Don Hellriegel Susan E. Jackson John W. Slocu ! Jr.

"A#A$%#$: A CO"&E'E#C( )ASED A&&*OACH

11th E+ition

Chapter 10: Achieving Organizational Control

&repare+ ,Argie )utler 'e.as A/" 0niversit-

2earning $oals
1. E.plain the 3oun+ations o3 control 4. %+enti3- the si. phases o3 the corrective control o+el 5. Descri,e the pri ar- etho+s o3 organizational control 6. E.plain ke- corporate governance issues an+ control echanis s
Chapter 10: &o1er&oint 10.1

 &rocesses 3or ensuring that ,ehaviors an+ +ecisions con3or to an organization7s stan+ar+s an+ legal re8uire ents! inclu+ing its rules! policies! proce+ures! an+ goals Ho1 controls an+ planning support each other
Controls help ensure that +ecisions! actions! an+ results are consistent 1ith plans Controls help aintain or re+irect actual ,ehaviors an+ results to1ar+ those +esire+ in plans Controls help provi+e essential in3or ation nee+e+ to plan &lans in+icate the purposes to ,e serve+ ,- controls
Chapter 10: &o1er&oint 10.4

 "echanis s inten+e+ to re+uce the likelihoo+ o3 an un1ante+ event an+ there,ini ize the nee+ 3or corrective action A 3e1 3or s:
1. 4. 5. 6. *ules an+ regulations Stan+ar+s *ecruit ent an+ selection proce+ures 'raining an+ +evelop ent progra s

Chapter 10: &o1er&oint 10.5

Corrective Controls
Corrective Controls
"echanis s inten+e+ to re+uce or eli inate un1ante+ ,ehaviors or results an+ there,return the situation to con3or it- 1ith the organization7s regulations an+ stan+ar+s A 3e1 3or s:
1. 4. 5. 6. Direct supervision an+ 3ee+,ack Disciplinar- action &roce+ures 3or reporting iscon+uct "onthl- or even +ail- 3inancial reports

Chapter 10: &o1er&oint 10.6

Source o3 Control
Stakehol+ers

&reventive
"aintaining 8uotas 3or hiring personnel in protecte+ class 0sing ,u+gets to gui+e e.pen+itures

Corrective
Changing recruit ent policies to attract 8uali3ie+ personnel Disciplining an e plo-ee 3or violating a <#o S oking= sa3et- regulation in a hazar+ous area
:continue+;

Organization

Chapter 10: &o1er&oint 10.9 :A+apte+ 3ro

'a,le 10.1;

Source o3 Control
$roup

&reventive
A+vising a ne1 e plo-ee a,out the group7s nor in relation to e.pecte+ level o3 output Deci+ing to skip lunch in or+er to co plete a pro?ect on ti e
'a,le 10.1;

Corrective
Harassing an+ sociallisolating a 1orker 1ho +oesn7t con3or to group nor s *evising a report -ou have 1ritten ,ecause -ou are +issatis3ie+ 1ith it

%n+ivi+ual

Chapter 10: &o1er&oint 10.> :A+apte+ 3ro

O,?ective controls

Accepta,le controls

'o Achieve Strategic $oals 'i el- controls

Co plete controls

Chapter 10: &o1er&oint 10.@ :A+apte+ 3ro

Aigure 10.1;

Ho1 "uch Organizational ControlC

Core 8uestions
1. Aor 1hat +esire+ ,ehaviors an+ results shoul+ organizational controls ,e +evelope+C 4. What are the costs an+ ,ene3its o3 the organizational controls re8uire+ to achieve the +esire+ ,ehaviors an+ resultsC 5. What are the costs an+ ,ene3its o3 utilizing alternative controlsD such as sel3E anage+ tea s! in3or al peer control! or in+ivi+ual sel3EcontrolC

Chapter 10: &o1er&oint 10.B

%nternal Control
A processGe33ecte+ ,- an organization7s ,oar+ o3 +irectors! anage ent! an+ other personnelG +esigne+ to provi+e reasona,le assurance regar+ing the achieve ent o3 goals in the various categories "a?or categories o3 internal control
1. E33ectiveness an+ e33icienc- o3 operations 4. *elia,ilit- o3 3inancial reporting 5. Co pliance 1ith applica,le la1s an+ regulations
Chapter 10: &o1er&oint 10.F

