Stakeholders’ Information Needs, Cost System Design, and Cost System Effectiveness in Dutch Local Government

• Author: Tjerk Budding,Martijn Schoute
• DOI: http://doi.org/10.1111/faam.12116
• Date: 01 February 2017
• Published date: 01 February 2017

Financial Accountability & Management, 33(1), February 2017, 0267-4424

Stakeholders’ Information Needs,

Cost System Design, and Cost

System Effectiveness in Dutch Local

Government

MARTIJN SCHOUTE AND TJERK BUDDING∗

Abstract: This study examines the relationships between stakeholders’ informa-

tion needs, cost system design, and cost system effectiveness in local government,

using a dataset of survey responses from 71 Dutch municipalities. Three cost system

design characteristics are examined: (a) the complexity and (b) the inclusiveness of

cost systems, and (c) their understandability for non-financial internal users. These

characteristics are shown to be only partly related to each other, and to differ in the

extent to which they are related to the information needs of internal and external

stakeholders, as well as to three cost system effectiveness characteristics.

Keywords: stakeholders’ information needs, financial reporting regulations, cost

system design, cost system effectiveness, local government

INTRODUCTION

A major topic in the field of management accounting concerns the extent

to which the design of cost systems is related to the context in which these

systems are being used. An important element of this context that appears to

influence the level of ‘sophistication’ of such systems, is the extent to which

organizations take into account the information needs of internal and external

stakeholders when designing a system. In the second half of the 1980s, Johnson

and Kaplan (1987) claimed that, at least among US private sector organizations,

∗The authors are from VU University Amsterdam. They would like to acknowledge the

helpful comments on earlier versions of the paper offered by the two anonymous reviewers,

Sandra Cohen, Henri Dekker, Jan van Helden, Martin Holzhacker, Jacco Wielhouwer, Eelke

Wiersma, and participants from the 2011 CIGAR Conference in Ghent, and the 2013 MAS

Conference of the American Accounting Association.

Address for correspondence: Dr. Martijn Schoute, Department of Accounting, VU

University Amsterdam, De Boelelaan 1105, 1081 HV Amsterdam, The Netherlands.

e-mail: m.schoute@vu.nl

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the design of cost systems had become dominated by financial reporting

regulations, and that this had led to deficiencies in the information that such

organizations used for managerial decision-making purposes. A subsequent

series of studies has examined this claim, and found little evidence of a

generally held belief that financial reporting dominates management accounting

(e.g., Hopper et al., 1992; Joseph et al., 1996). At the same time, however,

Joseph et al. (1996) also found evidence that the management accountants

who responded to their survey used integrated financial and management

accounting systems, and had little discretion in the content of their management

reports.

Research among public sector organizations shows mixed results. Pilcher

and Dean (2009) have recently replicated the Joseph et al. (1996) study in

an Australian local government context, and found similar results. In other

governmental settings, however, research has shown that the design of cost

systems generally tends to be dominated by the information needs of external

stakeholders (e.g., Lapsley and Wright, 2004). In addition, contrary to custom

among private sector organizations, in which the level of ‘sophistication’ of

cost systems is usually mainly determined by the information needs of internal

stakeholders (e.g., Kaplan and Cooper, 1998), research has also shown that it is

satisfying external stakeholders’ information needs which leads to the usage

of more ‘sophisticated’ cost systems in governmental organizations (Geiger

and Ittner, 1996). Our current understanding of how the information needs

of internal versus external stakeholders affect the design (and, in turn, the

effectiveness) of cost systems in governmental organizations is still limited,

however, and prior studies argue that the literature would benefit from

additional research in this area (cf. Geiger and Ittner, 1996; Lapsley and Wright,

2004).

In this study, we examine these, and related, issues in a Dutch local

government context. Since 2004, Dutch municipalities have faced a somewhat

ambiguous situation, which may have an effect on the design of their cost

systems and (as a result) the usefulness of their information for different

stakeholders. On the one hand, due to changes in financial reporting

regulations in 2003, municipalities now have freedom in how they design

their cost system and how they provide financial information in their financial

reports. On the other hand, however, they are still required by law to provide

full cost information to central government (i.e., Statistics Netherlands) in a

prescribed and detailed format, and to ground some municipal tariffs (such

as for building permits) on full cost information for the services provided.

Dutch legislation does not prescribe how overhead costs should be allocated

for these purposes. A priori, one would expect municipalities to have adapted

their cost system to their own, internal information needs, especially since

the fiscal crisis, when the prospect of severe financial cut-backs should have

increased further their desire for insight into their costs, in particular overhead

costs.

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2017 John Wiley & Sons Ltd