Management System Control - Assignment Example

Management System Control Name Professor Institution Course Date Table of Contents Table of Contents 2 Executive Summary 3 Introduction 4 Company Background 4 Actions and results 5 Organizational context influencing management control system choices. 7 Explanation and Justification of type of proposed management control system 9 Identification and justification of financial and non-financial key performance indicators the audit department 10 Critical evaluation of the proposed management control system 12 Conclusion 12 References 13 Executive Summary The term performance management was not common until 1970’s. From then, the performance language has turned out to be an each day attribute of operations in numerous public sector firms. According to Fullerton & Wempe (2009, p.215) the performance language has been related to the setting of management control system which is very important in achieving organizational objective and integrity, and upholding shareholder confidence. Therefore, this report will focus on management control system at external audit department of Deloitte Company. This will be evaluated based on actions and results which this department often wishes to control for their clients. Also this report will discuss the organizational context influencing management control system choices and identify and justify financial and non-financial key performance indicators relevant at the audit department. This finalized by critical evaluation of the proposed management control system consisting of balanced scorecard and job analysis. Introduction Since 1970’s, companies have created management control systems and implemented them within different functional areas including production, external audit, accounting, human resource and marketing among others (Bourne, Melnyk & Faull 2007, p.781). The system has been widely in the recent years to gauge performance of these departments. Within the companies, these systems play different roles because different departments have dissimilar actions. However, one common thing with management control system is that every management expects is such systems to restore accountability and integrity. Among the functional areas mentioned, external audit has been regarded by various management theories as one which uphold transparency, accountability as well as internal control within organizations. According to Carpinetti, Galda´mez & Gerolamo (2008, p.407) various researches claim that after the election of 1997, Labour Government of UK came to power and promoted the subject of controlling and managing public expenditure and enhancing public services through external auditing (Folz, Abdelrazek, Chung 2009, p.67). Due to the importance of this functional area, this report will focus key action and results which can be controlled by means of management control system at the external audit department of Deloitte. Also, this report will describe the organizational context influencing management control system choices and identify and justify financial and non-financial key performance indicators relevant at the external audit department. Company Background Deloitte Touche is a professional service company which was first established in the UK in 1845 but later moved its headquarters to the US (Deloitte 2014). The company has grown over the years and now operates in 150 countries across the globe with over 200000 employees. It growth have seen accumulate the largest share of the market based on revenue ahead of PricewaterhouseCoopers, Ernst & Young and KPMG. Deloitte offers services like tax, audit, consulting, financial advisory and enterprise risk. Today, Deloitte UK has the leading number of customers among the FTSE 250 firms (Deloitte 2014). With Audit division, Deloitte offers traditional audit and accounting service including IT control assurance and external auditing. Actions and results Many companies fail to register good performance either because they have not adopted any management control system or they have interfered with the one they are implementing (Franco-Santos 2007). For that reason external audit at Deloitte normally design for a their clients management control system which control actions that are intended to be controlled are dubious evaluation of results, misstatements, internal control, and independence of the Auditor, poor reporting, risk management practice and conflict of interests. In controlling such factors, different performance controlling tools can be used including program management (staff training), balanced scorecard, and job analysis. Dubious results are as a result of inappropriate accounting practices. Deloitte therefore designs a system for their clients which brings on board audit committee. This audit committee oversight the auditing practices, form a great relationship with the auditor while monitoring his or her actions (van der Steen, M 2011). With the help of Deloitte the set audit committee restores clear communication channel, exchange and information sharing insights within their audit departments. The audit committee helps with formal assessments and giving regular feedback on objectivity, professional skepticism and independence of the auditor (Franco-Santos 2007). It helps in controlling misstatements and poor reporting that the internal auditors normally do deliberately to cover up their actions. Some of the companies which have outsourced Deloitte service in the past over this matter include Coca Cola Company and Tesco Supermarket among others. Independence of the auditors has become a big concern to the companies. In fact, many companies have collapsed due to influence from directors; Enron, One.Tel, WorldCom are some of the examples. Van der Steen (2011, p. 524) asserts that the independence assurance provision by audit committee concerning accounting practices within accounting department remains a key facet of the external audit. Deloitte sets up a policy for their external auditor to be answerable to audit committee and not the management of the company there are auditing. The report of the audit can therefore be analyzed before final verdict is sent to the company management. Enron company internal audit department was unable to report due to strong influence of the CEO Kenneth Lay. For instance, at Enron financial reports were documented quickly to inflate continue the stock price of the company (Salter 2008). It can then be argued that