Management Control Systems

CHAPTER 3

Action,
Action, Personnel,
Personnel,
and
and Cultural
Cultural
Controls
Controls Student
Student name:
name: Hanan
Hanan
Abaza
Abaza
 Previously discussed..
 Management Control Systems
› Results Controls
› Action Controls
› People Controls
 Controls can focus on:
› the results produced RESULTS CONTROLS

› the actions taken

ACTION CONTROLS

› the types of people

employed and their PEOPLE CONTROLS
shared values and
norms
Action
Action
controls

controls
Ensuring
Ensuring that
that employees
employees perform
perform (or
(or do
do not
not
perform)
perform) certain
certain actions
actions known
known to
to be
be beneficial
beneficial
(or
(or harmful)
harmful) to
to the
the organization
organization
Prevention
Prevention // detection
detection
Most
Most action
action controls
controls are
are aimed
aimed at
at preventing
preventing
undesirable
undesirable behaviors
behaviors
Effectiveness of action controls
: They are feasible only when the managers
1. know what actions are (un)desirable
• Difficult in highly complex and uncertain task environments
(e.g., research engineers or top-level managers
2. and have the ability to insure that the desired actions
will occur
• For example, effectiveness of organizational procedures?
Personnel
Personnel control
control
Are
Are design
design to
to make
make it
it more
more likely
likely that
that employee
employee
will
will
perform
perform the
the desired
desired tasks
tasks satisfactory
satisfactory onon their
their
own
own
.Ex:
.Ex: experienced,
experienced, honest
honest && hard
hard working
working
Cultural
Cultural controls
controls
Are
Are designed
designed to
to encourage
encourage mutual
mutual monitoring,
monitoring,
exist
exist to
to shape
shape to
to organization
organization behavioral
behavioral norms
norms
and
and to
to encourage
encourage employees
employees to
to monitor
monitor andand
influence
influence each
each others
others behaviors
behaviors (the
(the dominant
dominantform
form
of
of control)
control)
 Basic forms of action control …

1) behavioral constraints
2) Pre- action reviews
3) Action accountability
4) Redundancy
……Basic forms of action control
Basic forms of action control

1.behavioral
1.behavioral constraints
constraints
it
it is
is aa negative
negative form
form of
of action
action control
control .. They
They
make
make it it impossible
impossible or
or difficult
difficult for
for employee
employee to to
do
do thing
thing that
that should
should not
not bebe done
done ..
Physical constraints
Ex: Including locks, computer passwords, access limit
. to certain areas
Some behavioral constraint devices are technically
sophisticated and often expensive such as magnetic
identifications card or fingerprint/eyeball pattern
reader.

Administrative
Administrative constraints:
constraints:

A.
A. Restriction
Restriction of
of decision-making
decision-making authority
authority
limit
limit on
on employees’
employees’ ability
ability to
to perform
perform all/
all/ aa portion
portion of
of aa
specific
specific act;
act; to
to minimize
minimize the
the risk
risk that
that untrained
untrained employees
employees
will
will make
make mistakes.
mistakes.

(Ex:
(Ex: low
low grade
grade manager
manager can
can only
only approve
approve $1000
$1000
expenditures,
expenditures, while
while med-grade
med-grade manager
manager can
can approve
approve $10000
$10000
expenditure
expenditure ))

B.
B. separation
separation of
of duties
duties (dividing
(dividing up
up tasks)
tasks)
To
To accomplish
accomplish sensitive
sensitive duties
duties thus
thus Making
Making its
its impossible
impossible or
or
difficult
difficult for
for one
one person
person to
to complete
complete certain
certain task
task alone
alone ..
different
different persons
persons for
for positions
positions that
that closely
closely related
related

(Ex:
(Ex: checks
checks receiver
receiver must
must be
be separated
separated from
from the
the accountant
accountant
who
who make
make the
the payment
payment entries
entries in
in the
the account
account receivable
receivable
 Separation of
duties
ne of the basic requirements of Internal control
The effectiveness of separation of duties is
limited, it does not prevent the collusion
between two or more employee , or with third
parties or with the top management, the causes
of fraud.
behavior-shaping
behavior-shaping constraint,
constraint, also
also sometimes
sometimes referred
referred to
to asas
a forcing
a forcing function or poka-yoke
function or poka-yoke "mistake-proofing",
"mistake-proofing", is is aa
technique
technique used used in error-tolerant
in error-tolerant design to
design to prevent
preventthethe user
user from
from
making
making common errors or
common errors or mistakes.
mistakes. Where
Where aa certain
certain action
action
must
must be be completed
completed beforebefore the
the next
next step
step performed
performed .Ex:
.Ex:
microwaves,
microwaves, itit is is impossible
impossible to
to start
start the
the microwave
microwave while
while the
the
door
door is is still
still open
open
-- Its
Its difficult
difficult to to make
make behavioral
behavioral constraints
constraints foolproof
foolproof where
where
employees
employees are are disloyal,
disloyal, deceitful.
deceitful.
2.
2. Pre-
Pre- action
action reviews
reviews
(Review/modification/approval)
(Review/modification/approval)

