1. MANAGEMENT SYSTEMS Accounting, Control, and Decision making
Henri Teittinen

2. Accounting as part of the organizational management system
CEO
MANAGEMENT TEAM
CFO
CONTROLLER
FUNCTIONS
BUSINESS UNIT MANAGER
Process A
Process B
Process C
Accounting as part of the organizational management system
Causes of control problems
What are the uses of measurement systems?
Different organizational contexts
Strategy as a basis for performance management systems

3. Accounting, decision making and control
The core question of this course:
How do we get others to do what we want them to do
To manage performance, a manager (and an organization) needs:
Information to make good decisions
A system of controls to ensure managers and employees at all levels do their best for the company

4. Teittinen & Auvinen 2014

5. Discussions:
What kind of controls you have experienced? In your current jobs, in your summer jobs?
As a manager (top-down)
As an employee (top-down)
Visible / invisible forms of control, etc. (also down to top, and networks)

6. Decision making in organizations
Typical decisions made by managers and accountants within an organization:
1) short-term decision making;
2) pricing decisions;
3) product-mix decisions;
4) equipment replacement decisions;
5) outsourcing decisions;
6) factors to be considered in discontinuity decisions;
7) sell or process further decisions.
Burns, Quinn, Warren & Oliveira (2013), Management Accounting, McGraw-Hill Education, UK

7. The role of accounting in organizational decision making
Uncertainty of objectives
Low
High
Uncertainty of cause and effect
Answer machines
Decision by computation
Ammunition (dialogue) machines
Decision by compromise
Answer machines/Learning machines
Decision by judgement
Rationalization machines
(Idea machines)
Ex post legitimation
(Decision by inspiration)
Uncertainty, decision making and the roles of accounting practice (adapted from Burchell et al. 1980; Boland 1979)

8. Management control Planning what the organization should do.
Coordinating the activities of several parts of the organization.
Communicating information.
Evaluating information.
Deciding what, if any, action should be taken.
Influencing people to change their behavior.

9. Management control - definitions
The process by which managers ensure that resources are obtained and used effectively and efficiently in the accomplishment of the organization’s objectives. Anthony (1965)
Management control is the process of guiding organizations into viable patterns of activity in a changing environment. (Berry et al. 2005)

10. Management control - definitions
Formal and informal controls
Financial and non-financial controls
Integration between the needs of corporate managers to monitor the financial consequences of decentralized activities
…to keep in touch with the emerging longer term strategic issues that are related to managing successful change
Organising
Planning
Evaluating
Rewarding

11. Management control - definitions
Decentralization
Structuring of activities
diagnostic control systems
monitor and reward achievement of specified goals through the review of critical performance variables or key success factors
interactive control systems
opportunity-seeking and learning

12. Management control - definitions
Personnel control mechanisms that influence organizational actors by aligning their personal objectives with those of the organization
Action control mechanisms that influence organizational actors by prescribing the actions they should take
Results control mechanisms that influence organizational actors by measuring the result of their actions
Merchant (1985)

13. Management control - definitions
Management control as practice
Bundle of practices and material arrangements.
Situated in offices and workshops, using configurations of machines and computers, organizational members negotiate strategies, budgets, and performance targets, they discuss ways of realising them, alert others to contingencies, give orders, follow, dispute, or circumvent instructions, generate reports and make comparisons, give and receive advice, find excuses, take corrective action, etc.
Rules, procedures, standards
A management control system is a bundle management control practices plus material and technical arrangements
Ahrens T. & Chapman C. (2007)

14. Management control
Management control is the process by which managers influence other members of the organization to implement the organization’s strategies.
Management control systems help managers move an organization toward its strategic objectives.
Thus management control focuses primarily on strategy execution.
Anthony & Govindarajan (2001)

15. Management control process
Management control process is the process by which managers at all levels ensure that the people they supervise implement their intended strategies.
Standard is not preset. Management decides what the organization should be doing. The control process includes planning.
Management control is not automatic. Some detectors may be mechanical but often managers detect important information with own eyes, ears, and other senses.
Organization’s behavior involve human beings, thus managers must interact with other person to effect change.
Management control requires coordination among individuals. Management control must ensure that each part works in harmony with the others.

16. Management control

17. Management control vs. strategic control
Strategic control involves management adressing the question:
Is our strategy valid?
Is our strategy still valid (in chancing environments)?
Should we change our strategy?
Management control focuses on execution.

18. Strategic control vs. management control
Strategy formulation is the least systematic of the three: task control is the most systematic and management control lies there between.
Strategy formulation focuses on the long run, task control focuses short run activities and management control is there between.
Strategy formulation uses rough approximations of the future, task control uses current accurate data and management control is in between.
Each activity involves planning and control: but the emphasis varies with the type of activity.
The planning process is much more important in strategy formulation, the control process is much more important in task control and in management control those have approximately equal importance.

19. Management control (system) and Tools for Implementing strategy

20. Management control areas
Behavior in organizations
Responsibility centers
Profit centers
Transfer pricing
Measuring and controlling assets employed
Strategic planning
Budget preparation
Performance measurement
Management compensation
Controls for differentiated strategies

21. Basic levers of control (Simons 1995)

22. Ferreira & Otley 2009

23. Tuomela 2005

24. Causes of (behavioral) management control problems
Lack of direction
Some employees perform inadequately simply because they do not know what they are expected to do.
Motivational problems
Employees understand what is expected, but some do not perform as expected.
Employees sometimes act in their own personal interest at the expence of their organizations interest.
Personal limitations
Employees are unable to perform as expected.
Training, education, experience, etc.

25. Control problem avoidance
Activity elimination
No ability to control certain activities, perhaps no resources, no good understanding of the required processes, legal or structural limitations.
Automation
Computers, techology, automatization, etc. to reduce control problems.
Feasibility. Humans have ability to solve problems.
Cost of technology.
Centralization
Centralization of decision making
Risk sharing
Insurance
Joint venture