Post on 11-Mar-2020
Management Control Systems
Chapter 14:
Controllers, Auditors, and Boards of Directors
Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003
Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 - 2 -
Corporate financial management roles ...
Controller Treasurer
Chief Financial Officer
Vice President Finance
Provision of Capital
Money Management
Risk Management
External Financial Reporting
Management Control Systems
Internal Control
Financial reporting and control Raising and managing capital
Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 - 3 -
The controllership function …
The controller (or the control department) ...
– Designs and operates information and control
systems:
» e.g., supervision of all accounting records
(financial / managerial);
– Prepares financial reports to shareholders and
external parties;
– Prepares and analyzes performance reports and
assists managers by interpreting these reports;
Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 - 4 -
The controllership function …
The controller (or the control department) ...
– Analyzes program and budget proposals and
consolidates the plans of the various business
segments into an overall annual budget;
– Supervises internal audit and accounting control
procedures to ensure the validity of information;
– Performs operational audits;
– Develops personnel in the controller organization.
Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 - 5 -
The treasury function ...
Basically, the treasury function entails
the control of corporate funds ...
– Provision of Capital
Financing;
Cash planning;
Investor and creditor relationships.
– Money Management
Banking: cash and deposits;
A/R, A/P, collections, disbursements;
Loans and investments (securities).
– Risk Management
Insurance, including employee benefits.
Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 - 6 -
The control department ...
Controller
MIS Accounting Budgeting Internal
Audit
Special
Projects
Administrative
Systems
Managerial
Accounting
Financial
Accounting
P&L-statements
Consolidation
Tax Returns
...
Cost Accounting
Inventory Control
Make-or-buy
...
Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 - 7 -
What should be the relationship between the corporate
controller and the division controller?
Corporate Control Department
SBUs / Divisions / Segments / Functional Areas
Top Management
President / Vice-Presidents
XYZ
Divisional Controller
... ... ... ... ...
?
Relation to the line ...
Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 - 8 -
Relation to the line ...
The controllership function is a staff function ...
» The controller designs and operates the control
and information systems (e.g., control measures);
» However, the use of this information remains
the responsibility of line management.
The controller can make recommendations for
action to management, but (s)he does not make
nor enforce management decisions.
This is not to say that the controller should not
be involved in or have a good knowledge of the
business ...
Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 - 9 -
The business unit controller ...
Two major responsibilities ...
– The management-service responsibility ...
» Help business unit management in the
business decision process;
» It requires that the business unit controller
becomes actively involved in the local
decision making process.
» INVOLVEMENT
Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 - 10 -
The business unit controller ...
– The financial reporting and internal control
responsibility ...
» Ensure that the financial information from the
business unit is accurate and that internal
control practices conform to corporate policy
and procedures;
» It requires that the business unit controller
acts as a "policeman" or local guardian for
the corporate office.
» INDEPENDENCE
Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 - 11 -
Divided responsibility and loyalty ...
The business unit controller's job priorities
and loyalties are changed when the reporting
relationship is changed ...
– Centralization of the controllership function
» Solid-line with the corporate controller;
Dotted-line with the business unit manager
(staff-relationship).
» Emphasis on financial control responsibility.
» "Corporate spy” (HQ representative, irritant,
unbiased partner, checker, policeman).
Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 - 12 -
Divided responsibility and loyalty ...
– Decentralization of the controllership function
» Dotted-line with the corporate controller; Solid-line with the business unit manager.
» Emphasis on management-service
responsibility.
» "Business unit ally” (trusted assistant, helper).
Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 - 13 -
Alternative controller relationships ...
Centralization of the controllership function
– solid-line
Corporate Control Department
SBUs / Divisions / Segments / Functional Areas
Top Management
President / Vice-Presidents
XYZ
Divisional Controller
... ... ... ... ...
Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 - 14 -
Alternative controller relationships ...
Decentralization of the controllership function
– dotted-line
Corporate Control Department
SBUs / Divisions / Segments / Functional Areas
Top Management
President / Vice-Presidents
XYZ
Divisional Controller
... ... ... ... ...
Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 - 15 -
Factors influencing centralization of control ...
Corporate management / controller’s desire to ...
» Exercise “tight” control
» Implement uniform control systems across
business units or divisions
» Achieve economies of scale in control
» Speed up the introduction of new control
techniques / procedures
» ...
Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 - 16 -
Possible solution …
The business unit controller should ...
» Collect actual accounting and other data
on performance, following prescribed rules;
» Assist in preparing the budget;
» Analyze results so as to inform the business
unit general manager of trouble spots and
areas of improvement.
financial
control
mgnt.
service
If the business unit controller is expected to add
value to the business, to be an adviser, (s)he should
report to the business unit general manager.
Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 - 17 -
Possible solution …
Relationship with corporate controller ...
– The corporate controller has "functional control"
» Develop (uniform) control / information systems;
» Prescribe rules / procedures for the collection
of information;
» Study and suggest new control techniques for
the better performance of the controllers in the
business units;
» Educate / train controllers (formal courses and
informal meetings).
Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 - 18 -
And also ...
Internal auditors and audit committees can be used
to oversee the controller function;
Personnel / cultural controls (selection and training
of controllers);
Incentive systems that do not create temptation
(e.g., rewards based on performance measures
they can manipulate);
Centralization / decentralization of the controllership
function.
Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 - 19 -
Auditors ...
The internal audit function operates in staff capacity and
reports high in the organization, at least to the controller
or financial vice-president.
Financial audits
– External auditors / GAAP
Compliance audits
– External / internal auditors;
– Compliance with laws and rules / administrative policies.
Performance audits
– External / internal auditors / consultants;
– Evaluation of the performance of the company, its management,
a department, or a specific activity (+ make recommendations).
Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 - 20 -
Audits – two benefits …
The audit report adds credibility to the information
provided to user groups;
Anticipation of the audit increases the motivation
of the individuals involved to act in a legal, ethical
way and in the best interest of the company and its
owners.
Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 - 21 -
Board of directors ...
Shareholders, who typically own a portfolio of firms, delegate
their authority for internal control to a board of directors.
» The board is given ultimate control over management;
» It monitors and approves management decisions, and
chooses, dismisses, and rewards managers.
Two main control responsibilities: » Safeguard the equity investors’ interests by ensuring that
management seeks to maximize shareholder value;
» Protect the interests of other corporate stakeholders (employees,
customers, suppliers, competitors, and society at large) by ensuring
that the employees in the corporation act in a legally and socially
responsible manner.
Independence / outside directors / interlocking directorates.
Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 - 22 -
Audit committees ...
Overseers of the company’s financial reporting
process and its internal control systems.
Maintain lines of communication between the board
and the company’s external auditors, internal auditors,
financial management, and inside and outside counsel.
Independence from management is crucial for
effectiveness.
Recommended to be made up solely of outside
directors.