Management Consulting/management control system
1.Short notes:Cost and Time Overruns
2‘New Management techniques such as Total Quality Management, Just in Time are in tune with the conceptual foundations of Management Control Systems’. Explain
3.‘Every responsibility center manager in an organization is an expense center manager also’. Do you agree with this statement and if so, try to explain the same by giving examples.
4. As a manager of a multinational company what are the difficulties that you may be confronted with while adopting management control practices across various countries.
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1.Short notes:Cost and Time Overruns
One of the main functions of project management is to forecast and track costs to avoid cost overruns. While poor execution of project management tasks can lead to increased costs, you can link less obvious reasons to the processes of project management and the underlying nature of complex projects. Effective project management identifies such possible sources of cost overruns early and mitigates their effect.
A common reason for cost overruns is the inaccuracy of cost estimates. When the bids for subcontracts or the actual costs come in, they are often higher than anticipated. Such cost overruns are due either to incorrect estimates or to changed conditions in the marketplace. You can review cost estimates before placing orders to identify mistakes or changed conditions. An overall review may find that increases in some areas are compensated by decreases in others. You may be able to adjust requirements to reduce costs or seek out lower-cost suppliers. Advising the business owners or managers of possible higher costs at this stage gives them the option of making changes and maintaining their budgets.
Sometimes, the designs or drawings that form the basis of the project are not realistic. You may find that a combination of specified features is difficult to achieve or that drawings show an incorrect arrangement. Executing the project as specified will either cost extra or cause problems that must be resolved later at additional cost. As project manager, you have to continuously compare plans with executed work to find such discrepancies early and correct them.
The project progresses according to a plan that assigns durations to project tasks. If the projected durations can be too short, the project take longer than anticipated and cause cost overruns. Monitoring project tasks on the critical path, which is the task sequence from project start to finish that takes the longest to complete, helps reduce the risk of delays. Project tasks off the critical path have slack times, or free times between tasks, that you can use to compensate for delays.
Changes in the scope of supply within a project frequently cause cost overruns. These changes result from new requirements that the owners introduce and fixes for functions that don't work as specified. As project manager, you must make sure the owners understand that additional requirements result in higher costs, which you can classify as improvements rather than cost overruns. When you discover that parts of the project don't work as specified, you must explore different solutions and present them to the owners. Sometimes, you can find acceptable levels of functionality that don't cause cost overruns.
Time overruns occur when projects or tasks within a project is not completed by the time the project plan specifies. This can occur when materials to complete a project are back ordered and work cannot be completed until the materials arrive. Sometimes, labor shortages can cause work to be completed slower than anticipated.
Ranking Cause of Time overruns
1Practice of assigning contract to lowest bidder
2.Contractor‟s poor site management
3.Cash flow and financial difficulties faced by contractors
4.Ineffective planning and scheduling by contractors
5 Problems with subcontractors
6 Inadequate contractor experience
7 Material procurement
8 Underestimate project duration
9.Incompetent designers andcontractors
10. Shortage of site workers
11. Shortages of construction materials
12 .Change management
13 Escalation of material prices
14Mistakes during the constructionstage
15 Labour productivity
16Lack of communication betweenparties
17 Low speed of decision making
18 Changes in scope of projects
19 Poor technical performances
20 Improper techniques and tools
21 Improper site co-ordination and
management of the electrical andmechanical installation.
22 Frequent changes by owners
23 Difficulties in getting work permit
24 Unforeseen ground condition
25.Inadequate client‟s finance and
payments for completed work
26 Owner interference
27defects identified during the fireservices inspection
28 Necessary variations of works
29.availability and failure
30 Social and technological issues
2‘New Management techniques such as Total Quality Management, Just in Time are in tune with the conceptual foundations of Management Control Systems’. Explain
concepts of the management techniques - Total Quality Management, Just in Time related to Management Control Systems.
WHAT IS THE MODERN ORGANIZATION SEEKING
- Access wider geographic markets by complying with a recognised standard.
- New customers who require ISO 9000 compliance.
- Reduce customer rejection of products/services because of poor quality.
- Improve customer loyalty.
- Reduce or eliminate repetition of work.
- Reduce warranty and customer support costs.
- Reduce management time spent on “putting out fires”.
- Improve productivity by “doing it right the first time”.
TO THIS END, THE MANAGEMENT INTRODUCES VARIOUS
SYSTEMS / TECHNIQUES TO ACHIEVE ITS OBJECTIVES.
WHAT DOES TQM / JIT paradigm OFFER :
-Developing a corporate quality policy.
-Designing and implementing a quality system.