Scrutiny
Scrutiny of
of the
the action
action plans
plans of
of the
the employees
employees
being
being controlled
controlled (approval/checking
(approval/checking made
made by by
the
the supervisors
supervisors about
about certain
certain proposals).
proposals). A A
common
common form
form of
of pre-
pre- action
action review
review take
take place
place
during
during planning
planning and
and budgeting
budgeting process
process ..

3.
3. Action
Action accountability
accountability
it
it is
is aa negative
negative form
form of
of action
action control
control .. They
They
make
make it it impossible
impossible or
or difficult
difficult for
for employee
employee
to
to dodo thing
thing that
that should
should not
not be
be done
done ..
 Action Accountability
Holding employees accountable for the actions
. they take
:Its implementation requires

1.Defining of actions which is good/bad

2.Communicating the definitions to employees (work

rules)

3.Observing / tracking what happens

4.Rewarding good actions, or punishing

Accountable communication . 2
:
Administratively
can be hold
work rules, policies and procedures, codes of conduct.
Ex: such as 1. McDonalds prescribe & communicate in writing how to
handle cash/how to hire personnel, 2. nurses using pre-operative checklist
3. department stores personnel also have set of procedures they are
expected to follow .
Socially
The desired action do not have to be in written form,
they can communicated face to face in meetings.
Sometimes the action desired are not communicate
explicitly at all, lawyers, Doctors & manager are held
accountable for their actions that involve professional
judgment and they should act professionally.
Action accountability to be effective individuals must
understand what is required and feel reasonably sure
their action will be noticed with rewards or
punishments .
3.observing / tracking actions

Direct observation / supervision; product line

Periodic tracking (e.g., retail stores “mystery
shoppers”);
Examine Evidence of actions taken (e.g., activity
reports).
4.Rewarding good actions , or
punishing actions that deviate
Action accountability is usually implemented
with negative reinforcements, action are more
often linked with punishment than with reward.

Ex ( anyone late on a shift, loses a day’s

bonus).
4.
4. Redundancy
Redundancy (backup)
(backup)

Assigning
Assigning more
more people
people (or
(or machines)
machines) to
to aa
task
task than
than necessary.
necessary. Ex:
Ex: backup”
backup” people
people or
or
facilities.
facilities.

it
it increases
increases the
the probability
probability that
that aa task
task will
will
be
be satisfactorily
satisfactorily accomplished.
accomplished. Its Its common
common
in
in computer
computer facility
facility ,, security
security functions
functions but
but
its
its rarely
rarely used
used in
in the
the other
other areas
areas because
because itsits
expensive
expensive

Assigning
Assigning more
more than
than one
one employees
employees to
to the
the same
same task
task
can
can result
result in
in conflict,
conflict, frustration
frustration and
and boredom.
boredom.
Action controls & control Problem
1.Behavior conctraints Primarily directed at one
control problem: eliminate motivational
problems. Employee who engage in undesirable
behaviors can prevented from doing so.
2.Pre- action review address all three control
problems:
they involve communication to the employee
about what is desired
PROS:
PROS:
 Alleviate
Alleviate (minimize)
(minimize) lack
lack of
of direction;
direction;
 Provide
Provide motivation;
motivation;
 Mitigate
Mitigate personal
personal limitations.
limitations.
 Prevent
Prevent mistakes
mistakes or
or harmful
harmful actions
actions from
from
happening
happening
 Action controls & Action
Problems
3.Action accountability : addresses all three control
problems. desired action can help provide direction
and alleviate the type of personnel limitation by
increase the expertise and skills . and reward or
punish help provide motivation .
4.Redundancy: limited in addressing the control
problems: its helping in accomplish particular
task
 Provide motivation, and perform
satisfactory
 Overcome personal limitations.
Types of action
also: rather costly
Lack of direction Motivational Personal
controls problems limitations
Behavioral X
constraints
Preaction review X X X
Action X X X
accountability
redundancy X X
 Prevention VS detection
Action control can serve to prevent or detect
undesirable behavior,
- Prevention: none of the costs of undesirable behaviors will
be incurred.
- Detections: they applied after the occurrence of the
behavior . And can be effective if the detection is made in
timely manner and correction of effects of harmful action .

