Accounting for control and trust building in interfirm transactional relationships

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Accounting, Organizations and Society 34 (2009) 267–283 www.elsevier.com/locate/aos

Accounting for control and trust building in interfirm transactional relationships Ed Vosselman a,*, Jeltje van der Meer-Kooistra b,1 a

Radboud University, Nijmegen School of Management, Department of Economics, P.O. Box 9108, 6500 HK Nijmegen, The Netherlands b University of Groningen, Faculty of Economics and Business, Department of Accounting, 9700 AV Groningen, The Netherlands

Abstract This paper theorises the accounting-control-trust nexus in interfirm transactional relationships. In the context of such relationships, accounting has predominantly been conceptualised as a control technology. However, in our paper we analyse stable and durable relationships as being the results of interaction between control and trust building. Such an analysis calls for an additional conceptualisation of accounting as a trust building technology. Furthermore, we explain the interaction between accounting for control and accounting for trust building in the context of a process of embedded agency. Accounting for control is underpinned by a governance structure, which includes accounting structures that have the potential to act as safeguarding and incentivizing devices with the aim of aligning long-term interests. The governance structure is flanked by trust from the institutional environment of the transactional relationship. Accounting for trust building originates from voluntary local decisions to show commitment to the relationship. It takes the form of ad hoc calculations and accounts and becomes a device for relational signalling. Adequate interaction between accounting for control and accounting for trust building results in stable and durable interfirm transactional relationships. Ó 2008 Elsevier Ltd. All rights reserved.

Introduction Ever since Otley observed that ‘‘the scope of the activity of management control is enlarged and it no longer confines within the legal boundaries of the organization” (Otley, 1994, p. 293) and Hopwood urged ‘‘the examination of some of the accounting and informational consequences of more explicit concerns with the management of the supply chain * Corresponding author. Tel.: +31 243611876; fax: +31 243612379. E-mail addresses: [email protected] (E. Vosselman), [email protected] (Jeltje van der Meer-Kooistra). 1 Tel.: +31 503633829; fax: +31 503637356.

and a more conscious questioning of what activities reside within and without the enterprise” (Hopwood, 1996, p. 590), many accounting studies have dealt with interfirm transactional relationships. These studies take a rationalist approach, a constructivist approach or a combination of the two. Rationalist approaches to accounting and control in interfirm transactional relationships theorise and examine the instrumental relationship between control problems and control devices designed and used to manage these problems. A few of these studies adopt a contingency approach without explicitly and substantially incorporating an organisational economics analysis (e.g. Cooper & Slagmulder, 2004; Kaju¨ter & Kulmala, 2005; Mahana, 2006).

0361-3682/$ - see front matter Ó 2008 Elsevier Ltd. All rights reserved. doi:10.1016/j.aos.2008.04.002

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But, most of them – at least partially – draw upon organisational economics; in particular on transaction cost economics (e.g. Anderson & Dekker, 2005; Anderson, Glenn, & Sedatole, 2000; Dekker, 2003; Dekker, 2004; Donada & Nogatchewsky, 2006; Gietzmann, 1996; Langfield-Smith & Smith, 2003; Nicholson, Jones, & Espenlaub, 2006; Sartorius & Kirsten, 2005; Van den Bogaard & Spekle´, 2003; Van der Meer-Kooistra & Vosselman, 2000). The accounting studies that take a constructivist approach (e.g. Cuganesan & Lee, 2006; Franses & Garnsey, 1996; Ha˚kansson & Lind, 2004; Mouritsen, Hansen, & Hansen, 2001; Mouritsen & Thrane, 2006; Seal, Cullen, Dunlop, Berry, & Ahmed, 1999) highlight the role of accounting in constituting and shaping interfirm relationships. Some other studies combine the constructivist approach with a rationalist approach (e.g. Chua & Mahama, 2007; Free, 2007; Thrane & Hald, 2006). These studies show the instrumental and the social to be intertwined. Furthermore, a few studies draw upon branches of institutional theory other than transaction cost economics; for example, structuration theory (Seal, Berry, & Cullen, 2004) and evolutionary theory (Coad & Cullen, 2006). A number of studies touch upon the concept of trust and its relation to control. In a rationalist approach, control and trust are both instrumental in absorbing uncertainty and behavioural risks (Dekker, 2004; Emsley & Kidon, 2007; LangfieldSmith & Smith, 2003; Tomkins, 2001; Van der Meer-Kooistra & Vosselman, 2000). Control and trust are predominantly seen as two distinct concepts, either substitutive of or complementary to each other (Dekker, 2004). The substitution perspective suggests that trust and control are inversely related. This implies that more control results in less trust and, vice versa, more trust results in less control. Van der Meer-Kooistra and Vosselman (2000), for example, consider trust to be a substitute to control in interfirm relationships characterised by transactions of a high complexity and surrounded by a high level of uncertainty. In such relationships trust efficiently replaces control in transactional relationships. The complementarity perspective perceives control and trust as mutually reinforcing. Tomkins (2001), in exploring the interaction between accounting information and trust in relationships with different degrees of complexity, suggests that at an earlier stage of the interfirm transactional relationship control may add to trust; in other words, more control leads to more trust. He

rejects the rather simple inverse relationship between control and trust. He claims that at an earlier stage of the relationship the accounting information exchange that follows from the use of controls may produce more positive expectations about future contributions to the relationship. In this way, control could add to trust. In a similar vein, Emsley and Kidon (2007) examine the relationship between control-related information and trust in a joint venture of international airlines. Their study reveals that control-related information affected the level of trust, either in a positive or in a negative way. It could either help to build trust or destroy trust. In a constructivist approach, control and trust are viewed as active forces in a relationship or network, where they help to mediate, shape and construct that very relationship or network. Mouritsen and Thrane (2006), for instance, view control practices (labelled as management control technologies) as carriers or sources of trust, thereby linking up with the notion of a complementary relationship. They provide evidence that there is trust when proper management control technologies are in place. Trust differs from management control technologies in the sense that it is not an object, but a quasi-object. In their view, trust is an aspiration circulating in the interfirm relationship or network. It is a problematising device that becomes important when it is absent. It then mobilises control that facilitates ongoing business in the network. In this way, trust is shown to emerge through management control technologies including accounting. From a rationalist approach, this paper aims to further contribute to the theory on the relationship between control and trust. Until now there has been little theoretical debate on the control-trust nexus. Hence, there is a strong need to move beyond ‘empiricism’ and to do more theoretical work, thereby creating a more comprehensive understanding of the control-trust nexus (Bijlsma-Frankema & Costa, 2005). More specifically, we intend to explore the accounting-control-trust nexus. Not only do we aim to get a richer understanding of the way control and trust (building) in interfirm transactional relationships are interrelated, but we also aim to get a deeper insight into the way accounting is related to control as well as to trust building. In particular, extant literature fails to explore the way accounting is linked to trust building. It perceives accounting to be directly related to control. Accounting, more specifically, is perceived to be related to external mea-

