Flashcards
C&A
Cards in this deck (173)
- 1Primary function of management controlto influence employee behaviours in desirable ways
- 2benefit of management controlincreased probability that organization's objectives will be achieved
- 3management controldevices/systems managers use to ensure that behavior/decisions of employees are consistens with organizations objectives/strategies
- 4disadvantages of management controlsuppress initiative, creativity & innovation
- 5strategic control vs management controlSC: is our strategy valid or do we need to change it? (focus on external)
MC: are employees likely to behave accordingly? do they understand what is expected? (focus on internal) - 6why is management control necessary?1. lack of direction
2. motivational problems
3. personal limitations - 7lack of directionemployees perform poorly bc they dont know what orga wants from them. management control involves informing employees then.
- 8motivational problemsemployees have other goals than orga -> motivational problems occur. management control involves providing of incentives then.
- 9personal limitationsemployees lack intelligence, training or experience to perform well. management control involves training then.
- 10good controlmanagement can be reasonably sure that no major unpleasant surpirses will occur
- 11trade-offcosts of implementing management control vs control loss costs (cost benefit analysis for optimal control)
- 12avoidance of control problemsactivity limitation, automation, centralization, risk sharing
- 13results control (RC)- RC influences action bc employees are concerned about consequences then
- employees are empowered to take those actions they believe will best produce desired outsomes
- RC particularly dominant as means of controlling behaviour of professional employees with decision authority
- involves rewarding employees for generating good results.
e.g. pay for performance, job security, promotions...) - 14disadvantage results controlcreates meritocracies - only the BEST is rewarded
- 15management by exception approachintervening and investigating only when performance is lagging (typical for RC)
- 16implementation of results control (4 steps)1. define performance dimensions on which results are desired (what you measure is what you get)
2. define measurements of performance
3. setting performance targets
4. providing rewards/incentives (extrinsic vs intrinsic rewards) - 17conditions determining effectiveness of RC1. knowledge of desired results: what results are required in areas they wish to control
2. ability to influence desirable results
3. ability to measure controllable results effectively - 18result measures should be1. precise
2. accurate
3. congruent
4. objective
5. understandable
6. timely - 19controllability principleemployees are held accountable only for results they were able to influence
- 20action controlensuring that employees perform certain actions known to be beneficial for orga
- 214 types of action control1. behavioral constraints
2. pre-action reviews
3. action accountability
4. redundancy - 22behavioral constraints1. physical constraints: limiting access like locks, PC passwords...
2. administrative constraints: restriction on decision making authority or seperation of duties
3. or combination of both - 23pre-action reviewsaction plans of employees must be approved by reviewers or modified
- 24action accountabilityholding employees accountable for actions they take:
1. define acceptable actions
2. communicate them to employees
3. track/observe actions (mystery shopper e.g.)
4. reward good actions and punish bad ones
5. evaluate - 25redundancyassign more employees/machines to particular task than strictly necessary
- 26control problems addressed by RC1. lack of direction
2. motivational problems
3. personal limitations - 27control problems addressed by behavioral constraints1. motivational problems
- 28control problems addressed by redundancy1. motivational problems
2. personal limitations - 29control problems addressed by pre-action reviews1. lack of direction
2. motivational problems
3. personal limitations - 30control problems addressed by action accountability1. lack of direction
2. motivational problems
3. personal limitations - 31preventive controlsmost powerful form of control bc none of the costs of undesirable behavior will be incurred. they are designed to prevent problems before orga suffers any adverse effects on performance.
e.g. planning processes, segregation of duties, approval loops, passwords...) - 32detective controlsreconciliations, analytical reviews etc
- 33effectiveness of action controls depend on1. knowledge of desired results (analyze past actions and identify undesired ones)
2. ability to ensure that undesired actions are not taken - 34cultural controlindirect control.
shape organizational behavioral norms and encourage employees to monitor and influence each other's behavior.
works like group pressure.
