Wim Van der Stede

Management Control Systems

Chapter 14:Controllers, Auditors, and Boards of Directors

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003

- 2 -Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003

Corporate financial management roles ...

Controller Treasurer

Chief Financial OfficerVice President Finance

Provision of Capital Money Management

Risk Management

External Financial Reporting Management Control Systems Internal Control

Financial reporting and control Raising and managing capital

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The controllership function …

The controller (or the control department) ...

– Designs and operates information and control systems:» e.g., supervision of all accounting records

(financial / managerial);

– Prepares financial reports to shareholders and external parties;

– Prepares and analyzes performance reports and assists managers by interpreting these reports;

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The controllership function …

The controller (or the control department) ...

– Analyzes program and budget proposals and consolidates the plans of the various business segments into an overall annual budget;

– Supervises internal audit and accounting control procedures to ensure the validity of information;

– Performs operational audits;

– Develops personnel in the controller organization.

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The treasury function ... Basically, the treasury function entails

the control of corporate funds ...

– Provision of Capital Financing; Cash planning; Investor and creditor relationships.

– Money Management Banking: cash and deposits; A/R, A/P, collections, disbursements; Loans and investments (securities).

– Risk Management Insurance, including employee benefits.

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The control department ...

Controller

MIS Accounting Budgeting Internal Audit

SpecialProjects

AdministrativeSystems

ManagerialAccounting

FinancialAccounting

P&L-statementsConsolidationTax Returns...

Cost AccountingInventory ControlMake-or-buy...

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What should be the relationship between the corporate controller and the division controller?

Corporate Control Department

SBUs / Divisions / Segments / Functional Areas

Top ManagementPresident / Vice-Presidents

XYZ

Divisional Controller

... ... ... ......

?

Relation to the line ...

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Relation to the line ...

The controllership function is a staff function ...

» The controller designs and operates the control and information systems (e.g., control measures);

» However, the use of this information remainsthe responsibility of line management.

The controller can make recommendations for action to management, but (s)he does not make nor enforce management decisions.

This is not to say that the controller should notbe involved in or have a good knowledge of the business ...

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The business unit controller ... Two major responsibilities ...

– The management-service responsibility ...

» Help business unit management in the business decision process;

» It requires that the business unit controller becomes actively involved in the local decision making process.

» INVOLVEMENT

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The business unit controller ...– The financial reporting and internal control

responsibility ...

» Ensure that the financial information from the business unit is accurate and that internal control practices conform to corporate policy and procedures;

» It requires that the business unit controller acts as a "policeman" or local guardian for the corporate office.

» INDEPENDENCE

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Divided responsibility and loyalty ...

The business unit controller's job prioritiesand loyalties are changed when the reporting relationship is changed ...

– Centralization of the controllership function

» Solid-line with the corporate controller;Dotted-line with the business unit manager (staff-relationship).

» Emphasis on financial control responsibility.

» "Corporate spy” (HQ representative, irritant, unbiased partner, checker, policeman).

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Divided responsibility and loyalty ...

– Decentralization of the controllership function

» Dotted-line with the corporate controller;Solid-line with the business unit manager.

» Emphasis on management-service responsibility.

» "Business unit ally” (trusted assistant, helper).

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Alternative controller relationships ...

Centralization of the controllership function

– solid-line

Corporate Control Department

SBUs / Divisions / Segments / Functional Areas

Top ManagementPresident / Vice-Presidents

XYZ

Divisional Controller

... ... ... ......

- 14 -Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003

Alternative controller relationships ...

Decentralization of the controllership function

– dotted-line

Corporate Control Department

SBUs / Divisions / Segments / Functional Areas

Top ManagementPresident / Vice-Presidents

XYZ

Divisional Controller

... ... ... ......

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Factors influencing centralization of control ...

Corporate management / controller’s desire to ...

» Exercise “tight” control

» Implement uniform control systems acrossbusiness units or divisions

» Achieve economies of scale in control

» Speed up the introduction of new control techniques / procedures

» ...

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Possible solution … The business unit controller should ...

» Collect actual accounting and other dataon performance, following prescribed rules;

» Assist in preparing the budget;

» Analyze results so as to inform the business unit general manager of trouble spots and areas of improvement.

financial control

mgnt.service

If the business unit controller is expected to addvalue to the business, to be an adviser, (s)he should

report to the business unit general manager.

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Possible solution … Relationship with corporate controller ...

– The corporate controller has "functional control"

» Develop (uniform) control / information systems;

» Prescribe rules / procedures for the collectionof information;

» Study and suggest new control techniques forthe better performance of the controllers in the business units;

» Educate / train controllers (formal courses and informal meetings).

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And also ...

Internal auditors and audit committees can be usedto oversee the controller function;

Personnel / cultural controls (selection and trainingof controllers);

Incentive systems that do not create temptation(e.g., rewards based on performance measuresthey can manipulate);

Centralization / decentralization of the controllership function.

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Auditors ... The internal audit function operates in staff capacity and

reports high in the organization, at least to the controlleror financial vice-president.

Financial audits– External auditors / GAAP

Compliance audits– External / internal auditors;– Compliance with laws and rules / administrative policies.

Performance audits– External / internal auditors / consultants;– Evaluation of the performance of the company, its management,

a department, or a specific activity (+ make recommendations).

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Audits – two benefits …

The audit report adds credibility to the information provided to user groups;

Anticipation of the audit increases the motivationof the individuals involved to act in a legal, ethical way and in the best interest of the company and its owners.

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Board of directors ... Shareholders, who typically own a portfolio of firms, delegate

their authority for internal control to a board of directors.» The board is given ultimate control over management;

» It monitors and approves management decisions, andchooses, dismisses, and rewards managers.

Two main control responsibilities:» Safeguard the equity investors’ interests by ensuring that

management seeks to maximize shareholder value;

» Protect the interests of other corporate stakeholders (employees, customers, suppliers, competitors, and society at large) by ensuring that the employees in the corporation act in a legally and socially responsible manner.

Independence / outside directors / interlocking directorates.

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Audit committees ...

Overseers of the company’s financial reportingprocess and its internal control systems.

Maintain lines of communication between the board and the company’s external auditors, internal auditors, financial management, and inside and outside counsel.

Independence from management is crucial for effectiveness.

Recommended to be made up solely of outside directors.