Assessing the Reliability of Self-assessment based PostCompletion Auditing Reports
Dr. Jari HUIKKU
Aalto University School of Business
Department of Accounting
Runeberginkatu 22-24
00100 Helsinki, Finland
jari.huikku@aalto.fi
Visiting AUT University, Business School
Abstract
This study investigates the reliability of self-assessment based post-completion auditing (PCA) reports. More
specifically, it focusses on exploring, mapping and discussing the circumstances influencing potential for
PCA report manipulation. In doing this the paper draws on the combination of literatures on agency theory,
actor network theory, and concept of equifinality provided originally by open system theory. The empirical
evidence of this case study is based on 24 semi-structured interviews and documentation of PCA reports in
one of the major European forest company. In spite of the scepticism among scholars, and CIMA’s current
definition of PCA suggesting that it has to be ‘an objective, independent assessment’, it is common to conduct
PCA as a self-assessment based review. The findings suggest that to consider self-assessment based PCA
suspicious and unreliable is a too hasty conclusion. The phenomenon is much more nuanced. It is argued that
in assessing the reliability of self-assessment based PCA various aspects have to be taken into account. The
findings lend specifically support to the contention that measurability/verifiability of PCA data enhances the
perceived reliability of PCA reports. Additionally, collectivity in constructing the PCA reports appears to play
a major role in ensuring the quality of PCA reports. Furthermore, with regard to practical implications, it is
suggested that CIMA could consider modifying its definition of PCA by loosening or re-defining the
requirements about ‘an objective and independent’ assessment.
1. INTRODUCTION
This study examines the reliability of self-assessment based post-completion auditing
(PCA) reports. The PCA of capital investments involves a formal review of a
commissioned investment project, focusing on a comparison between the pre-investment
estimates and the actual achievements after completion (Huikku, 2007; Chenhall and
Morris, 1993). PCA can be regarded as one formal control system within a company’s total
management control system package, which comprises various formal and informal
controls (Otley, 1999; Malmi and Brown, 2008). It appears that most of the large
companies in the Anglo-Saxon countries conduct PCA and many companies in other
countries have adopted PCA as well. The following adoption rates have been reported in
different countries: 1) In UK, 74% (Harris et al., 2009), 98% (Arnold and Hatzopoulos,
2000) and 79% (Neale, 1991b); 2) In USA, 88% (Farragher et al., 1999), 76% (Gordon and
Myers, 1991) and 90% (Klammer and Walker, 1984); 3) In Norway, 41% (Neale, 1994); 4)
In Italy, 71% (Azzone and Maccarrone, 2001); and 5) In Finland, 67% (Huikku, 2011).
Prior research suggests that the major objective for companies to implement PCA is
the enhancement of organizational learning (OL) for future capital investments (Neale,
1989, 1994; Azzone and Maccarrone, 2001; Huikku, 2009). Similarly, the major perceived
benefits from PCA within companies are related to its enhancement of organizational
1
learning (Corr, 1983; Neale, 1991a, 1994: Pierce and Tsay, 1992; Huikku, 2008). In other
words, PCA information has the potential to help a company avoid previous mistakes and
to systematically identify successful processes that can be repeated in the future investment
projects (Shapiro, 2005; Northcott and Alkaraan, 2007). Specifically, PCA can help
companies improve the accuracy of underlying assumptions and goals in their investment
planning material (Chenhall and Morris, 1993; Huikku, 2008). Contributions to PCA
literature suggest that PCA information can also be conducive to learning for capital
investment processes in general - not merely for project-specific investment activities
(Mills and Kennedy, 1993; Huikku, 2008). PCA information may, for example, trigger
improvements in capital investment procedures and instructions. Learning is of utmost
importance for enhancing success in capital investment which in turn greatly affects the
extent to which a company can achieve its strategic objectives. In addition to enhancing
OL, accountability related issues such as measuring performance of an investment project,
enhancing the integrity of investment appraisals and evaluating/rewarding personnel have
been reported as managerial uses of PCA (Huikku, 2008; Neale, 1991, 1994; Pierce and
Tsay, 1992). Performance measurement can be considered PCA’s core and prerequisite
function; it supports other uses of PCA, but it is not beneficial per se (Huikku, 2008).
Moreover, PCA’s beneficial role in assisting detection of underperforming current
investment
projects
and
analyzing
the
appropriate
actions
required
(correction/abandonment) is perceived within companies to be of minor, but not negligible,
importance (Neale, 1989; Pierce and Tsay, 1992; Huikku, 2008).
PCA reports play a major role in communicating the results of PCA in an
organization, and hence, in enabling PCA’s OL and accountability functions. In a PCA
report a company evaluates the success of an investment by comparing and analyzing the
ex-post outcomes of an investment project with its ex-ante targets (Neale and Holmes,
1991). In order to be useful for OL and accountability purposes, the PCA reports have to be
relevant and reliable.1 In PCA context relevance could be interpreted to mean that
information is relevant when it helps managers to learn from the PCA for future capital
investment (OL uses) or to support PCA’s accountability functions (accountability uses).
Specifically, in investigating the quality of PCA reports, this study focusses on reliability of
PCA reports by addressing its three fundamental characteristics: completeness, neutrality
and freedom from errors. In assessing the reliability of PCA reports, professional
competence and objectivity of the person or team conducting PCA and making PCA reports
will be discussed because they have been suggested to be heavily associated with the
quality of the PCA reports (e.g. Gulliver, 1987: Dillon and Caldwell, 1981; see also e.g.
Eilifsen et al., 2010, p. 149 in internal auditing context). The term objective is understood
to mean existing outside of the mind, having a separate or independent existence. In most
contexts, objectivity means fairness and impartiality; someone who is objective has not
allowed prejudice or self-interest to distort judgment (Porter, 1996, 4). Objectivity refers to
external reality independent of a person who perceives it (Ijiri, 1967). The concept of
independence of PCA conductor will also be addressed in assessing the objectivity, and
consequently reliability of PCA reports.
1
Similar to financial accounting context, this paper uses relevance and reliability as the major qualitative
characteristics in assessing the quality of (PCA) reporting (see e.g. IFRS standards). Information is relevant if
it is capable of making a difference in the decisions made by users, i.e. when it influences the economic
decisions of users by helping them evaluate past, present or future events by having predictive and/or
confirmatory value.
2
Researchers have different opinions about who would be the most suitable person or
team to conduct PCA. According to one approach emphasising the professional competence
of PCA conductors (e.g. Dillon and Caldwell, 1981), the compilation of a PCA report
requires the contribution of people with detailed knowledge. Other researchers (e.g.
Gulliver, 1987) contend that objectivity can be achieved only by using outside people or a
team that has not been involved in the investment project. Lumijärvi (1990) reports in his
case study that the objectivity can be deteriorated if the investment group members were
allowed to review their own investments. They utilised their information advantage to
manipulate PCA figures and exaggerated performance estimations. In a similar vein, Cheng
et al. (2009) suggest that there are risks of biased information sharing if the project
personnel conduct the PCA itself. Even though there are obvious risks for reliability, for
example Farragher et al. (1999) and Huikku (2011) report that in most of the companies
PCA is conducted by persons or teams with prior involvement in the project. In fact,
interestingly, this common practice appears to contrast sharply to CIMA’s (2005, 60)
definition of PCA emphasising objectivity and independence of PCA:
“Post-completion audit is an objective, independent assessment of the success of a capital project in
relation to plan. Covers the whole life of the project and provides feedback to managers to aid the
implementation and control of future projects.”
Although the common practice in companies to allow staff to review their own
investment projects has been recognised as a major threat for the reliability of PCA reports,
there are still major gaps in the research. To the best of my knowledge, the relationship
between PCA conductor and the reliability of PCA reports has not been a primary focus of
any empirical study. One plausible reason for this is the difficulty to get an access to
sensitive data potentially revealing embarrassing issues about dysfunctional behaviour
within a company. Dysfunctional behaviour can be described as actions in which the
subordinate attempts to manipulate elements of an established control system for his own
purposes (e.g. Jaworski and Young, 1992).
In spite of the significant role that PCA conductor choice has for the reliability of
PCA reports, our knowledge about this important relationship is in its infancy.
Nevertheless, Lumijärvi (1990; case study) and Cheng et al. (2009; laboratory experiment
study) suggest that self-assessment based PCA involves risks for reliability in terms of
information manipulation. Consequently, motivated by Lumijärvi’s and Cheng et al.’s
studies, our aim is to examine if, how, and under which conditions companies jeopardise
the reliability of PCA reports when PCA is conducted by business units making the
investment. In examining potential for information manipulation, we draw on agency theory
related literature; specifically on Birnberg et al’s (1983) framework about information
manipulation behaviour that groups it into six categories: smoothing, biasing, focusing,
filtering, gaming, and illegal acts. Because of asymmetric information distribution,
managers may be in a position to play games in the capital budgeting process. They may
use their information advantage to enhance their self-interest objectives in order to receive
the desired funds for example by focusing on certain aspects of information, filtering
information or even distorting information (Lumijärvi, 1990).
In explaining reliability of PCA reports the paper draws also to the management
control package literature (see e.g Malmi and Brown, 2008) and specifically on the notion
of equifinality. In an organizational context, an equifinal situation means that the same final
state can be achieved by multiple organizational structures, even if the contingencies faced
by the organization are the same (Gresov and Drazin, 1997). In PCA context an equifinal
situation occurs in performance measurement if other control mechanisms can act as
alternatives to PCA (Huikku, 2007). Hence, the PCA reports based on self-assessment do
3
not constitute the only source of information about the success of an investment project
(Huikku, 2008). Additionally, the notions about collectivity and heterogeneous networks
provided by actor-network literature (Latour, 1986, 2005) will be utilized in explaining the
perceived reliability of PCA reports. In line with Latour’s ideas, Mouritsen (2011) suggest
that collectively produced numbers in heterogeneous networks comprising both human and
non-human actors are perceived more “objective”.
This study contributes to the PCA literature by extending the discussion about
relationship between the reliability of PCA reports and PCA conductor. More specifically,
it explores, maps and discusses aspects diminishing (increasing) potential for manipulation
of self-audited PCA reports. In doing this, the paper contributes also to agency theory based
discussion about gameplaying behaviour in capital budgeting. Additionally, the paper
extends the notion of equifinality to explain why self-auditing does not necessarily
jeopardize the reliability of PCA reports. Furthermore, we discuss and challenge the
appropriateness of CIMA’s current definition of PCA suggesting that it has to be “an
objective, independent assessment”. Moreover, with regard to the practical implications of
the study, enhanced understanding about the aspects affecting the reliability of PCA reports
may help organizations to design their PCA systems more appropriately.
In this study, PCA is defined as follows. PCA is a formal review of a completed
investment project fulfilling the following criteria: (1) it takes place after an investment has
been completed (commissioned) and has begun to generate cash flows (or savings); (2)
PCA reporting is at least partly focused on a comparison between the pre-investment
estimates of an investment project and the actual figures and achievements after
completion; and (3) PCA is systematic and regular, and there are instructions related to it.
This definition is congruent with that suggested by Gadella (1986), Pierce and Tsay (1992),
and Chenhall and Morris (1993), but is more explicit with regard to criterion (3). 2 The
empirical evidence of this case study is primarily based both on the 24 interviews in one of
the major European forest industry corporation and the examination of its latest PCA
reports related to major investment projects.
The remainder of this paper is structured as follows. Section two presents the
literature that forms the basis for this study, and Section three describes the research
method. The empirical results are presented in Section four and discussed in Section five.
Section six concludes the paper.
2.
