Privatization and management accounting systems change: The case of the 19th century Spanish tobacco monopoly

Accounting Historians Journal, The, Dec 2002 by Macias, Marta

Vangermeersch Manuscript Award Winner, 2001

Abstract: This paper examines changes to the accounting system of the Spanish tobacco monopoly in 1887, following the decision by the state to lease the publicly owned and state-run monopoly to a privatesector company. The switch to private-sector management generated a fundamental change in the demands made of the accounting system. As a result, double-entry bookkeeping and a new method of calculating costs were implemented. The paper discusses the motives behind the design of the new accounting system and its consequences using the framework provided by agency theory. It highlights the need to consider the role of the capital structure of the firm and the state as explanatory factors for both the parameters and uses of cost accounting information.

INTRODUCTION

Contributions addressing the emergence of cost accounting practices in organizations have provided important insights into the broader processes involved in the production of accounting information. Competitive pressures [e.g., Johnson and Kaplan, 1987; Edwards and Newell, 1991; Fleischman and Parker, 1991, 1997], enforcement of disciplinary practices [e.g., Hoskin and Macve, 1986, 1988], and the quest for greater labor productivity [Hopper and Armstrong, 1991] have been highlighted as underpinning the development of cost management systems. Much of this research has focused on Anglo-American settings characterized by strong, competitive environments. In spite of several contributions on the role of government agency [e.g., Ezzamel et al., 1990; Tyson, 1993], evidence about the nature of and motives behind such practices in other contexts is still needed. This paper, by examining the privatization of the Spanish tobacco monopoly in 1887, will explore the impact of ownership structure on management accounting systems. This privatization did not entail changes either in the competitive environment or in the productive technology used by the industry, allowing us to isolate the influence of the shift from public to private ownership on such practices. Archival evidence was gathered from three primary sources. The Archive of the Tobacco Company (Archivo de Historico de la Fabrica de Tabacos de Sevilla, AHFTS) and the Intermediate Archive of the Tobacco Company (Archivo Intermedio de la Fabrica de Tabacos de Sevilla) constitute comprehensive sources for understanding internal developments at the tobacco factory. In addition, the Bank of Spain houses the Archive of the Bank of Spain (Archivo Historico del Banco de Espana, AHBE), which is essential for investigating the privatization of the tobacco monopoly.

In recent times, the Spanish tobacco monopoly has been extensively studied. Carmona et al. [1997] examined from a Foucauldian perspective the implementation by 1773 of a cost accounting system. They showed cost calculations to be part of a strong disciplinary regime that enhanced visibility and served to establish a system of calculability that rendered human accountability visible. Carmona et al. [1998] used an institutional theory framework to explain changes to financial and cost accounting practices throughout the period from 1760 to 1790. They concluded that new accounting practices emerged as a means of enhancing the external legitimacy of the organization. Carmona and Macias [2001] studied the implementation of budgets and cost accounting procedures in the period from 1820 to 1887. They focused on the state's motivation in exerting institutional pressures aimed at the implementation of early cost management practices and studied different organizational responses to simultaneous pressures arising from a single institutional source. In the period analyzed in all these papers, the monopoly was publicly owned and state-run. Finally, Macias [2002] explored determinants of accounting disclosure by analyzing the evolution of corporate financial reporting throughout the first leasing contract (1887-1896). The current paper also analyzes the impact of the privatization process but is significantly different in its exploration of the factors driving the design of management accounting information at the factory level, the tobacco factory of Seville being the unit of analysis. It is argued that the shift from public to private management entailed a fundamental change in the philosophy of management, with profitability and efficiency being privileged. Thus, a new demand for accounting information emerged with an appropriately redesigned accounting system.

The remainder of the paper is divided into five sections. In the next section, the theoretical framework is discussed. The historical context, the characteristics of the tobacco industry and the privatization process is then discussed. The subsequent section deals with the impact of privatization on management accounting systems. This is followed by a discussion of findings and conclusions.

THEORETICAL FRAMEWORK

Agency theory has highlighted the influence of different divisions of property rights in the emergence of efficient organizational forms [Jensen and Meckling, 1976]. The definition of property rights affects both the incentive schemes and the design of control mechanisms that regulate the relationship between principal and agent. In state-owned firms, the diffuse nature of ownership provides owners with low incentives to control management. Managers of state-owned firms may behave in ways which are not consistent with the interests of owners for three main reasons: (i) the existence of multiple objectives [Rees, 1984; Utton, 1986]; (ii) the absence of tight, external controls given no threat of take-over [Wright and Thompson, 1994] or bankruptcy exist [Kornai, 1986; Vickers and Yarrow, 1988; Stiglitz, 1989]; and, (iii) the existence of soft, internal control. Monitoring systems are expected to be bureaucratic, focusing on legal aspects [Bos, 1991]. Private ownership, on the contrary, is assumed to enhance management accountability and improve performance [Donahue, 1989; Jensen, 1989; Zeckhauser and Horn, 1989; Goodman and Loveman, 1991]. The assumption that ownership per se creates an environment that is conductive to high or low performance has been contested [Aharoni, 2000, p. 50]. Economic literature has traditionally focused on Anglo-Saxon and other developed economies in which privatization has been undertaken through the selling-off of public enterprises in a context of simultaneous deregulation and the prevalence of external control mechanisms. However, this scenario is not always the case. Recent literature on privatization [e.g., Dharwadkar, 2000; Ramamurti, 2000] has examined the situation in emerging economies where neither capital markets nor economic institutions are well-developed, emphasizing the importance of government's residual ownership and the type of capital the firm attracts to understand the results of privatization cases. Post-privatization operations of the firm and the strategy of the acquirer may be heavily influenced by the terms stipulated by government [Freudenberg and Bird, 1991; Uhlenbruck and DeCastro, 1998]. The outcome of privatization is not always the same type of private firm. Therefore, factors such as national characteristics, the role of the state, and the internal organization of the privatized firm may explain changes in management concerns and the behavior that follows privatization processes [Leeway and Murtha, 1994; DeCastro and Uhlenbruck, 1997; Uhlenbruck and DeCastro, 1998; Aharoni, 2000].