Managerial Accounting:
An Introduction To Concepts, Methods, And UsesChapter 12
Incentive Issues
Maher, Stickney and Weil
Learning Objectives (Slide 1 of 3)
Describe key characteristics of divisional incentive compensation plans.
Explain how incentive plans can affect the development phase of the product life cycle.
Compare and contrast expectancy and agency approaches to motivation.
Describe the balanced scorecard as a way to tie performance measures to organizational goals.
Learning Objectives (Slide 2 of 3)
Explain the importance of performance measures for the four balanced scorecard perspectives.
Explain what constitutes fraudulent financial reporting.
Define the two most common types of fraud and demonstrate their impact on financial statements.
Learning Objectives (Slide 3 of 3)
Identify the incentives for committing financial fraud.
Explain how environmental conditions influence fraudulent conduct.
Identify controls that can be instituted to prevent financial fraud.
Discuss Divisional Incentive Compensation
Plans (Slide 1 of 4)
Discuss Divisional Incentive Compensation
Plans (Slide 2 of 4)
Discuss Divisional Incentive Compensation
Plans (Slide 3 of 4)
Discuss Divisional Incentive Compensation
Plans (Slide 4 of 4)
Review Incentives and the
Product Life Cycle
Views of Behavior (Slide 1 of 3)
Define the expectancy theory view
Expectancy Theory Perspective
EmployeeEffort RewardsPerformance
Expectancy of Objective Probability
That Effort Will Result in Performance
That Effort Will Result in Rewards
Expectancy of Objective Probability
Views of Behavior (Slide 2 of 3)
Agency theory - focuses on: Relations between principals and
agents where principals assign responsibility and agents work on behalf of the principal
The cost of agents pursuing their own interests instead of those of the principal
Views of Behavior (Slide 3 of 3)
Define the Agency theory view
Balanced Scorecard (Slide 1 of 5)
Define The balanced scorecard
Most companies use four categories or “perspectives” of performance measures A company can build an incentive plan
around these four perspectives
Draw the Balanced Scorecard
Balanced Scorecard (Slide 2 of 5)
Learning and growth perspective - indicates how well the infrastructure for innovation and long-term growth is working
Focuses on developing the capabilities of employees
Key measures for evaluating manager performance in this area might include:
Employee satisfaction
Employee retention
Employee productivity
Balanced Scorecard (Slide 3 of 5)
Internal business & production process perspective - indicates how well internal business processes are working Closely related to the learning and growth
perspective Employees are the best source of better ideas
for better business processes Supplier relations are critical for success
Company may provide incentives for good supplier relations such as certification programs
Balanced Scorecard (Slide 4 of 5)
Customer perspective - indicates how the company’s strategy and operations add value to customers Focuses on how a company should look to its
customers for success Company should provide incentives to employees
to meet customer expectations Performance measures might include:
Customer satisfaction and retention Market share Customer profitability
Balanced Scorecard (Slide 5 of 5)
Financial perspective - indicates whether company’s strategy and operations add value to shareholders
Performance measures include:
Net income
Return on investment
Explain Motivational Issues in Designing Incentive Systems
Problems With Incentive
Compensation Plans
Fraudulent Financial Reporting
Define Fraudulent financial reporting
Types of Fraud What are the two most common types
of financial statement fraud?
Causes of Financial Fraud
Fraudulent financial reporting may occur because of a combination of pressures, incentives, opportunities, and environment
May result from: High-pressure performance evaluation
systems The environment top management sets for
dealing with ethical issues Lack of, or inadequate, internal controls
Internal Controls Companies establish internal controls
to help prevent fraud. Define Internal Controls
Internal Controls
A basic internal control would involve a separation of duties so that one employee could not carry out a series of tasks to commit fraud and take steps to hide it
Auditing Internal auditors can deter fraud by
reviewing and testing internal controls and ensuring controls are in place and working properly
Independent auditors provide an opinion on the financial statements Fraud detection is not their primary
responsibility, but presence of auditors and their review of the internal control system should help to deter it
If you have any comments or suggestions concerning this PowerPoint Presentation for Managerial Accounting, An Introduction To Concepts, Methods, And Uses, please contact:
Dr. Michael Blue, CFE, CPA, CMA [email protected]
Bloomsburg University of Pennsylvania
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