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sure based control.2 It provides financial and nonfinancial measures and information on the (output of) the (expected) behaviour of parties in the relationship, not only in order to co-ordinate actions but also in order to cope with appropriation concerns (Dekker, 2004; Gulati & Singh, 1998). External measure based controls (or ‘‘hard controls”) aim to incentivize, monitor or constrain actions of the parties involved, thus safeguarding against potential opportunistic behaviour by which a party searches self-interest at the expense of the other party in the relationship. So, these controls cope with behavioural uncertainty by making behaviour predictable and transparent. Although control-related accounting information is claimed to have an impact on the level of trust (e.g. Emsley & Kidon, 2007; Tomkins, 2001), accounting information has not been directly related to trust building. As we argue that it needs both control and trust to absorb behavioural uncertainty and to effectively cope with appropriation concerns, we claim that the scope of accounting should include the building of trust. Therefore, in order to broaden its scope we will not only conceptualise accounting as a control technology, but also as a trust building technology. To that end, trust is regarded to be an outcome of a trust building process at the level of the transactional relationship.3 This outcome implies that a party is willing to accept vulnerability, although this party is not completely sure that the 2

Following Eisenhardt (1985), two basic approaches to control can be distinguished – external-measure based control and internal value-based control. External measure-based controls include formal rules, procedures and policies to safeguard, monitor and reward desirable performance. To a certain extent they rely on accounting measures and accounting information. External measure-based controls are formal control structures that, in the context of interfirm transactional relationships, are codified in a contractual arrangement. The main modes of formal control are behavioural control and output control (Ouchi & Maguire, 1975). The formal control structures in writing form the basis of control practices in action. Internal-value based controls encourage desirable behaviour and outcome and are imposed and internalised organizational goals, values, norms and culture. Internal-value based control refers to the idea of clan control proposed by Ouchi (1979). This type of control does not rely on accounting measures and accounting information. As our analysis emphasises control that is directly related to accounting measures and accounting information, the concept of control we adopt excludes internal-value based control. Our focus is on external measure-based control. 3 Other authors use specific terms for this concept of trust, e.g. process-based trust (Zucker, 1986), goodwill trust (Sako, 1992) or relational trust (Rousseau, Sitkin, Burt, & Camerer, 1998).

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other party will not behave opportunistically. Our notion of trust is consistent with views expressed by other authors. For, although the concept of trust proves to be more ambiguous than that of control, and it could even be stated that the issue of defining trust remains largely unresolved (Das & Teng, 2001), the willingness to accept vulnerability (Mayer, Davis, & Schoorman, 1995; Mc. Evily, Perrone, & Zaheer, 2003; Schoorman, Mayer, & Davis, 2005) may be considered to be the core of trust. Positive expectations about the ability, the benevolence and the integrity of the other party form the input for such a willingness, whereas risk taking in the relationship is the outcome of this willingness. The latter is the behavioural manifestation of trust. Trust thus encompasses perception, volition/intentionality and behaviour (Mc. Evily et al., 2003). From a rationalist approach, the paper adopts the view that trust and control have a common goal: they are both instrumental to the absorption of behavioural uncertainty. It takes the perspective that in order to absorb behavioural uncertainty, control and trust do not just substitute or complement, but interact. An interaction approach includes substitution as well as complementary connections, but acknowledges that both trust and control are not static. The rather simple ‘and/or’ or ‘and/and’ debate on the relationship between control and trust downplays the dynamics between trust and control. An interaction perspective accounts for the interrelated dynamics of control and trust.4,5 Control needs trust, and trust needs control. At the same time, control produces trust and trust produces control. In the course of the relationship, control may

4 The dynamic character of our analysis is similar to Tomkins (2001) analysis. However, there is an important difference. Whereas Tomkins views control and trust as two distinct concepts by assuming that uncertainty can be absorbed ‘‘either by building higher levels of trust or by building more extensive control mechanisms with the associated increase in information” (2001, p. 167), we take the position that the absorption of uncertainty is a result of an interaction between the two. 5 An interaction perspective on trust and control is similar to the ‘duality perspective’ on trust and control as advocated by Mo¨llering (2005). However, we argue that an interaction perspective leaves more room for the influence that control has on the level of trust, and vice versa. Changes in control might either accelerate or hinder the building of trust, whereas the building or destroying of trust might influence the writing, use or consequences of controls. Therefore, stable and durable interfirm transactional relationships not only need both control and trust (as is claimed in a duality perspective), but also benefit (or sometimes suffer) from each other.

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change, and such change may have direct as well as indirect effects. It may directly affect the absorption of behavioural uncertainty, but may also have a direct effect on the level of trust, with a subsequent (indirect) effect on the absorption of behavioural uncertainty. Furthermore, the paper extends earlier work by relating accounting to control as well as to trust building. Accounting is present in formal control practices stemming from a contractual arrangement as well as in voluntary interactions between individuals that result in trust. In a control context, accounting is argued to be directly instrumental to the alignment of interests of the parties involved, by compensating for negative behavioural expectations (fear for opportunism). Accounting helps to incentivize, safeguard or constrain the actions of parties involved. In the context of trust building, accounting is argued to be directly instrumental to the generation of positive behavioural expectations. Here, accounting serves the process of relational signalling, a process we argue to be at the heart of the trust building process. Accounting, then, helps in stimulating the willingness to accept vulnerability. The remainder of the paper is organised as follows. In the next section accounting for control is analysed in terms of control practices enabled by a centre. Such a centre is a governance structure in the form of a contractual arrangement that offers safeguarding devices as well as incentive systems, thereby constraining and directing the behaviour of the parties involved (formal control structures). We will show that in order to be effective, the governance structure and incorporated formal control structures need trust that originates outside the relationship, while the formal control structures and the practices that stem from them produce trust at the level of the relationship. The third section contains an analysis of the drivers and the mechanisms of accounting for trust building. We will show that trust building needs a governance structure and incorporated formal control structures. Together, trust and control constitute positive expectations, thus enabling durable and stable relationships. The fourth section examines the interaction between accounting for control and accounting for trust building. In the final section, we draw conclusions and offer suggestions for future research. Accounting, control and governance structure In this section we will show that accounting for formal control has a power base in a governance

