Control System Costs

Question 1

What are the two types of control system costs and is there a link between the two?

Answer 1

• Direct – includes all the out of pocket monetary costs required to design and implement MCS’s e.g. cost of paying cash bonuses, investment in information systems, managerial time.
• Indirect – in terms of dysfunctional attitudes, hard to measure. Include; Behavioural displacement, Gamesmanship, Operating delays and negative attitudes.
• There is said to be an intricate link between direct and indirect costs. BNP Paribas failure to comply $9bn indirect fine followed by direct costs to overhaul internal controls

Question 2

What is behavioural displacement and how does it affect, result, action and personnel/cultural controls?

Answer 2

• An indirect cost when MCS’s produce or encourages behaviours that are not consistent with the organizations objectives.
• Results controls – setting of results measures which are incongruent with the organizations “true” objectives. One example includes sales quotas relating to volume rather than high profit “big ticket” items. Incongruence occurs from focusing on easy to quantify results metrics that lead them to incompletely capture all of the desired results. Garbage collection. “is what is counted all that counts?”
• Action controls – means-ends inversion, meaning that employees pay attention to what they do (the means) while losing sight of what they are to accomplish. Investing only in small investments to be within the action accountability controls but this may not be suboptimal. Incongruence, length of calls. Promotion of rigid, non-adaptive behaviours lack of experimentation and competitive advantage. May hinder innovation.
• Personnel/ Cultural controls – recruiting the wrong types of employees or providing insufficient training

Question 3

What is Gamesmanship? Discuss two major forms!

Answer 3

• Indirect Cost - We use the term gamesmanship to refer generally to the actions employees take to improve their performance without producing any positive effects for the organization. Results controls mostly!
• The first type, Creation of Slack resources involves the consumption of organizations resources by employees beyond what is required to achieve company objectives. Relating mostly to result controls which are tight (budget targets). Managers protect themselves against underachieving through budgetary slack, for example. Budgetary slack achieved through negotiating easy achievable targets, deliberately lower than their future prediction. Protection against future contingencies. Positive of slack – reduce tensions, Negative of slack – obscures information and decision making.
• The second major type, Data Manipulation – (1) falsification of accounting records. (2) Data management - most favourable accounting method or altering operating decisions switching from accelerated to straight line depreciation. Sometimes managers manipulate data so performance is bad so for example share price falls in presence of option grants!!

Question 4

What are operating delays?

Answer 4

• An indirect cost mainly resulting from action controls! Pre-action reviews and behavioural constraints. Minor delays such as entering passwords etc. Major requiring signatures from various managers at various levels. “Straight jacket” operations and hence curtail market responsiveness. “Bureaucracy killing entrepreneurial ship” eg.
• Action controls – act first, apologise later.

Question 5

What are negative attitudes and which control do they relate to?

Answer 5

• Mainly related to results and action controls. They include job tension, frustration and resistance they coincident with other behaviours such as game playing, lack of effort, absenteeism and turnover.
• Results controls can produce negative attitudes! Lack of commitment to performance targets defined in the results controls system. Most employees are not committed to targets considered too difficult, not meaningful, not controllable, or imprudent. Inequitable rewards. Allowing employees to participate in setting targets often reduces negative attitudes to results controls but could create budgetary slack.