Behavioral and Organizational Issues in Management Accounting and Control Systems

1. Behavioral and Organizational Issues in Management Accounting and Control Systems Chapter 9 © 2012 Pearson Prentice Hall. All rights reserved.

2. Management Accountingand Control Systems (MACS) • A major role for MACS systems is to motivate behavior congruent with the desires of the organization • Technical Considerations • Relevance of information that is accurate, timely, consistent, and flexible • Scope must be comprehensive and include all activities across the entire value chain of the organization © 2012 Pearson Prentice Hall. All rights reserved.

3. Major Behavioral Considerations • Embedding the organization’s ethical code of conduct into MACS design • Using a mix of short and long-term qualitative and quantitative performance measures • Empowering employees to be involved in decision making and MACS design • Developing an appropriate incentive system to reward performance © 2012 Pearson Prentice Hall. All rights reserved.

4. Impact of MACS on Behavior • Many managers try to implement new systems without considering the behavioral implications and consequences of a MACS • Negative consequences: • Goal congruence may not occur • Motivation could be low • Employees may be encouraged to engage in dysfunctional behavior © 2012 Pearson Prentice Hall. All rights reserved.

5. Human Resource Modelof Motivation (HRMM) • Contemporary management view of motivation • Based on initiatives to improve the quality of working life and the strong influence of Japanese management practices • Introduces a high level of employee responsibility for and participation in decisions in the work environment • Serves as the basis for the presentation of the four behavioral considerations in MACS design © 2012 Pearson Prentice Hall. All rights reserved.

6. Central Assumptions of HRMM • Organizations operate under a system of beliefs about the values, purpose, and direction of their organization • People find work enjoyable and desire to participate in: • Developing objectives • Making decisions • Attaining goals in their work environment • Individuals are motivated by both financial and nonfinancial means of compensation © 2012 Pearson Prentice Hall. All rights reserved.

7. Central Assumptions of HRMM • Employees have a great deal of knowledge and information about their jobs, the application of which will improve the way they perform tasks and benefit the organization as a whole • Individuals are highly creative, ethical, and responsible • Employees desire opportunities to effect change in their organizations © 2012 Pearson Prentice Hall. All rights reserved.

8. Ethical Code of Conductand MACS Design • A set of ethical principles is at the center of many boundary systems • MACS should incorporate the principles of an organization’s code of ethical conduct • MACS that incorporate ethical principles can provide decision makers with guidance as they face ethical dilemmas © 2012 Pearson Prentice Hall. All rights reserved.

9. Pressures Affecting MACS • Managers are often subject to intense pressures from their job circumstances and from other influential organizational members to suspend their ethical judgment in certain situations • These pressures include the following requests: • to tailor information to favor particular individuals or groups • to falsify reports or test results • for confidential information • to ignore questionable or unethical practices © 2012 Pearson Prentice Hall. All rights reserved.

10. Ethics and Management Accountants • Management accountants are guided by the organization’s code of ethical conduct and the ethical standards of their professional associations • Management accountants often play a significant role in MACS design, which should reflect their professional standards © 2012 Pearson Prentice Hall. All rights reserved.

11. Incorporating Ethics intoa MACS Design • To incorporate ethical principles into the design of a MACS, designers might attempt to ensure the following: • That the organization has formulated, implemented, and communicated to all employees a comprehensive code of ethics • That all employees understand the organization’s code of ethics and the boundary systems that constrain behavior • That a system exists to detect and report violations of the organization’s code of ethics © 2012 Pearson Prentice Hall. All rights reserved.

12. Avoiding Ethical Dilemmas • Most organizations attempt to address ethical considerations and avoid ethical dilemmas by developing a code of ethics • Ethical considerations listed in descending order of authority: • Legal rules • Societal norms • Professional memberships • Organizational/group norms • Personal norms © 2012 Pearson Prentice Hall. All rights reserved.

13. Ethical Hierarchy • An action that is prohibited by law should be unacceptable by society, by one’s profession, by the organization, and then by each individual • An action that is legally and socially acceptable may be professionally unacceptable and unacceptable to the organization and its employees © 2012 Pearson Prentice Hall. All rights reserved.