cultures are built on shared believes, norms, values... - 35personnel controlmotivate ppl to control their own behavior
- 36personnel controls serve 3 basic purposes:1. clarify expectations from orga
2. ensure that employees are able to do good job
3. increase likelihood that employees engage in self-monitoring - 37how to implement personnel controls1. selection & placement
2. job design & provision of necessary resources
3. training - 38forms of cultural controls1. code of conduct
2. group rewards
3. job rotation
4. physical & social arrangements
5. tone at top
6. open book management (sharing of information) - 39control problems addressed by selection & placement1. lack of direction
2. motivational problems
3. personal limitations - 40control problems addressed by training1. lack of direction
2. personal limitations - 41control problems addressed by job design & provision of necessary resources1. lack of direction
2. motivational problems
3. personal limitations - 42control problems addressed by job rotation1. lack of direction
2. motivational porblems
3. personal limitations - 43control problems addressed by group rewards1. lack of direction
2. motivational problems
3. personal limitations - 44control problems addressed by tone at the top1. lack of direction
- 45control problems addressed by physical & social arrangements1. personal limitations
- 46control problems addressed by codes of conduct1. lack of direction
- 47tight control- almost always involve different kinds of control
- provide higher degree of certainty that employees behave like orga wants - 48desired results must be1. congruent with orga objectives
2. specific (descirbed in specific terms)
3. timely (described in short incerements of time)
4. communicated & internalized
5. complete - 49performance measures must be1. precise
2. objective
3. timely
4. understandable - 50reinforcements/incentives provided must be1. directly linked to performance
2. definetly linked to performance
3. in best case: incentives are provided individually, bc different employees react in different ways to monetary/nonmonetary incentives - 51what makes controls tight?- frequent
- detailed
- who performes controls? - 52investing in MCS causes- direct out of pocket costs
- indirect, less obvious costs - 53direct out of pocket costsdirect monetary costs
- 54indirect costs of implementing MCScan be greater than direct costs, caused by behavioral displacement
- 55behavioral displacementoccurs when MCS encourages behaviors that are not consistent with orga objectives
- 56forms of behavioral displacement1. gamesmanship
2. operating delays
3. negative attitudes - 57behavioral displacement @ RCwhen orga defines set of result measures that are inconsistent with orga objectives
- 58behavioral displacement @ ACmeans-ends inversion: employees just pay attention to what they do and lose sight of what they should accomplish
action incongruence: specified actions doesnt fit to true objectives of orga
rigid, non-adaptive behavior: creating consistent behavior, but hindrance of employee s abilities to see change and react to it - 59reasons for incongruence of result measures and true orga objectives1. poor understanding of desired results
2. over quantification (concentration on areas that are quantifiable, ignore quality factors) - 60when action controls?action controls and bureaucracy can be good in stable environments with centralized knowledge about what actions are desired
- 61behavioral displacement @ personnel/cultural control1. wrong recruiting
2. wrong training
3. culture gives wrong norms
4. implementation in the wrong environment - 62gamesmanshipactions that employees take to improve their performance indicators without producing positive effect for orga
- 632 forms of gamesmanship1. creation of slack resources
2. data manipulation - 64creation of slack resources- consumption or orga resources in excess what is actually needed
- budget slack/resource slack/slack in target setting - 65advantages/disadvantages slack+ can reduce manager tension
+ can increase organizational resilience to change
+ can make availabe some resources that can be used for innovation
- obscures true underlying performance
- distorts the decisions based on the obscured information - 66data manipulationemployee makes himself looking good by changing performance indicators.
1. falsification
2. data management - 67falsificationreport errorneous data (fraud, illegal)
- 68data managementany action designed to change the reported results like sales, earnings etc... (legal, but lousy)
- accounting methods: involves an intervention in measurement process like flexibility in use of accounting standards or methods to manage earnings
- operating methods: altering operating decisions (actively push sales or delay expenditures...) - 69operating delaysdelays like limiting access to stockroom by requiring a superior signature or sth like that
possible solution: decentralization (increases autonomy)
decision delays can be very costly, especially in highly competitive markets, it kills entrepreneurial spirit - 70negative attitudes produced by action controlsmost ppl react negatively to action controls, annoying to feel being observed 24/7,
- 71negative attitudes produced by results control1. lack of employee commitment to peformance targets (if targets are unrealistic)
2. problems in measurement system (if measurement system is perceived as being unfair)
3. low rewards (not valued high)
4. no participation in target setting - 72result controls and possible harmful side effects1. behavioral displacement
2. gamesmanship
3. negative attitudes - 73behavioral constraints and harmful side effects1. operating delays
2. negative attitudes - 74pre-action reviews and harmful side effects1. operating delays
2. negative attitudes - 75action accountability and harmful side effects1. behavioral displacement
2. gamesmanship
3. negative attitudes - 76redundancy and harmful side effects1. negative attitude
- 77selection & placement and harmful side effects1. behavioral displacement
- 78training and harmful side effects1. behavioral displacement
- 79creation of strong organizational culture and harmful side effects1. behavioral dusplacement
- 80group based rewards and harmful side effectsbehavioral displacement
- 81how to design an MCS?1. answer two basis questions:
a) what is desired
b) what is likely to happen?