Literature
Reliability of PCA reports
A PCA report typically include the following elements (see e.g. Huikku, 2001 and 2011;
Azzone and Maccarrone, 2001; Neale and Holmes, 1991): 1) description of the investment
project, 2) follow up on the cost budget, scheduling, and technical specifications, to see that
they are progressing according to plan, 3) comparison of ex-ante and ex-post investment
2
Nevertheless, I recognise the difficulty of providing a catch-all definition of PCA including more detailed
requirements such as the type of projects selected, the format, who does it, who is responsible for it, when and
how frequently it is conducted, and how the results are communicated. In addition to informal ways of
controlling capital investments, the PCA definition adopted here rules out monitoring and routine reporting. In
practice, monitoring of the implementation phase and PCA are overlapping concepts, because monitoring is,
to some extent, a prerequisite for PCA. Monitoring alone cannot, however, be considered as fulfilling the
criteria for PCA. In a monitoring phase, it is typically too early to estimate whether or not an investment
project will achieve its targets. Internal and external routine reporting (monthly, trimestral, annually, etc.) do
not usually fulfil all the criteria required for PCA. For example, routine reporting is typically: (1) profit-center
or cost-center focused, not investment project focused and, (2) does not compare the pre-investment
objectives of an investment project with the actual achievements.
4
calculations, 4) comments on the achievement of objectives. Additionally, companies may
include the following elements in their PCA reports: proposals for action (suggestions,
helpful hints, lessons learned), comparison of non-monetary targets and actual outcome,
and attachments including more material. Mukherjee (1988) and Neale and Holmes (1991)
have presented models for PCA reports. According to Huikku (2011), less than half of the
companies studied in Finland used a standard format for PCA reports. In order to ensure
comparability between ex ante and ex post calculations (e.g. NPV, IRR, Payback period), it
is appropriate to use the same capital budgeting techniques in both phases. Because PCA is
typically conducted already much before the end of the life-cycle of an investment (e.g. one
year after commissioning), PCA calculations include uncertain forecasts about the future
cash flows of investments (Neale and Holmes, 1991; Huikku, 2011).
In this study we will make an attempt to assess the reliability of PCA reports by
addressing its three characteristics: (1) completeness, (2) neutrality, and (3) freedom from
error. A complete PCA report is expected to include all information necessary for a user to
understand the phenomenon being depicted, including all necessary descriptions and
explanations. Neutrally depicted PCA report is without bias in the selection or presentation
of information. It is not slanted, weighted, emphasized, de-emphasised or otherwise
manipulated to increase the probability that information will be received favorably or
infavorably by the users. A PCA report is free from errors if there are no errors in the
description of the phenomenon (i.e. the success of an investment project).
It appears that the reliability of PCA reports is not perceived as a major challenge in
the previous studies. This is interesting, because commonly adopted self-assessment based
PCA does not comply with CIMA’s PCA definition or suggestions by the scholars
(Lumijärvi, 1990; Cheng et al., 2009) pinpointing risks of biased PCA reports. According
to Linder’s (2005) literature review of empirical studies about the problems of PCA, the
lack of reliability has not explicitly been mentioned among the 23 different problem areas
listed. In line with this, Huikku (2004 and 2008) found in his explicit investigation of this
issue that the companies do not perceive the lack of reliability of PCA reports as an
essential problem even though they commonly conducted self-auditing based PCA.
Choice of a PCA auditor
Relatively many authors have in their normative writings covered issues related to
the choice of PCA auditor and its relationship to the PCA quality, whereas empirical
research is scarce. Normative literature focuses specifically on weighing the pros and cons
of different PCA auditor choices from professional competence and objectivity point of
views. The polar alternatives for PCA auditor choice are that people earlier involved with
the investment project conduct PCA or outside persons with no prior involvement conduct
it. The writers suggesting that it would be appropriate if PCA is performed by the same
persons that were responsible for the justification of the project emphasize competence
related issues (Dillon and Caldwell, 1981). Self-auditors have the most intimate knowledge
and understanding about the objectives and outcomes of the investment project which in
turn helps efficient data gathering and comparability in analyzing (Holmes et al., 1991).
Additionally, PCA auditors could obtain direct feedback about the success of their
investment projects and reasons affecting it, and hence by reflecting own activities they can
learn for the future investment projects (Dillon and Caldwell, 1981; Gadella, 1991). Direct
and faster feedback may also enhance the ability to modify an on-going investment project
that is underperforming (Dillon and Caldwell, 1981). Moreover, Linder (2007) suggests
5
that the high degree of participation of self-auditors in PCA will reduce the perceived
distrust effects of PCA, and consequently enhance employee satisfaction.
According to another approach suggested in the normative literature, objectivity of
PCA reports can be achieved only by using outsiders or a team that has not been involved
in the investment project (Gulliver, 1987; Northcott, 1992). Self-auditors being involved in
initiating or running the project may have vested interests in performing PCA. They could
present the situation subjectively or even utilize their information advantage to manipulate
PCA reports because their motivating force may be self-preservation and avoidance of
criticism by both peers and superiors in the organization (Holmes et al., 1991). Temptation
to manipulation is expected to increase if the project is underperforming or the original
investment appraisal has been sketchy or even defective (Neale, 1995). Additionally,
Huikku (2001) suggests that room for manipulation or over-optimism in PCA calculations
is higher with regard to the estimations of future cash flows than actual figures.
Independent PCA auditors are expected to be more critical, to pose more penetrating
questions, and to see and pinpoint more general improvement potential in the capital
budgeting process (Huikku, 2001; Neale and Holmes, 1990). Even though the PCA is
conducted by an independent person or group, the PCA reporting may be biased if the
investment project initiator has influence over the information presented to PCA auditors
(Northcott, 1992).
Proponents of independent and objective PCA auditors come out with three options:
internal auditors (Gadella, 1991; Northcott, 1992; Singhvi, 1986; Holmes et al., 1991), a
designated person/team (Gulliver, 1987; Neale and Holmes, 1990; Northcott, 1992; Neale,
1995), and staff from division/group or other business units (Neale and Holmes, 1990).
Internal auditors have been suggested to be appropriate for conducting PCA because of
their broad knowledge of accounting and finance, and auditing skills. The challenges of
using completely independent persons/units are primarily related to the lack of projectspecific knowledge (Neale and Holmes, 1990). Hence, data gathering and analyzing can be
time consuming and difficult, and the quality of PCA reports may suffer from this.
Additionally, inter-divisional competition may dilute the quality of PCA reports conducted
by staff from other business units in the corporation (Neale and Holmes, 1990).
In order to fulfill the simultaneous requirements of professional competence and
objectivity in performing PCA, mixed PCA teams have been advocated as a solution
(Heebink, 1964; Neale and Holmes, 1990; Holmes et al, 1991). The mixed team is
composed of both the investing unit and outside persons. The challenges facing the mixed
PCA teams can be related to the difficulties in integrating the two groups (Azzone and
Maccarrone, 2001). A lighter version of enhancing the quality of PCA reports is to connect
people from business unit making the investment with outside persons to PCA at the end of
the PCA phase. This can take place, for example, by letting outside persons comment on
the draft PCA report made by the business unit making the investment or vice versa if
conducted by outside resources (Dillon and Caldwell, 1981; Huikku, 2011).
Empirical evidence reported in prior studies with regard to a PCA auditor can be
delineated two groups: (1) studies investigating who conducts PCA in companies, and (2)
studies addressing relationship between PCA auditor and gameplaying in PCA (will be
reviewed in the following section). In practice, the persons or teams conducting PCA vary
widely among firms, and all the options suggested by consultative literature for PCA
auditors exist. Typically companies let the business units make a self-audit (see e.g.
Segelod, 1997; Kennedy and Mills, 1993; Morgan and Tang, 1993; Huikku, 2011). Segelod
6
(1997), for example, reports that PCA was invariably performed by the unit responsible for
the investment. In a similar vein, Farragher (1999) and Morgan and Tang (1993) found that
only in about 25% of the companies PCA was performed by an independent person or
team. The usage of mixed teams have also been reported (Azzone and Maccarrone, 2001;
Huikku, 2011). Additionally, enhancing the quality of PCA reports by letting outside
persons comment on the draft PCA report made by the business unit making the investment
or vice versa appears to be typical in Finland (Huikku, 2011).
In business units typically project managers are responsible for PCA reports, but
controllers play a major role in compilation of the PCA report (Kennedy and Mills, 1993;
Azzone and Maccarrone, 2001; Huikku, 2011). Whether the PCA auditors are internal or
external, controllers in the business units are the central source of PCA information (e.g.
actual figures, estimates, explanations for gaps, and learning experiences). According to
Huikku’s (2011) study, companies perceive controllers to enhance the reliability of PCA.
They were considered to be objective and not to manipulate the figures because they were
commonly expected to report to their superiors in the finance and accounting function
outside the business unit making the investment. It appears that in practice the role of
internal auditors in PCA is minor (Ghobadian and Smyth, 1989; Kennedy and Mills, 1993;
Huikku, 2011). One probable reason is the common attitude towards internal auditing,
which regards its role more as a part of negative control mechanism and not as a learning
mechanism.
Gameplaying and PCA
In the management literature, gameplaying traditionally refers to management actions that
are intended to mislead superiors, or even the whole organization. Accordingly, Merchant
(1985, p. 78) defines gamesmanship as “the actions that managers take that are intended to
improve their measures of performance without producing any positive economic effects.”
Gaming through manipulation of information occurs when a sender of information distorts
the information for the managers’ own favor (Argyris, 1987). Argyris (1990) suggests that
if gaming becomes public, management usually stops the gaming and sets new rules to
reduce the likelihood that the gaming will continue.
The existence of information asymmetry between agent (subordinate) and principal
(superior) is the prerequisite for potential to opportunistically manipulate information (e.g.
Williamson et al., 1975). Information is asymmetrically distributed if the agent has more
knowledge than the principal about a relevant issue (e.g. Fama and Jensen, 1983; Bourgeois
and Brodwin, 1984).3 With regard to capital budgeting, Waterhouse and Tiessen (1978)
suggest that the primary problem in capital allocation decisions is that the necessary
information is widely dispersed within the organization, and this leads to dysfunctional
behaviours.4 In other words, if the decision-maker does not possess complete information,
3
See e.g. Eisenhardt (1989) about the basic assumptions of agency theory in principal-agent relationships
such as the existence of information asymmetry, self-interest, goal conflict, and contractual situation. Harrell
and Harrison (1994) suggest that if agents (e.g. project managers) have both incentive to shirk and privatelyheld information, they will act in their own self-interest and not maximize the expected profits of the firm.
Nevertheless, Rutledge and Karim, 1999, and Noreen, 1988, claim that managers’ ethical considerations may
constrain their pure self-interest.
4
See e.g. Haka’s (2007) literature review about agency theory-based research and information asymmetry in
capital budgeting context.
7
as is typical in decentralised profit center organizations, gameplaying may occur at the
lower levels (see e.g. Bourgeois and Brodwin, 1984; Hertenstein, 1986; Marsh et al., 1988).
Managers’ desire to increase the likelihood of receiving the desired investment funds has
been pinpointed as the major reason for gameplaying in capital budgeting (e.g. Lumijärvi,
1990). According to Bower (1970), managers play against each other in capital budgeting
to reach organizational position and power. In PCA context, the conductors of PCA reports
are subordinates (agent) and top management is considered superior (principal).
Birnberg et al. (1983) have identified six methods used by subordinates to distort
accounting information: smoothing, biasing, focusing, filtering, gaming, and “illegal” acts.
