Adcroft and Willis
(2005) allege that performance measurement reduces the professionalism of public sector
staff and turns services into commodities, which runs counter to all thinking on quality and
results in poorer performance. Whereas, private sector focuses on non-financial measures and
effectively implementing these performance measures to achieve their goal.
Historically, the public sector had been run by professionals, making decisions based on
professional criteria, but the new managers threatened their autonomy and power base. The
professionals responded by supposedly embracing the new regime, while working with
managers and senior personnel to actually modify and moderate the changes and ensuring
that the professionals continued to be in a position of power (Sehested, 2002). Kirkpatrick
and Ackroyd (2003) take a different approach (organisational archetype theory) but produce
the same conclusion that professionals have worked to minimise extreme change and that
many of the old working practices and values continue. Whereas, private sector has followed
decentralization criteria, where the employs are empowered and can make important
decisions to improve the overall system.
In public sector, bureaucracy is observed where the subordinate obeys his or her superior’s
order, it is because their respective role and position in a system of social relationships is
already defined. As we know public sector is centralized and the top management orders and
assigns the tasks to the lower managers, which show case a communication pattern of the
accounting information in public sector. These day-to-day communications eventually sets a
norm and creates reality. Whereas, in private sector mostly they have decentralized
communication method which again sets a tone and results in the organizational reality.
Further, in private organizations there is an increase use of quality management and
performance reporting systems, everyday individual activities are more and more defined by
a flow of documents that provide formal instructions for how, when, and by whom these
activities are to be realized. In turn, each document that results from ongoing organizational
actions and interactions feeds back into these inter actions and shapes how the people
operate.

4.3 Types of Control used in Public vs Private Sector

We can review the types of control in public and private sectors by using a management
control system package conceptual framework by Malmi and Brown (2008).

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Figure 3 - Management Control System Package
4.3.1 Culture
The culture is values, beliefs and social norms, which influence employee’s behaviour.
Culture is however a control system when it is used to regulate behaviour. There are three
aspects of cultural control which are value-based controls, symbol-based controls, and clan
controls. Employees behave in according to the value statement because it is expected by the
organisation. We can say that the value is designed to impact employee behaviour. In public
sector the senior managers communicate formally and reinforce systematically in order to
provide simple values, purpose, and direction for organisation. Whereas, in private sector
they are more informal and yet provide the direction for organisation by setting goals.
In symbol based controls the organisations builds visible expressions, such as creating
workspace design and dress codes, in order to develop a specific type of culture. In private
sector organisations create an open plan office in order to create a culture of communication
and collaboration to control behaviour. Mostly private organisations do not regulate the staff
to wear a specific dress code. Whereas, in public sector, the office plan is designed to divide
top management and lower management and require staff to wear a uniform in order to create
a culture of professionalism.
Further, the subcultures or the individual groups are labelled as clans. In clan an individual is
expose to a socialization process, which imparts in them a set of skills and values. In public
organisation the clan system fits best as it relates to groups, such as professions (i.e. doctors
or professors). Whereas, private sector do not strictly follow clan system as they also bond
cross functional. Further, the clan in private sector would be people working in the same
industry like finance and accountants, food and beverages etc.
4.3.2 Planning
Planning is a control, which sets out the goals of the functional areas of the organisation, by
provides the standards to be achieved in relation to the goals, and clarifies the level of effort
and behaviour expected from organisation members. We can say that planning controls the
activities of groups and individuals to ensure they are in line with desired organisational
goals. There are two approaches of planning, which are action planning and long range
planning. In public sector they tend to focus on the goals and actions for the immediate