14. Dealing with Ethical Conflicts • A decision maker may face an ethical conflict when the individual’s code of ethics sets a higher standard than the organization’s • Organizations that formulate and support specific and unambiguous ethical codes create an environment that reduces ethical conflicts • One step is to maintain a hierarchy of authority © 2012 Pearson Prentice Hall. All rights reserved.

15. Role of Senior Management • A critical variable that can reduce ethical conflicts is the way that the chief executive and other senior managers behave and conduct business • If these individuals demonstrate exemplary behavior, other organizational members will have role models to emulate • Organizations whose leaders evince unethical behavior cannot expect their employees to behave according to high ethical standards © 2012 Pearson Prentice Hall. All rights reserved.

16. Conflicts within a Code of Ethics • When organizations develop a formal code of ethics, they can create the potential for explicit ethical conflicts to arise with the code itself • The conflicts that appear most in practice are those between the organization’s code of ethics and: • The law • Common societal expectations • The individual’s set of personal and professional ethics • Other conflicts relate to personal values and norms of behavior that were acceptable prior to the adoption of the organization’s new code of ethics but that are now in question © 2012 Pearson Prentice Hall. All rights reserved.

17. Conflict Between Individual andOrganizational Values • If the organization’s code of ethics is more stringent than an individual’s code, conflicts may arise, but if adherence to the organization’s ethical code is required and enforced © 2012 Pearson Prentice Hall. All rights reserved.

18. Conflict Between Individual andOrganizational Values • Issues may arise when the individual’s personal code of ethics prohibits certain types of behavior that are legal, socially acceptable, professionally acceptable, and acceptable to the organization • Potential for conflict in such situations is heightened when the action that is unacceptable to the individual is desirable to the organization • The organization may require that the person do things that he or she finds unacceptable © 2012 Pearson Prentice Hall. All rights reserved.

19. Conflict with Stated Values • Employees may observe management, even senior management, engaging in unethical behavior • This type of conflict is the most difficult because the organization is misrepresenting its ethical system • The employee is in a position of drawing attention to the problem by being a whistle-blower © 2012 Pearson Prentice Hall. All rights reserved.

20. Conflict with Stated Values • Experts who have studied this problem advise that the individual should determine: • That the facts are correct • That a conflict exists between the organization’s stated ethical policy and the actions of its employees in practice • Whether this conflict is institutional or reflects the decisions and actions of only a small minority of employees • Most experts recommend that the employee work with respected leaders in the organization to change the discrepancy between practiced and stated ethics © 2012 Pearson Prentice Hall. All rights reserved.

21. Conflict with Stated Values • Other potential courses of action include: • Point out the discrepancy to a superior and refuse to act unethically • Point out the discrepancy to a superior and act unethically • Take the discrepancy to a mediator in the organization, if one exists • Go outside the organization to publicly resolve the issue © 2012 Pearson Prentice Hall. All rights reserved.

22. Conflict with Stated Values • Go outside the organization anonymously to resolve the issue • Resign and go public to resolve the issue • Resign and remain silent • Do nothing, hoping that the problem vanishes © 2012 Pearson Prentice Hall. All rights reserved.

23. Conflict with Stated Values • If the organization is serious about its stated code of ethics, it should have an effective ethics control system to ensure and provide evidence that the organization’s stated and practiced ethics are the same, including a means for employees to point out inconsistencies and to protect those employees © 2012 Pearson Prentice Hall. All rights reserved.

24. Effective Ethical Control • To promote ethical decision making, an ethical control system should include the following: • A statement of the organization’s values and code of ethics written in practical terms, with examples that the employees can relate to their individual jobs • A clear statement of the employee’s ethical responsibilities for every job description and a specific review of the employee’s ethical performance as part of every performance review • Adequate training to help employees identify ethical dilemmas in practice and learn how to deal with those they can reasonably expect to face © 2012 Pearson Prentice Hall. All rights reserved.

