Chương I:

Chapter 4
Chu ẩn mực và
Designing and Evaluating
tiêu chuẩn trong
Management Control Systems
kiểm toán hoạt động

[Link] LOGO
 Learning outcomes
❖4.1. Choice of controls

❖4.2. Choice of controls tightness

❖4.3. Adapting to change

❖4.4. Keeping a behavioral focus

❖4.5. Maintaining good control

❖4.6. Control system costs (direct, indirect, adaptation
costs)
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 Objectives

❖ Analyze the pros and cons and conditions for applying appropriate types of
control for the organization

❖ Analyze conditions to ensure the tightness of the management control

system

❖ Identify and analyze the influence of factors affecting the management

control in the context of change

❖ Identify and analyze factors that ensure a good management control system

❖ Identify the categories of costs involved in designing and operating a

management control system
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 Designing control systems

❖ Two basic questions:

• What is desired ?
• What is likely to happen ?

❖ If what is likely is different from what is desired, then two

basic MCS-design questions must be addressed:

• What controls should be used ?

• How tightly should each be applied ?

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 What is desired ?

❖ Start from objectives and strategies ...

• They should be important guides to the actions that
are expected, especially if they are specific …
– e.g., “Become a leader in the industry ” vs.
“15% ROI and 20% sales growth.”

❖ Identify the key actions (KA)

• i.e., actions that must be performed to provide
the greatest probability of success.

❖ Identify the key results (KR)

• i.e., the few key areas where things must go
right for the business to flourish.

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 What is likely ?

❖ Three questions:
• Do employees understand what they are expected
to do (key actions) or to accomplish (key results)?
– lack of direction
• Are they properly motivated?
– lack of motivation
• Are they able to fulfil their desired roles?
– personal limitations

❖ The discrepancy between what is desired and what is likely

will determine the choice and the tightness of the
management control systems
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 4.1. Choice of controls ...
❖ The different types of controls (action, results and people
controls) are not equally effective at addressing each of the control
problems.
Lack of Lack of Personal
direction motivation limitations
Results accountability
Action controls
- Behavioral constraints
- Preaction reviews
- Action accountability
Personnel controls
- Selection / placement
- Training
- Provision of resources
- Strong culture
- Group-based rewards

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 Start with people controls ...
❖ Personnel controls …
• Must always be relied on to a certain extent;
• Have relatively few harmful side-effects;
• Involve relatively low out-of-pocket costs.

❖ However, it is rare that people controls will be sufficient.

In most cases, it is necessary to supplement them with …
• action controls;
• results controls.

❖ Maybe, you just shouldn’t put all your trust in people !?

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 Pros and cons
of action controls ...
PRO CON
❖ The most direct form of control. ❖ Only for highly routinized jobs.
❖ Tend to lead to documentation ❖ May discourage creativity,
of the accumulation of knowledge innovation, and adaptation.
as to what works best.
❖ May cause sloppiness.
▪ Organizational memory
❖ May cause negative attitudes.
❖ An efficient way of coordination:
▪ e.g., little opportunity for
▪ i.e., they increase the predictability
creativity and self-
of actions and reduce the amount
of inter-organizational information
actualization.
flows to achieve a coordinated ❖ Sometimes very costly
effort.
▪ e.g., preaction reviews

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 Pros and cons of
results controls ...
PRO CON

❖ Behavior can be influenced ❖ Often less than perfect indicators of

while allowing significant whether good actions have been taken.
autonomy. ❖ They shift risk to employees (because
❖ They yield greater employee of uncontrollable factors). Hence, they
commitment and motivation. often require a risk premium for risk
averse employees.
❖ They are often inexpensive.
❖ Sometimes conflicting functions:
▪ e.g., performance measures
are often collected for ▪ Motivation to achieve
reasons not directly • targets should be “challenging”;
related to management ▪ Communication among entities
control. • targets should be slightly conservative.

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 4.2. Choice of control
tightness ...
❖ What are the potential benefits of tight controls?
▪ In any organization, tight control is most beneficial over
areas most critical to the organization’s success.

❖ What are the costs?

❖ Are any harmful side-effects likely?

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 Choice of control tightness ...
❖ What are the potential benefits of tight controls?
▪ In any organization, tight control is most beneficial over
areas most critical to the organization’s success.
▪ The critical success factors vary widely across
organizations
▪ The potential benefits of tight controls also tend to be
higher when performance is poor

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 Choice of control tightness ...

❖ What are the costs?

▪ Some forms of control are costly to implement in tight form
▪ Tight results controls might require extensive studies to
gather useful performance standards, or they might
require sophisticated information systems to collect and
analyze all the required performance data.

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 Choice of control tightness ...
❖ Are any harmful side-effects likely?
▪ All the conditions necessary to make a type of control
feasible
▪ Harmful side effects are likely if the control is
implemented, especially if the control is implemented in
tight form

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 Choice of control tightness ...

❖ Simultaneous tight-loose controls

▪ The MCSs used in these companies can be considered loose in that
they allow, and even encourage, autonomy, entrepreneurship, and
innovation
▪ These same control systems can also be called tight because the
people in the company share a set of rigid values (such as focus on
customer needs)
▪ The MCSs in these organizations are dominated by personnel or
cultural control; or they can be said to be tight on objectives and core
values, but loose on procedures.
▪ What do managers of organizations without strong cultures do?

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 Choice of control tightness ...