-Developing measures for capturing quality costs and benefits from improved quality.
-Encouragement of teamwork and participation of the management and the workforce.
-Continuous education and training to foster employee attitudes, management beliefs and value system.
-Usage of problem solving tools and techniques.
-Benchmarking of business results and processes.
-Improvement of managerial and technical processes.
-Integrating the customers’ and suppliers’ expectations.
-Carrying out quality audits and reviews on a continuous basis.
WHAT ARE THE BENEFITS OF TQM/JIT TO AN ORGANIZATION.
TQM / JIT leads to a synergy of benefits to the firm.
1.A philosophy that improves business from top to bottom
[everybody in the organization is involved towards the same objective]
2.A focused, systematic and structured approach to enhancing customer's satisfaction
[helps to increase sales / profit of the organization ]
3.Process improvement methods that reduce or eliminate problems i.e. non conformance costs
[improves the efficiency of the process and better results]
4.Tools and techniques for improvement - quality operating system
[improved working methods for improves results ]
5.Delivering what the customer want's in terms of service, product and the whole experience
[helps to tailor the product/service to match customer requirements and the
6.Intrinsic motivation and improved attitudes throughout the workforce
[improved work conditions means employees are motivated to perform better]
7.Workforce is proactive - prevention orientated
[it helps to prevent accidents / quality rejects etc ]
[it encourages discussion among employees/ between managers and employees]
9.Reduction in waste and rework
[continual discussion /continual improvements / proactive attitude
helps to prevent waste / rework/ reduces rejects.]
10.Increase in process ownership- employee involvement and empowerment
[setting of quality circles/ problem solving teams improves
the employee involvement and empowers employee to make decisions]
11.Everyone from top to bottom educated.
[TQM involves continual training at all levels which
helps the development of the individuals ]
12.Improved customer/supplier relationships (internally & externall)
[TQM takes the system across all working units
including all departments internally and external stakeholders integration]
[TQM helps to improve the customer servicing and helps
the competitive positioning of the company in the market]
14.TQM / JIT Through education, management and staff are given the tools to achieve all the above. Education provides for guided innovation from all levels. Training, which is a cost, shows a commitment by management .
15. TQM / JIT HELPS Individual staff self improvement, which is a motivator.
Staff will collectively provide continual improvement of company systems. By working together, communication/departmental barriers will be broken down. The standard of service can be set, maintained and then improved. Suppliers will be working with rather than working for the company . The standard of staff and management will improve through education. The adoption of a new attitude to work, by everyone embracing the ideas of TQM / JIT.
Direct benefits of TQM / JIT are as follows:
- Increased pride of workmanship among individual workers
- Increased readiness
- Improved sustainability caused by extended time between equipment failures
- Greater mission survivability
- Better justification for budgets because of more efficient operations
- Streamlined maintenance and production processes.
The bottom line of TQM/ JIT is “more bang for the buck.”
The concept behind TQM / JIT revolves around a change from management by results to management by process (quality) improvement. Managers are tasked with con- tinuously improving each and every process in their organization. That means combining quantitative methods and human resource management techniques to improve customer-supplier .
When a committed organisation applies TQM/JIT proven approach, the benefits can be profound
A philosophy that improves business from top to bottom
- A focused, systematic and structured approach to enhancing customer's satisfaction
- Process improvement methods that reduce or eliminate problems i.e. non conformance costs
-Tools and techniques for improvement - quality operating system
- Delivering what the customer want's in terms of service, product and the whole experience
- Intrinsic motivation and improved attitudes throughout the workforce
- Workforce is proactive - prevention orientated
- Enhanced communication
-Reduction in waste and rework
-Increase in process ownership- employee involvement and empowerment
-Everyone from top to bottom educated
- Improved customer/supplier relationships (internally & externally)
- Market competitiveness
b) Benchmarking and Management Control System
How are the concepts of the management techniques - Benchmarking related to Management Control Systems.
Management Control System
• A management control system is a logical integration of management accounting tools to gather and report data and to evaluate performancePurposes of a management control system
• clearly communicate the organization’s goals
• ensure that every manager and employee understands the specific actions required of him/her to achieve organizational goals
• communicate the results of actions across the organization
• ensure that the management control system adjusts to changes in the environment
Management Control System Step
1. Begin by specifying the organizations goals, subgoals and objectives – Goals are what the organization hopes to achieve in the long run – Subgoals or key success factors are more specific and provide more focus to guide daily actions – Objectives are specific benchmarks which management would like to see achieved – Important to keep all three in balance to avoid concentrating solely on short-run achievements at the expense of long run goals
2. Establish responsibility centers
3. Develop performance measures4. Measure and report on financial performance5. Measure and report on non-financial performance
4. The Management Control System Set Goals, Measures, Targets Plan Feedback and and Evaluate,Execute Learning Reward Monitor, Report
5. Setting Goals, Objectives and Performance MeasuresTop management develops organization-wide goals, measures and targets. They also identify the critical processes. Top management and critical process managers develop critical success factors and performance measures. They also specify objectives Critical process managers and lower-level managers develop performance measures for objectives.