25. Effective Ethical Control • Evidence that senior management expects members to adhere to its code of ethics, meaning that management must: • Provide a statement of the consequences of violating the organization’s code of ethics • Establish a means of dealing with violations of the organization’s code of ethics promptly, ruthlessly, and consistently according to the statement of consequences • Provide visible support of ethical decision making at every opportunity • Provide a private line of communication (without retribution) from employees directly to the chief executive officer, chief operating officer, head of human resource management, or someone else on the board of directors © 2012 Pearson Prentice Hall. All rights reserved.

26. Effective Ethical Control • Evidence that employees can make ethical decisions or report violations of the organizations stated ethics (be the whistle-blower) without fear of reprisals from superiors, subordinates, or peers • An ongoing internal audit of the efficacy of the organization’s ethical control system • Formal training is part of the process of promoting ethical decision making © 2012 Pearson Prentice Hall. All rights reserved.

27. Motivation • In addition to fostering ethical behavior, a central issue in MACS design is how to motivate appropriate behavior at work • When designing jobs and specific tasks, system designers should consider the following three dimensions of motivation: • Direction • Intensity • Persistence © 2012 Pearson Prentice Hall. All rights reserved.

28. Goal Congruence • Goal congruence—the organization and its employees align their respective goals • The alignment of goals occurs as employees: • Perform their jobs well and are helping to achieve organizational objectives, and • Are attaining their individual goals at the same time © 2012 Pearson Prentice Hall. All rights reserved.

29. Diagnostic Control Systems • Even if goals are aligned, different types of tasks require different levels of skill, precision, responsibility, initiative, and uncertainty • In most situations, managers try to establish systems that they do not have to personally monitor on a regular basis • These are called diagnostic control systems © 2012 Pearson Prentice Hall. All rights reserved.

30. Interactive Control Systems • If there is a large degree of strategic uncertainty, managers spend much more time monitoring the decisions and actions of their subordinates • These are called interactive control systems • At the core of both systems are two common methods of control: task and results control © 2012 Pearson Prentice Hall. All rights reserved.

31. Task Control • Task control is the process of finding ways to control behavior so that a job is completed in a pre-specified manner • Task control can be broken down into two categories: • Preventive control • Monitoring © 2012 Pearson Prentice Hall. All rights reserved.

32. Task Control • Task control is most appropriate when: • There are legal requirements to follow specific rules or procedures to protect public safety • Employees handle liquid or other precious assets • The organization can control its environment and eliminate uncertainty and the need for judgment © 2012 Pearson Prentice Hall. All rights reserved.

33. Results Control • Results control methods focus on measuring employee performance against stated objectives • The organization must have clearly defined objectives, communicated them to appropriate organization members, and designed performance measures consistent with the objectives © 2012 Pearson Prentice Hall. All rights reserved.

34. Results Control • Results control is most effective when: • Organization members understand the organization’s objectives and their contribution to those objectives • Organization members have the knowledge and skill to respond to changing situations by taking corrective actions and making sound decisions • The performance measurement system is designed to assess individual contributions so that an individual can be motivated to take action and make decisions that reflect their own and the organization’s best interests © 2012 Pearson Prentice Hall. All rights reserved.

35. Need for MultiplePerformance Measures • The ways in which organizations measure performance send signals to all employees and stakeholders about what the organization considers as its priorities • Using multiple measures of performance helps employees focus on several dimensions of their jobs rather than just keying in on one dimension © 2012 Pearson Prentice Hall. All rights reserved.

36. Behavior Not Goal-Congruent • Occasionally employees are so motivated to achieve a single goal that they engage in dysfunctional behavior: • Gaming the performance indicator • Data falsification • Smoothing (a form of earnings management) © 2012 Pearson Prentice Hall. All rights reserved.

37. Encouraging the Desired Behavior • Boundary systems give employees a clear understanding of what is considered appropriate and inappropriate behavior • Organizations may also design performance measurement systems that encourage the desired behavior • Use multiple performance measures to reflect the complexities of the work environment © 2012 Pearson Prentice Hall. All rights reserved.