structure that safeguards against risks of appropriation. The governance structure is embedded in trust from the institutional environment of the transactional relationship. The embedded governance structure produces thin trust at the level of the transactional relationship. Appropriation concerns and governance structure Accounting for control in interfirm transactional relationships comes in the form of a formal control device or a formal incentive scheme. There are various types of such devices or schemes: inter alia, a bureaucratic performance measurement and management system (Van der Meer-Kooistra & Vosselman, 2000), open book accounting (Cooper & Slagmulder, 2004; Dekker, 2004; Van der MeerKooistra & Vosselman, 2000) and a financial incentive scheme (Dekker, 2004; Van der Meer-Kooistra & Vosselman, 2000). Besides satisfying co-ordination requirements, the accounting practices are meant to be safeguards against risks of appropriation; there are appropriation concerns (Dekker, 2004; Gulati & Singh, 1998). Appropriation concerns are directly related to the notion that parties enter into a transactional relationship based on the pursuit of long-term self-interest. Because interests can diverge during the course of the relationship, opportunistic behaviour may occur. One party can seek self-interest, even at the expense of other parties. Against this background, formal accounting practices act as vehicles for safeguarding and, as a deterrence or incentive scheme, help to align interests. The practices limit the range of parties’ actions and entail monitoring, sanctions and incentives. Formal accounting and control practices in interfirm transactional relationships cannot be taken for granted. These practices must rest upon a formal power base that is designed, negotiated and established at the level of the interfirm transactional relationship. Driven by appropriation concerns, the formal power base is an institution that structures and enables accounting and control practices. Appropriation concerns produce negative expectations about future behaviour. The institution, incorporating formal accounting and control structures, is meant to compensate for such negative behavioural expectations. In terms of transaction cost economics, the institution takes the form of a governance structure, which Williamson (1979) describes as ‘‘the institutional framework within which trans-

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actions are executed” (1979, p. 239). In interfirm transactional relationships, the institutional framework essentially takes the form of a contract. An effective governance structure compensates for the legitimate negative expectations that parties have of each other regarding future behaviour. Negative expectations are legitimate when third parties, who do not hold any stake in the relationship, state that anyone placed in a specific situation would mistrust certain explicit or implicit promises made by one of the stake-holding parties (Lindenberg, 2000). This rather ‘objective’ mistrust is irrespective of the true intention of the promisor when he makes his promise, since the promise is ‘‘blatantly against his selfinterest” (Lindenberg, 2000, p. 12). The mistrusting party then can claim contractual clauses as part of a governance structure that fosters mutual co-operation by reducing opportunities and incentives for opportunism and/or by compensating a party’s loss if opportunism nevertheless occurs, without running the risk of being accused of abnormal risk aversion or lack of good faith (Lindenberg, 2000). The governance structure and the production of thin trust A governance structure thus compensates for potential opportunism. Once agreed upon by the parties involved, the formal accounting and control structures, as parts of the governance structure, have the potential to safeguard against opportunistic behaviour and to incentivize desired behaviour. Once they are enacted, they take the form of accounting and control practices. Through accounting practices such as open book accounting, information asymmetries are balanced. Through accounting and control practices such as target costing and performance measurement, the efforts or the output of the efforts of a supplier can be controlled. And through accounting and control practices that take the form of financial incentive schemes, the costs and benefits associated with certain behaviour can be modified (Dekker, 2004). The accounting and control practices help align the interests of the parties involved. In doing so they produce thin trust (the term is borrowed from Klein Woolthuis, Hillebrand, & Nooteboom, 2005; Nooteboom, 2002) at the level of the transactional relationship. The trust is ‘thin’ because it only rests upon compensation for negative behavioural expectations without by itself producing positive behavioural expectations. Formal accounting and control structures and the practices that result from them move issues of

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alignment of interests to the flank of the relationship, thus creating space for the development of committed day-to-day interaction. This is consistent with the findings of Seal et al. (2004), who illustrate that the abstract character and the systemness of accounting create trust. Furthermore, it fits with Mouritsen and Thrane’s (2006) analysis that management control technologies make trust a matter of practices, irrespective of individuals’ motivations. Trust from the institutional environment: the embeddedness of the governance structure A governance structure cannot produce thin trust at the level of an interfirm transactional relationship without importing trust from the institutional environment of that relationship, which comprises the social, economic and legal environment. Such institutional trust is required due to the complexity and uncertainty surrounding the transactional relationship. As a consequence of complexity and uncertainty, governance structures can never be complete and therefore cannot be easily enforceable (Blumberg, 2001; Vosselman & Van der Meer-Kooistra, 2006).6 To improve the effectiveness of the governance structure, it needs additional support from the institutional environment. Trust from the institutional environment has the potential to flank the formal control structures with credible voice threats and credible exit threats. The credibility of voice threats in a social-economic environment depends on the existence of trustworthy organisational networks through which reputations are affected. A party in a transactional relationship, knowing full well that negative experiences will be voiced to a network that penalises incompetent and malevolent behaviour, will get additional incentives to forgo opportunistic behaviour.7 The credibility of voice threats in the legal environment of the relationship depends on trust in regulatory bodies and the legal system. For instance, parties who know that malevolent behaviour could be voiced to a trustworthy court may 6 According to Macaulay, incompleteness, inexplicitness and non-enforceability limit the meaning of contracts (Macaulay, 1963). 7 Various scholars (Granovetter, 1985; Lyons, 1996; Uzzi, 1997; Zucker, 1986) point to the role of organisational networks in information processing and in increasing the credibility of the information.

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get incentives to behave benevolently. The credibility of exit threats requires trust in the working of markets, so that the threatening party can effectively threaten to switch to alternative parties. The credibility of exit threats could be further enhanced by trust in legislation and regulatory bodies concerning the working of free markets. In sum, in order to be effective, the governance structure needs to be an embedded governance structure. At the level of the interfirm transactional relationship, the institutional framework must be embedded in trust in institutions in the environment of the transactional relationship. Regulations and legislation establish a common framework and specify rules governing transactions in general (Bachmann, 2001; Luhmann, 1979; Zucker, 1986). The same applies to the rules and norms accepted in organisational networks the parties are part of (Lorenz, 1999). In this way, regulations, legislation and social norms and rules are all sources of trust that may increase the enforceability of the governance structure. In conclusion, to produce thin trust at the level of the transactional relationship, formal accounting and control structures require trust in institutions located outside the transactional relationship. Main argument The main argument in this section can be schematised as follows (Fig. 1): Legitimate negative expectations about future behaviour induce the creation of an institution in the form of a governance structure. Such an institution needs institutional trust stemming from the environment of the transactional relationship. The resulting embedded governance structure incorporates formal accounting and control structures and credible threats. The former are potentially translated into accounting and control practices. Formal accounting and control structures and credible threats produce thin trust at the level of the transactional relationship, while the presence of thin trust presupposes the presence of formal accounting and control structures and credible threats. The dotted line in Fig. 1 represents this ‘two-sides-of-thesame-coin’ quality of these components.