❖ Simultaneous tight-loose controls

▪ What do managers of organizations without strong
cultures do?
• It may be possible to approach a similar type of simultaneous
tight-loose control
• Using tight controls over the few key actions or results that have
the greatest potential impact on the success of the organization
• Selective use of tight controls may limit these effects

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 4.3. Adapting to change

❖ As firms grow, their controls evolve, usually towards …

• Increased formalization of procedures ...

– for action accountability purposes;
and/or

• Development of more elaborate information

systems ...
– for results control purposes.

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 4.4. Keeping a behavioral focus

❖ There is no one best form of control ...

▪ What works best in one company (or area within
a company), may not work in another ...
▪ e.g., accounting personnel vs. design engineers.

❖ Therefore, it is important to keep the focus on

the people involved, because …
▪ It is their responses that will determine the success
or failure of the control system !

❖ The benefits of controls are derived only from

their impacts on behaviors!
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 Overview ...
Can people be avoided? Yes Control-problem
(e.g., automation, centralization)
avoidance
No
Yes
Can you rely on people involved?
No People controls
Yes
Can you make people reliable?
No
Have knowledge about what Yes Able to assess whether
specific actions are desirable? specific action was taken?
Yes
No
Action controls
Have knowledge about what Yes
results are desirable? Able to measure results?
Yes
No
Results controls
?
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 Depending on ...

Knowledge of which specific actions are desirable

Ability to measure results on important performance dimensions
Excellent

Action Control
and/or Action Control
Results Control (e.g., large projects)

Results Control Personnel Control

(e.g., movie director, (e.g., research lab)
SBU-manager)
Poor

High Low

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 4.5. Maintaining good control

❖ What causes control problems so serious that an organization is “out

of control”?
▪ One cause is an imperfect understanding of the setting and/or the effect
of the management controls in that setting

▪ Another cause is management’s inclination to subjugate the

implementation of management controls to other, often more pressing,
business demands

❖ Organizations must inevitably finetune control systems as the

situation calls for, using the best assessments, knowledge, and
insights available. [Link]
 Maintaining good control...

❖ Criticisms should be made carefully

▪ knowing what should be criticized is not unproblematic
▪ criticisms of MCSs must be made with caution
• Controls that seem quite loose may have some unseen
benefits, such as in terms of high creativity, a healthy
spirit of cooperation, or low cost
• MCSs only reduce the probability of poor per- formance;
they do not eliminate it
• There is no single best way to accomplish good control.

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 4.6. Control system costs (direct,
indirect, adaptation costs)
❖ Benefit of controls
▪ A higher probability that people will both work hard and direct their
energies to serve the organization’s interests.
❖ Costs of controls
▪ Direct out-of-pocket costs
• Easy to quantify: cost of cash bonuses, internal audit staffs, etc.;
• Difficult to quantify: time spend on planning and budgeting
activities, on pre-action reviews, etc.
▪ Harmful side-effects
» Behavioral displacement
» Gamesmanship
» Operating delays
» Negative attitudes. [Link]
 Behavioral displacement ...

❖ Behavioral displacement occurs when the control system produces /

encourages behaviors that are not consistent
with the organization’s objectives.
❖ With results controls, it occurs when the results measures are incongruent
with the organization’s true objectives; because …
• Poor understanding of the desired results:
– unwillingness to adapt production schedules to profitable rush
orders
– sales volumes instead of profits, etc.
• Over-quantification: focus solely on quantifiable measures
– “Intangibles” are often overlooked.
❖ With action controls, it comes in the form of ...
• Means-ends inversion
– Employees are induced to pay more attention to what
they do and lose sight of what they try to accomplish.
• Rigid, non-adaptive, bureaucratic behavior
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 Gamesmanship ...

❖ Refers to the actions managers take to improve their performance indicators

without producing any positive economic effects. Two main alternatives
▪ Creation of slack resources
– Consumption of assets in excess of what is required;
– Slack can reduce manager tension and stimulate innovation;
– However, it causes inefficient resource allocation;
– Depends on information asymmetry, measurement precision, and
degree of subordinate participation in setting performance targets.
▪ Data manipulation
– Trying to “look good” by fudging the control indicators;
– Falsification, i.e., reporting erroneous data;
– Data management, i.e., any action to change the reported result:
» Through accounting methods (e.g., reserves, write-offs)
» Through operating methods (e.g., delaying expenses).
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 Operating delays ...

❖ Mostly associated with action controls,

notably, delays caused by:

• Pre-action reviews;
• Behavioral constraints.
• Bureaucratic organizations.

❖ When fast action is important, operational

delays can be quite costly.

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 Negative attitudes ...

❖ Job tension, conflict, frustration, resistance, etc.

• Are often coincident with many harmful behaviors, such
as, gaming, lack of effort, absenteeism, turnover, etc.
❖ Action controls often “annoy” professionals, but
also lower-level personnel …
• Sometimes difficult to avoid: e.g., it is difficult for people to enjoy
following a strict set of procedures for a long period of time ...
❖ Results controls ...
• Lack of employee commitment to the performance targets;
– targets are too difficult, not meaningful, not controllable.
• Performance evaluations are perceived as being unfair;
• The controls are implemented in a people-insensitive, non-
supportive way.
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 Adaptation costs

❖ Adaptation costs may may arise from the need to adapt MCSs
to the context in which they operate or incur when firms adapt
their MCSs across different strategic business units (SBUs).
❖ Adapting MCSs is particularly challenging in multinational
environments.
❖ Other cost drivers of adaptation costs:
▪ National culture
▪ Local institutions
▪ Differences in local business environments
▪ Foreign currency translation

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