38. Using a Mix ofPerformance Measures • MACS designers need to expand their views of the kinds of performance measures to use • Need for measures of quality, speed to market, cycle time, flexibility, complexity, innovation, and productivity • New realities—the movement from “tall” organizations to “flat” organizations © 2012 Pearson Prentice Hall. All rights reserved.

39. MACS Design:Empowering Employees • Empowering employees in MACS design requires two essential elements: • Allowing employees to participate in decision making • Ensuring that employees understand the information they are using and generating © 2012 Pearson Prentice Hall. All rights reserved.

40. Participation in Decision Making • Research has suggested that employees who participate in decision making feel greater morale and job satisfaction • In most industries, people still perform the majority of work and have superior information • MACS designers should enlist the participation of employees © 2012 Pearson Prentice Hall. All rights reserved.

41. Understanding Information • Empowering employees requires ensuring that they understand the information they use and on which they are evaluated • Employees at all levels must understand the organization’s performance measures and the way they are computed in order to be able to take actions that lead to superior performance • Employees have to be constantly re-educated as the system and its performance measures change © 2012 Pearson Prentice Hall. All rights reserved.

42. Incentive Systems • Types of reward systems to motivate employees: • Intrinsic rewards • Extrinsic rewards • Organizations use many systems of financial rewards • Theories of motivation: • Expectancy theory • Agency theory • Goal setting theory © 2012 Pearson Prentice Hall. All rights reserved.

43. Intrinsic Rewards • Come from within an individual and reflect: • Satisfaction from doing the job • Growth opportunities the job provides • the nature of the organization and type of work performed • Design jobs and develop a culture that lead employees to derive intrinsic rewards • Not affected by management accounting information © 2012 Pearson Prentice Hall. All rights reserved.

44. Extrinsic Rewards • Any reward that one person provides another to recognize a job well done • Based on assessed performance • Reinforce the notion that employees have distinguished themselves within the organization • Extrinsic rewards may reinforce the perception that wages compensate the employee for a minimally acceptable effort and that the organization must use additional rewards to motivate the employee to provide additional effort © 2012 Pearson Prentice Hall. All rights reserved.

45. Intrinsic vs. Extrinsic Rewards • Many compensation experts believe that organizations have not made enough use of intrinsic rewards • Some argue that people who expect to receive a reward for completing a task successfully do not perform as well as those who expect no reward © 2012 Pearson Prentice Hall. All rights reserved.

46. Intrinsic vs. Extrinsic Rewards • Most organizations ignore the role of intrinsic rewards in motivation and blindly accept the view that only financial extrinsic rewards motivate employees • Many people believe that financial extrinsic rewards are both necessary and sufficient to motivate superior performance • Both systematic and anecdotal evidence suggest: • Financial extrinsic rewards are not necessary to create effective organizations • Performance rewards do not necessarily create them © 2012 Pearson Prentice Hall. All rights reserved.

47. Intrinsic vs. Extrinsic Rewards • Some argue that any incentive compensation program is unacceptable • They suggest that organizations must strive to be excellent to survive in a competitive world • Superior and committed performance is necessary for all employees and is part of the contract of employment and does not merit additional pay • Many organizations rely on extrinsic monetary rewards to motivate performance © 2012 Pearson Prentice Hall. All rights reserved.

48. Incentive Compensation • Incentive compensation reward systems provide monetary (extrinsic) rewards based on measured results • Pay-for-performance systems • Base rewards on achieving or exceeding some measured performance • Require performance measurement systems that gather relevant and reliable performance information • Based on absolute performance, performance relative to some plan, or performance relative to that of some comparable group © 2012 Pearson Prentice Hall. All rights reserved.

49. Absolute Performance • Measures of absolute performance include: • The number of acceptable quality units produced • The organization’s results • The organization’s share price performance © 2012 Pearson Prentice Hall. All rights reserved.

50. Relative Performance • Rewards based on relative performance are those tied to the following: • The ability to exceed a performance target level • The amount of a bonus pool • The degree to which performance exceeds the average performance level of a comparable group © 2012 Pearson Prentice Hall. All rights reserved.