2. answer next two questions:
a) what controls should be used and
b) how tight - 82understanding desired actions & results1. key actions: what actions need to be performed to achieve highest probability of success
2. key results: key areas wherein things must go right in order for business to succeed - 83choice of controlsset of MC selected from feasible alternatives should provide greatest net benefits (benefits-costs)
first look at cultural/personnel control (its cheaper), then check costs of AC or RC - 84avantages AC- most direct form of control
- leads to documentation (organizational memory)
- actions become predictable, leads to coordination - 85disadvantages AC- feasibility limitation (excellent knowledge about required actions to take is needed)
- behavioral displacement (ppl tend to focus on actions they know best and are easier to control instead of most important ones)
- can lead to rigid behavior, non adaption
- discourage creativity and innovation
- sloppiness (employees could become too familiar with certain tasks -> careless and rushed work)
- cause negative attitudes (no self-actualization)
- may be costly - 86advantages RC- feasibilty (perfect knowledge about actions not neccessary)
- employees are granted autonomy
- provide on-the-job training
- less costly than AC - 87disadvantages RC- provide less than perfect indications whether good actions have been taken bc measures fail to meet all qualities of good measures: congruence, precision, timeliness, objectivity, understandability
- risk is shifted from owners to employees (when results affected by sth else than employee skills)
- competing control functions for performance targets: motivation to achieve vs coordination
- not all employees want autonomy - 88choice of control tightnessdepends on 3 factors:
a) what are potential benefits of tight control
b) what are costs of implementing tight controls
c) what are potential harmful side effect - 89tight controls most beneficialin areas most critical to orga success
tight or not depends on cost-benefit analysis - 90usually when firm growsalso number of AC and RC will grow
everything becomes more fomalized - 91optimal form of controlthere is no optimal form of control.
behavior of employees is unpredictable.
best to use is mix of tigth & lose controls to create autonomy and influence on same time.
tight control for important areas, for other areas lose control
if possible let culture do the work, creates value sharing and avoid harmful side effects - 92opportunity cost of capital- a dollar today is more worth than a dollar tmrrw
- economic and accounting profits differ (accounting profts dont include opportunity costs of money tied up in project)
- all cash flows have to be converted to equivalent flows (occured at same time) - 93future value (FV)X * (1 + interest rate)
100€ * 1,05 = 105€ (end-of-year euros)
over several (3) years:
100€ * 1,05³ - 94present value (PV)discount
amount of money / (1+interest rate)
105/1.05 = 100 - 95perpetuityinfinite streams of equal payment
PV = FV/r - 96annuitystream of equal cash flows for defined period of time
PV = FV / r * (1-(1/(1+r)^n)) - 97monthly interest rateannual interest rate = 6%
monthly = (1+r)^1/12-1
1.06^1/12 - 1
= 0,0048 - 98capital budgetingprocess of deciding how much to invest in projects that yield cash flows over several years
all costs of projetcs are opportunity costs
once project is built the opp costs become fixed costs - 99discount cash flows, not accounting earningsfocus on cash flows bc accounting earnings contain accounting accruals
sales are recorded when legal liability arises, not when cash is collected
earnings do not contain money spent until economic benefits of investment is received
therefor dollars earned do not reflect dollars received (accounting earnings) - 100working capitalcurrent assets (cash, inventory, accounts receivable) - current liabilities (acc payable, notes payable, long term debt)
- 101sunk costsincurred prior to investment decison and are forgone, not include in analysis
BUT include opportunity costs - 102financing costscosts of fincancing project are implicitly included when future cash flows are discounted
therefor do not include interest charges on debt! - 103paybacknumber of years or months it takes to return initial investment
initial investment/cash inflow every year
e.g.