the board of directors exercised insufficient LJM transaction oversight and compensation controls hence failing to safeguard shareholders of Enron Company from unfair transactions (Chhaochharia & Grinstein 2007). The situation put the internal auditor on a dilemma because refusing to heed to CEO’s demand could lead job loss. With auditor committee in place, internal control is assured because the auditor reports to the committee about everything taking place within the auditing departments (Van der Steen 2011, p.517). The financial reporting to the audit committee has become a norm in the global auditing practice. The internal control that has been lacking in the internal audit has improved under external audit which are provided outsourced companies like the Deloitte. Also external audit have ensured reduced conflicts of interest because the auditing best practice require them to declare their interest before accepting to carry out the service. Organizational context influencing management control system choices. The management control system is normally influenced by organizational strategy, potential employees’ problems, executive degree of knowledge and competence regarding external auditing. Normally the choice of management control system used by Deloitte when carrying external auditing for a client is determined by organizational expansion strategies, product or market development, recruitment, research and development (Pavlov & Bourne 2011, p.111). All these strategies involve use of funds. Before expansion or product development, the accountants and External auditors which in this case Deloitte needs to advice the top management comprising of the CEO and board of directors of the company they are working for on the financial position of the company. It guides an aspect of whether the current performance meets the objectives or expectations. Management can chose balanced scorecard as the best management control system. This is because balanced scorecard design is concerns determining part of financial and also non-financial steps and incorporating set objective to them, in order that when they are evaluated it becomes easier to know whether present performance satisfies the expectations (Moullin et al 2007, p.283). When Deloitte notifies the executives of the areas in which performance diverge from projections, thus they may be persuaded to concentrate their interest on such areas, and expectantly prompt improved results within the accounting department. Measuring of the product should not just be based on the number of sales it makes but also the demand of the product, lead time and the market delivery time (Trkman 2010, p.128). Also potential employees control problems influences the choice of management control system. Normally employees have different skills and competence regarding accounting practices. In that case they may post different results or even misstatement. Therefore, the Deloitte Company must implement management control system which can rectify such inabilities. Morgeson et al (2004, p.677) state that in this case, job analysis is viable. Job analysis is the process of evaluating the job requirements and establishing behaviors, knowledge, skills and other attributes desirable for reasonable job performance. Van der Steen (2011, p.521) asserts that by any means of job analysis, Deloitte Company requires to understand what the significant function of the job entails, for how they are done, and the needed human attributes desirable to carry out the job effectively. For example, there are large companies which have the position of accounting officers, financial officers and internal auditors who have their distinct jobs. However, some medium companies only have accountant who double up as the finance officer and internal auditor. In those cases, Deloitte will be forced to design management control systems which consider the different job description. Companies must not just measure performance based on the financial indicators to reward their employees but can measure individual skill, knowledge, customer service and team work using job analysis (Lau & Berry 2010, p.587). Management degree of knowledge concerning functional area is very important in implementing management system because it determines how long the manager could take in improving and controlling it. When outsourcing its services Deloitte Company often asked their clients (Managers) how familiar are they are with management control systems. This makes it easy for Deloitte to create one which the managers are comfortable with for convenience when interpreting results. For instance, a manager may be familiar with balanced scorecard but may not be familiar with program management hence Deloitte when make it easier by designing balanced scorecard. Van der Steen (2011, p.503) claims that the manager must be able to control every aspect of the system so as to integrate internal controls which can lead poor results. Explanation and Justification of type of proposed management control system There are two types of control system that are proposed consisting of balanced scorecard and job analysis. These management control systems will be used alongside each other. While balanced scorecard is used in control actions of managers and what emerges from their actions, job analysis determines which staff best fit for a certain job (Lau & Berry 2010, p.296). Deloitte also recommends job analysis system of control since it adds to several vital Human Resource Management operations as it classifies and evaluates the relationship between the job and the requirements. Deloitte implements balanced scorecard for incorporating both financial and non-financial measures to check and manage crucial actions in the value creation. According to Trkman (2010, p.127) financial measures requires to be complemented by non-financial performance assessments and an array of the important indicators of prospect performance that are often non-financial in nature. Deloitte uses the balanced scorecard is used here as a strategic management tool to enable the organization to convert strategic objective into pertinent performance measures. Kaplan & Norton (2008a, p.67) also claim that comprehensively, summarized, balanced scorecard normally tells the manager the skills, knowledge and systems which employees need to be innovative and create the apt strategic efficiencies and abilities, i.e. the internal processes which will deliver particular