trust building is reflected. We will explore the mechanisms behind relational signalling and explain that framing is at the centre of these mechanisms. A need for trust building By compensating for legitimate negative expectations, formal accounting and control structures help to produce a ‘zero-positive’ situation. These structures help to compensate for negative behavioural expectations (they create a ‘zero’ situation) and move appropriation concerns to the flank of the relationship, thereby enabling commitment (a ‘positive’ situation) to day-to-day interaction. However, as a consequence of fundamental uncertainty, thin trust is a necessary but not a sufficient condition for the continuance of a transactional relationship. It is not only impossible to fully enforce the formal control structures that are codified in a governance structure, at a more fundamental level it is also impossible to fully capture all potential forms of opportunism by the codification of formal control structures. Therefore, parties entering into a transactional relationship must have the willingness to take behavioural risks that are related to remaining fundamental uncertainty. This willingness requires positive behavioural expectations. Compensating for legitimate negative behavioural expectations is thus not enough; there is an additional need for positive behavioural expectations. Apart from the thin trust needed to compensate for legitimate negative expectations about future behaviour, there is an additional need for the building of thick trust8 through which positive behavioural expectations regarding the behaviour of other parties are produced. Thick trust complements thin trust with positive expectations about the ability, benevolence and integrity of the other party. We will explain that the building of thick trust is the result of voluntary local decisions. This differs from thin trust, which is the result of a contract that is negotiated and institutionally embedded. Whereas thin trust is the result of ‘structure’, thick trust is the result of ‘agency’. Therefore, the building of trust in a transactional relationship may be viewed as a matter of ‘embedded agency’ (Garud & Karnoe, 2001).

Accounting, relational signalling and trust building In this section we will conceptualise accounting as a device for relational signalling through which

8

The term ‘thick trust’ is borrowed from Nooteboom (2002); see also Klein Woolthuis et al. (2005).

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PROBLEM: LEGITIMATE NEGATIVE EXPECTATIONS ABOUT FUTURE BEHAVIOUR POTENTIAL OPPORTUNISTIC BEHAVIOUR

INSTITUTIONAL TRUST FROM THE ENVIRONMENT

SOLUTION:GOVERNANCE STRUCTURE

CREDIBLE THREATS FORMAL ACCOUNTING AND CONTROL STRUCTURES

THIN TRUST AT THE LEVEL OF THE TRANSACTIONAL RELATIONSHIP

Fig. 1. Embedded governance structure, formal control and thin trust.

Accounting as a device for relational signalling Accounting may help in reaching positive expectations about the ability, benevolence and integrity of the other party. As we will show below, the use of accounting is then empowered by voluntary local decisions to show commitment to the relationship. Such showing of commitment involves relational signalling (Lindenberg, 2000). Accounting is therefore a relational signalling device that emerges in the course of the relationship in the form of ad hoc calculations and accounts. As such, it may add to other relational signals that show through parties’ behaviour and that signal the ability and the intention to behave co-operatively. By giving relational signals, parties deliberately show their inclination to behave co-operatively and, thus, their trustworthiness. Consequently, trust is built into the relationship. Mechanisms behind relational signalling In order to understand the mechanisms behind accounting for relational signalling, we must explore the drivers behind relational signalling. At a more fundamental level, we must explore the drivers of the willingness for continued commitment and co-operative behaviour. Such continued commitment and corresponding co-operative behaviour cannot be taken for granted, because parties could be expected to enter into and stay in a transactional

relationship out of the pursuit of self-interest. What is it, then, in the course of the relationship that could urge them to relax their short-term search for self-interest and forgo unexpected opportunities to behave opportunistically?9 What factors can induce parties to behave cooperatively, even at the expense of their short-term self-interest? The mitigation of the pursuit of short-term self-interest rests on voluntary local decisions. These decisions entail actions that incorporate relational signals, signals that one stays committed to the relationship and that one wants to act co-operatively. What drives such voluntary 9

Such opportunities can easily arise during a relationship, which can be illustrated by a few examples (see also Lindenberg, 2000). Suppose that a supplier in a transactional relationship is confronted with a sudden spell of unanticipated high staff absenteeism. As a result, the supplier may feel tempted to skip the laborious quality control of the products that must be delivered to the party in the transactional relationship. Even though the requirement for quality control itself may not have been specified in the contract, skipping the quality control procedure could easily lead to non-compliance with the quality standards that were specifically agreed upon, which could lead to negative long-term consequences for the relationship. Nevertheless, although the client trusts the supplier to perform quality control, skipping this quality control ‘just this one time’ would be in the supplier’s short-term interest and could thus lead to opportunistic behaviour. To cite another example: a demanding client outside the transactional relationship could create the temptation for the supplier to give high priority to that specific client, thereby giving less priority to the orders from a party in the transactional relationship.

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decisions? What self-regulating mechanisms might induce individual parties to deliberately take decisions that foster co-operative behaviour, even at the expense of short-term self-interest? What are the cognitive drivers for such co-operative action? Drawing on insights from social psychology, we will show in the next section that a focal goal is essential in guiding co-operative behaviour. Such a focal goal is connected to a loss frame, a gain frame or a normative (co-operative) frame. ‘Focal goal’ as a driver of co-operative behaviour Goals have proven to be very important in guiding a party’s decisions and may even determine the decisions (Gollwitzer & Moskiwitz, 1996; Kruglanski, 1996). Parties have many goals. Given limited cognitive capabilities, a party cannot give the same amount of attention to every goal; some of the goals will be in the foreground and others will be in the background. Therefore, in a given situation the party will select a goal that is most important to him. He will select a focal goal, while putting the other goals in the background. This phenomenon is called framing (Lindenberg, 2000). The main goal or frame is determined by the definition of the situation and, in turn, also helps to structure the situation, i.e. it helps to find alternative courses of action and to discriminate between alternative courses of action. Furthermore, the frame mobilises the norms, knowledge and expectations associated with its pursuit. The frame, therefore, not only influences what a party looks at, but also how he looks at it (Chaserant, 2003, p. 168). Not only the frame, but also the goals in the background will be influential. The degree of their influence will depend on the salience of the frame, for example the strength of the frame related to the strength of the goals in the background. The less salient the frame, the more it competes with goals in the background and the more the choices will also be influenced by the goals in the background, and vice versa. Wherever strong competitive goals exist, the frame becomes precarious. Lindenberg (2000) distinguishes three overarching frames. The first overarching frame is a gain frame. This frame is concerned with the increase of one’s scarce resources, such as money and disposable time. A party who is in a salient gain frame chooses an action that maximises his individual gains. He is seeking self-interest and fits the standard figure of the ‘homo economicus’; he seeks self-interest, even if it requires opportunism.