Control Environ ent *isk Assess ent Control Activities %n3or ation an+ Co unication "onitoring %nternal Control

Chapter 10: &o1er&oint 10.10 :Aigure 10.4;

Snapshot
Fundamentally, control exists only to mitigate risk. So every internal control framework has to start with a systematic approach to identifying riskLook at some of the major recent corporate failures. here did the pro!lems fundamentally arise" #hey occurred primarily !ecause of !reakdowns in the control environment.$

2arr- *itten,erg! Chair an! COSOGCo ittee o3 Sponsoring Organizations o3 the 'rea+1a- Co ission
Chapter 10: &o1er&oint 10.11

2i itations o3 internal control

Cannot change a ,a+ anager into a goo+ one E.ternal in3luences a- ,e ,e-on+ anage ent7s control Ju+g ents a- ,e 3ault-

"a- ,e circu vente+ ,- collusion o3 t1o or ore e plo-ees "anage ent can overri+e the control s-ste
Chapter 10: &o1er&oint 10.14

1. De3ine the S-ste

4. %+enti3- HeCharacteristics

5. Set Stan+ar+s

6. Collect %n3or ation

%3 okacontinue 9. "ake Co parisons >. Diagnose an+ Correct &ro,le s %3 +eviations

Chapter 10: &o1er&oint 10.15 :Aigure 10.5;

Snapshot
%any large companies suffer the ravages of fiefdoms, turf wars and !ureaucracy. &t's a pro!lem that !egins when individuals, groups, or divisions try to protect their turfs, reshaping their environments to gain as much control as possi!le(ltimately, fiefdoms lose their a!ility to act consistently on !ehalf of the greater good of the company.$

*o,ert J. Her,ol+! Aor er Chie3 Operating O33icer o3 "icroso3t! an+ author o3 #he Fiefdom Syndrome
Chapter 10: &o1er&oint 10.16

Chapter 10: &o1er&oint 10.19 :Aigure 10.6;

"echanistic Control "etho+s

0se o3 +etaile+ rules an+ proce+ures 1henever possi,le 'opE+o1n authorit-! 1ith e phasis on positional po1er Activit-E,ase+ ?o, +escriptions that prescri,e +a-EtoE+a- ,ehaviors
Chapter 10: &o1er&oint 10.1> :A+apte+ 3ro

Organic Control "etho+s

0se o3 +etaile+ rules an+ proce+ures onl- 1hen necessar Ale.i,le authorit-! 1ith e phasis on e.pert po1er an+ net1orks o3 in3luence *esultsE,ase+ ?o, +escriptions that e phasize goals to ,e achieve+
:continue+;

'a,le 10.4;

"echanistic Control "etho+s

E phasis on e.trinsic re1ar+s :1ages! pensions! status s- ,ols; Distrust o3 tea s! ,ase+ on an assu ption that tea goals con3lict 1ith organizational goals

Organic Control "etho+s

E phasis on ,oth e.trinsic an+ intrinsic re1ar+s : eaning3ul 1ork; 0se o3 tea ! ,ase+ on an assu ption that tea goals an+ nor s assist in achieving organizational goals

Chapter 10: &o1er&oint 10.1@ :A+apte+ 3ro

'a,le 10.4;

 'he collection an+ evaluation o3 +ata relate+ to sales! prices! costs! an+ pro3its 3or gui+ing +ecisions an+ evaluating results "arket controls re8uire:
1. 'he costs o3 the resources use+ in pro+ucing outputs to ,e easure+ onetaril4. 'he value o3 the goo+s an+ services pro+uce+ to ,e +e3ine+ clearl- an+ price+ onetaril5. 'he prices o3 the goo+s an+ services pro+uce+ to ,e set co petitivelChapter 10: &o1er&oint 10.1B

