Management Control in Non-profit Organizations - Essay Example

Organisational Behaviour This essay will the four levers suggested by Simon to control risks in organisation. It will then explain the systemsapproach and the organisational control theory. The usefulness of these theories will be critically appraised in relation to the role and operation of managerial accounting. According to Robert Simon when organisations are on a road to success they often ignore the underlying risks that can envelope their companies. He says organisation is vulnerable in areas of growth, culture and information management. Break down can occur in any area of operations or result in failure of process capabilities. (Simon, 2002) To avoid such risks Simon has prescribed four levers of control. These levers are given below: (Leo D'Acierno, 1996) Belief System: This system is used to communicate the organisational vision and mission strategies. This system is designed to control the efforts of the employees towards a single goal. Managing belief systems is very important to an organisations success. If there is no mission or vision for the company, there is a possibility of non-alignment of company goals and individual goals. If there is no definite direction, every individual charts their own paths. Thus to canalise everybody's effort a system of control needs to be set on the ideologies and expectations of the company. Boundary System: Once the vision and mission of the company is clear, it is necessary to outline the code of conduct and ethical stand that the organisation takes. Without a proper policy on the acceptable and non-acceptable behaviour, an organisation can invite trouble. When employees are under work pressure there is a tendency to behave in a fashion which might not be acceptable to an organisation. For example, maintaining dignity of labour can be a stated policy on ethical behaviour of employees. If this policy is clearly outlined, employees will refrain from raising their voices and screaming at each other, thus following decorum inside the organisational premises. Diagnostic Control System: This system is designed so that managers can monitor the performances of their tasks without a day-to day monitoring by their seniors. This system is set to allow the managers to achieve pre-determined goals and tasks. This system helps in diagnosing any variations in the business plans. For example, if a particular report has to be published on 8th of every month, the draft should be ready by 4th of every month. By stating the dates and the parameters for the completion of the draft, the manager is able to check whether his report will be published on time or not. He can perform a diagnostic check before it is too late based on the pre-set deadlines and targets. Interactive Control system: This system is used to communicate with managers and subordinates on key issues. In this system, managers openly converse with their team members to inculcate key learning's and important issues. Every organisation has different improvement tools and performance measurement standards. The way these managers use these tools is important. Managers who interact, take active feedbacks and have one-on-one meetings avoid a lot of paperwork and documentation. This system can help control the time spent in documentation and paperwork. The systems Approach: The above levers do represent the evolution of a systems approach. Any systems approach has specialisation. The components of a theory are categorized in their specialised fields. There is grouping of related disciplines or sub-disciplines. Once these disciplines are grouped it is necessary to coordinate the interactions amongst these groups. Lastly, the systems or subsystems should emphasize emergent properties of their groups or sub-groups. When these elements are present in an approach, the approach can be termed as systems approach. Simons Four levers of control have emerging properties. They have specific features, are grouped together and function in coordination with each other. Thus it can be stated that these four levers of controls were evolution of systems approach. Organisational Control Theory For managing inter organisational controls, control patterns are used. These control patterns are based on design patterns. These design patterns are based on a problem which is recurring. The pattern selects a solution based on the context. Context: Here, the context of the problem needs to be defined based on an ideal perspective. This is done so that no one behaves opportunistically. A context should be based on a control problem which has occurred due to failure to perform the stated norms. A control problem occurs if there is a deviation in following the prescribed value. For example, if an assignment which has to be delivered at the end of month, fails to do so, it deviates from the value model that is based on commitment to delivery. Problem: This contains one or more control problems based on situations that have potential for opportunistic behaviour. This has a value model and a process model. A control problem is defined by one or more risks. A violation of the laid-out model increases the amount of risk. A problem records the number of instances where the value-model is not adhered to. To understand a control problem and to arrive at a right solution one has to understand the inter-organisational business processes associated with different value models. Solution: The solution outlines the control mechanism which prevents, detects or corrects the control problem with different design patterns reducing variations. Solutions