They suggest in their theoretical study that each of these methods could be potential
gameplaying methods in resource allocation process (i.e. capital investment process). In
addition to more general description of these methods, we provide here examples how these
methods could be related to self-assessment based PCA. Smoothing is playing with the
timing of reporting a certain message between different periods. A manager may delay
sending of a message to a future period even though the appropriate timing would have
been the current period and vice versa. In practice smoothing may occur in PCA when, for
example, a PCA conductor shifts investment project cash flows in his PCA calculation from
one period to another. Biasing occurs when the manager selects from a set of possible
messages a signal that is likely to be accepted and is most favorable to him. Accordingly, in
PCA phase a manager may, for example, present the most optimistic scenario for future
cash flow estimates in order to maximize the values of ex-post profitability calculations
(e.g. NPV, IRR). Focusing happens “when certain aspects of the information set are either
enhanced (highlighted) or degraded.” In a PCA report, positive future opportunities could
be highlighted and risks related to investment project cash flow degraded. In a similar vein,
in data filtering the PCA data is filtered so that the more desirable elements of the PCA data
are communicated and the less desirable ones are not (i.e. “forgetting to tell”). Accordingly,
filtering is closely related to focusing.
Whereas smoothing, biasing, focusing, and filtering are methods intended by the
sender to manipulate the recipient by affecting the data available to the recipient, gaming in
Birnberg et al.’s list relates directly to superior-subordinate relationship as described in the
agency literature (see e.g. Jensen and Meckling, 1976; see also Simons, 1995, 81-84). The
superior sets the rules of the game and the subordinate then chooses his acts to maximize
his own payoff. In other words, the subordinate will choose the most favorable outcome
regardless of the action that the superior prefers (Jaworski and Young, 1992). In selfassessment based PCA context the PCA conductor may pay more attention to investment
projects that are linked to his rewards. “Illegal” acts violate private law (i.e. organizational
rules) or a public law. “Illegal” acts occur when the PCA conductor distorts PCA data by
fiddling the figures or forging underlying documents, for example. Birnberg et al. suggest
that in capital budgeting context, the investment appraisal proposers may use all six
methods under the conditions when simultaneously belief in measurability/verifiability of
data and belief in analyzability of proposals is low. On the other contrary, very little
manipulation is anticipated if measurability/verifiability and analyzability are expected to
be high. According to Argyris (1990), the methods presented by Birnberg et al. can be
considered organizational defensive routines, because they bypass the causes of the threat
and embarrassment of subordinates, and cover-up the bypass while it is being produced.
Empirical studies addressing gameplaying and PCA are not voluminous. The only
one to our knowledge is Lumijärvi’s (1990) extensive field study (71 theme interviews) that
investigated gameplaying in capital budgeting in a large divisionalised Finnish corporation
8
and covered simultaneously to some extent PCA related issues. In the company studied the
persons involved with the investment appraisal (i.e. proposers) also performed PCA. He
discovered that information asymmetry enabled many types of gameplaying in capital
budgeting, and conducting PCA was the only factor which might decrease information
manipulation; especially, when a proposer of an investment project is aware of the coming
review (see also Scapens and Sale, 1981: Neale, 1994). Nevertheless, he found that when
PCA is employed, a new game appeared: manipulation of PCA reports. By using
information manipulation, an investing unit makes an attempt to indicate project success,
regardless of the project’s actual outcome. Covering up an underperforming investment
project can be performed by preparing a calculation that shows the capital investment to be
in accordance with the investment plan. Additionally, items that would cover gameplaying
in the previous phases of capital budgeting process can be omitted from the PCA report, i.e.
all relevant information is not disclosed. In one case the manipulation of PCA reports was
uncovered when a PC controller later analysed more in detail the previously compiled PCA
report. It appeared in Lumijärvi’s study that the primary motivation of manipulation was to
keep the likelihood of receiving funds in the future at as high a level as possible. Based on
his findings, Lumijärvi (1990, p. 218) suggests that “In fact, to a great extent an ex post
report can be manipulated to show anything that is desired” and concludes that post-audits
by outsiders would reduce the likelihood of manipulation of PCA reports.
Cheng et al.’s (2009) experimental laboratory study is the only research having the
primary focus on addressing the relationship between PCA auditors and reliability of PCA
reports. More specifically, the study investigates the factors that impact manager’s
willingness to share private information5 in the PCA phase if managers self-audit the
projects. Cheng et al. (2009) suggest that managers with higher personal responsibility for
the initial project decision were significantly less willing to share information that is private
and unfavorable for the manager. Accordingly, managers place less emphasis on, or even
ignore negative project feedback in their PCA reporting. This jeopardizes the effectiveness
of PCA as a learning tool (see also Huikku, 2011). In a similar vein, they suggest that if
PCA is primarily used for accountability purposes (e.g. performance evaluation), not for
OL purposes, managers involved in the investment project were significantly less willing to
share unfavorable project information. Cheng et al. (2009) conclude that there are risks of
biased information sharing in PCA if it is performed by persons responsible for the project
and if PCA is conducted for accountability purposes. Hence, as Lumijärvi, they emphasise
that the choice of PCA auditor is critical for the reliability of PCA reporting, and question
the appropriateness of self-assessment based PCA. Moreover, Cheng et al. suggest that the
future studies could investigate whether the willingness of managers to share unfavourable
information in PCA is associated with the following issues: sharing objective data vs.
subjective judgements, failure based on own fault vs. second party mistake, and the level of
information asymmetry.
Linder (2007, 2008) suggests in his theoretical studies that linking extrinsic rewards
(e.g. financial: bonuses; and non-financial: promotions) or punishment (e.g. public
criticism) to PCA results will not enhance organizational learning but may increase
dysfunctional consequences like an increase in distrust. It is also plausible to assume that
agents (self-auditors) would be keener on game playing in PCA reporting if PCA is tied to
the evaluation/reward systems. According to scholars, in practice only few companies use
PCA in formal evaluation/rewarding of managers or consider it beneficial for it (Smith,
Cataldo II (2003) suggests that the term ‘private information’ is more frequently associated with financial
accounting research and literature, whereas the term ‘hidden information’ is more frequently associated with
managerial accounting research and literature. Our study uses both concepts synonymously.
5
9
1994; Neale, 1994; Huikku, 2008). Avoiding staff reluctance to conduct PCA and
specifically timing-related reasons, such as a mismatch of PCA results with bonus targets
based on financial years and long interval between an investment appraisal and PCA, seem
to discourage companies from integrating PCA and reward systems (Huikku, 2008).
Notions about management control package and collectivity in explaining the reliability of
PCA reports
In this study we will later elaborate whether on the one hand notions about management
control package and on the other hand collectivity in producing PCA reports affect their
reliability. Contributions to the management control (MC) package literature suggest that
companies use simultaneously various formal and informal control mechanisms (Otley,
1999; Malmi and Brown, 2008). Malmi and Brown (2008) categorise these mechanisms as
cybernetic controls (including planning and reward/compensation), cultural controls and
administrative controls. MC package approach advocates suggest that management control
systems can be regarded to operate as a package of interrelated formal and informal control
mechanisms, and consequently in studying them a wide and holistic view is appropriate
(Otley, 1980, 1999; Flamholz et al., 1985; Macintosh and Daft, 1987; Alvesson and
Kärreman, 2004). Accordingly, where on the one hand, research in MCS contends that
different types of controls can be used in a complementary, mutually reinforcing manner
(Waterhouse and Tiessen, 1978; Merchant, 1985) on the other hand, several researchers
(Galbraith, 1973; Mintzberg, 1983; Fisher, 1995; Gerdin, 2005; Sandelin, 2008) maintain
that control systems may substitute rather than complement each other.
The complementarity and substitution of control mechanisms in MC context have
been addressed by drawing on the notion of equifinality (e.g. Gerdin, 2005; Huikku, 2007;
Sandelin, 2008). In an equifinal situation, open systems have not only one, but multiple
alternative choices for reaching the desired final state (von Bertalanffy, 1968). Equifinality
occurs in an organizational setting when “a system can reach the same final state, from
different initial conditions and by a variety of different paths” (Katz and Kahn, 1978, p. 30).
Gresov and Drazin (1997) maintain that equifinality in the organization design
context means that the same final state (i.e. performance of an organization) can be
achieved by multiple organizational structures. This is the case even if the contingencies
faced by the organization are the same. Accordingly, they present a classification of four
design conditions, that build on the degree of conflict in functional demands (low vs. high)
and the latitude of structural options (constrained vs. unconstrained). Equifinality in its
different forms occurs in three of these situations, whereas an optimal profile is assumed
when there is low conflict in functional demands and constrained latitude of available
structural options (see Gresov and Drazin, 1997). In the situation of trade-off equifinality a
low conflict in functional demands occurs, and latitude of structural options is
unconstrained. Furthermore, in a situation of suboptimal equifinality a company attempts to
satisfy multiple and conflicting functional demands with constrained structural options.
Finally, in a situation of configurational equifinality a company has unconstrained options
to satisfy conflicting functional demands.
In PCA context we can consider the evaluation of the success of an investment the
functional demand; i.e. only a low degree of conflict in functional demands is expected and
the structural options are unconstrained. This kind of situation corresponds most closely to
trade-off equifinality, where a trade-off (i.e. substitution) of one structure for another still
10
facilitates achievement of the same functional outcome (Gresov and Drazin, 1997).6
Huikku (2007) suggests that companies can use alternate capital investment controls for
evaluation, and this may discourage companies from adopting PCA. The alternate controls
include formal and informal systems and procedures for performance measurement such as
following up production key figures, sales and profit centers.
With regard to producing future-oriented numbers for PCA reports, the major
challenge is to make accurate cash flow estimates for the future periods, i.e. for the
remaining useful life of an investment project beyond actual. The cash flows of these future
periods have typically a great effect on the outcomes of NPV, IRR and payback period in
PCA calculations. In assessing the quality of future-oriented calculations, it is often very
difficult to distinguish between intentional mispresentations (lies) and honest misestimates
(Lev, 2003, 32). Nevertheless, Power (1997, 87) maintains that in financial accounting
context, the future-oriented calculations can be made auditable if the auditor ensures that
uncertainties are fully disclosed, the underlying assumptions are reasonable, and the auditee
system for generating the disclosure is appropriate.
Contributions related to notions of actor-network (ANT) theories, suggest that
collectivity plays a role in enhancing the perceived “objectiveness” of future numbers.
Accordingly, referring to Latour (1986), Mouritsen (2011) suggests that collectively created
and useful representation of financial reports seems to replace traditional view of truth. In a
similar vein, Porter (1996) maintains that the trust in numbers is more related to their
impersonality than their ability to exactly copy the world. Millo and MacKenzie (2009)
have examined how heterogeneous networks of human and non-human actors take part in
constituting financial risk management as a techno-social network (see also e.g. Law, 1991
and Latour, 2005). Hence, they suggest that the network does not solely include social
(human) networks, but non-humans are existing as well. Callon (2009) illustrates the same
in carbon market context. In a similar vein, closely related to the notions of ANT, Miller
and O’Leary (2007) maintain further that in capital budgeting context the intermediaries
such as written documents and technical artefacts play a central role in enhancing the
efficacy of heterogeneous networks in acting as agents for constitutive change.
To summarise, the scarce empirical literature emphasise that self-assessment based
PCA constitute an obvious risk for the reliability of PCA reports in terms of potential
information manipulation. However, in practice companies typically let the persons or
teams earlier involved with the investment project to conduct PCA. Consequently, this
study examines if, how, and under which conditions self-assessment based PCA potentially
jeopardizes the reliability of PCA reports when PCA is conducted by business units making
the investment. In doing this, in addition to PCA literature, we draw on a combination of
the literatures on agency-based theory, equifinality and actor-network-based research. The
notions of agency-based theory about potential data manipulation between a principal and a
subordinate act as a trigger and a lens for discovering and discussing aspects that may
enhance or diminish game playing behavior in PCA. Birnberg et al.’s (1983) framework
provides an appropriate tool to address potential distortion of accounting information.