6. Forms of Organizational Structure President StaffFunctional VP VP VP VP Marketing Production Human Resources Finance Divisional Matrix President Staff President Functional VPs Mkt. Prod. H.R. Fin. A Divisional VP VP VP VPs BDivision A Division B Division C C
7. Responsibility Centres• Set of activities assigned to a manager or a group of managers/employees• Based on principle of responsibility accounting which holds that managers should be evaluated on the activities which they can influence or controlCost Centre• Area for which cost data is accumulated such as an assembly departmentExpense Centre• Area dominated by discretionary expenses such as legal or accountingRevenue Centre• Area primarily responsible for generating sales such as a sales officeProfit Centre• Area responsible for controlling costs and generating revenuesInvestment Centre• Area responsible for income (revenues - expenses) in relation to its invested capital
8. Developing Measures of PerformanceGood performance measures will1. Relate to the goals of the organization2. Balance long-run and short-run concerns3. Reflect the management of key decisions and activities4. Be affected by actions of managers and employees5. Be readily understood by managers and employees6. Be used in evaluating and rewarding employees7. Be reasonably objective and easily measured8. Be used consistently and regularly
9. Controllability and Measuring Financial PerformanceControllable Cost• Cost which is directly influenced by the manager of a responsibility centre during a particular time period• Absolute or total control is not required in order for a cost to be classified as controllable• Key is to look for the manager or managers who are in the best position to explain the results achievedUncontrollable Cost• Any cost that cannot be affected by management of a responsibility centre within a given time spanMeasuring Financial Performance• Principle of responsibility accounting holds that it is fair to evaluate managers only on the costs under their control• Uncontrollable costs should be ignored in evaluating the manager because nothing he or she does will affect these costs
10. Contribution Income Statement for Measuring Performance Whole Branch Branch Company A B Net sales revenue $4,000 $1,500 $2,500 Variable costs 3,260 1,200 2,060Controllable Direct Contribution margin 740 300 440 Costs Costs Fixed costs controllable by manager 260 100 160 Contribution controllable by manager 480 200 280 Fixed costs controllable by others 200 90 110Uncontrollable Contribution by segment 280 $110 $170 Costs Indirect Unallocated costs 100 Costs Income before income taxes $180 • Evaluate manager on "contribution controllable by segment manager" (all controllable costs) • Evaluate segment on its "contribution by segment" (all direct costs)
11. Nonfinancial PerformanceControl of Quality Measures• Quality requires meeting customers requirements and maintaining this level throughout the production and sales process• Four categories 1. prevention 2. appraisal 3. internal failure 4. external failure• Total quality management (TQM) focuses on all areas of businessControl of Cycle Time• Cycle time is the time taken to complete a product or service• Summary measure of effectiveness and efficiency and an important cost driverControl of Productivity• Relationship of outputs to inputs for material, labour and equipment• Multiple productivity measures may include – Labour cost as a % of sales dollars – Sales per employee – Machinery & equipment investments per employee – Total labour cost per hour
12. Balanced Scorecard• Performance reporting approach which links organizational strategy to actions of managers and employees• Combines financial and operating measures• Links performance to rewards Financial Strength• Recognizes diversity in organizational goals Customer Organizational Satisfaction Learning Business Process Improvement
13. The Future of Management Control Systems• A changing environment requires changes in the management control system OrganizationalFour key Goalsfactors mustbe monitored Organizational Responsibilityat all times Structure Centres Performance MeasurementImportant factors to keep in mind:• Individuals will generally behave in their own self-interest• Design systems so that individuals pursuing their own self-interest will also achieve the organizations objectives• Best benchmark for evaluating current performance is expected or budgeted performance
• Nonfinancial performance is just as important as financial performance• Periodically review the success of the management control system• Learn from your and your competitors mistakes
Benchmarking vs. Reengineering
Another type of method of performance review and improvement is reengineering. Reengineering has been defined as "the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in contemporary measures of performance, such as cost, quality, service, and speed (4)." This generally involves discarding old practices with completely new ones. The new practices are usually determined from a process that requires a team and consultant to come up with, measure, and convince others to take up new ideas.