Most action control are aimed to prevent undesirable

behavior . exception of action of accountability control
because this type of control designed, to motivate
employees to behave appropriately.
it can’t be verified whether, the appropriate actions
were taken ,until evidence of action is gathered.
 Prevention VS detection

Type of action Prevention Detection

controls
Behavioral Locks on valuable N/A
constraints assets, separation of
duties
Preaction reviews Expenditure approvals N/A
budget reviews

Action Pre-specified policies Compliance-oriented

accountability linked to expectations of internal audits, cash
rewards and reconciliations
punishments Peer review

Redundancy Assigning multiple N/A

people to an important
task
 Conditions
Conditionsdetermining
determiningthe
the
effectiveness
effectivenessof
ofaction
actioncontrols
controls
-knowledge of the desired actions

Lack of knowledge, as to what action are desirable is

the constraint use of action control, and knowledge is
often difficult to obtain . most organizations do not
have good idea, on how employees in this role, should
best spend their time.

knowledge of the desired actions can be discovered in

2 ways:
 analyzing the actions/results patterns in a specific
situations / similar situations over time to learn what
actions produce the best results.
 Or to be informed by others(consultants),who have
detailed knowledge of best practice for strategic
decisions
Ability
managerstoare
ensure that desired
able to ensure, actions
that the desirable are
actions
are taken(undesirable actions do not occur).
taken
The effectiveness of the behavioral constraints and pre-
action reviews varies directly with the reliability of the
physical devices / administrative procedures the
organization has in place to ensure that the desired
actions are taken.
action tracking often provides a significant challenge
that must be faced in making action-accountability
controls effective.

The criteria that should be used to judge are:

precision, objectivity, timeliness,
understandability.

•Precision: supervisor can distinguish good,

from bad actions. for ex: can examine if sales
people spend enough time on market
•Objectively:

freedom from bias, reports of action prepared by

those whose actions are being controlled cannot
be relied upon, self reports are not objective.

most company use direct supervisor and internal

auditor to provide objectively check on such
report.
without objectively can’t be sure whether the
action report reflect the actual action taken .
Timeliness

 If the tracking of actions is not timely,

interventions are not possible before
harm is done.
 Motivational effect of the feedback &
rewards is lost, when tracking is
delayed.
•Understandability :

employee can easily understand prescription

to show up to work on time, if the employee
do not understand the detail procedures , the
behavior will be unsatisfactory.

The action control system is not perfect, and

to make it near perfect, its costly, therefore
some managers use personal and culture
controls, to fill in the gaps.
These controls help employees to control
their own behaviors.
 Pros and cons of action
PRO controls Cons
PRO Cons
The
 The most
most direct
direct form
form of
of Only
 Only for
for highly
highly routines'
routines'
control
control jobs
jobs
Tend
 Tend to to lead
lead to
to May
 May discourage
discourage
documentation
documentation creativity,
creativity, innovation,
innovation,
of
of the
the accumulation
accumulation of of and
and adaptation
adaptation
knowledge
knowledge as as to
to what
what
works May
 May cause
cause sloppiness
sloppiness
works best.
best.
Organizational
 Organizational memorymemory May
 May cause
cause negative
negative
attitudes
attitudes
An
 An efficient
efficient way
way ofof
coordination: e.g.,
 e.g., little
little opportunity
opportunity
coordination: for
for
i.e.,
 i.e., they
they increase
increase the
the creativity
creativity and
and
predictability
predictability of of actions
actions self-
self-
and
and reduce
reduce the
the amount
amount actualization
actualization
of
of inter-organizational
inter-organizational
information Sometimes
 Sometimes very very costly
costly
information flowsflows toto
 PERSONNEL
CONTROLS
Personnel controls build on employees’ natural
tendencies to control/motivate themselves,

1. Clarify expectations: help ensure

employees understands what the
organization wants
2. Help ensure that the employees are
able to do a good job (have the
capability; experience, intelligence and
resources)
3. Increase the likelihood that each
employee will engage in self-
monitoring
 Self-monitoring is
self-control, Intrinsic motivation, Ethics and
morality, Trust and Loyalty
The naturally present force that pushes most
employees to want to do a good job ,and to be
naturally committed to the organization’s
goals.