Contributions in the equifinality literature and actor-network theory literatures provide
assistance for explaining the aspects affecting the level of reliability of PCA reports.
6
The potentiality for a trade-off effect has previously been acknowledged in other organizational studies by
Galbraith (1977), Kerr and Jermier (1978), and Eisenhardt (1988).
11
3. Research method
There is little prior theory and empirical evidence about the relationship between selfassessment based PCA and reliability of PCA reports. One plausible reason is the
sensitivity of the issue; it can be difficult to get an access to honest data potentially
revealing dysfunctional behavior (e.g. information manipulation) within a company (e.g.
Hopwood, 1972; Otley, 1978; Merchant, 1990). Hirst (1983) suggests that a case study
approach would be appropriate in investigating manipulative behavior. Consequently,
limited prior knowledge and sensitivity of the research topic encourage adopting a sensitive
and deep-probing case study method enabling also explorative approaches instead of a
survey method, for example (Vaivio, 2008). Our results do not make an attempt to offer
statistical or constructive generalization, but they can potentially be generalized
contextually (Lukka and Kasanen, 1995; Modell, 2005; Ahrens and Chapman, 2006). The
theoretical contribution of the study relates to theory refinement; it elaborates further prior
theories by clarifying them, adding more details to them and extending their scope
(Keating, 1995; Ittner and Larcker, 2001).
The European forest corporation (Eufoco) became the object of this study; it was
suitable and willing to participate the study. As Eufoco has about two decades
comprehensive experience in conducting self-assessment based PCA, it can be regarded as
the most-likely case for this research setting (Keating, 1995). It is globally one of the major
players in its industry which is characterized by a high degree of capital-intensity, and
hence Eufoco has been investing several hundred million euros, even over billion, annually.
The typical major investments are projects to expanse production facilities (mills and
production lines) in paper, packaging, and wood handling industry. The division has been
made according to the product portfolio. In order to get an access to the sensitive
information, the research was linked to our commitment to provide feedback and
recommendations to the management at the end of the data gathering phase. This link
committed and encouraged also the company to provide us very intimate information we
required. Additionally, it was agreed upon that the management of Eufoco had possibility
to check the results of the research at the draft phase.
Theme interviews with the most knowledgeable persons at the different level
(group, division and mill) and examination of the last PCA reports related to the major
investments were the primary data sources. Altogether, 24 semi-structured interviews were
conducted in 2010; amounting to 38 hours of tape-recorded and transcribed material. All
the interviews were face-to-face interviews, except one which was a telephone interview.
The interviewees consisted of 22 different persons (hereinafter H1-H22). At the group level
eight persons were interviewed: SVP and manager of investments and capex, CFO, director
of group business controlling, SVP of group strategy, SVP of internal auditing, manager of
purchasing and investments, and EVP of group technology and strategy. At the divisional
level eight interviews took place. They covered all the executives responsible for the
investment activities in their respective divisions and other persons closely related to capital
investment and PCA. At the mill level, six persons including two mill managers were
interviewed. We were also provided all the PCA material regarding the last 22 major
investments reviewed in the corporation.
In order to enhance the validity and reliability of the study, triangulation was
mainly conducted as synchronic and diachronic primary data source triangulation (Pauwels
and Matthyssens, 2004) by interviewing two key persons at the group level more than once
and the different persons on the same topics many times. Additionally, PCA reports
12
provided an excellent base for triangulation purposes. Moreover, we used the capital
investment manual, investor presentations, interim/annual reports, newspaper and magazine
articles, and informal corridor and lunch discussions as the secondary data sources.
After each interview and without delay the material was transcribed. Thereafter the
transcribed material, relevant PCA reports and other material (e.g capital investment and
PCA instructions) were preliminary analysed to obtain feedback for the coming interviews
and analysis. Accordingly, during the interview process the material was continuously read
and re-read, findings contrasted to prior theory and theories relevant for this study. Theme
interview structure was not totally closed in the beginning. It slightly evolved during the
interview process as our understanding about the phenomenon increased enabling us to
focus more on the interesting topics that raised (Atkinson and Shaffir, 1998). The research
method of this study can be called abductive (Dubois and Gadde, 2002); it is based on
ongoing iterations between data and theory, combining both inductive and deductive modes
of theorizing. Finally, after the whole interview process had been conducted, coding and
analyzing of data continued mainly based on thematic approach – and the first versions of
the paper were written (e.g. Yin, 2009). In the following empirical part we will illustrate
and explore aspects affecting the reliability of self-audited PCA in Eufoco. Later on, we
will map and discuss more in detail the role and importance of these various aspects.
4. Results
4.1. Post-completion auditing in Eufoco
In Eufoco the investments are divided into three categories according to their size: major
(over €15 million), medium-sized (5-15), and minor investments (under 5). In practice,
major and medium-sized investments are called strategic investments and include typically
projects related to expansion of production capacity or manufacturing new products. Minor
investments consist of development and replacement investments. Strategic investments are
funded from group investment fund, whereas minor investments are funded from a
Business Area’s (BA) annual investment allocation (budget). The appraisals for the major
capital investments are approved by the CEO and the Board of directors. Investment
planning and control is coordinated by the Group investment function. Additionally,
Investment working group (IWG) plays a central role in evaluating and developing
feasibility studies and investment appraisals, and reviewing PCA reports. IWG consists of
about ten members representing BAs and group functions. In Eufoco, the investing units
conduct the PCA themselves.
According to Eufoco’s written PCA instructions, all major capital investment projects are
selected for PCA.7 Additionally, PCA instructions define objectives for PCA, timing of
PCA, content of a PCA report, and presentation forum of PCA reports. Enhancement of
organizational learning (OL) is the primary objective for PCA in Eufoco’s PCA guidelines
(i.e. investment manual). This was also clearly supported by the numerous comments of the
managers interviewed. With regard to perceived OL benefits from PCA, managers
specifically emphasized its role in improving the accuracy of underlying key assumptions
and goals in planning material for future investment projects. Furthermore, PCA feedback
has aided Eufoco in developing the investment process as a whole (e.g. to improve
investment guidelines and procedures). The secondary objective for PCA in the guideline
(and in the interviews) is related to accountability, namely evaluation of the success of an
Furthermore, BA’s have selected discretionarily few medium-sized capital investments for PCA, but these
audits have not been reported to the group.
7
13
investment project, but it is much less emphasized than OL. By evaluation, people can be
made accountable for their investment appraisals. H1 explained:
The current PCA process primarily gathers learning experiences about successes and
failures. Its target is that those involved in the project learn for the next investment project
and that this learning would also be disseminated to other mills. The controlling
[auditability] function is not emphasized as such.
Formal personnel evaluation was not considered as an explicit objective for or perceived
benefit from PCA, and the incentive systems are not linked to PCA. However, some
interviewees perceived that PCA is moderately used for informal personnel evaluation as
H12 explained:
Yes, we evaluate informally how chaps have managed the projects and it has impact on
the selection of project personnel for the future projects.
In a similar vein, H16 stated that PCAs provide information about the expertise of staff in
planning and managing investments but it will not be accented as an objective because
otherwise “you cannot get good data in the PCA reports” In other words, the self-auditors
would potentially be more tempted to manipulate the reports.
In accordance with the PCA guidelines, PCA is conducted roughly one year after
the investment project has been completed and it has reached a relatively settled state.
Location of responsibility for PCA system is centralized to Group investment function. It
has ownership of PCA activities and is in charge of tasks such as the development of the
PCA system and its general functioning (e.g. providing policies, giving instructions,
ensuring that BAs/mills adhere to them, and checking the reports before presentation).
Dissemination of PCA reports is relatively brief covering people involved in the project and
the IWG members. Company does not have a centralized database or archive for PCA
reports, but some BAs have an investment site in their intranet, where PCA material is
filed. In these BAs, 1 or 2 people from every mill have an access to this material.
Typically, a PCA report consists of about 30 pages in Power Point format. Eufoco
has instructions how to compile it. According to the instructions, the PCA report will
consist of the following main themes: (1) Executive summary, (2) Description of the scope
of the investment project, (3) Review of the investment outlay and profitability, (4)
Description of key operational impacts, (5) Evaluation of key profitability drivers, (6)
Lessons learned, and (7) Site or business area specific issues. However, in practice, the
format/template required is relatively loose and PCA reports do not necessarily strictly
follow this instructed structure. As a result, the content and length of PCA reports vary and
this complicates readability and comparison between different reports. It appears that
sometimes the PCA auditors modify the content for their own opportunistic purposes and
leave something out. The comment of H11 represents a common opinion in the
organization advocating tighter guidelines for the PCA report:
I think that we give too much freedom for the PCA auditors with regard to the content of PCA
report. We should have tighter, more formal guidelines for the content.
4.2
PCA as a self-audit
In Eufoco, PCA is conducted on a self-assessment basis. Hence, the investing units conduct
the PCA themselves, i.e. they make a self-auditing. Within the investing units, the project
manager has a significant role in compiling the PCA report. However, sometimes the
project manager is not anymore available for PCA. In these cases the PCA has been
conducted by a person or a team that has not been as committed to the project as project
manager would have been. Project manager has typically the most in-depth and
14
comprehensive knowledge about the progress of an investment. It appears that the role of a
mill controller varies between the projects. It is common that he is responsible for
providing the figures for the PCA calculation and presentation. Additionally, in some mills
the person in charge of investments within a mill is involved with the compiling or at least
providing information for the PCA report. The typical role of mill manager in compiling
the PCA report is described by the H12:
It is in fact more or less the project manager and the controller who compile the PCA
report. However, the mill manager is responsible for the project and he has to present it
[at the IWG meeting]. Hence, he has to know the project. Otherwise he will be caught at
no time.
Hence, although project managers are typically in charge of constructing the PCA report, it
is an outcome of a collective group work (e.g. project manager, controller, mill manager).
Specifically, controllers play a central role in providing figures and finding explanations for
gaps. Controllers were considered to be neutral and objective resources and hence enhance
the reliability of reports. They were not expected to manipulate the figures because they do
not report only to mill managers but also to their functional superiors outside the investing
unit. Segregation of duties in providing information for PCA was generally considered to
enhance the reliability of PCA reports as stated by H13:
We have a segregation of duties and this means in practice that there are several parties in
generating the needed information. (H13)
It appears that there has never been an explicit discussion and decision-making
about the choice of a PCA auditor. The interviewees commonly motivated the selfassessment approach primarily by emphasizing the self-auditor’s intimate knowledge and
understanding about the project as H2 explained:
I would say that the project manager and his team have by far the best conception what has
been done and how one has succeeded in it. Of course, financial figures come from the
controlling organization, but it is just one element…although very important one. But that
team… it knows exactly what has happened and can put that on the paper.
H10 continued in a similar vein:
No one else [than the project manager and his team] has that experience what really
happened there.
Another major advantage explained in the interviews was related to learning by reflecting
on one’s own activities as H3 stated:
The old saying “you learn when you do it yourself” is very valid. When you swot up on
the issue [PCA report] you will learn and remember…what is behind the figures and how it
has been compiled.
H1 added about the positive impact of self-learning on the motivation of PCA auditors:
One clearly positive issue is that the project team is more committed to conduct the PCA. It
is a kind of direct final phase in that continuum [investment process]. They go through the
project once again, identify and document the lessons learned, successes and failures. It
has a learning function for that project team.
Additionally, H4 from the mill emphasized accountability related issues:
Specifically, it is good when you know at the investment appraisal phase that you will be
required to make a [PCA] report. It teaches you to be responsible for the promises of your
own.
15
The interviewees were relatively satisfied with the quality of PCA reports. Accordingly,
some of them were considered to be really good and self-critical. Nevertheless, specifically
PCA reports regarding underperforming projects were not always considered satisfactory.