The second overarching frame is a loss frame. There is asymmetry between gains and losses in the sense that losses are given more weight than gains (Kahneman, Knetsch, & Thaler, 1991). Compared to gains, losses give rise to strong emotional responses. Consequently, the expectation or experience of a loss immediately induces a frame switch towards a loss frame, which aims at preventing or fighting the feeling of loss. Furthermore, the time horizon of a loss frame is relatively short (Loewenstein, 1996). The greater the loss, the stronger the emotion of a party and the greater the probability of an immediate frame switch. The emotional strength of a loss frame and its short time horizon make it potentially very damaging to an interfirm transactional relationship. Despite the costs they incur to manage the loss, parties will do almost anything, and do it quickly, to avoid or counteract losses – even if they have to harm their transactional relationship. As a consequence of the mobilisation of a loss frame, these costs are benefits foregone by putting the gain frame in the background. It is important to note that such a loss frame will also be mobilised when the non-realisation of a firmly anticipated gain leads to a feeling of disruption. Missed ‘golden opportunities’ for one of the parties involved, brought in by third parties, can easily lead to shocks in ongoing interfirm relationships. The third overarching frame is a normative frame. Here the goal is ‘to act appropriately’, ‘to do the right thing’ (Lindenberg, 2000). By complying with accepted norms of behaviour, a party is seeking social approbation or is trying to preserve the relationship. Generally speaking, normative frames are stabilised in groups through rites and rituals and through common purpose. Rites, rituals and common purpose influence the salience of the frame by increasing the value of the normative frame and by decreasing the value of conflicting background goals. In a normative frame, the costs of conformity and the benefits of non-conformity are in the background, these being an element in a gain frame. Their influence is, therefore, dependent on the salience of the normative frame. Lindenberg (2000, p. 20) states that the salience of a frame is dependent on two important variables: emotional (‘hot’) and instrumental (‘cold’) relevance to ‘self’. For salience, ‘hot’ goals are stronger than ‘cool’ goals. His a priory ranking of the three frames in terms of the strength vis-a`-vis each other is loss frame, gain frame and normative frame.

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Enlightened self-interest in interfirm transactional relationships Parties in a gain frame are seeking self-interest; if they have to, they will not hesitate to behave opportunistically. However, the tendency towards opportunistic behaviour will be mitigated when there are conflicting goals (a normative frame) in the background. Such a situation leads to enlightened selfinterest, a ‘‘duality between a gain frame and the willingness to comply with co-operative norms’ (Chaserant, 2003, p. 170). In order to absorb behavioural uncertainty in a transactional relationship, relatively strong and stable normative goals are especially needed in situations in which detailed monitoring of contract performance is difficult, and therefore costly. Such normative frames will be strengthened and stabilised in self-regulating processes. Parties wanting to continue a relationship take an interest in each others’ strong and stable normative goals. This is mainly due to the damaging consequences of a potential loss on framing. As was explained earlier, despite the costs incurred to manage the loss, a party will do almost anything, and do it quickly, to avoid or counteract losses – even if he has to harm the transactional relationship. If he feels confronted with opportunistic behaviour from his partner and if he experiences losses for this reason, then continuing the relationship itself could be at stake, with potential long-term negative consequences. Therefore, given the potential consequences, each party will try to prevent his partner from switching to a loss frame. Each party takes an interest in stable normative goals and is therefore willing to keep his own normative goals stable. Simply by keeping their normative frames stable and by showing these stable frames through trustworthy (i.e. competent, benevolent and honest) behaviour, parties can avoid the mobilisation of loss frames with their damaging potential. Trustworthy behaviour becomes manifest through relational signals (Chaserant, 2003; Lindenberg, 2000). A party will trust his partner if he understands from his partner’s behavioural signals that the partner has stable co-operative behaviour, based on stable normative goals. Trust is built gradually by monitoring these relational signals. In this way, relational signalling brings a process of trust building to the fore. Here, trust is conceived as a cognitive state that generates positive expecta-

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tions of the abilities, intentions and integrity of the other. It is the result of past deliberative behaviour in an ongoing process. In that process, the parties’ search for individual gains is transparently weakened by relational considerations and norms of co-operation (the goal to act appropriately in the transactional relation and not purely as a ‘homo economicus’). The relational signals in the process point towards the absence of an inclination to act opportunistically. They signal that the sender’s goal is not to seek short-term individual gains, but to conform to norms of co-operation and to preserve the relationship. The level of trust between partners will increase, because each partner receives more signals that the other is committed to the relationship. The relational signal mechanism does not reject the importance of self-interest in executing transactions in a transactional relationship, but is consistent with it. Relational signals foster the parties’ long-term pursuit of self-interest. In such processes, enlightened self-interest (Chaserant, 2003, p. 165) guides the rationality of decisions and actions: the search for individual gain is transparently weakened by relational considerations and norms of cooperation. Enlightened self-interest gives rise to a party’s search for individual gain in a specific mixture with the search for compliance with co-operative norms. When self-interest is sufficiently enlightened, thick trust will be built in the relationship.10 Main argument The main argument in this section so far can be schematised as follows (Fig. 2): Fundamental uncertainty induces trust building through relational signalling. Such trust builds on the layer of thin trust stemming from an embedded governance structure and transforms a ‘zero-positive’ situation into a situation in which parties have positive expectations about each others’ future behaviour. These positive expectations reflect thick trust, and the other way around. This two-way process is represented by the dotted line (Fig. 2) between positive expectations and thick trust.

10

Trust is hard to achieve, but very easy to lose. Therefore, in order to maintain a certain level of trust or increase it, the relational signalling mechanism must continue during the entire relationship.

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PROBLEM: FUNDAMENTAL UNCERTAINTY (INCOMPLETE GOVERNANCE STRUCTURE)

THIN TRUST FROM AN EMBEDDED GOVERNANCE STRUCTUR

SOLUTION: TRUST BUILDING BY RELATIONAL SIGNALLING

POSITIV E EXPECTATIONS ABOUT FUTURE BEHAVIOUR

THICK TRUST

Fig. 2. Trust building and relational signalling.