It is also effective, because most people have a

conscience that leads them to do what is right.
and able to derive positive feelings of self-
respect and self-satisfactions, when they do a
good job and see the organization succeeds
 Implementing personnel
controls
Generally, it is about …
“… finding the right people, giving them a good
work environment and the necessary resources ”

 Selection and placement

 Finding the right people to do a particular job
 Training
 Give employees a greater sense of professionalism
 Create interest in the job by helping employees to understand
their job better
 Job design + provision of necessary resources
 So that motivated and qualified employees have a high
probability of success (e.g., equipment, staff support, freedom
from interruption)
Methods
Methods to
to implement
implement personnel
personnel
controls
controls
1.selection and placement of employees
• Finding the right people to do a job and giving
them a good work-environment and the
necessary resources can obviously increase the
probability that a job will be done properly.
•Organization primary, focus on matching job
requirement with job applicants
skills/experience. Or references check for new
employees.
some organization have restored and analyzing
potential employee to avoid high risk .
 2. Training
Training can provide useful information
about what results and actions expected
and how the assigned task can be best
performed, also it can have positive
motivational effects because employees
can be given a greater sense of
professionalism, and they are often more
interested in performing well in jobs they
understand better, organization use formal
training to improve the skills of their
personnel . much training take place
informally through employee monitoring .
Job design and provision of necessary resourc
A well designed job allows motivated and
qualified employees a high probability of
success.
Some job are too complex
Ex:(salespeople assigned too many accounts to handle
effectively )

Resource needs are highly job-specific like (info,

equipment, supplies, staff support)
CULTURAL CONTROLS
Cultural controls or mutual monitoring tap into
social pressure and group norms and values
 Cultural controls are effective because
members of a group have emotional
ties and a sense of responsibility to one
another
 Cultures are built on shared ...
 traditions
 norms
 beliefs
 ideologies
 attitudes
 ways of behaving
 Cultural
Cultural Controls
Controls
 In addition to Results, Action, and
Personnel controls, Cultural controls exist
to shape organizational behavioral norms
and to encourage employees to monitor
and influence each other’s behaviors.
 Cultural controls are designed to
encourage mutual monitoring, its powerful
for monitoring of group pressure on
individuals, who deviate from the group
norms and values; it is most effective
where members of a group have emotional
ties to one another.
 Cultural
Cultural Controls
Controls
 Cultural norms can be in written and
unwritten rules, however, communities
social and pressure are stronger than legal
contracts.
 Cultures are built on shared relations,
beliefs, norms, values, ideologies, attitudes,
and ways of behaving.
 Managers can create and shape
organization’s culture by: (1) Codes of
conduct (2) Group rewards (3) Intra-
organizational transfers (4) Physical and
social arrangements (5) Tone at the top.
 Ways to shape culture
 Codes of conduct
 Codes of ethics; corporate credos, mission statements, etc.
 Formal written documents with broad statements of
corporate values, commitments to stakeholders, and the
ways in which top management would like the firm to
function
 Fundamental guiding principles of the company

 Group-based rewards
 For example, profit-sharing, employee ownership of company
stock
 These are cultural controls (although of a results control
nature) because the link between group (individual)
performance and rewards is stronger (weaker)
 Codes of Conduct
 It is a formal written documents provide
broad, general statement of organizational
values, commitments to stockholders, and the
way in which management would like the
organization to function.
 It designed to help employees understand
what behaviors are expected, even in the
absence of rules.
 Major areas where codes focus in:
1- Purchasing guidelines 2- Information
Security
3- Environment responsibility 4- Marketing
5- Product Safety6- Workplace safety
7- Confidentiality of employee records
 Codes of Conduct

 To maximize effect of codes of conduct,

they must be reinforced through formal
training sessions or discussed among
employees and their superiors.
 How the codes are drafted?
1- Top Management
2- Legal Department
3- Board of directors
 Codes of Conduct

 The codes are dynamic documents, they change

if:
1.Specific incident within the company or
industry
2.New leadership
3.New Laws
4.Change in business strategy
 Codes of conduct need to be supported by
strong leadership and proper tone from the top.
Ex: Enron managers bankruptcy in spite of their strong
code of conduct
 Group Rewards
 is a type of cultural control rather than results
control, rewards provided based on collective
achievement encourages cultural controls:
( Bonus, Profit sharing, based on entity
performance – cost reduction or profit increase
- compensations, and ownership of company’s
stock).
 Group rewards can have a positive effect on
motivation and performance by:
 1- Encourage teamwork
 2- On-the-job training by experienced staff
 3- Peer pressure on individual employees to
exert themselves
 Evidence of success:

Open Book Management. (OBM).

