1.6 Accounting in an ‘Age of Empowerment’

There are three perspectives to accounting. The technical-rational (what you should do in general), institutional (the image your give of yourself) and the socio-political (to get power).

The management control function sits between the operational/task control and strategic planning/strategy formulation. Managers are called upon to be both planners and controllers.

Operational control entails:

\- establishing and maintaining accounts and records

\- Financial supervision and control

\- safeguarding

\- Engaging, training and allocating staff

And

\- ensuring activities are orderly and secure

\- prevent swindle, stealing, …

\- Record transactions with few errors as possible

This information is then further processed, analyzed and aggregated to provide information for management control.

Management control focuses on implementing strategies and achieving goals across and organization, is systematic, requires people to analyze, evaluate and interact and depends on operating information. There are 4 systems to controlling business strategy at your disposal:

\- Beliefs system (control of core values)

\- Interactive control systems (control of strategic uncertainties)

\- Boundary system (risks to be avoided)

\- Diagnostic control system (Critical performance variables)

In general you need also information and the broader your horizon becomes the more your measures will be financial. Trust is important and an information system is good if it supports you, it needs to be fit for the task.

It is generally expected that information of task control type comes from within, is routine and a mix of informal and information and the further you move to strategic planning you will need outside information in ad hoc ways. Task control information is usually quite detailed, specific and accurate; strategic planning data are more aggregated and rough and ready. Management control falls between the two.

The following is the management control process. It is a circle, never ending.

1\. Reporting and analysis, possibly with external information. You also need to consider strategies, possibly new ones.

2\. These are fed back into the programming (possibly external info)

3\. You move on to Budgeting (again with external info) and this might be revised from stage 1

4\. Operating and measurement comes next (again external info possible) and here action might be needed from 1.

Management control structures often rely on a chain of accountability which is primarily vertical. At each stage the top person gives specification of performance and the person below gives back information on performance.

You can also be allocating responsibility and authority using accounting and a separate budget might reflect the boundary of the manager’s financial authority. These responsibility centres are sometimes called cost centres.

1\. Discretionary expense centres

Fixed amount of money to spend during a financial period. Checked at intervals.

2\. Standard expense centres

expected to produce or handle a product. comparing actual costs with the standard costs multiplied by volume

3\. Revenue centres

revenue target set

4\. Profit centres

either a profit target or a deficit limit

5\. Investment centres

Here the centre is dealt with like a separate business, taking care of investment and return on investment (or capital) = responsibility centre profit / net assets employed.

Management control systems are only effective if they influence behaviour. Only when managers understand how these systems influence the behaviour of their subordinates and what trade-offs occur in each control strategy can they learn to use organizational control systems effectively. Remember:

1\. Measurement indicates what is important.

2\. Subordinates tend to put energy into measured areas.

3\. If this performance is improving this can be a source for personal satisfaction

Subordinates also put their effort into “game playing” and “beat the system”, set low goals that can be easily met, manipulate measures or sabotage the system.

There are two approaches:

External control: motivated primarily by external rewards and need to be controlled. The goal is to stretch subordinates and leave little room for slack. These measures need to be set up so that they cannot be manipulated. Rewards need to be directly and openly tied to performance. But people might try to improve their performance measures but not create any commitment to their doing a better job, other measures might also be important. They might also try to reduce the flow of valid information and use excessive caution.

Internal motivation: Subordinates can be motivated by building their commitments to organizational goals and by their being involved and these goals are set anticipatively and set up for joint problem identification and solution. The system is used as an “early warning” function because you work closely together. Rewards are tied to performance but not specific measures but rather tied to the entire job performance. This gives subordinates little incentive for playing games or to behave dysfunctional. Because there is less control there might be lower targets and the system becomes difficult to use as a basis for giving rewards. Some individuals might not respond to the system.

For choosing an approach you need to look at:

1\. Consistency between strategy choice and managerial style

2\. Organizational climate, structure, and reward system

3\. Reliability of job performance measures

4\. Individual differences among subordinates

An informed choice can be made using the decision-tree approach (Study Guide page 73).