700000/200000 = 3.5 years - 104decison making (7 steps)1. clarify problems
2. define criterion upon decision should be based (e.g. market share, profit)
3. identify alternatives
4. develope decision model (simplified representation of problem)
5. collect data
6. select alternative
7. evaluate - 105usefulness of data3 characteristics define usefulness of data
1. relevance
2. accuracy
3. timeliness - 106primary role of managerial accountanta) decide what information is releavnt in order to solve problem
b) provide accurate and timely data - 107relevant informationtwo criteria:
1) cost or benefit information must involve future event
2) costs differ among competing alternatives - 108joint prodction processresults in 2 or more products (joint products)
example of cocoa beans, after joint production process two products: cocoa butter and cocoa powder - 109split-off-pointpoint in production process where joint products are identifiable as two seperate products
- 110theory of constraintsidentify bottlenecks and find ways to relax them
- 111managing constraints- outsourcing bottleneck operation
- employ parallel processing, products can undergo productionprocess simultanously then
- working overtime at bottleneck operation
- retrain employees and shift them to bottleneck
- eliminate any non-value added activities at bottleneck - 112sensitivity analysistechnique to find out what would happen if data varies
beneficial for dealing with uncertainty - 113purposes of incentives1. motivational (effort-inducing)
2. informational (effort-directing)
3. attraction & retention (attract & retain empoyees)
4. non-control purposes (when performance of orga is poor then cash outlays for compensation packages is lower as well) - 114monetary incentives1. salary increase
2. short-term incentives (bonuses, piece-rate payments, comissions)
3. long-term incentives (based on performance measures over periods greater than 1 year) - 115stock option plansgive employees the right to purchase a set number of shares of company stock at a set price during a specified period of time
- 116advantages stock option plans- motivates employees to increase stock price
- employees only benefit when stock price rises
- some of employees wealth is tied to company
- lead to longterm focus
- incentive compensation without cash outlay - 117disadvantages stock option plans- no penalty for losses -> managers will act more risky
- generates windfall compensation when stock prices improve marketwide instead bc of firm performance
- morale & retention problems when stock price decreases dramatically - 118restricted stock plansemployees are given stocks for free but they just may sell it after they have been in company for specific period of time
- 119evaluate incentive systemsrewards should be
1. valued by employees
2. large enough to have impact
3. understandable
4. timely
5. generating durable feelings
6. reversible, in case evaluators make mistakes
7. cost efficient - 120group rewardslead to cultural control
can also lead to free riders - 121investment myopiaholding managers accountable for short term profits may induce them to reduce or postpone investments that promise payoffs in future measurement periods
- 122operating myopiamanagers can destroy goodwill by forcing employees to work overtime at end of measurement period in order to book earnings faster
- 123channel stuffingboosting near term sales by talking buyers in purchasing greater amounts while grant discounts or lower prices to boost sales
- 124divisonalizationhuge companies with different division and different responsibilty centers
- 125ROIreturn on investment
accounting profits earned by division divided by investments tied in division - 126disadvantages ROI- numerator is accounting profits -> myopia
- tendency for measures to induce suboptimization
- difficulties in measuring fixed assets portion - 127suboptimizationmanagers make investments that make division look good even though these investments are not in best interest of orga
example:
cost of capital 15%, investment opportunity offers 20% return, its good for comoany but manager with performance target 30% wouldnt do it - 128remedies to myopia problem1. reduce pressure for short term performance
- increase long term indicator weighting
- make short term goals easier to achieve, so managers can focus on long term performance
2. pre-action reviews to control devlopmental long term investments
3. lengthen horizon on which performance is measured
4. change what is measured (shareholder value creation instead of accounting income)
5. combine different measurement systems (BSC and market and accounting measurement systems) - 129hedgehog conceptorgas are more likely to succeed when they focus on single, simple, big purpose above all else
- 130financial intermediariesused to provide independent certification
venture capital firms, banks, collective investment funds, pension funds...