value to their target market that will ultimately results to high level of shareholder value. Deloitte Company considers that balanced scorecard develops strategy maps so as to show cause-and-effect connections in which particular improvements build the needed results. In the external environment, performance measure focused on how the business can provide value. Such value cannot be realized through measure of financial indicators. On the other hand, job analysis is needed to be used together with balanced scorecard. Job analysis is another form of non-financial measurement the management which Deloitte conduct for companies to assess the efficiency of a company (van der Steen 2011, p.503). This is also part of their external auditing services which involves vetting the internal employees at the auditing department to ascertain their capability to produce results. Morgeson et al (2004) argue that as an area which deals with behavior, they can conduct aptitude test to understand the motivation, role knowledge and attitude towards work. Workforce is the most important asset of the firm and their efficiency is a great advantage to themselves and the company. The job analysis process involves the Deloitte clarifying the functions of the sitting employee, then the conditions and nature of work, and eventually some fundamental qualifications (Muchinsky 2012). Identification and justification of financial and non-financial key performance indicators the audit department Change in the business created a lot of questions that could not be answered by the past management accounting notions. The new form of management accounting has used various indicators of performance away from financial indicators to measure the success of an organization (Franco-Santos 2007). In past years, numerous organizations have tried to manage and control organizational performance by the use the balanced scorecard method in which performance is monitored and measured in several dimensions like financial performance and non-financial indicators such as customer service, social responsibility and employee stewardship. Deloitte has played a big part in helping companies across the globe in designing and implementing management controlling system. While shareholders always want an increase in the equity, customers are often concerned with how they are served, quality of product offered and corporate governance of the company (Chhaochharia & Grinstein 2007). Deloitte has been recommending and designing balanced scorecard for companies which they can to measure financial performance and their non-financial attributes. Evans, Leone & Nagarajan (2005, p.14) hold that the new forms performance measurement and management styles have embraced by majority of contemporary and technologically-savvy firms have demonstrated that companies should not just concentrate on making money but should hence systems that help them maximize their profits. Balanced scorecard designed by Deloitte is used “to manage company’s budgeting, internal controls, misstatements and financial reporting” (Evans, Leone & Nagarajan 2005, p.13). As stated earlier Deloitte also argue that companies ought to compliment balanced scorecard with job analysis system. Deloitte uses designs job analysis policies and procedure to help their clients in controlling behavior and social contracts. This system entails negative ethics and values which can results conflict of interest, as well as helping categorize the skills and attitudes and roles which an employee posses. Critical evaluation of the proposed management control system The two management system recommended including balanced scorecard and job analysis have been used in some largest multination companies composing of IBM, Unilever and Tesco Chains of Supermarket and have proved effective (Carpinetti, Galda´mez & Gerolamo 2008, p.411). Some of the actions which undermine accounting practices are financial while others are non-financial. After collapsed of different companies in the last decade, managers have been put on high alert of the same happening in their organization if control management is not improved (Franco-Santos 2007). Balanced scorecard has proved to be more effective due to its flexibility in dealing with poor financial practice such as doubtful evaluation of results, misstatements, fraud, inflated price of shares, poor reporting, risk management practices and non-financial aspects like inexperienced accounting officers (Carpinetti, Galda´mez & Gerolamo 2008, p. 413). Job analysis is adopted to ensure employees with better behaviors are recruited into the organization and have the knowledge and skills to perform well. Muchinsky, (2012) argues that a job evaluation describes the activities, tasks, work, goals, products, services and processes necessary to carry out a specific job. It gathers details concerning work activities, machine, human behaviors, tools and work aids, standards of performance, job context, and human necessities. There are numerous techniques used to carry out a job analysis comprising of work sampling, observation, interviews with managers and in-offices, the repertory grid system, questionnaires, critical event investigations among others. Conclusion Performance measurement is an element of organizational success that has existed for decades. Each and every business strives for the good performance. However, sometimes it is not always the case. Employees sometimes allow their personal interest to prevail over organizational goal. Management control system must then be entrenched into an organization to put checks on what is to be done and what is not accepted. Modern managers must be able to combine various performance financial and non-financial performance indicators whenever because their form the pillar on which organization effectiveness is measured. This is a business that focuses on the interest of the owner and that of the customer has a high chance of surviving. References Bourne, M, Melnyk, S & Faull, N 2007, The impact of performance measurement on performance, International Journal of Operations & Production Management, Vol. 27, No. 8, pp. 781-783 Carpinetti, L.C.R, Galda´mez, E.V.C. & Gerolamo, M.C 2008, A measurement system for managing performance of industrial clusters: a conceptual model and research cases, International Journal of Productivity and Performance Management, Vol. 57, No. 5, pp. 405-419. 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