have a control mechanism that describes the implementation process of value models and process models. The variations are based on the forces that operate in these variations. (Kartseva, Hulstljn, Tan, Gordljn, 2006) Control theories: Application of a control system provides the link between the organization's enduring goals and long-term strategies and its day-to-day activities. For this reason an organization's management control function must be designed to operate in a systematic fashion if operating activities are to be efficient, effective, and contribute to its enduring objectives (Anthony & Young 1999). A corporate culture, an integrated system of general and formal controls, and a system of compensation and incentives are the three primary components of an organization's management control system. Goffee & Jones (1996) describe corporate culture as a sense of community within an organization based upon shared values and mutual obligations. This sense of community, mutual obligations, and shared values gives meaning to the activities of an organization's members and provides them with the rules of behaviour within their organization According to Green & Welsh (1988); in formal means of control the standards of performances are determined. There are set ways for measuring performance and making comparisons between standards and performances. Feedbacks generally provide information on variance. Control theories and managerial accounting: Financial operations are very critical to any organisation. If these operations are carried out under effective management control and proper systems, other members of the organisation will be influenced and thus implement similar strategies in achieving their objectives. Accounting processes can be successfully carried out if the following three formal controls are operational. 1. Operational Plans: This would include the organisations budget plans and work processes to support this budget. The budget will provide as a document to support decision making for senior management as well as for employees doing their day to day activities. Operational plan can serve as an effective standard for checking whether the planned budget has been carried out or not. 2. Performance Measurement System: This system should have processes that will compile and report the results of everybody's work activities on a monthly basis. An effective performance measurement system will involve adhering to the financial limits and operating data with responsibility. 3. Feedback Mechanism: This mechanism encourages reporting of variances between actual and planned performances. With a proper feedback the management gets to review their plans and policies and thus can make changes accordingly to ensure better results for the next quarter. Managerial Accounting is a field where even small mistakes can lead to major financial set backs. Thus it would be wiser to follow the four levers suggested by Simon to control the risks involved in financial operations. A Belief system will control behaviour that will be unacceptable to the organisation. For example, if an organisation clearly states their belief system that submitting false receipts and claiming compensations on false documents will not be tolerated, lot of money and accounting time will be saved in processing false documents. If a proper boundary system is in place employees will have a process manual to consult in moments of confusion. If the accounts section circulates a documents granting sanction amounts and sanction limits to their employees, the employees will have a means of controlling their spends as per their allocations. Thus accounting people can save lot of their time which gets consumed in explaining why a particular voucher was rejected or not sanctioned. Diagnostic control system will help in determining variances in the best laid plans. For example, if the administrative budget allocated to the administration department exceeds their spends, the amount sanctioned will help the administration manager to stop further expenses and take measures to control or recover pending amounts. A diagnostic system will serve as a check for him to prevent non-compliance at the organisation level. An interactive control system will help in communicating with each other without paper work. For example, sometimes talking to a person or meeting the individual in person for a chat can solve a lot of complicated issues. For example, if an employee from the marketing department is determined in spending more than his allocated amount, with the promise that he will generate business, can be resolved on an interactive basis, rather than passing emails to and fro. Minor adjustments can be worked out informally with commitments to deliver results. Systems Approach and its usefulness ( Goldratt, 1991, pp 52-78): The latest systems approach is the "Theory of Constraints" explained by Eliyahu M. Goldratt. This approach is explained with reference to organisation as a system and managerial accounting. In this approach an organisation is considered to be a chain of dependent variables. All the functions, processes and expenditures are linked together. For example, The net profit of a company is not an independent variable that can be derived at by itself. To obtain this result lot of other variables, like sales, production, vendors, resources etc, have to be taken into consideration Throughput is defined as the rate at which the system generates money through sales. Thus to achieve throughput all the different variables in the system have to be connected. For example, to arrive at the sales