 Create a clear line, between employees actions and
corporate financial performance.
1. Share companies financial information, and any other
information can help employees at work.
2. Train employees to understand these information, and
how they can contribute to companies performance.
3. Rewards linked to the company performance.
4. Cultural change from a Top-Down culture: to ensure
that employees understand both what the information
means and how they themselves can contribute to
company performance
 Group rewards delegate the monitoring of
employee’s activities to employee’s coworkers
,which is The essence of MUTUAL MONITORING.
Other Ways to shape culture
Intra-organizational transfers
Improve the socialization of individuals in an
organization
alleviate the formation of incompatible goals
and perspectives.
Improve identification with the organization as
a whole as
opposed to subunit identification
Mitigate fraud by preventing employees from
becoming too familiar with transactions.
 Other Ways to shape
culture
 Physical and social arrangements
For example, office plans, interior decor, dress
codes and vocabulary, etc.
 Tone at the top
Top management statements & behaviors must be
consistent with the culture they are trying to
create.
Management cannot say one thing and do another
Sometimes whistle-blowers are ignored regarding
ethics concerns, reports of malpractice.(Ex ;
ENRON )
1-Intra-organizational
1-Intra-organizational
Transfers
Transfers

 Employee rotation improves the socialization

of employees giving them better appreciation
of problems faced by different parts of the
organization

 Transfers also can reduce employee fraud by

preventing employees from becoming to
familiar with certain entity's activities,
colleagues, and transactions.
2-
2- Physical
Physical &
& Social
Social Arrangements
Arrangements

 Physical and social arrangements can also

help in shaping organizational culture.
 Physical arrangements: Office planes,
Architecture, and interior decor.
 Social arrangements: Dress codes, and
Vocabulary.
3-Tone
3-Tone at
at the
the top
top

 Management can not say one thing and do

another
 Management set the tone that honesty and
integrity are valued and rewarded by the
organization.
 Cultural Controls & Control Problems
Lack of Motivatio Personal
Types of Control Directio nal Limitatio
n Problems ns
Ways of effecting personnel
controls
Selection and placement
Training
Job design & provision of resources
Ways of effecting cultural
controls
Codes of conduct
Group rewards
Intra-organizational transfers
Physical & social arrangements
Tone at the top
 Effectiveness of Personnel /
Cultural Controls


 Organizations
Organizations relyrely on
on some
some extent,
extent, onon their
their
employees,
employees, to to guide
guide and
and motivate
motivate
themselves.
themselves.

 Hiring
Hiring is
is the
the most
most important
important decision,
decision, hire
hire
the
the smartest,
smartest, most
most inspired
inspired people,
people, give
give
them
them the
the resources,
resources, andand get
get away
away from
from
there
there way.
way.

 The
The stronger
stronger thethe culture,
culture, the
the less
less need
need for
for
policies
policies manuals,
manuals, organizations
organizations charts,
charts,
detailed
detailed procedures,
procedures, and and rules.
rules.
Advantages of
Personnel/Cultural controls

 Personnel/cultural
Personnel/cultural controls
controls have
have several
several
advantages,
advantages, over
over result
result and
and action
action controls:
controls:
1. They
1. They are
are usable
usable toto some
some extent,
extent, in
in almost
almost
every
every setting.
setting.
2. Their
2. Their cost
cost is
is often
often lower
lower than
than other
other forms
forms of
of
controls.
controls.
3. They
3. They usually
usually produce
produce fewer
fewer harmful
harmful side
side
effects.
effects.
 The
 The degree
degree of
of personnel/cultural
personnel/cultural effectiveness
effectiveness
can
can vary
vary significantly
significantly across
across individuals,
individuals, groups,
groups,
and
and societies,
societies, some
some groups
groups and
and societies
societies have
have
stronger
stronger emotional
emotional ties
ties among
among their
their members.
members.
 Start with people controls
 People control …
 Must always be relied on, to a certain extent.
 Have relatively few harmful side-effects
 Involve relatively low out-of-pocket costs

 However, it is rare that people control will be sufficient;

hence, in most cases, it is necessary to supplement
them with…
 Action controls
 Results controls
 Soft controls(People/cultural) encourage self & mutual
monitoring.
 Orgs became flatter ,leaner with wider spans of control.
THANK YOU

Done by: Hanan Abaza