Incentive conflicts in the accounting field are the potentially dangerous outcome of communication disruption. I know an example when, in my company, the governing board did not find a common language with middle managers, which led to not only disagreements but also financial problems. The situation was associated with the owners’ dissatisfaction with the company’s distribution of cash flows.
The managers of our organization did not want to go beyond their responsibility and did not seek to increase the productivity of the venture, deliberately limiting the range of control. According to Brickley, Smith, and Zimmerman (2015), this situation is found in companies with a hierarchical structure where individual governing boards have different priorities and interests. When analyzing the situation in our company, it can be noted that the organizational mechanism was unstable, which led to a conflict situation and, ultimately, reduced the firm value.
The controversial situation that arose due to the difference in responsibility and priorities caused a slowdown in all the company’s operations and harmed its performance. As Blouin, Robinson, and Seidman (2018) note, the coordination carried out by governing boards may have various outcomes depending on the degree of subordinates’ involvement in the work process and their interest in achieving the goals set.
Concerning the situation in our organization, there was no understanding among individual leaders, and the considered incentive conflict was caused by differences in assessing the importance of certain interventions. Accordingly, to avoid such disagreements, it is crucial to establish clear communication among all the structures of one firm so that it could not lose its value. Otherwise, not only losses will arise but also interpersonal disagreements, which is unacceptable in a large team.
References
Blouin, J. L., Robinson, L. A., & Seidman, J. K. (2018). Conflicting transfer pricing incentives and the role of coordination. Contemporary Accounting Research, 35(1), 87-116. Web.
Brickley, J., Smith, C., & Zimmerman, J. (2015). Managerial economics and organizational architecture (6th ed.). New York, NY: McGraw-Hill Education.