Securing institutional legitimacy or organizational effectiveness?

Purpose – The purpose of this paper is to consider the impact of a major initiative (the National Competition Policy) and pieces of legislation (the Local Government Act and the Local Government Finance Standards) on the internal practices of a large Australian local authority. Design/methodology/approach – A theoretical framework is developed using new public management (NPM) and neo‐institutional theory literatures to explain the findings. A case study approach was applied to collect the data for the research. Findings – The findings reveal that the National Competition Policy 1993, the Local Government Act 1993 and the Local Government Finance Standards 1994 mainly have brought about significant changes to the organisation's internal management control processes, such as financial reporting, budgeting and performance appraisal. The changes brought in appeared to be coincidentally similar to NPM ideals. Furthermore, senior managers (such as the chief executive and divisional heads) played a major role in implementing new accounting technologies (activity‐based costing and the balanced scorecard type performance measurement system). Research limitations/implications – Future research on public sector financial management from the outset of organisational contexts could considerably further the stock of knowledge in this area, especially given the rapid changes occurring within the public sector throughout the world. Future research may wish to extend this study by assessing how external legitimating functions become internal reality, the perceptions of reality of the organisational members, and how these perceptions change over time. Practical implications – The findings reported provide evidence to further our understanding of how the introduction of private sector styles of organisational practices into large areas of the public sector brought about significant changes in the demand for “new” financial management practices. Originality/value – The findings reported on in this paper will open a new path of research that may increase our understanding about the factors that play a role in the design of management and accounting systems in a public sector context. Further, they will help policy makers and public sector managers in their day‐to‐day decision‐making.