Management Control in Non-profit Organizations - Essay Example

Organisational Behaviour 1. Introduction This essay evaluates the four levers suggested by Simon to control risks in organisation. It will then explain the systems approach and the organisational control theory. In this explanation, the evaluation and criticism of systems approach in implementing organisation control theory can be observed. The critical appraise of usefulness of these theories in relation to the role and operation of managerial accounting is considered. 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 namely; Belief System, Boundary System, Diagnostic Control System, Interactive Control System. (Leo D'Acierno, 1996). Before implementing them, the planning and control system is a compulsion in organisation. 2. Planning and Control Organisational Control Theory can be used for managing inter organisational controls. Control patterns present in this theory help to design the systems that solves the problems. The design of the system will help in selecting a context suited to stated norms. The deviation that creates problem can be avoided with these controls. The problem may arise from opportunistic behaviour and the planning and control system should minimise the opportunistic behaviour of the employees. This results in a solution that outlines the control mechanism that prevents or corrects the problem. This is possible with Control theories: and their application. This 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 by planning and control systems. This includes enduring objectives. (Anthony & Young 1999), the corporate culture, an integrated system of general and formal controls, and a system of compensation and incentives. (Goffee & Jones (1996) describe corporate culture as a sense of community within an organization based upon shared values and mutual obligations. 2.1 Evaluation of Four Controls and Criticism Belief System is useful in communicating organisational vision and mission strategies to the lower management and other staff. This system is designed to control the efforts of the employees towards a single goal. This may hinder the creativity of the employee in some special circumstances and to avoid this continuous monitoring of the management about the implementation is necessary. This makes managing belief systems as very important to an organisation’s 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 his or her own paths. Thus to streamline every employee’s effort a system of control mixed with encouragement is needed to set on the ideologies and expectations of the company. This needs outline of the code of conduct before implementing. This is possible with Boundary system that outlines the code of conduct and ethical standards. This results in a proper policy on the acceptable and non-acceptable behaviour of an organisation for not inviting 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. This is possible by Boundary System that clearly outlines, and thus making employees to refrain from raising their voices and screaming at each other. This results in decorum inside the organisational premises. Even in course of implementation of Boundary system, a monitoring system is needed. This is possible with Diagnostic Control System and is designed to enable managers to 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 and this diagnosis should not disturb the decorum maintained by boundary control system and the standards of inspiration induced by belief system. For example, if a particular report has to be published on eighth of every month, the draft should be ready by fourth 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. Though this induces discipline the absence of interaction may disturb the inspiration and ethics induced by first two levers. This can be made possible by interactive control system. The Interactive Control system can be 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. The way these managers use these tools is important and decides the way they control the time spent in documentation and paper work and its coordination with the productive work. The productive work is materialised and maximised by system approach. The system approach is the resultant of above levers systems. Any systems approach has specialisation. This is possible by categorisation of specialised fields. This involves grouping of related disciplines or sub-disciplines. Once these disciplines are grouped, the coordination of interaction result in emphasising the emergent properties The presence of these elements in an approach makes it systems approach. As Simon’s four levers of control have emerging properties they have specific features and 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. The final system in the implementation of various organisational systems is managerial accounting. 3. Control theories and managerial accounting The importance of managerial accounting is due to the critical nature of financial operations in 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 operational plans, performance measurement system and feedback mechanisms are operational. Operational Plans 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 and provides fiscal discipline. Performance Measurement System has processes that 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. Feedback Mechanism encourages reporting of variances between actual and planned performances. As a result Managerial Accounting is a field that deals with the circumstances, 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 and as a part of managerial accounting. A Belief system will control behaviour that will be unacceptable to the organisation. This saves accounting time and avoids the presentation of false documents. The proper boundary system will result in 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 When this discipline is observed in employees, diagnostic control system will help in determining variances in the best laid plans. The plans will turn more productive when an interactive control system will help in communicating with each other without paper work. 3.1 Systems Approach and its usefulness ( Goldratt, 1991, pp 52-78): The latest system approach is the “Theory of Constraints” explained by Eliyahu M. Goldratt and is based on fiscal discipline that is induced by managerial accounting. This importance of fiscal discipline is observed in practice of managerial accounting. In actual practice, any organisation is considered 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 it. This is possible by achieving Throughput in all the different variables in the system has to be connected. For example, to arrive at the sales forecasts, the information on market demands, capacity to produce, availability of resources etc have to be known and linked. The weaker links that are responsible for not achieving throughput can be improved by practicing managerial accounting. This is made possible by interlinking organisation with different methods of managerial accounting. This is possible by theory of constraints and 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. The fourth step is to elevate the systems constraint. The usefulness of the approach lies in looking 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. This is the essence of managerial accounting combined with systems approach and levers of control. Conclusion The managerial accounting is beneficial to any organisation when it is combined with Simon’s levers of controls while practicing. 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 simultaneously allows individuals to express their creativity and feel empowered. Thus, when all the levers are operating in harmony with each other, effective results can be obtained. Simons approach mixed with managerial accounting effectively manages the internal harmony and smooth functioning of an organisation. It is preventive in nature. The systems approach is curative in nature. The problem solving approach evolved will be a mix of both preventive and curative nature thus minimising the curative needs by preventing the problems. This makes weaker points in any organisation minimum by prevention. This is due to simultaneous use of both the approaches depending on the need of the organisation. As a result, the managerial accounting with Simon’s four levers helps in reducing risks in the accounting department making it effective and creative. References 1. Anthony, R. & D. Young, Management Control in Non-profit Organizations, Irwin / McGraw-Hill, 1999 2. Eliyahu M. Goldratt, The Haystack Syndrome, North River Press, January 1991, pp 52-78 3. Goffee, R. & G. Jones (1996) "What Holds the Modern Company Together?" Harvard Business Review. November-December 1996. pp. 133-48. 4. Green, S. & M. Welsh (1988) "Cybernetics and dependence: Refraining the control concept." Academy of Management Review. Vol. 13. pp. 287-301 5. 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 6. Martin Fellenz, Control Theory in Organizational Behaviour: Review, Critique, and Prospects, University of Dublin-School of Business Studies, October 1997, 7. Robert Simons, February 13, 2002, http://www.executiveforum.net/pdfs/simons.pdf Accessed on 19 February 2008 8. 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