Reengineering can be problematic in government because they are don't have profits and completely discarding old processes and breaking down barriers between departments run into political, trade union, or other pressures. This sometimes results in the creation of new agencies rather than overhauling old ones. Reengineering is very expensive and prone to failure rates in over fifty percent of cases. It also requires TQM after its successful implementation.
While reengineering is cutting-edge and dramatic, and encourages employees to think big, it is still an internal process. It does not involve the practices of one organization to compare itself to those of another. While benchmarking may result in the use of completely new ideas similar to reengineering, it often is simply improving on existing ones. In addition, after performing reengineering, organizations often turn to TQM, to maintain their success.
Benchmarking vs. Performance Measurement
�Performance Measurement is government's way of determining whether it is providing a quality product at a reasonable cost (5).� In fact, more than half of all U.S. cities collect performance measures of some type (6). Performance measurement is also used in both government and the private sector for reporting to management.
Performance measurement can be used to measure such things as productivity, effectiveness, quality, and timeliness. When performance measures are used extensively and consistently they can be quite effective improving an organization�s output. Government agencies used for the following reasons (7):
� Better decision-making: it provides managers with information to perform their management control functions;
� Performance appraisal: it links both individual and organizational performance to aspects of personnel management and motivates public employees;
� Accountability: it fosters responsibility on the part of managers;
� Service delivery: Improvements in public service performance;
� Public participation: clear reporting of performance measures can stimulate the public to take a greater interest in and provide more encouragement for government employees to provide quality services; and
� Improvement of civic discourse: it helps to make public deliberations about service delivery more factual and specific.
What benchmarking does is to use data collected as performance measures and compare it to other organizations that perform those duties or processes. By comparing to other organizations through benchmarking, performance measurement becomes something other than "bean counting". However, since performance measurement is a prerequisite to benchmarking, the two have become intertwined, but they are not the same.
TQM Performance Measurement Re-engineering Benchmarking
Focus Internal Internal Internal External
Main Principles Develop dialogue within a process to improve it through gradual increments Take measurements for comparison and improvement Develop completely new methods for obsolete or failing processes Compare processes with others who do the same and determine best methods
These processes can be thought of as the following situation. An organization is seeking improvement. First, it takes performance measures and determines what processes need to be improved. Then, TQM can be employed to improve these processes internally. In addition, an organization may look beyond itself to other organizations for insight, and benchmark. If both TQM and benchmarking are not enough of an improvement, an organization may seek re-engineering, and restructure the whole process. In any case, performance measurement and TQM will need to be employed to insure that the processes developed remain at the proper levels. Finally, the whole process will need to be repeated as new improvements are needed.
Benchmarking has many advantages which will be discussed in this section. Rank Xerox's experience with benchmarking led them to the following benefits (16):
� Benchmarking brings out the newness and innovative ways of managing operations.
� It is an effective team building tool.
� It has increased general awareness of costs and performance of products and services in relation to those of competitor organizations.
� It brings together all the divisions and helps to develop a common front for facing competition.
� It highlights the importance of employee involvement and, as such, encourages recognition of individual/team efforts.
Benchmarking Do�s and Don�ts:
The following is an abbreviated list of do�s and don�ts from Bogan and English (24):
� As a general rule, the process or function selected should be one of the most critical to your business strategy.
� Projects should be well defined, and generally they should require less than a year to complete the research, analysis, action planning, and preliminary implementation.
� Management must support the project, provide adequate resources, and be prepared to champion implementation of the best practice findings.
� The organization must be willing to change.
� The team must understand who the customer is for the study. The customer�s expectations from the study are established by direct interaction.
� It is very useful to have an explicit mission statement which documents the project�s deliverables, purpose and metrics.
� Identify all that may be affected by the project and secure their ideas, contributions, and support.
� Consider implementation issues early in the planning phase and throughout the project.
� Don�t initially benchmark areas where the organization already performs well.
� Don�t benchmark topics or processes that aren�t important.
� Don�t benchmark processes that are so broad in scope, so poorly defined, or so poorly circumscribed, that the team cannot agree on its mission and cannot focus its efforts.
� Don�t undertake benchmarking projects with a team that is too large to be effective (10 or more) or too small to be credible (1 to 2).
� Don�t undertake complex process benchmarking efforts with team members that don�t understand the benchmarking process and don�t have access to and experienced benchmarking facilitator.
� Don�t benchmark unless all those affected by likely changes are represented on the benchmarking team or are given opportunity to contribute their ideas and interests to the benchmarking process.