forcasts, the information on market demands, capacity to produce, availability of resources etc have to be known and linked. When throughput cannot be achieved the reason is presence of weaker links. According to Goldratt there is only one weakest link in chain. If this weakest link can be improved, the entire performance can be achieved. For example, if the weakest link is market, and if this is developed throughput can be achieved. Goldratt terms this weakest link as "constraint" An organisation is like a grid. It is interlinked. The products and resources are all inter-dependent. The problem of managerial accountants is they think only in terms of cost-world. There needs to be a shift from the cost-world to the throughput world. If you consider costs as independent variables, they will be difficult to calculate. If costs are considered in light of throughput, it will be easier to identify the "constraint" and remove it to achieve desired throughput. The theory of constraints consists of five steps. The first step is to identify the systems constraint. The second step is to decide how to exploit the systems constraint. For example if constraint is a machine, the next step will be to decide how to remove obstacles and reach a stage where the machine gives maximum throughput. The third step is to subordinate everything else to the above decision. Thus if machine is the constraint, all other links in the system have to work towards removing this constraint.The fourth step is to elevate the systems constraint. If machine is the constraint, purchase more machines to increase throughput. The fifth step states that if in previous steps, a constraint has been broken, go back to step one. The sixth step says after going back, do not allow inertia to cause another system constraint. Usefulness of this approach: This approach looks at a problem from a holistic view point. If problems are solved by this approach, not only one problem gets eradicated but the whole system benefits from the solution. The approach is designed in such a manner that it keeps continuous improvements in the system and allows renewal of policies while eradication of constraints. In the light of managerial accounting, if high costs are constraints, and if they are looked at from throughput perspective, the problem can be eradicated by identifying the weakest link or "constraint" that is causing this problem. Since all processes, products and resources are connected in this chain of system; by eradicating the one constraint the problem can be eliminated. Conclusion: In the light of Simon's levers of controls, the managerial accounting function can derive strict benefits. These levers can reduce the chaos and uncertainties that arise in handling complex financial issues. This approach is definitely a revolution amongst the other control theories. It has a compliance structure and at the same time it allows individuals to express their creativity and feel empowered. For example, an accountant can follow the procedural controls to submit filled tax forms on a particular date. With interactive controls established the manager can communicate with the accountant and ask him to download tax form which is available online. Thus the accountant can use his creativity to download and design these forms to suit his requirements. He can also make processes and save these forms for future use, so that he reduces re-work. Thus when all the levers are operating in harmony with each other, effective results can be obtained. Simons approach effectively manages the internal harmony and smooth functioning of an organisation. It is preventive in nature. The systems approach is curative in nature. This is a problem solving approach. Thus when prevention fails and problems arise, the theory of constraints helps in eradicating the problem and keeping the system in an atmosphere where there is continuous monitoring of weakest links. Any one approach may not be used in exclusion with other. Both the approaches can be applied depending on the need of the organisation. In reference to managerial accounting, Simon's four levers will help in reducing risks in the accounting department. However, if problem of cash not tallying, wrong budget estimates, auditing errors, the best way would be to connect accounting to all other functions and see where the weakest link lies. The answer is intuitive. Look for the link and solve it. References Anthony, R. & D. Young, Management Control in Non-profit Organizations, Irwin / McGraw-Hill, 1999 Eliyahu M. Goldratt, The Haystack Syndrome, North River Press, January 1991, pp 52-78 Goffee, R. & G. Jones (1996) "What Holds the Modern Company Together" Harvard Business Review. November-December 1996. pp. 133-48. Green, S. & M. Welsh (1988) "Cybernetics and dependence: Refraining the control concept." Academy of Management Review. Vol. 13. pp. 287-301 Leo D'Acierno, "Levers of Control: How Managers use Innovative Control Systems to Drive Strategic Renewal" by Robert Simons, First Quarter, 1996, http://www.strategy-business.com/press/16635507/8553 Accessed on 19 February 2008 Martin Fellenz, Control Theory in Organizational Behaviour: Review, Critique, and Prospects, University of Dublin-School of Business Studies, October 1997, Robert Simons, February 13, 2002, http://www.executiveforum.net/pdfs/simons.pdf Accessed on 19 February 2008 Vera Kartseva, Jorls Hulstljn, Yao-HuaTan, Jaap Gordljn, Towards Value-based Design Patterns for Inter- Organisational Controls, June 2006 http://www.bledconference.org/proceedings.nsf/Proceedings/6F0D2151E333C774C12571800032CB71/$File/34_Kartseva.pdf Read More