Again this year we have had about ten post-audits. One of them was, I would say in a
world-class, even though the project as such was a failure. Then we have had mediocre
reports and one weak report. We can easily see that the scale, how the quality varies, is too
broad (H2).
I think that nowadays we take PCA much more seriously than earlier. The quality of
[PCA] reports has improved. Nevertheless, they are not at a level where I would like
them to be. Specifically, when the project has not achieved its targets we sometimes
receive weird reports (H11).
In spite of the rational motivation provided for self-assessment based PCA, the
interviewees commonly noted general level challenges related to objectivity in using selfassessment based PCA.
If you let the project team to conduct the PCA merely by itself, it will be their self-portrait.
And this self-portrait can be distorted. It will focus only on something. That’s why you need
an external person to see the wholeness (H19).
It is in the human nature that one starts to cover up if something starts to go awry
(H8).
The negative side [of self-auditing] is that sometimes the PCA report is a collection of
excuses why the project is underperforming (H12).
The degree of objectivity diminishes when you start to approach those parties that
have been more involved with the investment project. It is a kind of a baby of your own.
You start to rationalize its excellence and fit to the strategy. The objectivity will vanish. It is
inevitable. (H13)
In the next section we will discuss the issues related to competence and objectivity related
of PCA reports.
4.3
Balancing between the competence and objectivity of a PCA auditor
As illustrated earlier, the PCA reports are considered relatively reliable, although the
managers are not totally satisfied with their quality. The self-auditing is advocated by
emphasizing the higher competence of self-auditors to conduct PCA instead of objectivity
issues. The quality of PCA reports is sometimes suffering from both lack of competence
and lack of objectivity as explained by H16:
The first version that we received from the investing unit was immediately thrown back.
They did it in a prettified manner and tried to find all possible positive arguments to make it
look fine and beautiful. They had clearly not understood how to conduct PCA; which
figures to include and how to review it. And now the next version is already much more
realistic, clearer and better. It is a kind of iteration process and a mill manager does it
maybe once in a life-time, if we think about the major investments.
16
H12 continued about the competence challenge in smaller factories:
The sizes of our factories vary tremendously. The big factories have conducted a lot of
PCAs and they have human resources, whereas in a small factory one guy may wear three
hats [have three positions]. Accordingly, it is natural that we have to support them more
[from BA] (H12).
The lack of competence, per se, is considered in Eufoco a bigger threat to the quality of
PCA reports than objectivity related issues. Letting totally external teams or persons to
conduct PCA was not considered appropriate:
I do not think that a “commando” type group would be a good solution [for conducting
PCA]. It would considerably diminish the motivation of mills to PCA process, because
“commando” would be regarded a form of punishment or police. It would be a fringe in
controlling. We would lose a lot of learning potential within the units. (H1)
The prior literature has suggested that internal auditing would be suitable party for
conducting PCA. However, as commented above, using “a commando group” may have its
disadvantages. In addition to lack of project-specific knowledge of internal auditors and
threat to motivation of mill staff, threat to segregation of duties was highlighted by the
representative of internal auditing. He was concerned that it would be harmful if they
themselves both conducted PCA and simultaneously audited the investment process in its
entirety:
Internal auditing is expected to evaluate the functioning of internal processes in the
corporation, such as the whole capital investment process. If we conducted PCA, we would
in fact audit our own work. This should not be possible. (H13)
Even though total “externalizing” of PCA was not sponsored, the managers interviewed,
however, clearly advocated increasing the role of independent reviewing content to PCA in
order to diminish manipulation as the following quotes illustrate:
If he [PCA auditor] comes outside the Business Area and the motivation is in order,
then he is equipped with an open mind. There are no prejudices that this was a good
project and this was a lousy project. He just calmly checks the figures, checks the
implementation and start-up. He has no need to excuse for his actions. No hidden agendas.
Just an empty table, no need to hide anything. No need to think that I’ll forget to tell this.
Nothing like that. (H2).
I do not consider it as a viable arrangement that there would be for example 2-3 persons
dedicated to travel around the globe and conduct PCAs. I think that the investing mill has
to be involved with conducting PCA. However, I would like to see both parties involved: the
investing mill and an outside party. (H7)
I would say that there should be an external person, I mean not a member of the project
team, for example from group controlling, who checks the [PCA] calculations. In order to
ensure that there is a correct calculation with correct premises. (H10)
The following brief case “the praised PCA” illustrates how increasing the content of
independence in PCA may affect the reliability of PCA report. The investment project was
a major foreign direct investment to expand production capacity. The project became a
disaster due to the project-specific problems and the deteriorated economical situation in
17
the country. The project manager and the key persons in planning and implementing the
investment had exited the company before the PCA took place. With regard to the main
knowledgeable actors, only the chairman of the steering group was left in the corporation.
An executive from BA level who had not major prior engagement to the project and the
chairman of the steering group were in charge of conducting the PCA. The executive
described the starting point as follows:
In this PCA we faced a very challenging situation because project staff and people at the
mill had changed many times and we had lost partly basic documentation. To find and
understand the original premises was difficult. This must have been the most demanding
PCA ever conducted at Eufoco. (H16)
He added:
We were very open in the PCA reporting. We didn’t hide anything in the auditing. It was
made with very strong realism. We have received feedback from the corporate staff that
even though the project as such was a big disaster, this is exactly the way how one should
write a PCA report. Not to prettify anything but to tell what really happened. The chairman
of the steering group had a major role in conducting this PCA with me. His situation was in
fact annoying but on the other hand he was just in a process to retire. We talked a lot how
to conduct and report this PCA. He took this so that he will not excuse himself at all. He
said that he knows what happened and he will take responsibility for it.
One top level executive from the group acted as a sparring partner in PCA. He had some
prior knowledge about the project.
I have been involved with some PCAs, for example projects X and Z. From profitability
point of view they were disasters, but concerning PCA quality they were one of the best
ones I have ever seen in this house. Those guys really wanted to figure out, also for
themselves, why these projects failed. They really worked a lot. I acted as a sparring
partner for them a couple of times. We had many fruitful discussions why these projects
failed. I think that they wanted to get the peace of mind, to understand profoundly
what had happened.
This case “The praised PCA” clearly indicates that from objectivity point of view it plays a
role who conducts PCA. This is also confirmed by the comment of H11 explaining the
presentation of Project Y by the managers not involved in planning and implementation of
the project:
Responsibility had totally changed and the guy presented it of course in a tone that “hey
this was done by my predecessor, I have nothing to do with it, let us lay our pens down.”
That was a good thing. (H11).
Taken together, the interviewees commonly suggest that in order to balance between
competency and objectivity, it would be appropriate to combine people from the mill
(competence), if possible, with external parties (objectivity), i.e. they advocate a mixed
group for PCA.
18
4.4
Reliability of PCA reports: figures and text
In the following, we will address the reliability of PCA reports at Eufoco more in detail.
First, we will focus on the figures presented in the report. Then, with regard to figures, we
will present a specific phenomenon encountered in Eufoco, namely, omitting ex post
investment profitability calculations. We will continue by addressing the reliability of
textual part of PCA reports and by synthesizing the findings.
Figures in PCA report
Figures, and specifically the ex post profitability calculations, play a major role in PCA
reports as emphasized by H11:
I think that [in PCA] the profitability calculations are for me the thing number one. Are we
making the money we have promised, and if not, what are the reasons for that. This must be
the first question and the first answer. If we do not match these, the rest is not important
anymore.
With regard to investment profitability calculations, the same capital budgeting techniques
(payback period, NPV, and IRR) are used both ex ante and ex post. In practice, the PCA
calculation includes actual and forecast figures as H10 describes:
Then you reconstruct the profitability calculation. You take first actual figures, for example
1.5 years, then you estimate the coming periods and calculate.
In other words, PCA calculations do not include only historical (actual) data but also
uncertain future estimates. With regard to the actual figures, the managers do not recall
their distortion.
If we are now talking about a conscious distortion of figures in PCA, I think that this would
be interpreted as a major malpractice in our corporation and one would not get off with
excuses. (H13)
I have never experienced that somebody would have distorted this [actual] information.
(H3)
The future estimates are primarily derived from the strategic plans of mills and BAs, and
are thus not only calculated for these purposes ad hoc. In Eufoco, there is a close linkage
between the estimates in PCA report and the figures presented in strategic planning and
budgeting material as presented by the interviewees:
The future years are derived from the strategic figures of the mill. (H5)
One tries to ensure the quality of PCA reports by using the same premises [for the future
periods] as the mill has in its strategy. Then we use the same calculation template and
principles as at the appraisal phase. So, it is comparable in that sense.(H4).
We have a process to update twice a year the main premises for the coming five years.
Business areas are responsible for this. It is an estimate about selling prices, costs for raw
material and energy. After five years we have to use so called fixed trend prices. We have to
use these figures for the investment appraisal and PCA purposes. (H8)
The figures are not ad hoc figures provided only for PCA purposes (H10)
They have to take the figures for the future years from the strategy. Hence, there is in
practice no opportunity to manipulate these figures. (H1)
19
Consequently, the close linkage between existing estimates and PCA report estimates
enhance the reliability of PCA calculations. Moreover, it appears that in Eufoco the
strategic price and volume estimates for the whole industry given by consulting companies
closely guide the setting of Eufoco’s estimates.
Nevertheless, it seems that sometimes the link between the figures in strategic planning and
in investment appraisal material can be ambiguous or non-existing. This may leave room
for the PCA conductors to use estimates of their own.
When you receive a PCA report you will see that the first two years have not been good but
after that everything will change and you will get more than was originally promised. It is
systematically like this. The start-up has been slow but then it will come. These are the first
things we ask the mills to correct. (H16)
H2 added similarly:
Sure, the future plays a major role in these calculations. Prices, costs, operating rates,
efficiencies… Yeah, there is an opportunity to prettify the picture. (H2)
It appears that even though Eufoco asks mills/BAs to provide recalculated NPV, IRR and
payback in their PCA reports, the focus in reviewing the figures is on actual figures
(financial and non-financial) as H7 described:
The role of profitability calculations is rather… rather low. And I am actually quite ok
with that. What is usually focused, and is more important for people are the short
term issues. So, if you promise cost decrease of x MEUR per year, then you certainly want
to see 2 years later what is your cost decrease on an annual basis right now. But the NPV
number with the 20 years calculation has less relevance in those kinds of cases. Or
have you promised to reduce your personnel by 30 people, then we would absolutely like to
see what the reduction has been and so on. So those are short term things. I think that they
are as important in the PCA as NPV and IRR, because it is just a new
projection
two
years later. Of course you have some more facts but you have, anyway,
a
lot
of
uncertainties about the future.
H17 continued similarly:
Actually I don’t care so much about these profitability indicators in the PCA-report,
because, well, we conduct these PCAs usually one year after start-up. So, if we then
compare for example NPV, IRR or payback. It is still only one year which is an actual
number and then other, I don’t know, 10 years or something which is still estimated. So it is
still quite much guessing I would say. What I actually think is important to see are these
[actual] operational figures: have speed targets [e.g. for a paper machine] been achieved,
is production progressing according to plan, are the savings promised there and so on.
Hence, we focus on comparing the actual figures with the promised ones. Everything that
contains future estimations is then… a kind of “must” that has to be done.
Actual figures are considered much more reliable than “updated” investment profitability
calculations including uncertain future estimates. Nevertheless, updated calculations have
still an essential role in communicating the success of an investment project.
