Management Control Systems · Merchant and Van der Stede: Management Control Systems-© Pearson...

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


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;


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.


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.


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

...


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 ...


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 ...


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


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


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).


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).


Alternative controller relationships ...

Centralization of the controllership function

– solid-line



Top Management


XYZ


... ... ... ... ...


Alternative controller relationships ...

Decentralization of the controllership function

– dotted-line



Top Management


XYZ


... ... ... ... ...


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

» ...


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.


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).


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.


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).


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.


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.


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.

Management Control Systems · Merchant and Van der Stede: Management Control Systems-© Pearson...

Documents

Transcript of Management Control Systems · Merchant and Van der Stede: Management Control Systems-© Pearson...