Managerial Accounting: An Introduction To Concepts, Methods, And Uses Chapter 12 Incentive Issues Maher, Stickney and Weil

Learning Objectives (Slide 1 of 3)  Describe key characteristics of divisional incentive compensation plans.  Explain how incentive plans can affect the development phase of the product life cycle.  Compare and contrast expectancy and agency approaches to motivation.  Describe the balanced scorecard as a way to tie performance measures to organizational goals.

Learning Objectives (Slide 2 of 3)  Explain the importance of performance measures for the four balanced scorecard perspectives.  Explain what constitutes fraudulent financial reporting.  Define the two most common types of fraud and demonstrate their impact on financial statements.

Learning Objectives (Slide 3 of 3)  Identify the incentives for committing financial fraud.  Explain how environmental conditions influence fraudulent conduct.  Identify controls that can be instituted to prevent financial fraud.

Discuss Divisional Incentive Compensation Plans (Slide 1 of 4)

Discuss Divisional Incentive Compensation Plans (Slide 2 of 4)

Discuss Divisional Incentive Compensation Plans (Slide 3 of 4)

Discuss Divisional Incentive Compensation Plans (Slide 4 of 4)

Review Incentives and the Product Life Cycle

Views of Behavior (Slide 1 of 3) Define the expectancy theory view

Expectancy Theory Perspective Employee Effort Employee Effort Rewards Performance Expectancy of Objective Probability That Effort Will Result in Performance That Effort Will Result in Rewards Expectancy of Objective Probability

Views of Behavior (Slide 2 of 3)  Agency theory - focuses on:  Relations between principals and agents where principals assign responsibility and agents work on behalf of the principal  The cost of agents pursuing their own interests instead of those of the principal

Views of Behavior (Slide 3 of 3)  Define the Agency theory view

Balanced Scorecard (Slide 1 of 5)  Define The balanced scorecard  Most companies use four categories or “perspectives” of performance measures  A company can build an incentive plan around these four perspectives

Draw the Balanced Scorecard

Balanced Scorecard (Slide 2 of 5)  Learning and growth perspective - indicates how well the infrastructure for innovation and long-term growth is working  Focuses on developing the capabilities of employees  Key measures for evaluating manager performance in this area might include:  Employee satisfaction  Employee retention  Employee productivity

Balanced Scorecard (Slide 3 of 5)  Internal business & production process perspective - indicates how well internal business processes are working  Closely related to the learning and growth perspective  Employees are the best source of better ideas for better business processes  Supplier relations are critical for success  Company may provide incentives for good supplier relations such as certification programs

Balanced Scorecard (Slide 4 of 5)  Customer perspective - indicates how the company’s strategy and operations add value to customers  Focuses on how a company should look to its customers for success  Company should provide incentives to employees to meet customer expectations  Performance measures might include:  Customer satisfaction and retention  Market share  Customer profitability

Balanced Scorecard (Slide 5 of 5)  Financial perspective - indicates whether company’s strategy and operations add value to shareholders  Performance measures include:  Net income  Return on investment

Explain Motivational Issues in Designing Incentive Systems

Problems With Incentive Compensation Plans

Fraudulent Financial Reporting Define Fraudulent financial reporting

Types of Fraud  What are the two most common types of financial statement fraud?

Causes of Financial Fraud  Fraudulent financial reporting may occur because of a combination of pressures, incentives, opportunities, and environment  May result from:  High-pressure performance evaluation systems  The environment top management sets for dealing with ethical issues  Lack of, or inadequate, internal controls

Internal Controls  Companies establish internal controls to help prevent fraud. Define Internal Controls

Internal Controls  A basic internal control would involve a separation of duties so that one employee could not carry out a series of tasks to commit fraud and take steps to hide it

Auditing  Internal auditors can deter fraud by reviewing and testing internal controls and ensuring controls are in place and working properly  Independent auditors provide an opinion on the financial statements  Fraud detection is not their primary responsibility, but presence of auditors and their review of the internal control system should help to deter it

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