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future, usually a 12-month period. Whereas, the private sector focuses on the goals and
actions for the medium and long run usually up to 5 years. They have a strategic focus.
4.3.3 Cybernetic Controls
Cybernetic is associated with the concept of control which is a process using standards of
performance, measuring system performance, comparing that performance to standards,
evaluating the variances in the systems, and modifying the system’s conduct. There are four
cybernetic systems, which are budgets, financial measures, non-financial measures, and
hybrid measure, which contains financial and non-financial measures. In public sector, it is
observe that they are use budgeting method, which is a comprehensive plan that serves many
different purposes, specifically performance planning and evaluation of actual performance
against the plan. Public sector use it for number of factors such as integration of processes
and resource allocation decisions, and evaluating performance against those plans. Whereas
private sectors use hybrid measure which includes financial performance measures and non-
financial performance measures. They focus on target setting. Further, in private sectors non-
financial measures are gaining more importance, which are used to overcome some of the
perceived limitations in financial measures and to identify the drivers of performance. In
times that are more recent the balance scorecard (BSC), which is a hybrid measure has
become quite dominant in private sector. Public sector are also trying to implement and adopt
BSC.
4.3.4 Reward and Compensation
Reward and compensation systems mainly focuses on motivating and increasing the
performance of an individual and groups within the organisation. Recently public sector has
changed its employee contracts from rational to transactional, which implies more explicit
performance measures and legal agreements. They now compensate the employees on their
performance. As we know private sector is adopting the same compensation system from
many years. It focuses on the performance measures and KPIs of an individual employee.
4.3.5 Administrative Controls
Administrative control systems direct the behaviour of an employee by organizing
individuals and groups, monitoring and by specifying the tasks to assess their performance.
There are three groups of administrative controls, which are organisation design and
structure, governance structures, and the procedures and policies.
Organisational design constitutes of the structure in which an organisation operates. Public
sector has complex systems as compare to the private organisation due to which it has greater
formalization, and specialization. If we observe private organizations there, size is small as
compare to the public sector. Private organizations empowers their employees to make
decision and add value to their organization.
The governance structure includes the formal lines of authority and accountability. In public
sector, they have more formal in their organizational approach and they are centralized.
Whereas in private sectors they are decentralized. Further, we have witnessed that in private
sectors there is communication that is more informal.
Policies and procedures relates to the bureaucratic approach in order to specifying the
processes and behaviour within the organisation. In public sector, it is more common because
they are bureaucratic and follow a set of standard policies and procedures. Whereas, in
private sectors they can bit lenient in their policies and procedures. They set policies and
procedure to maintain the conduct of the organisation not imposing them any strict rules.

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4.4 Measurement used in Public vs Private Sector
It has been observed there are different performance measures as mentioned earlier in
cybernetic controls. In public sector, performance measures is one area, in which they are
facing problems. Public sector does not know how to measure the satisfaction of the public
when they are using welfare services, as if they go to a public hospital, where the treatment is
free, and then they cannot assess the performance of the hospital. So, it was argued that in
public sector the performance measure techniques were not properly used as one of the main
problem was the lack of statistical rigour and testing which was carried out on performance
indicator data. The results are audited, but are not validated or reliability tested. Similarly,
league tables are being used in all areas of the public sector, but no allowance is made in
these tables for natural variation within the data (Jacobs and Goddard, 2007). Public sector
has to focus on performance indicators as well. Further, it was observed that many public
sector organisations struggle with the Balanced Scorecard because they have not invested
sufficient time and effort in customising it to meet their needs. Chang (2006) provides a
critique of the Balanced Scorecard in the health service and suggests that it is used more as an
information system than a strategic performance management tool. Whereas, private sector
was successful in implementing balance score card and recently more focusing on non-
financial measures for the organisational success. Here we can say that public sector is
struggling with adopting and implement are performance measure, which fits the
organisation. Whereas, private sector evolving with new techniques and have already
successfully implemented balance scorecard in their organisations.
Further, we have observed that public sector has a goal of running an efficient welfare state,
whereas private sector has a goal to achieve profits. We has witnessed that in public sector
there is no proper way to measure the result of its effectiveness, such as how can it measure
that people are satisfied with the institution facility or transport service. Realizing the goal in
public sector is difficult because it’s more qualitative base. Whereas, private sectors can
easily measure their goals, as they now how much profit they will earn by selling their
product.

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