Accountability and Control

1
Accountability and Control
PA 546 Constantine Hadjilambrinos

• Lecture 4
• September 20, 2005

2
Management Control Systems
PA 546 Constantine Hadjilambrinos

• Responsibility accounting
• Communicate expectations
• Track results
• Use results (performance measures) as feedback
• Improve performance

3
Motivation is crucial!
PA 546 Constantine Hadjilambrinos

• People make things happen
• Be on the lookout for goal divergence (personal
  vs organizational objectives)
• Design incentives and disincentives to minimize
  goal divergence
• Be careful of unintended consequences

4
Performance Measurement
PA 546 Constantine Hadjilambrinos

• Measure
• Private benefits to organization
• Benefits to society
• Effectiveness
• Efficiency
• Quality
• Quantity

5
Variance Analysis
PA 546 Constantine Hadjilambrinos

• Results often vary from plan
• Why? Understanding reasons will help improve
  situation in future
• Control results in current year
• Evaluate performance of units and managers
• Unfavorable variance (-) Favorable variance ()
• Overall / Department / Line-item

6
Flexible Budgeting
PA 546 Constantine Hadjilambrinos

• Volume variance Output of goods and services is
  higher or lower than anticipated
• Price/rate variance Cost per unit of input
  resources is different than anticipated
• Quantity/use variance Amount of resources needed
  per unit of output is different than anticipated

7
PA 546 Constantine Hadjilambrinos

• Aggregation issues
• Positive and negative variances may cancel
  each other out
• One line item may be disproportionate
• Exception reporting
• Every variance needs to be examined by someone
• People at the top of the organization need to
  focus on significant variances

8
Cost Control
PA 546 Constantine Hadjilambrinos

• Fixed costs Do not vary with output. Variance
  cannot be separated into price and quantity
  components (rent or mortgage payments)
• Can only be addressed by increasing efficiency
• Variable costs Linked directly to output level
  (raw materials)
• Can be adjusted by varying output
• Can be also addressed by increasing efficiency

9
Revenue Variances
PA 546 Constantine Hadjilambrinos

• Also important to understand, keep track of and
  control
• May be more difficult to control than cost
  variances
• Also can be separated into components
• Components may not be the same as in costsno
  quantity variance

10
ETHICS
PA 546 Constantine Hadjilambrinos

• Unethical behavior erodes public confidence and
  trust
• Code of ethics is useful for drawing clear
  distinctions between acceptable and unacceptable
  behavior
• CompetenceKeep up, know what is legal
• Confidentiality
• IntegrityAvoid even appearance of conflict of
  interest
• Objectivity

11
Elements of Effective Control System
PA 546 Constantine Hadjilambrinos

• Audit trail
• Reliable personnel
• Separation of functions
• Proper authorization
• Adequate documentation
• Proper procedures
• Physical safeguards
• Bonding vacations/rotation
• Performance audits
• Cost-effectiveness analysis