Management Control Systems (2nd Edition)

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Chapter Code: MCS18

Pages : 528; Paperback;
210 X 275 mm approx.

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Management Control Systems Textbook

Implementation of Management Control Systems : Overview

There is no certainty that management control systems will always be effective, either in terms of design or in terms of implementation. These systems can only increase the probability of achievement of organizational objectives of effectiveness, efficiency, accuracy of financial reporting, and compliance.

Management controls should be integrated or in-built into the organization's activities. These in-built control systems will influence the organization's capability to achieve its objectives and also help in improving the quality of its business operations. There are five components of management control - control environment, risk assessment, control activities, information and communication, and monitoring the control system.

Control activities refer to the policies and procedures that are used in an organization to provide a reasonable assurance that the directions and instructions given by the management are followed appropriately.

Control activities differ depending on the business environment, organizational objectives, complexity in business operations, the people involved in the implementation of these activities, and organizational structure and culture. Conducting meetings helps in improving decision making and also in reducing the time taken for the decision-making process. Four different types of meetings which serve different purposes are: the daily check-in, the weekly tactical, the monthly strategic, and the quarterly off-site review.

Information systems will not be effective without proper communication between the different levels of management. Communication is not only required to pass on the information but is also necessary for coordination of work, assigning responsibilities, etc. Two types of communications - internal communication and external communication - take place in any organization.

The management controls are designed in such a way that the control activities involved are monitored on a continuous basis or separately. Continuous monitoring helps the organization by offering feedback on whether the control components are effective or ineffective. Separate assessment of activities helps in understanding the effectiveness of the control system as a whole and, in turn, of the continuous monitoring processes. The most important factor while implementing control systems is that the organizations should have proper processes in place to identify, communicate, follow up, and rectify discrepancies (if any) in the set plans and objectives.

Management control is implemented by a number of people both internal and external to the organization. Each of them plays a different role and has different responsibilities toward the effective implementation of a management control system. The entities internal to the organization are the management, the board of directors, the internal auditors, and most of the employees; the entities external to the organization include external auditors, regulatory bodies, customers, suppliers, and financial analysts.

Control is a process that is executed by people, and the relevant procedures should be practiced thoughtfully, rather than mechanically. Consistency of execution is another major requirement for the success of the administration of management control systems in an organization. The issues faced in implementation can be those which hinder the management control process or dysfunctional consequences of implementing the management control system.

Some issues that hinder management control process are: lack of proper organizational structure, management style, well-defined hierarchy, etc.; lack of proper person-job and person-reward fit; deficiencies in training and developing employees; collusion between the controlled person and the controlling person; illegitimate use of management authority; and lack of proper communication.

The implementation and administration of management control systems can lead to dysfunctional consequences that are counterproductive to the achievement of organizational objectives. It is necessary to closely monitor the control system to see whether it is actually motivating managers and employees to act in the interest of the organization, so that necessary corrective actions may be taken in the design and/or implementation. Some dysfunctional consequences of management control systems are excessive quantification and attempt to measure all possible measures, presence of standard operating procedures curbing innovation, and data manipulation.

The control requirements change depending on which stage of the life cycle the organization is in. Organizations usually go through five different phases of development and growth - the creativity phase, the direction phase, the decentralization phase, the coordination phase, and the collaboration phase. Transition from one phase to another is a difficult process for an organization as it involves changing the rules for the functioning of the organization, the control systems and procedures, as well as the way in which it will react and adapt to the external environment.

In the creativity phase, the decision-making power lies with the owners and communication is informal. In the direction phase, the organization adopts a functional structure with revenue centers and cost centers; it implements accounting, budgeting, and inventory management systems; there is formalization of communication and incentive schemes. In the decentralization phase, profit centers are created; managers are motivated through increased autonomy and incentives; and internal control and reporting systems help monitor the activities of lower level managers. In the coordination phase, organizations adopt a divisional or product structure with investment centers; proper systems for monitoring and control are put in place; strategic decisions are centralized; and incentives are linked to organizational performance. In the collaboration phase, a matrix structure is adopted; teamwork, social controls, and self-discipline are highly emphasized; incentives are based on team performance; and focus is on innovation and collaborative problem-solving. In addition to organizational growth, decline, or turnaround, change can also take place when an existing control system used by an organization is modified or a completely new control system is implemented.

Chapter 18 : Overview

Operationalizing a Management Control System
Control Activities
Monitoring the Control System

Organizational Roles Involved in Implementation
Internal Entities
External Entities

Challenges in Implementation
Hindrances to the Management Control Process

Dysfunctional Consequences of Management Control Systems

Impact of Organizational Life Cycle on Control Systems
Creativity Phase
Direction Phase
Decentralization Phase
Coordination Phase
Collaboration Phase
Control Systems and Organizational Decline or Change