ACCT 701 Chapter 9 Atkinson

Behavioral and Organizational
Issues in Management
Accounting and Control
Systems
Chapter 9
2012 Pearson Prentice Hall. All rights reserved.
Management Accounting
and Control Systems (MACS)
A major role for MACS 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
Major Behavioral
Considerations
Embedding the organizations 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
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
Human Resource Model

of 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
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
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
Ethical Code of Conduct

and MACS Design
A set of ethical principles is at the center of many

boundary systems
MACS should incorporate the principles of an

organizations code of ethical conduct
MACS that incorporate ethical principles can

provide decision makers with guidance as they
face ethical dilemmas
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
Incorporating Ethics into

a 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 organizations
code of ethics and the boundary systems that
constrain behavior
That a system exists to detect and report violations
of the organizations code of ethics
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
Ethical Hierarchy
An action that is prohibited by law should be

unacceptable by society, by ones 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
Dealing with Ethical Conflicts
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
Dealing with Ethical Conflicts
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
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
Conflict Between
Individual and
Organizational Values
If the organizations code of ethics is more

stringent than an individuals code, conflicts may
arise
If adherence to the organizations ethical code is
required and enforced, the individual is asked and
expected to pursue a more stringent code of ethics
Conflict Between
Individual and
Organizational Values
Issues may arise when the individuals 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
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
Experts who have studied this problem advise that

the individual should determine:
That the facts are correct and that a conflict exists
between the organizations 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
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
Work with respected leaders in the organization to
change the discrepancy

Go outside the organization to publicly resolve the
issue
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
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
organizations stated and practiced ethics are the
same, including a means for employees to point
out inconsistencies and to protect those employees
Effective Ethical Control
To promote ethical decision making, an ethical

control system should include the following:
A statement of the organizations 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 employees ethical
responsibilities for every job description and a specific
review of the employees 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

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

organizations code of ethics
Establish a means of dealing with violations of the
organizations 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

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
organizations ethical control system
Formal training is part of the process of promoting

ethical decision making
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
Goal Congruence
Goal congruencethe 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
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
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 control and results
control
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
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
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
Results Control
Results control is most effective when:

Organization members understand the
organizations 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
organizations best interests
Need for Multiple

Measures of Performance
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
Dysfunctional Behavior
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)
Using the BSC to Align

Employees to Goals
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 realitiesthe movement from tall

organizations to flat organizations
Change Management
Research has shown that the single most important

factor in making major changes to an organization
is having management support
Employees often resist change because they feel
threatened by:
Potential loss of jobs
Being reassigned to a new job
Increases in amount of work or responsibility
Changes in workplace environment
Changes in compensation
Empowering Employees to be
Involved in MACS Design
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
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
and understanding
MACS designers should enlist the participation of

employees
Education to
Understand 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
organizations 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
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
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
The challenge is to design jobs and develop a

culture that lead employees to derive intrinsic
rewards just by working
Not affected by management accounting
information
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
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
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
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
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
Absolute Performance
Measures of absolute performance include:

The number of acceptable quality units produced
The organizations results
The organizations share price performance
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
Effective Performance
Measurement
Six attributes must be in place for a measurement

system to motivate desired performance
Employees must understand their jobs and the
reward system and believe that it measures what

they control and contribute to the organization
Designers of the performance measurement system
must make a careful choice about whether it

measures employees inputs or outputs
Effective Performance
Measurement
The elements of performance that the performance
measurement system monitors and rewards should

reflect the organizations critical success factors
The reward system must set clear standards for
performance that employees accept
The measurement system must be calibrated so that
it can accurately assess performance
When it is critical that employees coordinate
decision making and other activities with other
employees, the reward system should reward group
rather than individual performance
Conditions Favoring
Incentive Compensation
Incentive compensation systems work best in

organizations in which employees have the skill
and authority to react to conditions and make
decisions
When the organization has empowered its

employees to make decisions, it can use incentive
compensation systems to motivate appropriate
decision-making behavior
Incentive Compensation and

Employee Responsibility
The incentive compensation system must focus

primarily on outcomes that the employee controls
or influences
Employees incentive compensation should reflect
the nature of their responsibilities in the
organization
A mix of rewarding both short- and long-term
outcomes is consistent with the goals of the
Balanced Scorecard approach
Rewarding Outcomes
Incentive compensation schemes tie rewards to the

outputs of employee performance rather than to
inputs such as their level of effort
Incentive compensation based on outcomes

requires that organization members understand
and contribute to the organizations objectives
Input-Based Compensation
Rewards may be based on inputs when:

It is impossible to measure outcomes consistently
Outcomes are affected by factors beyond the
employees control
Outcomes are expensive to measure
Input-based compensation measures the

employees time, knowledge, and skill level
Many organizations use some form of knowledgebased remuneration
Managing Incentive Plans
Considerable evidence indicates that organizations

have mismanaged incentive compensation plans,
particularly those for senior executives
Experts debate whether compensation systems

motivate goal-seeking behavior and whether they
are efficient
Managing Incentive Plans
Some studies show a positive correlation between

executive compensation and shareholder wealth
Other studies report finding no, or even a negative,
correlation between organization performance and
executive compensation
Many professionals argue that the amounts are
excessive and reflect high status rather than
performance
The issue of fairness has also surfaced
Types of Incentive Plans
Most common incentive compensation plans: cash

bonuses, profit sharing, gain sharing, stock
options, performance shares stock, stock
appreciation rights, participation units, and
employee stock ownership plans
Types of group compensation plans:
Those that rely on internal measures
Those that rely on performance of the
organizations share price in the stock market
Management accountants get involved in the first

group
Cash Bonus
A cash bonus plan pays cash based on some

measured performance
Cash bonuses can be:

Fixed in amount (triggered when measured
performance exceeds the target) or proportional to

the level of performance relative to the target
Based on individual or group performance
Paid to individuals or groups
Profit Sharing
A cash bonus calculated as a percentage of an

organization units reported profit
A group incentive compensation plan focused on
short-term performance
All profit-sharing plans define:
What portion of the organizations reported profits
is available for sharing

The sharing formula
The employees who are eligible to participate in
the plan
The formula for each employees share
Gain Sharing
Gain sharing is a system for distributing cash

bonuses from a pool when the total amount
available is a function of performance relative to
some target
Gain sharing is a group incentive that usually:
Provides for the sharing of financial gains in
organizational performance
Applies to a group of employees within an
organization unit, such as a department or a store
Gain sharing promotes teamwork and participation

in decision making
Stock Option Plans
A stock option is the right to purchase a unit of the

organizations stock at a specified price, called the
option price
A common approach to option pricing is to set the

option price at about 105% of the stocks market
price at the time the organization issues the stock
option
Other Stock-Related Plans
Organizations use many other forms of stockrelated incentive compensation plans
These plans provide incentive compensation to the

participants when the stock price increases
They are designed to motivate employees to act in

the long-term interests of the organization by
acting so as to increase its market (stock) value

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Behavioral and Organizational

2012 Pearson Prentice Hall. All rights reserved.

A major role for MACS is to motivate behavior

consistent, and flexible

2012 Pearson Prentice Hall. All rights reserved.

Embedding the organizations ethical code of

2012 Pearson Prentice Hall. All rights reserved.

Impact of MACS on Behavior

Many managers try to implement new systems

2012 Pearson Prentice Hall. All rights reserved.

Human Resource Model

Contemporary management view of motivation

Organizations operate under a system of beliefs

Individuals are motivated by both financial and

Employees have a great deal of knowledge and

2012 Pearson Prentice Hall. All rights reserved.

Ethical Code of Conduct

A set of ethical principles is at the center of many

MACS should incorporate the principles of an

MACS that incorporate ethical principles can

2012 Pearson Prentice Hall. All rights reserved.

Pressures Affecting MACS

Managers are often subject to intense pressures

Incorporating Ethics into

To incorporate ethical principles into the design of

and communicated to all employees a

Avoiding Ethical Dilemmas

Most organizations attempt to address ethical

An action that is prohibited by law should be

An action that is legally and socially acceptable

2012 Pearson Prentice Hall. All rights reserved.

Dealing with Ethical Conflicts

Organizations that formulate and support specific

One step is to maintain a hierarchy of authority

2012 Pearson Prentice Hall. All rights reserved.

Dealing with Ethical Conflicts

Organizations that formulate and support specific

One step is to maintain a hierarchy of authority

2012 Pearson Prentice Hall. All rights reserved.

Role of Senior Management

A critical variable that can reduce ethical conflicts

2012 Pearson Prentice Hall. All rights reserved.

If the organizations code of ethics is more

2012 Pearson Prentice Hall. All rights reserved.

Issues may arise when the individuals personal

Conflict with Stated Values

Employees may observe management, even senior

This type of conflict is the most difficult because

The employee is in a position of drawing attention

2012 Pearson Prentice Hall. All rights reserved.

Conflict with Stated Values

Experts who have studied this problem advise that

between the organizations stated ethical policy and

Most experts recommend that the employee work

Conflict with Stated Values

Other potential courses of action include:

2012 Pearson Prentice Hall. All rights reserved.

Conflict with Stated Values

2012 Pearson Prentice Hall. All rights reserved.

Conflict with Stated Values

If the organization is serious about its stated code

2012 Pearson Prentice Hall. All rights reserved.

Effective Ethical Control

To promote ethical decision making, an ethical