What tasks do controllers have

1. Unburdening
- Competent, meet company’s goals, unburdens manager by taking over his tasks
- Aim of controller: fulfill task as efficiently as possible
2. Complementing
- Some managers not completely familiar with business tools
- E.g. product manager, got the position because of technical know-how
- Controller must work efficiently AND effectively
3. Constraining
- Some managers more concerned with own goals than company’s
- Controller must constrain managers, recognize to opportunistic decisions by manager
- Controller must be very familiar with situation manager is in, and manager himself
Why do we need controllers
- Managers may have personal motives which influence behavior, divert attention in the
wrong direction
- Managers make mistakes – can wrongly interpret facts (Need: Quality assurance)
- Key task of controller: ENSURE RATIONALITY OF MANAGEMENT
- Reactive rationality assurance – taking corrective action when something goes wrong
o Proactive measures
o Guaranty that all knowledge in organization is made available to management –
only possible if whole organization is transparent and have the same figures
o Active rationality assurance – take role of CRITICAL counterpart
o Initiate creative discussions – prevent people acting on basis of old solutions

More than just financial metrics

- Success of a business = financial metrics (usually)
- But financial results are not everything  no longer enough to run a company successfully
o Controlling = use leading indicators (e.g. process, market, customer-related data)
- Comparing apples and orange
o Customer satisfaction is not market share
o Engage in effective discussions with management, to aim general agreement
- Understand all business areas
o Develop instinct for identifying factors for business success
o While financial control is essential, it is no longer enough
o Non-financial indicators
- The big picture matters  Oversee company as a whole
o Reconcile the financial and the business perspective

The changing role of controllers  from REPORTER to BUSINESS PARTNER

1. Reporters - Financial metrics used to run a company
2. Navigators – Supply numbers + use them for management control purposes
3. Business partners
- Closer to business, full spectrum of management skills
- Service-oriented and proactive (do not wait for manager to tell them before they start
looking for a problem)
- Reliance of management on controllers for support
CFO vs. Financial Controller (Vid 2, 3) – Why your controller isn’t a CFO
- CFO more forward-looking, why numbers look the way they do, whereas controller looks at
past numbers
- CFO: Liaison between different departments (from accounting to rest of company and
management team), focuses on what they need controller to do
- Controller: More accounting department, job is more reporting, tell stories based on the
numbers

Management Control System (Video 1)

- Manage resources to reach company goals – employees, financial assets
- Delegate decision rights to subordinates, but as managers, don’t lose grip on what needs to
be achieved
- Techniques in mgmt control system
o Organizational design
o Incentives mechanism
o Reporting, performance measurement
o Budgeting
o Target Setting
o Oversight
- Important: Setting the STANDARD
- Responsibility centers in a company is handled by a single manager

Management Control System (Video 2)

- Formalized procedures, processes introduced by senior management to direct activities of
organization
- Following basic issues addressed:
o Measuring activities – financial, non-financial sense of performance based on
relevant data
o Inform and support decisions relating to resource allocation
o Providing communication, motivating staff
 Employment contracts
 Internal policies and procedures
 Discipline, incentive schemes
 Performance appraisals, feedback
 Reporting lines that are consistent with responsibilities, org objectives
- Ensure that everyone is pulling in the same direction (coordination) so that goals of
organization are achieved
- Design of Management Control Systems: 2 schools of thought:
o Contingency School – no single, universally valid management control system
 Adapt organization to circumstances
 Org objectives, environment (certain/uncertain)
 Organization internal structure
o Institutional School
 Reporting systems focusing on norms that are internal to organization
 Influenced by organizations in the same industry (external)
- Management accounting/control system must constantly involve to adjust to internal and
external factors
 - Achieving GOAL CONGRUENCE within organization
o Common goals consistent with organization objectives
o Assign responsibilities (obligation to perform)
o Delegate authority to direct and exact performance of activities
o Establish ACCOUNTABILITY for failure to meet obligation
o EVALUATE performance (feedback which ensures controllability of responsibility)
- Costs of Quality: Four elements
o Internal failure costs – defects before delivery
o External failure costs – defects which reach customer
o Prevention costs – prevent defects
o Appraisal costs – Verification and control efforts to ensure that quality is achieved

Management Control – Simple over complex?

- Management control: reconciling varying topics and systems
o Reconciling fairly – reach a common understanding
 Can only be done if controllers can detect opportunistic manager behaviors
- Good Management Control – Clear and Simple
o To reach right decision, need to have comprehensive understanding of data at hand
o Mgmt control – preliminary decisions already made, retain an overview of all
available options
- Different tools for decision making vs management control
o Management control should be simple
o Controllers should dispense with intricate details for management controls
o Look for optimal integration of each manager’s viewpoint

Management controls – People, Action, Results Control

1. Action – knowledge of desirable actions is good
o E.g. banking – standardized knowledge required for activities
2. Results – poor knowledge of desirable actions, high ability to measure results
o E.g. in sales, there’s not one way to handle processes
3. Control – Low ability to measure results control (performance dimensions)
o E.g. research laboratory

Sources of control problems (principal-agent problem)

- Goal congruence
- Multiple conflicting objectives
- Conflicting timing of objectives (long-term vs short-term goals)

Management control structure

- Profit centers
- Responsibility accounting
- Transfer pricing