1 © 2012 John Wiley & Sons, Ltd, Accounting for Managers, 4th edition, Chapter 4 Management Control, Accounting and its Rational-Economic Assumptions

Overview Accounting and management control systems Cybernetic forms of control Non-financial performance measurement Theoretical framework 2 © 2012 John Wiley & Sons, Ltd, Accounting for Managers, 4th edition,

Management control & strategy ‘the process by which managers assure that resources are obtained and used effectively and efficiently in the accomplishment of the organization’s objectives’ ‘the process by which managers assure that resources are obtained and used effectively and efficiently in the accomplishment of the organization’s objectives’ – Anthony Strategy formulation Management control Task control 3 © 2012 John Wiley & Sons, Ltd, Accounting for Managers, 4th edition,

Management control & behaviour ‘the process of guiding organizations into viable patterns of activity in a changing environment … managers are concerned to influence the behaviour of other organizational participants so that some overall organizational goals are achieved’ ‘the process of guiding organizations into viable patterns of activity in a changing environment … managers are concerned to influence the behaviour of other organizational participants so that some overall organizational goals are achieved’ – Berry et al. Market Bureaucracy Clan – Ouchi 4 © 2012 John Wiley & Sons, Ltd, Accounting for Managers, 4th edition,

Management control & accounting ‘the formal, information- based routines and procedures used by managers to maintain or alter patterns in organizational activities... potentially significant levers of organizational change’ ‘the formal, information- based routines and procedures used by managers to maintain or alter patterns in organizational activities... potentially significant levers of organizational change’ – Simons ‘ ‘accounting is still seen as a pre-eminent technology by which to integrate diverse activities from strategy to operations and with which to render accountability’ – Otley et al. 5 © 2012 John Wiley & Sons, Ltd, Accounting for Managers, 4th edition,

Elements of a control system Control systems - feedback control – ‘the observed error is fed back into the process to instigate action to cause its reduction’ Planning systems - feed forward control – ‘because it is only an expected error that is used to stimulate the control process’ (Otley, 1987) 6 © 2012 John Wiley & Sons, Ltd, Accounting for Managers, 4th edition,

7 © 2012 John Wiley & Sons, Ltd, Accounting for Managers, 4th edition,

Standards against which performance can be compared – Previous time periods; – Similar organizations; – Estimates of future organizational performance ex ante (before the event); – Estimates of what might have been achieved ex post (after the event); – The performance necessary to achieve defined goals. Emmanuel et al. Emmanuel et al. © 2012 John Wiley & Sons, Ltd, Accounting for Managers, 4th edition,

Cybernetic control Four conditions: Four conditions: 1.Objective 2.Measuring outputs 3.Predict the effect of control actions to reduce deviations 4.Ability to reduce deviations Berry et al. Four types of control: – First-order control adjusts system inputs and causes behaviour to alter; – Second-order control alters system objectives or the standards to be attained; – Internal learning amends the predictive model on the basis of past experience – Systemic learning or adaptation changes the nature of the system itself © 2012 John Wiley & Sons, Ltd, Accounting for Managers, 4th edition,

© 2012 John Wiley & Sons, Ltd, Accounting for Managers, 4th edition,

Do these conditions exist? ‘organizational objectives are often vague, ambiguous and change with time... measures of achievement are possible only in correspondingly vague and often subjective terms... predictive models of organizational behaviour are partial and unreliable, and... different models may be held by different participants... the ability to act is highly constrained for most groups of participants’ ‘organizational objectives are often vague, ambiguous and change with time... measures of achievement are possible only in correspondingly vague and often subjective terms... predictive models of organizational behaviour are partial and unreliable, and... different models may be held by different participants... the ability to act is highly constrained for most groups of participants’ – Otley & Berry (1980) © 2012 John Wiley & Sons, Ltd, Accounting for Managers, 4th edition,

Accounting and management control ‘accounting information provides a window through which the real activities of the organization may be monitored, but it should be noted also that other windows are used that do not rely upon accounting information’ ‘accounting information provides a window through which the real activities of the organization may be monitored, but it should be noted also that other windows are used that do not rely upon accounting information’ – Otley & Berry (1994) © 2012 John Wiley & Sons, Ltd, Accounting for Managers, 4th edition,

Non-financial performance measurement Tableaux de bord – Innes Performance Pyramid – Lynch & Cross Results & Determinants Framework – Fitzgerald et al. Performance Prism – Neely et al. Business Excellence Model – European Foundation for Quality Management ISO 9000  Overwhelming emphasis on financial measures © 2012 John Wiley & Sons, Ltd, Accounting for Managers, 4th edition,

Accounting for Managers, 3rd ed., Ch 4 14 The Balanced Scorecard (Kaplan & Norton, 1996) © 2012 John Wiley & Sons, Ltd, Accounting for Managers, 4th edition,

Strategy mapping (Kaplan & Norton, 2001) A strategy map identifies the assumed cause-effect relationships. Performance targets are developed for each of the elements in the strategy map, and financial resources are allocated (through the budget process) to support the achievement of those targets. Regular monitoring and review of performance takes place through comparing actual performance against targets. Where performance needs to be improved, the strategy mapping process involves making resource reallocations through changing budgets. © 2012 John Wiley & Sons, Ltd, Accounting for Managers, 4th edition,

Theoretical framework ‘Rational paradigm – Driven by goals & strategy – Cybernetic control – Bounded rationality (March & Simon) Organizations are highly formalised Organizations are highly formalised – Role of accounting & control in managing a ‘contract’ between shareholders and managers  Rules governing behaviour and roles are determined independent of the attributes of the people occupying those roles  Division of labour and specialization of tasks, reducing transaction costs, efficiently processing information and monitoring the work of agents © 2012 John Wiley & Sons, Ltd, Accounting for Managers, 4th edition,

Key points Accounting as part of a management control system Cybernetic forms of control Non-financial performance measurement – the Balanced Scorecard and strategy mapping Theoretical framework: the rational paradigm © 2012 John Wiley & Sons, Ltd, Accounting for Managers, 4th edition,