Accounting for relational signalling: a closer look In order to stabilise the normative frames during their relationship, parties voluntarily signal their commitment (i.e. the absence of opportunism) to the relationship inter alia by the use of accounting information, for instance information about costs, performance and product quality. Accounting, therefore, is at the discretion of the individual parties and comes in the form of ad hoc calculations (‘ex ante’ or ‘ex post’), ad hoc accounts (‘ex post’) or open books. It acts as a vehicle for trust building (i.e. a vehicle for ‘thickening trust’). Trust then becomes a cognitive state in which one party has positive expectations about the abilities, intentions and integrity of the other party. In contrast to the formal accounting systems that are driven by legitimate fear, relational signalling is driven by the desire for shared positive expectations. It encourages parties to expect that the other’s intentions and motives are benign. In relational signalling, accounting acts as a means for voluntary information sharing and, therefore, encourages knowledge sharing. Relational signalling is thus not a means for formal behaviour control or output control, but serves to build the relationship. Accounting may even help to reach a state that is beyond commitment: identification. Sharing accounting information and the subsequent knowledge-sharing can lead to a situation in which parties come to see each other’s needs, preferences and priorities as their own (Lewicki & Bunker, 1996). This

can increase one’s perception that one’s own goals and values are similar to those of one’s partners. Viewed in this way, accounting acts as a mechanism that facilitates reaching a situation of sharing rather than exchange, which corresponds with the ideology of interfirm transactional relationships and networks (Mouritsen & Thrane, 2006). Accounting for relational signalling reflects commitment and constructs thick trust. This is consistent with Tomkins (2001), who argues that some forms of accounting help foster trust. It also adds to the modelling of Van der Meer-Kooistra and Vosselman (2000) by giving in-dept insight into the way trust is built at the level of the transactional relationship. This building of ‘goodwill trust’ (i.e. ‘thick’ trust) is particularly important in their trust-based pattern of management control. Furthermore, this adds to the position taken by Mouritsen and Thrane (2006). They state that it is the probability of its absence that makes trust important. Their case studies indicate that participants in the networks brought up the topic of trust when activities contravened the ideology of trust. It was constantly a ‘‘problematising affair rather than a descriptive affair” (Mouritsen & Thrane, 2006). Our analysis, however, reveals that thick trust – in the sense of an individual party’s cognitive state characterised by positive expectations about future behaviours of other parties – can be reflected by a relational signalling use of accounting. In other words, trust can be a positive state of mind, which can be disclosed by the voluntary provision of

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accounting information. Trust is not an actor by itself, but it both acts through accounting and is the result of the sharing of accounting. It exists as an important cognitive driving force to interact appropriately and co-operatively in the course of the relationship. It is a force that results in turn from appropriate and co-operative interactive behaviour involving relational signalling. Such a force goes well beyond the thin trust that results from the embedded governance structure and the accounting and control practices that stem from it. In what circumstances can accounting for trust building be expected? When do individual parties in the relationship experience strong cognitive drivers to voluntary signal co-operative behaviour to the other party? Lindenberg (2000) labels situations in which such drivers emerge as ‘solidarity situations’. He claims that there are five categories of such situations. First, there is a common good situation. All parties belong to a group. Each of the partners may signal that he will co-operatively contribute to the common good, even if there are possibilities to ‘free ride’. For instance, the design and use of concurrent cost management systems in interfirm transactional relationships, as described by Cooper and Slagmulder (2004), may signal trustworthy behaviour in such situations. Second, there is a sharing situation. If one of the partners is in a position to divide joint divisible benefits and costs, he may decide not to maximise his own gain, but could take a ‘fair share’. In such a situation, the disclosure of accounting information can signal the propensity for sharing behaviour. Third, there is a need situation. In times of need, parties may signal their willingness to help each other. Accounting as a disclosing or calculating device could be of help in analysing the situation or in finding solutions. Fourth, there is a breach temptation. Parties may show that they will refrain from hurting the other, even at their own expense. An example can be drawn from Van der Meer-Kooistra and Vosselman (2000), who examined an outsourcing relationship between NAM (the outsourcer) and a consortium (the contractors) that renders services in industrial maintenance and renovation. When there was a breakdown of a newly installed compressor, ‘ad hoc’ accounting information helped NAM to share the substantial costs of this breakdown with the consortium, even though NAM did not have a contractual obligation to do this. Fifth, there is a mishap situation. Although past actions of a party were driven by solidarity, they in fact did not come

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out that way. In such a situation the party could explain his intentions to his partner, he could apologise and he could take care of the possible damage his actions caused. Accounting may be a vehicle in achieving this. Also the opposite may arise; if a party knows in advance that for some reason he cannot keep to the agreement, he will warn his partners in advance, so that they can take measures to mitigate the damage. Again, accounting may be of help in this situation. Defection in any one of these five situations points to an instability of the normative frame and harms the trust building process. Such defection will lead the other party to a cognitive state in which he interprets co-operative behaviour in any of the other situations as ‘strategic’, as coming out of a gain frame, though having the appearances of a normative frame (Lindenberg, 2000). Interaction between control and trust Trust is not isolated from control. Control and trust interact in order to reach positive expectations about future behaviour. Building thick trust at the level of the transactional relationship requires an institutionally embedded governance structure. The embedded governance structure has to compensate for legitimate negative expectations about future behaviour. It has to compensate for the legitimate mistrust that the other party might behave opportunistically. It produces a layer of thin trust, thus creating a ‘zero-positive’ situation in which the building of thick trust is facilitated. In the course of the relationship, relational signals also produce positive expectations about future behaviour, thus reflecting a process of trust building. This process is accelerated by an agreed upon governance structure. The other way around, trust building strengthens the governance structure by enhancing the credibility of the formal control structures involved. It strengthens the basis for ‘structure’ in the relationship. Together, formal accounting and control structures (and the practices that stem from them) and trust building produce stability and durability. In order to fully capture the benefits of an interaction between trust and control, the governance structure has to compensate for all legitimate mistrust. In situations where legitimate mistrust is either not fully compensated or overcompensated, there might be consequences for the stability and durability of the relationship. In the situation where legitimate negative behavioural expectations are not