 "echanis s 3or preventing or correcting the isuse an+ isallocation o3 resources! especiall- onetar- resources Co parative 3inancial control: evaluation o3 a 3ir 7s 3inancial con+ition 3or t1o or ore ti e perio+s *atio anal-sis: selecting t1o signi3icant 3igures :or a co ,ination o3 a nu ,er o3 3igures;! e.pressing their relationship as a 3raction or percent! an+ co paring the value 3or t1o or ore perio+s o3 ti e E.a ple: return on invest ent :*O%; ratio is net pro3it ,e3ore ta. +ivi+e+ ,- net 1orth an+ is a easure o3 the e33icienc- o3 total assets in generating net pro3its
Chapter 10: &o1er&oint 10.1F

 )u+getar- control: the process o3 onitoring! co paring! an+ evaluating actual e.pen+iture levels in various categories in relation to ,u+gete+ a ounts! an+ aking changes as nee+e+ +uring the ,u+get ti e perio+ &urposes o3 ,u+geting 1. Help in planning work effectively 2. Assist in allocating resources 3. Aid in controlling and monitoring resource utilization during the budget period
Chapter 10: &o1er&oint 10.40

Co

on '-pes o3 )u+gets in a )usiness

Sales ,u+get Capital ,u+get

"aterials ,u+get

*esearch an+ +evelop ent ,u+get

2a,or ,u+get

Cash ,u+get

Chapter 10: &o1er&oint 10.41

 Auto ation: the use o3 sel3Eregulating +evices an+ processes that operate in+epen+entl- o3 people "achine control: utilizes sel3Eregulating instru ents or +evices to prevent an+ correct +eviations 3ro preset stan+ar+s %n continuous process or ro,otic operations! achines control other achines
Chapter 10: &o1er&oint 10.44

 'he pattern o3 relations an+ controls ,et1een the stockhol+ers! the ,oar+ o3 +irectors! an+ the top anage ent o3 a co pan E.pectations: set ,- the organization through policies! proce+ures! practices an+ gui+elines Co unication: akes sure that e.pectations are un+erstoo+ throughout the organization! an+ that there is proper training Accounta,ilit-: hol+s people accounta,le 3or eeting the e.pectations that have ,een set
Chapter 10: &o1er&oint 10.45

Corporate $overnance: A Sa ple o3 He- 'er s an+ Ele ents

)-la1s Annual report an+ Annual eeting

&ro.state ent

)oar+ o3 +irectors Annual eeting

Chapter 10: &o1er&oint 10.46

2a1s an+ regulatoragencies

&ossi,ilit- o3 ,eing ac8uire+

2a1suits ,stakehol+ers

&ro.- state ents: voting ,sharehol+ers

Chapter 10: &o1er&oint 10.49

 Eleven a?or sections +ealing 1ith such issues as:

1. Au+itor in+epen+ence 4. Corporate responsi,ilit5. Enhance+ 3inancial +isclosures 6. Con3licts o3 interest 9. Corporate accounta,ilitChapter 10: &o1er&oint 10.4>

 Certi3ication: re8uires CEOs an+ CEOs o3 pu,licltra+e+ co panies to personall- <testi3-=Isign that vali+ 3inancial accounting processes have ,een esta,lishe+ an+ use+ Au+ita,ilit-: re8uires co panies to +evelop an+ pu,lish internal processes so that outsi+ers can con3ir the e.istence o3 appropriate controls Disclosure: co panies ust report 3inancial results an+ aterial changes in corporate 3inancial con+ition or operations <on a rapi+ an+ current ,asis= Cri inal accounta,ilit WhistleE,lo1er protection
Chapter 10: &o1er&oint 10.4@

 %n+epen+ent )oar+s o3 +irectors Co pensation contracts that atte pt to align the interests o3 top e.ecutives 1ith those o3 stockhol+ers Corporate ,-la1s that set groun+ rules 3or the responsi,ilities o3 top e.ecutives an+ ,oar+ e ,ers Evaluation o3 CEO ,- the )oar+ Strategic allocation o3 corporate resources ,- )oar+ E.ercise o3 3i+uciar- responsi,ilit- an+ control ,the )oar+
Chapter 10: &o1er&oint 10.4B