Omitting ex post investment profitability calculations in PCA reports
We found an interesting variety of forgetting (filtering) in Eufoco. Namely, it appears that
PCA auditors do not always want to present all profitability calculations in PCA report but
omit them as H1 explained:
20
Sometimes with regard to the underperforming projects, the subjectivity appears in a
regrettable way. The units may apply the guidelines so that they avoid calculating certain
key figures [NPV, IRR or Payback period]. They explain that due to this and that reason we
cannot calculate them.
H11 and H2 added:
I would not say that the figures had been manipulated or that they had been over-optimistic.
People just avoid showing bad figures. They are just missing [in the PCA report]. I think
that this is human behavior. If you do not succeed, you leave it out. This you can see in our
reports. But I would not say that people intentionally show distorted figures. (H11)
…there have occasionally been clear deficiencies in these profitability calculations. They
may explain with a poker face for example that because the targeted operation rate was
95% and now it is only 62%, it is impossible to calculate the profitability. For me, it means
that the profitability is a red figure. You can calculate it but the figure is so horrible that
one doesn’t want to show it. (H2)
The approach of Group investment function and IWG has been occassionally mixed
whether to require always the calculations or not. Focusing on actual figures instead of the
whole estimated life-cycle of an investment seems to play a major role in this “looking the
other way” approach.
I agree with NN that to understand how the premises have changed between the plan and
outcome is more important than to make these technical profitability calculations. This is
the reason why we have occasionally looked the other way when the calculations have not
been made and we have let them explain why they have not presented the figures.
But okay, it is for me perfectly clear that the main reason not to show the numbers is that
they would be so bad. Nevertheless, they have not managed to escape scot-free because
these issues have been covered in the [Group IWG] meeting. (H1)
With regard to this V3 project, the PCA was done without a calculation. PCA was
presented at the Group IWG. The IWG stated that this is a nice PCA but where is the
calculation. Then I don’t know whether somebody asked that calculation or not, but it
should have been calculated. (H10)
One manager representing a unit with missing calculations commented his reluctant attitude
to update the calculations with regard to new estimates:
We are talking about guesses, we are supposed to update guesses. How much value added
this will really bring? We should pay attention to the selection of investments, not to
technically update investment calculations with new guesses (H15).
Another manager defended themselves why they do not always include all calculations:
A simple reason why the calculations were not made was that we knew in advance that
there will not be any profitability. We can state it in one sentence: no profitability (H10).
Textual part in PCA report
According to the managers interviewed, there is much more room for manipulation in
textual part of a PCA report than in figures as H4 commented:
In calculations it is difficult to adjust the figures, or in fact it is stupid, because the facts are
already there. But in text part… There you can forget something.
Other interviewees added in a similar vein:
21
In a text part, there you can have an influence, what and how to write, and which issues to
highlight. It is human. This [PCA report] is not a cold analysis what has happened. (H5)
I don’t believe that there is manipulation of figures, but there is a risk that a project team
tries to show the project outcome in a more positive light. They have tendency to tell
the
better stories and forget the worse ones. But key figures you cannot change. It would be
dangerous to present wrong figures. Nevertheless, in a text you can tell positive issues.
(H14)
But of course, the figures speak for themselves [although the text would be
manipulated] (H13).
We anticipate that a complete PCA report include all information necessary for a user to
understand the phenomenon being depicted, including all necessary descriptions and
explanations. Nevertheless, sometimes PCA reports delivered to the Group IWG lack
relevant information, i.e. units appear to filter negative information. Forgetting to tell all
relevant data in a PCA report was considered the number one way to distort PCA reports as
H7 explains:
The easiest way to manipulate or to lie is of course not to tell everything.
H16 continued:
I think that if you let the project manager to conduct PCA you will get the positive
side of the story and an effort will be made to show the negative aspects in a positive light
or to forget them.
One way to avoid embarrassment seems to be the blaming of other parties as explained by
H10:
One approach appears to be to tell the facts, but blame for example external parties, for
example suppliers. (H10)
H17 added about the completeness of the PCA reports delivered from the mill to BA:
Basically all kinds of things are missing every now and then. Because some mills do
not often have bigger investments, they are not use to do it [PCA report]. We have a
guideline how to conduct a PCA and accordingly, what we request should also be included.
Basically there could be anything missing, most recently the lessons learned part has been
missing, but it can be that they do not even compare the figures that they have achieved to
the promised figures in the investment card [investment proposal]. They may just show
what is the actual performance or something like that.
It appears that most forgetting occurs in reporting production key figures.
I think that our calculations endure daylight, they are transparent. But in this
reporting… one issue that they always try to smooth away is the lag in production forecast.
If they fall behind in sales, it is reported. It is an external factor. But if they fall behind in
production volumes, there is no project manager or production director who will
voluntarily bring it out. (H10)
In addition to forgetting, explaining away was regarded as one type of behavior.
Especially when projects have not gone as expected, we sometimes get funny presentations,
they are really funny. I would say sometimes I am upset; it is not funny anymore, it is
almost insulting what you see then. Then somebody tries to manoeuvre and find hundred
thousand explanations why it is so bad as it is. This has happened a couple of times (H11).
22
Furthermore, providing information overflow in order to blur the ex ante and ex post
comparisons of key figures has appeared as H1 stated:
In some projects you can see make-up. They even try to some extent cloud the report by
providing inessential information or by calculating the key figures with multiple different
ways. (H1)
Taken together, the major deficiencies in PCA reports seem to be related to completeness.
Filtering exist to some extent in terms of forgetting to tell all relevant data and omitted
calculations. Additionally, PCA reports may sometimes include some elements of focusing
(positive outcomes are emphasised and negative de-emphasised) and biasing (the most
favorable messages are reported). As presented in the Figure 1, it is suggested here that
there is a low potential to manipulate actual figures (i.e. they are perceived reliable),
whereas the potential is much higher related to future-oriented textual parts. The
combinations future figures and actual text can be considered to have moderate potential for
manipulation. In the following we will elaborate further aspects why managers in Eufoco
commonly consider their PCA reports to be reliable enough in spite of the deficiencies in
terms of filtering, focusing, and biasing.
FIGURES
TEXT
ACTUAL
Low
Moderate
FUTURE
Moderate
High
Figure 1. The magnitude of data manipulation potential in PCA report
4.5
Other aspects affecting the reliability of self-audited PCA reports
In this section we will further continue mapping and elaborating more aspects that are
related to the perceived reliability of self-audited PCA reports.
Asymmetric information
The existence of asymmetric information is a prerequisite for information manipulation.
Nevertheless, in Eufoco, the interviewees commonly commented that there is no big
information asymmetry between PCA auditors and the members of Group IWG. The Group
IWG consists of knowledgeable persons who have a lot of experience in various investment
projects as commented by H11:
The guys who sit there [Group IWG] know what it is all about. This is perhaps not that
clear for everybody who writes a report. Some guys make fools of themselves with the
report they have written.
However, all the managers did not totally agree as explained by H4 and H13:
Yes, naturally they [IWG members] know less about the details, but I do not think it
would harm a lot.
23
In many cases one has to probe very profoundly the reasons [behind the deviations] in
order to make the most of a [PCA] review. The knowledge advantage is present in all
controlling. You can pose certain basic questions and try to see inside the analysis, but of
course the person who is primarily acquainted with the case has a knowledge advantage.
(H13).
One concrete reason diminishing the information asymmetry is the usage of steering groups
for all the major projects. H12 explains the role of steering group in controlling the
investment projects:
We have in all major investment projects a steering group. It knows what has happened.
Hence, if you want to forget something, you have to withhold information already
from steering group. Ok, you do not have to tell everything in steering group meetings.
But you can hide only minor issues. It is not information that would affect
calculations or turn an unsuccessful project to a successful one. With regard to minor
investment projects, there is probably more room for hiding information because those
projects are reviewed only within a mill. But of course their effect for the corporation is
remarkably smaller (H12).
Steering groups follow continuously the project. How it proceeds and whether the plans
are followed or not. And all the changes in scope have to be approved by the steering
group. The project is followed in real time and the PCA report is in fact the final outcome
in this process. (H2)
BA and Group IWG members participate typically the steering groups of major
investments. Consequently, they get continuously feedback about the progress of an
investment. However, less attention is paid on minor investments and thus there can be
more room for manipulation.
The role of business area and group functions in enhancing the quality of PCA reports
It appeared that both the business area and group functions (group investment function and
IWG) have an important role in enhancing the PCA. The mills are not delivering the PCA
reports directly to the group. The BAs want to ensure the quality of the PCA report by
reviewing them within BA. In practice, BA’s investment working group, management
group or at least the persons responsible for investment activities within BA review the
draft PCA reports. It is common that the draft reports are also presented to the BA’s own
IWG as described by the H12:
Mills present their draft PCA reports at BA IWG meeting before they will be delivered to
the group. They are presented by the mill manager. He gets comments that this and that
is still missing. Then the organization will finalise the report.
H16 added in a similar vein:
It is in our basic processes that we never deliver a PCA report directly from the mill to
the group. That cannot happen. In a way, what is told about the investments has been
discussed and treated by the BA.
Additionally, in one BA a person within BA IWG checked all the PCA reports before they
were delivered to the group as H8 explained:
All these [draft PCA] reports go through him. His duty is to check that calculations
and everything has been done according to the instructions. He is a kind of filter who
comments the reports and asks mills to supplement if something is missing. If there are
more challenging issues, we discuss them together [e.g. among other BA IWG members].
Consequently, the BAs seem to have a major role in ensuring that the PCA reports have
been compiled according to the instructions and, specifically, that data or comments are not
24
deficient. BAs appear to be skeptical about the intrinsic objectivity and competence of mills
to conduct PCAs without BA’s guidance:
With regard to underperforming projects, we have some examples that the neutrality of the
mill has come to an end. Hence, the BA has to bring it [to the PCA report]. (H8)
Additionally, if a mill leaves something out [of the PCA report], we have to guide
them and say that, hey, this is essential, we have to tell this to other guys, too.
(H12).
It is common from a particular mill’s point of view, that there are not many major
investments within 10-15 years. In practice, this means that people are incapable
and novice when they should conduct a PCA. Accordingly, if you let the [PCA] reports to
be delivered without the checking, the quality of the reports is not adequate and the
conclusions drawn can be pretty childish. (H16)
The quality of the PCA reports would be much lower if the reports were not discussed
but delivered directly from the mill to the group. Some of the issues will be noticed only
when they are discussed in a group. (H17)
The PCA reports are delivered from BAs to Group investment function about 2 weeks
before Group IWG meetings. The staff of Group investment function makes a brief check
ensuring that all the required material has been enclosed and delivers further the PCA
reports to the members of Group IWG about one week before the meeting. For one’s part,
this procedure diminishes asymmetry of information and enables IWG members to analyse
the reports in advance and generate potential questions as H2 stated:
Everybody has an opportunity to read through the [PCA] material. This enhances
the level of discussions in connection with the presentation because they have about
one week to ponder what to ask there.
The PCA reports are presented at the IWG meeting by the mill manager and/or his staff
member (typically the project manager). A common duration of a PCA presentation is 45
minutes. At the IWG meeting, in addition to performance measurement, interactive
discussion and reflection regarding the PCA reports takes place. H1 describes an IWG
meeting about PCA:
There is a lot of discussion about the deviations [between the plan and the outcome]. For
example about the actual investment outlay or about the development of market forecast. It
is not a rubber stamp. Often more explanations are required. If for example a key figure is
missing, it will be required, if not required already earlier.
To sum, it seems that high business area and group involvement in constructing and
controlling PCA reports may play a major role in enhancing their quality.
Other aspects
The interviewees pinpointed also other aspects affecting the reliability of PCA reports:
level of ex ante documentation, managers’ controllability to reasons affecting performance
of an investment project, and alternate capital investment controls.