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fully compensated, the trust building process might be hindered, because in the parties’ eyes interests are inadequately aligned. The layer of thin trust, then, is too thin. This could explain the emphasis on further contract specification in the course of the relationship, which Langfield-Smith and Smith (2003) observed in their study into the outsourcing of IT & T at Central Energy. They observed that because of the uncertainty that parties experienced at the beginning of the relationship, performance indicators were intentionally established gradually in the course of the relationship, in the name of further contract specification. They also observed the following: ‘‘Interestingly, goodwill trust continued to exist, and may even have strengthened, in the face of the development of more rigid performance expectations and the development of contract specifications” (Langfield-Smith & Smith, 2003, p. 304). Viewed from our interaction perspective, further contract specification improved the basis for thin trust, and this in turn also improved the process of building thick trust. Apparently, the further contract specification in the course of the relationship not only created but also signalled trust, thus not only producing thin trust but also accelerating the process of building thick trust. Conversely, the creation of effective formal control structures incorporated in a governance structure is a process that could in itself be accelerated by the goodwill trust that is built into the relationship. Therefore, there is an interaction between trust building and the writing of formal control structures. Trust building accelerates contract specification, and contract specification accelerates trust building. In the situation where the formal control structures overcompensate legitimate mistrust, there may be negative consequences for the stability and durability of the relationship. Ghoshal and Moran (1996) argue that the use of formal control structures not only can have positive consequences in terms of attenuating opportunistic behaviour, but also can have negative consequences in terms of an increased proclivity to behave opportunistically. The latter is the result of a more negative disposition and attitude towards the relationship that emerges as a consequence of the writing and use of formal control devices. There is convincing empirical evidence (e.g. Enzle & Anderson, 1993) that formal control may reduce the intrinsic motivation and the commitment towards an organization. In the context of a transactional relationship this would imply that – particularly in situations that do not

provide legitimate negative behavioural expectations – formal control structures and related practices, as well as credible threats, have to be avoided for the sake of appropriate (i.e. non-opportunistic) behaviour in the relationship and, thus, for the sake of trust building. If partners in such a transactional relationship have relatively strong normative frames at the start and thus a very co-operative attitude, they may perceive the ‘illegitimate’ formal control structures as a ‘loss’ of co-operative norms. Therefore, they could change the precarious balance of their frames in the direction of a gain frame, thus pursuing their self-interests and negatively influencing co-operative behaviour. Accounting for control, accounting for trust building and accounting for stable and durable relationships: a summary Fig. 3 summarises the interaction between accounting for control and accounting for relational signalling and the resulting accounting for stable and durable relationships. Accounting for control is meant to be a solution for anticipated problems of opportunistic behaviour and thus compensates for legitimate negative behavioural expectations. Its acting stems from an embedded governance structure that serves as a formal power base for accounting and control practices. These practices serve instrumental accountability. An embedded governance structure is the result of an orchestrated design. It is a centre from which accounting instrumentally acts as a safeguarding or incentivizing device through which interests are aligned, and as such it is a source of thin trust in the transactional relationship. However, it may also be an obstacle for trust building processes at the level of the relationship. It may hinder the ‘thickening’ of trust. Above a legitimate threshold of control, it might entail local switches into gain frames. Such switches entail the risk of opportunistic behaviour and, therefore, the risk of instability of the relationship. Accounting for trust building is an element in relational signalling. It is meant to be a solution for the incompleteness of the governance structure, which is a consequence of fundamental uncertainty. Its acting stems from local positions. Individual actors voluntarily decide to signal their commitment to the relationship to each other (i.e. their intention to not behave opportunistically). Relational signalling corresponds with relational forms of account-

E. Vosselman, Jeltje van der Meer-Kooistra / Accounting, Organizations and Society 34 (2009) 267–283 Accounting for control Accounting for trust building Main behavioural problem

Potential opportunistic behaviour

Main mechanisms

Orchestrated design of formal accounting and control structures and related practices Cognitive drivers Power from an of the use of embedded governance accounting structure (an institution) Location of the drivers Centre; the contractual power-base Functions of Safeguarding device accounting Incentivizing device

Lack of positive behavioural expectations Voluntary self regulating decisions

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Accounting for stable and durable relationships Behavioural uncertainty

Embedded agency

Normative frames

Institutions and normative frames

Local: individual parties Information sharing device

Central and local

Form of accountability Instrumental

Relational

Accounting aims at

Control and thin trust

Thick trust

Safeguarding, incentivizing and sharing Instrumental and relational Control and thick trust

Threats

Excess of legitimate control threshold Lack of thin trust

Lack of salience of the normative frames

Salient gain frames and loss frames

Fig. 3. Accounting for control, trust building and relationships.

ability. Cognitive drivers for relational signalling stem from actors’ normative frames, which they intend to keep stable out of fear for switching into gain frames or even loss frames. Mutual relational signals act as devices for information sharing. Through such information sharing, commitments are aligned and thick trust is built in the course of the relationship. Such trust building is threatened by a possible switch to a salient gain frame or a loss frame. Control and trust interact in order to reach positive expectations about future behaviour, thereby producing stable and durable relationships. The interaction of control and trust fits with the notion of ‘embedded agency’ (Garud & Karnoe, 2001). Relational signalling (‘agency’) requires control (‘structure’). Given fundamental uncertainty, the writing of formal control structures and the orchestration of control practices (‘structure’) are themselves processes in which relational signals are important. Therefore, the development of formal control structures and the thin trust connected with it is also a process in which there is a need for trust. Control (‘structure’) therefore also requires relational signalling (‘agency’). The interaction between control and trust may have negative consequences for the level of trust in situations where control exceeds a legitimate threshold of control. Negative consequences may also

arise in situations where control does not reach the legitimate threshold and therefore fails to generate zero-positive behavioural expectations. Conclusions and discussion This paper contributes to the debate on the ‘accounting-control-trust’ nexus. It takes the view that control and trust are not just substituting or adding, but that they interact. Their common goal is the establishment and maintenance of positive behavioural expectations. In order to achieve a positive cognitive state of mind regarding future behaviour, control must be exercised and trust must be built. Accounting can serve both control practices and trust building. Effective control practices stem from a governance structure that parties negotiate and agree upon. The control practices entail forms of instrumental accountability. They may include performance measurement systems, target costing, cost management systems and financial incentive systems. They constrain and incentivize behaviour in light of the alignment of interests. It is assumed that long-term self-interest is an essential driver for parties to enter into and stay in a transactional relationship. Because long-term interests can diverge, parties try to align them by means of formal control structures and credible voice threats and exit

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threats. The credibility and effectiveness of the formal control structures and threats depend on the trustworthiness of the institutional environment, which consists not only of organisational networks to which the parties belong, but also of regulatory and legal institutions and social values and norms. Therefore, effective control at the level of the transactional relationship needs trust drawn from the trustworthiness of institutions outside the transactional relationship. Combined with such imported institutional trust, formal control structures (and practices resulting from them) produce thin trust at the level of the transactional relationship. Effective control empowered by an embedded governance structure produces a ‘zero-positive’ situation. Legitimate negative behavioural expectations are compensated for. Effective control produces thin trust in the relationship. Thin trust is reflected in formal control structures and practices such as performance management systems and financial incentive systems. However, because of the fundamental uncertainty surrounding the transactional relationships, the compensation for anticipated forms of opportunism that results from such formal control structures and practices is not enough to produce stable and durable relationships. As a consequence of fundamental uncertainty, it is impossible to compensate for all potential opportunism by agreedupon formal control structures and credible threats (i.e. by means of control). Therefore, for a transactional relationship to stay stable and durable, the remaining uncertainty has to be compensated by positive behavioural expectations. That is, control needs additional trust building. The thin trust stemming from control only constitutes a basis for the necessary production of positive behavioural expectations. Trust building is cognitively driven by voluntary local decisions to signal co-operative behaviour. Such local decisions can be viewed as the results of a self-regulating mechanism induced by the long-term interests that parties have in establishing and maintaining stable normative frames. It is through these relational signals that parties show each other that they are competent, benevolent and honest. It is through these relational signals (and the accounting that comes with them) that parties signal their willingness to not act opportunistically in the short-term. It is, therefore, through these signals that parties indicate to each other that they are prioritising their long-term interests above their short-term interests, thereby indicating their

