Transfer Pricing’s Effects on Accountability: A conflict of accountability demands

Abstract

Background and problem: Divisionalized firms often use transfer pricing as a means of controlling and evaluating separate units. Since transfer pricing creates an economic relationship between units and accounting information of the unit’s performance, transfer pricing is argued to have an effect on accountability. Such research is however limited, to which a possible explanation is the institutionalization of transfer pricing as an organizational everyday practice. As technology and availability develop, the expectations on accountability increase which creates a desire to resume research on transfer pricings effect on accountability. Aim of the study: The study investigates what impact transfer pricing has on various accountability demands and how it might affect the conflict between them. Methodology: A qualitative case study was performed at the Atlas Copco group, a company with a complex and divisionalized organizational structure with emphasis on their internal transactions. In-depth interviews were the primary source of data. The data analysis was performed using the analytical model developed and presented in the theoretical framework. Discussion and Conclusion: The current principles of the transfer pricing system cause a conflict in terms of viewing the relationship between internal service providers and their customers different were one unit considers the lateral/social accountability as dominant while the other considers the hierarchical accountability as prominent in the relationship. This causes uncertainties for the parties on how to act towards each other and which accounts should be given and demanded. It also opens up possibilities for sub-optimization in terms of a misdirected focus and not taking responsibility, but also in terms of de-motivating managers. The study also concluded that this conflict lead to a change in the object of accountability.