Inadequate documentation of the investment appraisal material jeopardizes appropriate
comparisons and analysis of the ex-post outcomes with its ex-ante objectives as explained
by H11:
Of course the problem is that PCA will in practice be made 4-5 years after the approval
and a lot of changes have taken place. You seldom meet people who really know what the
25
thinking was at that time. So, it is question about the documentation and who really knows
what it is all about. (H11).
H16 emphasized the importance of ex-ante documentation and continuity as a prerequisite
for proper PCA. Specifically, the steering group of an investment project may play a major
role in ensuring the establishment of audit trail:
It has many times been challenging that the original planning material has not been
standardized. Then we have a difficult starting point for PCA, and the first task will
be to figure out the starting point. It is often so that the project staff and the mill staff have
changed, and there are deficiencies in documentation. This is the problem number one.
Recently, we have paid more attention to the role of steering group and continuity. We need
an organization [steering group] which follows all the time the progress of an investment
project and document it. You start to build the audit trail by the disciplined activities of the
steering group and this enables the proper PCA. For example, in our FDI Case the work of
steering group did not function.
Additionally, if the investment appraisal material is inadequate, managers have more room
to interpret and present the original objectives in the favor of their own, i.e. they have more
room for manipulation.
It seems that the lack of managers’ controllability to reasons causing troubles to the
performance of an investment project diminishes dysfunctional behavior:
The common case is that the market has disappeared and the selling price of a product has
decreased by X %. Of course, nobody will take that blame personally. It is easy to tell [in
the PCA report]. The project manager has not had any influence on it. (H2)
The lack of controllability aspect can also be related to suppliers, subcontractors and
consultants.
In addition to PCA, Eufoco uses many simultaneous formal and informal means of
evaluating the success of its investments. Formal means include following up capacity
utilization, production key figures, sales, and profit centers, whereas informal means
include presentations and conversations in different forums, for example. The managers
emphasize that it is difficult to hide major issues and present an underperforming project as
a success:
So far I have never seen that somebody would have succeeded in making a nice report out
of a bad project. You see it and you feel it. (H11)
You do not have to tell everything. There can be issues which are left out. However, I would
say that the major issues are there… They are already in the figures. You cannot hide if the
payback will be 10 years and you had promised 3. (H12)
Additionally, transparency of the achievement of the main objectives seems to improve
perceived reliability of PCA reports as H3 commented:
If the targets are clearly measurable, you cannot change the outcome without impudent
manipulation.
Consequently, these alternative control mechanisms appear to restrict the room for
manipulating the PCA reports.
26
5. Discussion
The empirical findings presented above provide an illustration of potential aspects that may
affect the quality of PCA reports in context of a self-assessment based review. We begin
this discussion part by synthesizing the production of PCA report in Eufoco and reflecting
it briefly with the aid of IASB framework and Birnberg’s terminology about game playing.
Next, we will map and categorise the aspects that potentially diminish (increase)
manipulation of PCA reports. Then, we will further elaborate how measurability/variability
aspects, and specifically the existence of alternate control mechanisms, may constrain the
potential for data manipulation. We will conclude the section by discussing how the
collectivity related aspects may enhance the perceived objectivity of PCA report.
In Eufoco, the investing unit, in practice the investing mill, conducts the PCA itself.
Typically, project manager, mill controller, and mill manager are involved in making the
PCA report. Consequently, PCA can be considered a self-assessment of the completed
investment because the same people are involved in planning, implementation, and control
phases. Nevertheless, business area’s investment staff and/or management group reviews at
least to some extent draft PCA reports before they are delivered to the group. It seems that
the forums, formality, and depth in reviewing vary quite much between different business
areas. PCA reports are presented at the group investment working group by the mill
manager and/or his staff member (typically the project manager). Before the Investment
working group meeting the reports are briefly checked by the Group investment function
staff. At IWG meeting, in addition to performance measurement, interactive discussion and
reflection regarding the PCA reports takes place. Hence, there are four parties involved in
PCA: personnel at the mill, BA staff, Group investment staff, and Investment working
group.
Eufoco’s managers are relatively satisfied with the reliability of their PCA report,
and do not perceive self-auditing to a greater extent jeopardize the reliability of their PCA
reporting. In fact, lack of competence to conduct PCA was regarded as a bigger threat for
the quality of PCA reports than objectivity related issues. Nevertheless, some form of
manipulation appears to exist. With regard to the figures, the major challenges are related to
the future estimates, whereas actual figures are commonly considered reliable.
Additionally, a special phenomenon in Eufoco is the omitting of profitability calculations.
Similarly in textual part, forgetting to tell all relevant issues in PCA report seems to be the
major concern. Manipulation is more associated with underperforming projects.
Consequently, by using the characteristics of reliability provided by IASB and Birnberg’s
(1983) terminology about gameplaying, we can consider that the major deficiencies in
Eufoco’s PCA reports are related to completeness. Hence, filtering exist in terms of
forgetting to tell all relevant data and omitted calculations. To some extent, PCA reports are
not perceived to be totally neutrally depicted. They may occassionally include some
elements of focusing (positive outcomes are emphasised and negative de-emphasised) and
biasing (the most favourable messages are reported). However, the PCA reports are
considered to be free from major errors.
The findings are congruent with Lumijärvi’s (1990) and Cheng et al.’s (2009)
suggestions that self-assessment based PCA involves risks for reliability in terms of
information manipulation. Specifically, it appears that PCA auditors are less willing to
share unfavorable project information if the project is underperforming or information
reveals otherwise negative issues from the PCA auditor’s point of view. Accordingly, as
also pointed out by Lumijärvi (1990) and Cheng et al. (2009), the major game playing issue
in PCA appeared to be withholding private and negative PCA information, i.e. all relevant
information is not disclosed. The higher personal responsibility instead of low/collective
responsibility seems to reduce PCA auditors’ willingness to share this information (Cheng,
27
2009). This is the case specifically when PCA is conducted for accountability purposes.
Nevertheless, in Eufoco PCA is not primarily conducted for accountability purposes, but
for organizational learning purposes. In spite of the above illustrated deficiencies in PCA
reporting, the managers in Eufoco commonly consider their PCA reports to be reliable
enough. In the following, we will summarize and synthesize aspects that may affect the
perceived reliability of PCA reports. By doing this, we show that the suggestion by
Lumijärvi (1990) that “to a great extent an ex post report can be manipulated to show
anything that is desired” can be a too hasty conclusion.
According to our empirical findings, there seems to be various aspects that may
diminish (increase) room for manipulation of PCA reports. In Table 1 we have mapped and
categorized these aspects.
Table 1. Aspects diminishing and increasing potential for manipulation of self-audited
PCA reports
ASPECTS DIMINISHING MANIPULATON
Purpose of PCA
ASPECTS INCREASING MANIPULATION
Enhancement of organizational learning
Accountability
Evaluation/Rewarding
PCA not tied to evaluation/rewarding
PCA tied to evaluation/rewarding
PCA project/process-specific characteristics
Low level of asymmetric information
Well-performing project
Major size of an investment (a lot of attention paid)
Adequate documentation of ex-ante appraisal material
Investment appraisal proposers are aware of coming
PCA
Strictly defined template for PCA report
PCA conducted multiple times per project
High level of asymmetric information
Underperforming project
Minor size of an investment (only little attention paid)
Inadequate documentation of ex-ante appraisal material
Investment appraisal proposers are not aware of coming
PCA
No/loose template for PCA report
PCA conducted only once per project
Measurability/verifiability of PCA data
High transparency of achieved objectives
High focus on actual figures in ex-post calculations
Low focus on textual part of a PCA report
Close relation between strategic and PCA figures
Appropriate other means to control investment
projects
Ambiguous transparency of achieved objectives
High focus on updated ex-post calculations
High focus on textual part of a PCA report
Ambiguous relation between strategic and PCA figures
Inappropriate other means to control investment projects
Collectivity in constructing PCA reports
High business area involvement in constructing PCA
reports
High group level involvement in constructing PCA
reports
Well-functioning interactive forum for PCA reviews
High role of external experts in estimating strategic
prices and volumes
High level of segregation of duties in providing data
High involvement of controllers in providing data
No business area involvement in constructing PCA reports
No group level involvement in constructing PCA reports
Lack of interactive forum for PCA reviews
Low role of external experts in estimating strategic prices
and volumes
Low level of segregation of duties in providing data
Low involvement of controllers in providing data
Responsibility/controllability
Low personal responsibility for the negative outcome
Low controllability to factors leading to
underperformance
High personal responsibility for the negative outcome
High controllability to factors leading to underperformance
28
In line with the earlier studies (Smith, 1994, Huikku, 2008), accountability aspects
do not play a major role in Eufoco as a purpose of PCA and it has not explicitly linked its
PCA to personnel evaluation/rewarding systems. Diminishing temptation of self-auditors to
manipulate PCA reports was emphasized as a reason for this. Consequently, it appears that
self-auditors are less tempted to manipulate PCA reports if the purpose of PCA is the
enhancement of organizational learning and PCA is not tied to personnel evaluation and
incentives.
As illustrated by the empirical data, the PCA project/process specific characteristics
may influence on the potential to manipulate self-audited PCA reports. With regard to
investment project specific characteristics, it is plausible to assume that the potential is
lower if project information is symmetric, project is well-performing, project is major (i.e. a
lot of attention is paid on the PCA results), and documentation of ex-ante appraisal material
is adequate. In a similar vein regarding PCA process specific characteristics, as in Eufoco,
it seems that less manipulation will take place if the proposers of investment projects are
aware of the coming PCAs (Scapens and Sale, 1981: Neale, 1994). Also, strictly defined
template for PCA report may diminish “forgetting to tell” in reporting. Additionally,
multiple rounds of PCAs are likely to diminish tendency for manipulation.
In congruence with Birnberg et al.’s (1983) suggestion, it appears that high
measurability/verifiability of data combined with high potential to analyze it can play a
major role in ensuring the reliability of PCA reports. As in Eufoco, high focus on
measurable/verifiable actual figures and accordingly low focus on forecasted figures
including updated profitability calculations, and low focus on textual part will limit
tendency to manipulate the reports. Furthermore, close relation between strategic vs. PCA
figures and high transparency of achieved objectives seem to diminish manipulation
potential.
In line with Huikku (2007 and 2008), the empirical evidence shows that PCA does
not have exclusivity in evaluating the success of an investment, but companies have
typically many simultaneous alternate means to do it. Formal control mechanisms include
following up of capacity utilization, production key figures and sales, whereas informal
means include presentations and conversations in different forums, for example. As
suggested by Scapens et al. (1982), for major investments, profit center follow up can play
a major role also as a formal alternate control mechanism for capital investments.
Companies use the alternate control mechanisms in any case; irrespective, whether they are
PCA non-adopters or adopters (Huikku, 2007), or whether the PCA is based on selfassessment or not. Consequently, the alternate means constrain plausibly the potential for
data manipulation in PCA reports, and accordingly diminishes the criticality of PCA
auditor choice from reliability point of view.
Collectivity in constructing and controlling PCA reports very much characterizes
the PCA process in Eufoco. In investing unit many persons are involved in providing
information and drafting reports. They use for forecast periods the same price and volume
estimates than in strategic planning context. These are to some extent provided to them by
group or Business area functions. In fact, the strategic price and volume estimates originate
from industry-wide estimates by external consultant companies. The draft PCA report is
questioned and challenged first by Business area staff, then by group investment staff and
finally by investment working group. Interactive discussions take place at all these levels.
These procedures for constructing/controlling the PCA reports with experts within a
company, and steering groups for projects lower the level of asymmetric information, and
constrain the potential for data manipulation.