commitment to a stable and durable relationship above short-term opportunistic behaviour. These relational signals lead parties to positive expectations about future behaviour, and, therefore, leave the enduring commitments to the relationship unquestionable. In other words, the presence of relational signals contributes to the building of thick trust. Whereas thin trust emerges from the absence of legitimate negative behavioural expectations, thick trust emerges from the presence of positive behavioural expectations. Accounting may help to both construct and reflect these positive expectations. It comes in three forms: ad hoc calculations (‘ex ante’ or ‘ex post’), ad hoc accounts (‘ex post’) and open books. All these forms of accounting appear as a consequence of local decisions and signal co-operative behaviour. The opportunity for such decisions especially arises in so-called solidarity situations. In these situations, no form of instrumental accountability is involved, but there is joint problem solving, division of joint divisible benefits and costs, supportive behaviour or explaining behaviour (in case of mistakes). In short, there is relational accountability. In this way accounting acts as a sharing device and not as a control device. In sum, trust has been shown to play important roles in interfirm transactional relationships. Positive roles can be traced back both to its absence and to its presence. Its absence is a problem when there are legitimate negative expectations about future behaviour, i.e. legitimate expectations of future opportunistic behaviour. The problem of such absence encourages the orchestration of formal control structures and practices for interest alignment. Its presence signals positive expectations about future behaviour, i.e. expectations that there will be no future opportunistic behaviour. The prospect of its presence encourages relational signalling from local positions. Trust, therefore, helps to both produce control and add to control, either as an aspiration or as a positive state of mind. However, there can also be a controversy between control and trust. Control may decrease the level of trust in situations where it exceeds the necessary compensation for legitimate negative behavioural expectations. Excess control and the accounting that comes with it might then induce switches from normative frames to gain frames or even loss frames, with a corresponding increase in the search for short-term self-interest and a decrease in trust. This has negative consequences for the stability and durability of the relationship. Such negative conse-

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quences may also arise in situations where control does not reach the legitimate threshold, and thus fails to generate zero-positive behavioural expectations. The analysis in this paper adds to traditional notions of management control. Whereas the conceptualisation of accounting for control fits with the traditional notion of management control and therefore matches traditional management control structures and practices, accounting for relational signalling goes beyond that notion. Traditional management control presupposes a centre where hierarchical or institutional power is located and which is primarily concerned with the behaviour (or the output of the behaviour) of other parties. Accounting for relational signalling, however, does not presuppose such a centre and – from the perspective of local positions – is concerned with the stability and durability of a relationship. An individual party does not feel the need to control others or the activities of others, but feels an endogenous need to signal commitment to the other and expects the other to voluntarily signal commitment to him. Compared with control, from an information perspective it is the other way around: information is not demanded by a hierarchically or contractually empowered party (control perspective), but is voluntarily supplied (commitment perspective). As far as there is control, it is the local and informal control of the signals that parties give to each other. The emergence of accounting becomes more an informal object of control than a formal control device. This type of ‘relational control’ goes beyond the notions of behaviour control or outcome control stemming from a hierarchy or governance structure. But it also differs from the traditional notion of social control. This notion of control also puts the notion of a centre above the notion of individual discretion. Social control particularly relies on the embeddedness of the hierarchy or the governance structure in social and even legal norms and values. Although individual discretion is emphasised, it still is subordinate to the whole (the centre). In accounting for relational signalling, however, individual discretion is up-front and oriented towards the stability and durability of the relationship. It is subordinate to normative frames. This paper has provided a theoretical contribution to the accounting-control-trust nexus. The analysis in this paper opens up possibilities for future empirical research. Specifically, longitudinal case studies could generate more insights into the

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dynamics between control and relational signalling. Thus, these studies have the potential to further refine the modelling in this paper. Researchers could take contractual arrangements as well as relational signalling as their focal points. They could look at the contents of the contractual arrangements (with a special emphasis on ‘accounting’ contents) and study to what extent these arrangements are connected to the compensation of potential opportunistic behaviour. It would be interesting to have special emphasis on the consequences of possible undercompensation of legitimate mistrust as well as of the consequences of excess control. Essentially, it would be interesting to acquire more empirical insights into precisely how accounting acts in processes of relational signalling, what forms it takes and how it relates to the use of more formal control practices. Acknowledgements We wish to gratefully acknowledge the very helpful comments on earlier versions of this paper from two anonymous reviewers, Roeland Aernoudts, Neale O’Connor, Mahmoud Ezzamel, Gert van der Pijl, Olivier Saulpic, Roland Spekle´ and Bernard Verstegen. Errors remain ours. References Anderson, S. W., Glenn, D., & Sedatole, K. L. (2000). Sourcing parts of complex products: Evidence on transaction costs, high-powered incentives and ex-post opportunism. Accounting, Organizations and Society, 25, 723–749. Anderson, S. W., & Dekker, H. C. (2005). Management control for market transactions: The relation between transaction characteristics, incomplete contract design, and subsequent performance. Management Science, 51, 1734–1753. Bachmann, R. (2001). Trust, power and control in transorganizational relations. Organization Studies, 22(2), 337–365. Bijlsma-Frankema, K., & Costa, A. C. (2005). Understanding the trust-control nexus. International Sociology, 20, 259–282. Blumberg, B. F. (2001). Cooperation contracts between embedded firms. Organization Studies, 22(5), 825–852. Chaserant, C. (2003). Cooperation, contracts and social networks: From a bounded to a procedural rationality approach. Journal of Management and Governance, 7, 163–186. Chua, W. F., & Mahama, H. (2007). The effect of network ties on accounting controls in a supply chain: Field study evidence. Contemporary Accounting Research, 24, 47–86. Coad, A. F., & Cullen, J. (2006). Inter-organisational cost management: Towards an evolutionary perspective. Management Accounting Research, 17, 342–369. Cooper, R., & Slagmulder, R. (2004). Interorganizational cost management and relational context. Accounting, Organizations and Society, 29(1), 1–26.

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