analyze different investment oportunities to make investment decision - 131information intermediariesused to provide independent certification
auditors, financial analysts, credit rating agencies, financial press
provide information for investors on quality and various business investment opportunities - 132role of financial reporting in capital marketscritical challenge: allocation of savings to investment opportunities
- 133matching savings to business is complicated bc1. entrepreneurs have better information than savers on the value of the investment opportunity
2. investors know that entrepreneurs have incentive to inflate value of their businesses
3. savers lack financial sophistication - 134goal of financial analysisassess performance of orga in context of stated goals and strategy
- 135ratio analysishow line items in financial statements relate to each other
- 136cash flow analysisexamine firms liquidity and how it manages operating, investment and financing cash flows
- 137time-series compariosncompare ratios for orga over several years
- 138cross-sectional comparisoncompare ratios of different orgas
- 139ROEnet profit/shareholder's equity
provides indication of how well managers employ the funds invested by shareholders to generate returns - 140ROAnet profit/assets
how much profit an orga is able to generate for every dollar of assets invested - 141output of planning and budgeting systemwritten plan that clarifies where orga wishes to go (objectives) and how it intends to get there (strategies) and what results should be expected (performance targtes)
- 1424 main purposes of planning and budgeting1. planning
- staffing and operational tactics can be adjusted
- action control (preaction reviews)
- long term thinking
2. coordination
- sharing of infos across orga
- top down communication of objectives and bottom up communication of opportunities
3. top management oversight
- pre-action reviews
- management by exception
4. motivation
- plans and budgets affect manager motivation - 143strategic planningbroad process of thinking about orga's mission, objective and means
involves:
- overachieving vison or mission and objectives for the orga as a whole
- understanding of current position of orga (SWOT)
- agreement about types of businesses or activities orga should pursue
- strategy for each of the core businesses - 144capital budgeting (programming)- identification of specific action progams (investments to be made in next 5 years)
- specification of resources each will consume
- specification of potential constraints - 145operational budgeting- preparation of short term financial plan
- 146model based targetsperformance targets derived from predictions
- 147historical targetsperformance targets derived directly from performance in prior periods
- 148solution to budget gaming problemadopt a purely linear pay-for-performance system that rewards actual peformance independent of budget targets
no cap and no hurdles! - 149internal control (coso definition)process affected by management, designed to provide reasonable assurance regarding achievement of objectives in folowing categories:
- efficiency & effectiveness in operations
- reliability of financial reporting
- compliance with applicable laws & regulations
- safeguarding of orga's assets - 1505 components of internal control (coso)1. control environment
2. risk assessment
3. control activities
4. information & communication
5. monitoring - 151control environmentorga's culture with respect to importance of internal control
basis for any internal control system
consists of ethic values, integrity, commitment to competence, management philosophy - 152risk assessmentfocus on establishing measures that reduce residual risk to acceptable level
based on 2 dimensions: likelihood that risk occurs and its impact - 153residual riskrisk that control problems cannot be avoided and both detective and preventive controls are not effective
- 154control activitiesrisks can be controlled by detective and preventive measures
- 155information & communicationnecessary to facilitate control
subject to control and means to control - 156monitoringongoing activity of seperate evaluation
- 157corporate governanceaims at securing continuity of orga by maintaining good relations to stakeholders
- 158steering paradigmsteering & control cannot be seperated
by steering an object in certain direction, control of that object is achieved
when dealing with managemenbt and control, 4 elements will always be present:
1. control system (management)
2. controlled system (orga)
3. information system (needed to manage)
4. environment (stakeholders) - 159value cyclemodel that enables visualization of segregation of duties and helps to describe relationship between positions and events in orgas
- 160segregation of duties involves segregation of...1. authorization
2. custody (charged with safeguarding goods like money)
3. recording (records date related to purchases, sales, inventory...should be done by unit that does not have any other function than recording)
4. checking (checks realization of plan to norms established to that end)
5. execution (executes tasks assigned by authorization fucntion) - 161reconciliationssegregation of duties is preventive control measure, thats often not enough
corrective measures are necessary as well: reconciliations are important
e.g. reconcile recording made by 2 different officers within orga - 162direct checksapplied to processes, assigned tasks and procedures (AC)
- 163indirect checksapplied to outcomes of processes, assigned tasks and procedures (RC)
- 164total checkse.g. reconciliation between opening account and ending account
- 165detailed checkperformed on integral basis or by means of partial observations (when only few debitors are examined)
- 1663 steps of mitigating risks1. identification, sourcing, sizing
2. risk/reward trade-off (evaluate risk vs reward trade-off -> is risk acceptable or not)
3. monitor risks - 167information reliabilityencompasses two types of uncertainty:
1. were stated measurement methods carefully applied (precision)
2. is it a correct portrayal of the results (bias) - 168misstatements= recorded value - true value
- 169MCS feedback loop- managers measure performance
- compare with pre-set standard
- take corrective actions - 170more control = better control?nope.
- 171proactive controls= preventive
before orga suffers any negative effects
e.g. planning, segregation of duties - 172avoidanceeliminate possibility that control pürblems will occur
4 ways:
1) activity elimination: let third parties do where you have trouble with, licensing, subcontracting...
2) centralization: top management decides!
3) automation: use computers and machines
4) risk sharing: joint ventures - 173poka-yokesto combine physical and administrative constraints (AC)
making a system foolproof