Even though the cash flow estimates can be to some extent linked to the existing
budgetary and strategic planning figures, they commonly include personal subjective
judgment of PCA auditors. Nevertheless, it appeared that no single actor can alone decide
29
the final outcome of a PCA report. There are many parties involved in producing the
reports. The draft report circulates in an organization and modifications and clarifications
take place. The perceived reliability of reports increases continuously when more actors can
give their comments. This is closely congruent with the suggestion of Porter (1996) that
the trust in numbers is more related to their impersonality than their ability to exactly copy
the world. Hence, as in the case company, circulating and presenting PCA reports widely in
the organization adds and shares the accountability and responsibility for the reports (cf.
Mouritsen, 2011). PCA reports are distributed and no single agency has all responsibility.
The reports become more impersonal and impartial, and consequently they are perceived to
be more objective (cf. Huikku et al., 2012 in goodwill valuation context). The
heterogeneous networks in Eufoco do not consist only of human actors (Latour, 2005).
PCA report template, existing standard capital budgeting models (for calculating NPV, IRR
and Payback period), budgets, strategies, ex ante documentation play central role in this
techno-social network (Callon, 1998). Furthermore, it appears that low personal
responsibility for and controllability of the factors leading to underperformance decrease
tendency to information manipulation.
To sum up, it seems plausible to think that the above mapped and discussed aspects
– alone or in a combination – can diminish need and potential for manipulating, and hence
enhance the quality of PCA reports.
6. Conclusions
This study investigated the reliability of self-assessment based post-completion auditing
reports. More specifically, it focused on exploring, mapping and discussing the
circumstances influencing potential for PCA report manipulation. In line with Birnberg et
al. (1983), the concept of data manipulation was considered widely: not only covering
falsification of data or documents (illegal acts), for example, but also smoothing, biasing,
gaming, filtering, and focusing. In addition to Birnberg et al.’s data manipulation methods,
this study used concepts provided by financial reporting literature such as completeness,
neutrality, and freedom from errors in assessing the reliability of PCA reports. The paper
draws on the combination of literatures. The notions of agency theory literature about data
manipulation acted as a trigger and a lens for discovering and discussing the circumstances
affecting potentiality for gameplaying behavior in PCA. Contributions in the actor-network
theory guided the investigation to consider comprehensively potential human and nonhuman actors influencing the PCA report reliability. Specifically, the notions of collectivity
and impartiality help in explaining the role of various actors in ensuring the report
reliability. Furthermore, management control package literature combined with the concept
of equifinality provided assistance in explaining the influence of alternate control
mechanisms to measure/verify data included in PCA reports.
The empirical evidence for this case study was primarily based on 24 semistructured interviews and PCA documentation of 22 major investments in one of the major
European forest industry corporation. The intention of this predominantly explorative study
was to theorize about the data manipulation behavior in self-assessment based PCA
context, and to improve our understanding of this phenomenon. The paper makes a
contribution by providing a discussion of the circumstances influencing the potentiality for
PCA report manipulation. To the best of my knowledge, this is the first empirical study
explicitly addressing the relationship between the PCA conductor and the reliability of PCA
reports. Based on the empirical data, it is argued that in assessing the reliability of selfassessment based PCA various aspects have to be taken into account. These aspects include
purpose of PCA, relation to personnel evaluation/rewarding, measurability/verifiability of
30
PCA data, the level of collectivity in constructing PCA reports, the
responsibility/controllability aspects, and investment project specific characteristics. The
findings lend specifically support to the contention that measurability/verifiability of PCA
data enhances the perceived reliability of PCA reports. Additionally, collectivity in
constructing the PCA reports appears to play a major role in ensuring the quality of PCA
reports. Hence, to consider self-assessment based PCA reports automatically suspicious is a
too hasty conclusion.
The study has also practical implications. As in the case company, it is typical that
PCA is conducted as a self-assessment based review (Farragher et al. 1999; Huikku, 2011).
This challenges the appropriateness of CIMA’s current definition of PCA suggesting that it
has to be “an objective, independent assessment”. Firstly, the definition is not in
congruence with the practice. Secondly, as illustrated in this paper, it appears that the
reliability of a self-assessment based PCA report is not necessarily low, lacking “objectivity
and independence”. There are many aspects and circumstances we have to take into account
and weight before we can assess the reliability of PCA reports. Many aspects limit the room
for potential game playing behaviour in PCA. Aspects related to the competence of PCA
auditors can be in some circumstances considered more important than the pursuit of
objectivity. Additionally, companies may emphasise relevance and decision usefulness of
reports instead of reliability. Taken together, it is suggested that CIMA could consider
modifying its definition of PCA by loosening or re-defining the requirements about ‘an
objective and independent’ assessment.
The inherent empirical limitations of this study provide various fruitful avenues to
extend our understanding about the relationship between the PCA auditor and the quality of
PCA reports. In this study the case company did not emphasise accountability aspects as
their purpose for PCA, nor did they use PCA for evaluation/rewarding purposes. Further
research, most likely case research, could cast more light on the reliability of PCA reports
under these different circumstances. In this study major strategic investments obtaining a
lot of attention were addressed. Accordingly, we could study whether the aspects
influencing the data manipulation are similar in smaller investments. Furthermore, we
focused in this study on investigating a company conducting primarily only one PCA.
Hence, we could investigate to what extent multiple PCAs influence the perceived
reliability aspects of PCA reports.
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Appendix 1
-------------------------------------------------------------------------------------------------------------Interviews
Duration
(min)
-------------------------------------------------------------------------------------------------------------Senior Vice President, Group Investments & Capex (Group) &
95
Manager of Group Investments & Capex (Group)
Senior Vice President, Group Investments & Capex (Group) &
111
Manager of Group Investments & Capex (Group)
Manager of Group Investments & Capex (Group)
150
Senior Vice President, Group Strategy (Group)
117
Operations Manager (Mill, BA 1)
166
Mill Manager, (Mill, BA 1)
115
Superintendent, Paper Machine 2, (Mill, BA1)
30
Director, Group Business Controlling (Group)
86
Senior Vice President, Bus. Dev., Strategy and R&D (BA 1)
101
Senior Vice President, Operations (BA 2)
75
Senior Vice President, Investments and Operations (BA 3)
116
Senior Vice President, Group Investments & Capex (Group)
86
Executive Vice President, Technology & Strategy (Group)
67
Senior Vice President, Operations (BA 1)
100
Manager of Group Investments & Capex (Group)
119
Senior Vice President, Group Internal Audit (Group)
70
Senior Vice President, Central Europe & BA Investments (BA 4)
52
Business Controller (BA 2)
72
Senior Vice President (BA 4)
108
Director, Business Development & Investments (BA 1)
109
Chief Financial Officer (Group)
47
Manager of Controlling, (Mill, BA 1) &
120
Manager of Material Management, (Mill, BA 1)
Mill Manager, (Mill, BA 1)
60
Manager of Purchasing & Investments (Group)
90
All interviews were tape-recorded. All Interviews were face-to-face interviews (except Nr.
20, which was telephone interview).
-22 different persons:
Group level
BA level
Mill level
36
8
8
6
Appendix 2: AN INTERVIEW STRUCTURE
General:
-
Description of the person to be interviewed (education, career, main tasks and current
responsibilities).
How the person has participated in Post-Completion Auditing (PCA)? How often?
In recent years, what have been the biggest investments in the BA 2 business area (over 5 MEUR)?
o Have you conducted PCA for all of these investments?
Does “BA 2” business area have own written investment policy & instructions?
How business areas (business units, factories) compete with each other for the same restricted
investment funds?
BA 2 Post-completion auditing:
-
Which are the conducted PCA’s in the BA 2 during the last years?
How the PCA-reports are reviewed in the business area?
How the PCA-reports have been reviewed in the investment working group of BA?
To whom PCA-reports are distributed?
Post-completion auditing of capital investments: (= control or evaluation of the investment after start-up)
-
-
-
What is the motive for conducting PCA?
o Tool for learning vs. emphasizing accountability?
o Has PCA enhanced the reliability of investment proposals? If yes, how?
o The role of PCA as a tool for evaluating (informally) personnel involved in the investment
project?
What concrete benefits have been achieved by conducting PCA and what kinds of actions PCA
information have triggered in the company?
o How is PCA and information generated by PCA exploited in the company?
What are the main challenges in preparing PCA report?
Is it already known when investment plan is being accepted that investment will be post audited?
What is the motive of factories to conduct PCA?
What are the benefits to factories from conducting PCA?
PCA conductor:
-
-
-
-
Who conducts PCA and prepares the PCA report?
o How do you justify investing unit as a PCA conductor? Why investing unit conducts PCA?
o What kind of effect the PCA motive has on who conducts the PCA?
o Are you satisfied with the choice of present PCA conductor?
How would you see some other party as a PCA conductor?
What positive features you see as an investing unit conducting PCA?
o What negative features?
What positive features you see as an outside person or team conducting PCA??
o What negative features?
Do you feel that outside PCA conductors would be more objective and would question things more
and maybe put on more comments and improvement proposals in PCA phase, when compared with
investing unit?
In your opinion, who would be the most suitable person to conduct PCA? Why?
What kind of role the controller has on the preparation of PCA report?
What kind of role do personnel in other business areas/units/factories play in PCA?
What is the line-up for investment working group in business area and what role does that group play
in PCA?
Have you ever felt that lack of qualified personnel would have been a constraint in conducting PCA?
How do you see the PCA conductor’s superior`s effect on conducting PCA?
o Do you see it problematic in conducting PCA?
o Advantages and disadvantages?
How do you see the information asymmetry between PCA conductors and other people in the
company, when people involved in the investment are conducting the PCA and preparing the PCA
report?
37
Review, distribution and database of PCA-reports:
-
-
-
Does somebody review these draft reports before final reports are being reviewed in the IWG?
o What kind of role does BA play in reviewing these draft PCA reports?
o Do you feel these reviewers have enough knowledge and information on the investment
being post audited, so they are able to review these reports critically?
In what (formal) forums and how draft reports are reviewed before final PCA reports?
Do you receive PCA reports before the actual IWG-meeting?
o Do you review the PCA report before IWG-meeting?
o In what kind of matters do you pay attention to when reviewing the report?
o Have there been any kinds of modifications to PCA reports at this stage?
In what way the PCA reports are reviewed in the IWG-meeting?
To whom are the final PCA reports distributed?
o Is there some database for PCA-reports?
Do you receive PCA-reports from other business areas?
In what way “lessons learned” are distributed in the business area?
In practice, are improvement proposals presented in the PCA report executed in the company?
Content of PCA reports:
-
-
-
-
-
With regard to PCA reports, what is potential information, that can be subject to
o Forgetting to tell
o Biased/mispresenting,
o Window dressing
o Explaining away?
What kind of role do profitability calculations (NPV, IRR, PB) play in PCA report?
o In your opinion, are profitability measures, theirs realization and reasons for deviations
discussed in the PCA report sufficiently?
o Does it become evident from the PCA report how calculations have been made?
What do you think about the reliability (objectivity/accuracy/realism) of PCA reports?
o Do you feel that PCA reports are sometimes manipulated or calculations are maybe too
overoptimistic? Could you give an example?
o Do you feel that PCA conducters have “forgotten” to tell something
o Do you feel that PCA reports have included information that can be subject to:
 Biased/mispresenting,
 Window dressing
 Explaining away?
How is the reliability of PCA reports and calculations ensured?
In your opinion, what is the benefit from information manipulation/biasing included in PCA report?
How could the reliability of PCA reports be improved?
How do you think PCA affects on the evaluation of personnel involved in the capital investment
process?
o Does it have a different effect if there is collective responsibility vs. project has well-defined
leader who has the responsibility?
What is your personal opinion about PCA?
o Do you see it as an important part of investment process?
o Problems related to it?
o Benefits related to it?
38