Control, Performance Appraisals and Auditing PRESENTED BY: G. Okello, D. Wekesa, I. Ogolla, and C. Kaniiru LECTURER: Dr. M. Gachuuru

CONTROL Managers must monitor & evaluate: Are we efficiently converting inputs into outputs? Must accurately measure units of inputs and outputs. Is product quality improving? Are we competitive with other firms? Are employees responsive to customers? customer service is increasingly important. Are our managers innovative in outlook? Does the control system encourage risk-taking?

CONTROL SYSTEMS A good control system should: Formal, target-setting, monitoring, evaluation and feedback systems to provide managers with information to determine if strategy and structure are working effectively and efficiently. A good control system should: be flexible so managers can respond as needed. provide accurate information about the organization. provide information in a timely manner. Three Types of Control

Three Types of Control Outputs Inputs Conversion Process Concurrent (manage problems as they occur) Feedback Control (manage problems after they occur) Feedforward Control (anticipate problems)

CONTROL TYPES Feedforward: use in the input stage of the process. Managers anticipate problems before they arise. Managers can give rigorous specifications to suppliers to avoid quality Concurrent: gives immediate feedback on how inputs are converted into outputs. Allows managers to correct problems as they arise. Managers can see that a machine is becoming out of alignment and fix it. Feedback: provides after the fact information managers can use in the future. Customer reaction to products are used to take corrective action in the future.

CONTROL PROCESS STEPS Establish standards of performance, goals, or targets against which performance is evaluated. Measure actual performance Compare actual performance against chosen standards Evaluate results and take corrective action when the standard is not being achieved.

The Control Process 1. Establish standards, goals, or targets against which performance is to be evaluated. Standards must be consistent with strategy, for a low cost strategy, standards should focus closely on cost. Managers at each level need to set their own standards. 2. Measure actual performance: managers can measure outputs resulting from worker behavior or they can measure the behavior themselves. The more non-routine the task, the harder to measure. Managers then measure the behavior (come to work on time) not the output.

The Control Process 3. Compare actual performance against chosen standards. Managers must decide if performance actually deviates. Often, several problems combine creating low performance. 4. Evaluate result and take corrective action. Perhaps the standards have been set too high. Workers may need additional training, or equipment. This step is often hard since the environment is constantly changing.

The Goal-Setting Process Corporate level managers set goals for individual decisions to allow organization to achieve corporate goals. Divisional managers set goals for each function to allow the division to achieve its goals. Functional managers set goals for each worker to allow the function to achieve its goals.

3 Organizational Control Systems Output Control Financial Measures or performance Goals Operating budgets Behavior Control Direct supervision Management by Objective (MBO) Rules & Standard Operating Procedures Culture or Clan Control Values Norms Socialization

OUTPUT CONTROL SYSTEMS Financial Controls are objective and allow comparison to other firms. Profit ratios--measures how efficiently managers convert resources into profits. Return on Investment (ROI) is the most common. Liquidity ratios -- measure how well managers protect resources to meet short term debt. Current & quick ratios. Leverage ratios -- show how much debt is used to finance operations. Debt-to-asset & times-covered ratios. Activity ratios -- measures how managers create value from assets. Inventory turnover, days sales outstanding.

OUTPUT CONTROL SYSTEM Organizational Goals: after corporate financial goals are set, each division is given specific goals that must be met to attain the overall goals. Goals and thus output controls, will be set for each area of the firm. Goals are specific & difficult (not impossible) to achieve. Goal setting is a management skill developed over time. Operating budgets: a blueprint showing how managers can use resources. Managers are evaluated by how well they meet goals and stay in budget. Each division is often evaluated on its own budgets for cost, revenue or profit.

OUTPUT CONTROL PROBLEMS Managers must create output standards that motivate at all levels. Be careful of creating short-term goals that motivate managers to forget the future. It is easy to cut costs by dropping R&D now but it leads to future disaster. If standards are too high, workers may follow unethical behavior to attain them. Increase sales regardless of issues. This can be done by skipping safe production steps.

Behavior Control Systems Managers must motivate and shape employee behavior to meet organizational goals. Direct Supervision: managers who directly manage workers and can teach, reward, and correct. Very expensive since only a few workers can be managed by 1 manager. Can demotivate workers who desire more autonomy. Hard to do in complex job settings.

MANAGEMENT BY OBJECTIVES Management by Objectives (MBO): evaluates workers by attainment of specific objectives. Goals are set at each level of the firm. Goal setting is participatory with manager AND worker. Reviews held looking at progress toward goals. Pay raises and promotions are tied to goal attainment. Teams are also measured in this way with goals and performance measured for the team.

Bureaucratic Control Control through a system of rules and standard operating procedures (SOPs) that shape the behavior of divisions, functions, and individuals. Rules and SOPs tell the worker what to do. Standardized actions so outcomes are predictable. Still need output control to correct mistakes. Problems of Bureaucratic Control: Rules easier to make than delete. Leads to “red tape” Firm can become too standardized and not flexible. Best used for routine problems.

PERFORMANCE APPRAISAL Definition Performance appraisal is a system by which an employee’s job performance is measured against some expectation or standard. It can be regarded as a formal system of measuring, evaluating, and influencing an employee’s job-related attributes, behaviors and outcomes. A primary goal of performance appraisal is to provide feedback to employees on how well they are doing in their jobs and to provide direction to future development and accomplishments.

Objectives of an Appraisal Employees would like to know from a performance appraisal system: how they did; how they could do better in future; how they could obtain a larger share of rewards; and how they could achieve their life goals through their position. Therefore, from an employee’s viewpoint, he would desire that the appraisal system should aim at: their personal development; their work satisfaction; and their involvement in the organization.

Objectives (con’t) From the point of view of the organization, performance appraisal serves the purpose of: providing information about human resources and their development; measuring the efficiency with which human resources are being used and improved; providing motivation and compensation packages to employees; and maintaining organizational control.

Effective Appraisal Program The performance appraisal system should: be correlated with the organizational mission, philosophies and value system; cover assessment of performance as well as potential for development; take care of organizational as well as individual needs; and help in creating a clean environment by; linking rewards with achievements, generating information for the growth of the employee as well as of the organization, and suggesting appropriate person-task matching and career plans. Feedback is an important component of performance appraisal.

Uses of an Appraisal System A properly designed performance appraisal system can (Rao, 1985): help each employee understand their role and be clear about their functions; help employees to better understand their strengths and weaknesses with respect to their role and functions in the organization; help in identifying the developmental needs of employees; increase mutuality between employees and their supervisors so that every employee feels happy to work with their supervisor; act as a mechanism for increasing communication between employees and their supervisors;

Uses of an Appraisal System provide an opportunity to each employee for self-reflection and individual goal-setting; help employees internalize the culture, norms and values of the organization, thus developing an identity and commitment to the organization; help prepare employees for higher responsibilities in the future be instrumental in creating a positive and healthy climate in the organization that drives employees to give their best while enjoying doing so; and assist in a variety of personnel decisions by periodically generating data regarding each employee.

Characteristics of an Appraisal System Performance appraisal cannot be implemented successfully unless it is accepted by all concerned. Some of the important considerations in designing a performance appraisal system are: Goal - The job description and the performance goals should be structured, mutually decided and acceptable. Reliable and consistent - Should include both objective and subjective ratings to produce reliable and consistent measurement of performance. Practical and simple format - The appraisal format should be practical, simple and aim at fulfilling its basic functions. Regular and routine Participatory and open - Should necessarily involve the employee's participation, usually through an appraisal interview with the supervisor, for feedback and future planning.

Characteristics of an Appraisal System Rewards - Rewards - both positive and negative Feedback should be timely – Untimely feedback loses its utility and has only limited influence on performance. Impersonal feedback - Personal feedback is usually rejected with contempt, and eventually de-motivates the employee. Feedback must be noticeable - An open appraisal process creates credibility. Relevance and responsiveness - Appraisal of performance should be oriented towards the objectives of the programme in which the employee has a role.  Commitment - Responsibility for the appraisal system should be located at a senior level in the organization to ensure commitment and involvement throughout the management hierarchy.

Performance Appraisal Process Performance appraisal involves an evaluation of actual against desired performance. Craig, Beatty and Baird (1986) suggested an eight-stage performance appraisal process: Establishing standards and measures Communicating job expectations Planning The manager plans for the realization of performance expectations, arranging for the resources to be available. Monitoring performance Monitoring involve providing assistance as necessary and removing obstacles rather than interfering.

Appraisal Process (con’t) Appraising Involves documenting performance through observing, recalling, evaluating, written communication, judgment, and analysis of data. Feedback The session involves verbal communication, listening, problem solving, negotiating, compromising, conflict resolution and reaching consensus. Decision making Various decisions can be made about giving rewards (e.g., promotion, incentives, etc.) and punishments (e.g., demotion). Development of performance Development of performance by providing opportunities for upgrading skills and professional interactions. Such opportunities can also act as incentives

Approaches in Performance Appraisal Performance appraisal is a multistage process involving several activities, which can be administered using a variety of approaches: Intuitive approach - A supervisor or manager judges the employee based on their perception of the employee's behaviour. Self-appraisal approach - Employees evaluate their own performance using a common format. Group approach - The employee is evaluated by a group of persons. Trait approach - The manager or supervisor evaluates the employee on the basis of observable dimensions of personality. Appraisal based on achieved results - Appraisal is based on concrete, measurable, work achievements judged against fixed targets or goals. Behaviourial method - Focuses on observed behaviour and observable critical incidents.

Appraisal Techniques There are several techniques of performance appraisal, each with some strong points as well as limitations. Oberg (1972) has summarized some of the commonly used performance appraisal techniques. Essay appraisal method Graphic rating scale Field review method Forced-choice rating method Critical incident appraisal method Management by objectives Work standard approach Ranking methods

Components of the Appraisal Format The appraisal format should be designed in consonance with the objectives of the performance appraisal system, and generate information on a number of important aspects, including (Rao, 1985): Identification of key performance areas Self-appraisal by the subject Analysis Identification of training Identification of qualities

Problems in Evaluating Performance Some of the important problems faced by managers in evaluating performance are: Identification of appraisal criteria It is usually quite difficult to decide the criteria for evaluating performance, particularly the performance of those engaged in research activities. Assessment problems It is difficult to observe behaviour and interpret it in terms of its causes, effects and desirability. Policy problems The results of the appraisal system should be followed up through a set of well designed and enforced policies, and translated into rewards and punishments.

AUDITING TERMINOLOGY OF AUDITING FOOTING The process of proving totals of vertical columns of figures. CROSSFOOTING The proving of totals of figures appearing in horizontal rows. VOUCHING The process of establishing the accuracy and authenticity of entries in accounts, funds, or other records by examining such supporting evidence of the transactions as invoices, paid checks, and other original papers. VOUCHER A term used to describe any document supporting a transaction. TESTING The selecting and examining of a representative sample from a large number of similar items. ANALYZE The process of identifying and classifying, for further study the debit and credit entries contained in a fund or ledger account. Funds or accounts are analyzed in order to ascertain the nature of all the elements compromising the balance.

TERMINOLOGY (con’t) CONFIRM The process of proving the authenticity and accuracy of account balance by direct communication with the debtor, creditor, or other party to a transaction. RECONCILE To establish agreement between two sets of independently maintained, but related, records. VERIFY To prove the validity and accuracy of records, or to establish the existence and ownership of assets. COMPARE The process of observing the similarity or variations of particular items in financial statements from one period to the next. The term can also be used to mean ascertaining the agreement, or lack of agreement, between related documents such as a purchase order and an invoice. RECEIPT When monies are received, a receipt must be prepared properly signed by the individual receiving payment. The original copy should be given to the person(s) making the payment while the duplicate should remain in the binding. Receipts should be numbered consecutively when purchased from the printer. The receipt

AUDIT METHODS AND TECHNIQUES Financial Audit-systemic examination and evalution of financial systems, accounts in order to offer an opinion on accounts.  Compliance audit-organization is following the laws and ordinances that govern the handling of its general finances, such as those pertaining to tax levies, spending, investing, and borrowing

AUDITOR,S OPINIONS Qualified opinion-qualification of financial statements Disclaimer of opinion-Not able to form an opinion Non qualified opinion-True and fair position of the company

Conducting the Audit Preparation of audit plan. Check prior working papers, audit reports, newspaper clippings, audit plan. Planning of the audit STUDY AND EVALUATION OF INTERNAL CONTROL