THE CONTROLS FOR ANY ORGANIZATION ARE THE FOLLOWING
-EFFECTIVE ORGANIZATION STRUCTURE
-MANAGEMENT CONTROLS AT ALL LEVELS, WHICH INCLUDES
THESE CONTROLS ARE ,
-INVENTORY CONTROLS--RAW MATERIALS
-INVENTORY CONTROLS --FINISHED PRODUCTS
-SALES/ MARKETING EXPENSES CONTROL
-MONTHLY PERFORMANCE REVIEW AGAINST BUDGET
-HALF YEARLY BUSINESS AUDITING
IN ALL ORGANIZATIONS , WE HAVE INTEGRATED THE CONTROL
SYSTEMS INTO PLANNING, SO THAT IT HELPS
-TO MEASURE THE DEVIATIONS
-TO STUDY THE VARIANCES
-TO TAKE APPROPRIATE ACTIONS.
Management planning and control process"
P .PLANNING-----------------C.CONTROL [ c1.establish standards]
p1.establishing objectives.[FINANCIAL from accounts]
p2.determine detailed activities.
p6.communication and coordination
c2.measure and compare.[ ACTUAL FINANCIAL RESULTS from accounts]
c4.feedback and coach
c5.take corrective action.
The above schematic shows the important interrelationships between planning and control. As you can see, the control process does not begin after the entire planning process ends, as most managers believe.
After objectives are set in the first step of the planning process, appropriate standards should be developed for them. Standards are units of measurement established to serve as a reference base and are useful in determining time lines, sequences of activities, scheduling, and allocation of resources.
For example, if objectives are set and work is planned for 18 people on an assembly line, standards or reasonable expectations of performance from each person then need to be clearly established.
The second significant interaction between planning and control occurs with the final step of the control process-taking corrective action. This can take several forms, but two of the most effective are to change the objectives or alter the plan.
Managers dislike doing either; but if a positive motivational climate is to be established, these ought to be the first two corrective actions attempted. Objectives and standards are based on assumptions, but if these assumptions prove inaccurate, then objectives and standards require alteration. Thus sales quotas assigned on the premise of a booming economy can certainly be altered if, as is often the case, the economy turns sour.
Likewise, if the assumptions are accurate and objectives and standards have not been met, then it is possible that the plan developed was inadequate and needs to be changed.
IN ALL THESE, THE INFORMATION FOR CONTROL
IS PROVIDED FROM THE OPERATIONAL ACCOUNTS.
Controls are to be an integral part of any organization's financial and business policies and procedures. Controls consists of all the measures taken by the organization for the purpose of; (1) protecting its resources against waste, fraud, and inefficiency; (2) ensuring accuracy and reliability in accounting and operating data; (3) securing compliance with the policies of the organization; and (4) evaluating the level of performance in all organizational units of the organization. Controls are simply good business practices.
Everyone within the COMPANY has some role in controls. The roles vary depending upon the level of responsibility and the nature of involvement by the individual. The Board of President and senior executives establish the presence of integrity, ethics, competence and a positive control environment. The department heads have oversight responsibility for controls within their units. Managers and supervisory personnel are responsible for executing control policies and procedures at the detail level within their specific unit. Each individual within a unit is to be cognizant of proper internal control procedures associated with their specific job responsibilities.
The Internal Audit role is to examine the adequacy and effectiveness of the company internal controls and make recommendations where control improvements are needed. Since Internal Auditing is to remain independent and objective, the Internal Audit Office does not have the primary responsibility for establishing or maintaining internal controls. However, the effectiveness of the internal controls are enhanced through the reviews performed and recommendations made by Internal Auditing.
2.Elements of Internal Control
Internal control systems operate at different levels of effectiveness. Determining whether a particular internal control system is effective is a judgement resulting from an assessment of whether the five components - Control Environment, Risk Assessment, Control Activities, Information and Communication, and Monitoring - are present and functioning. Effective controls provide reasonable assurance regarding the accomplishment of established objectives.
**A. Control Environment
The control environment, as established by the organization's administration, sets the tone of THE COMPANY and influences the control consciousness of its people. MANAGERS of each department, area or activity establish a local control environment. This is the foundation for all other components of internal control, providing discipline and structure. Control environment factors include:
1 Integrity and ethical values;
2 The commitment to competence;
3 Leadership philosophy and operating style;
4 The way management assigns authority and responsibility, and organizes and develops its people;
5 Policies and procedures.
**B. Risk Assessment
Every entity faces a variety of risks from external and internal sources that must be assessed. A precondition to risk assessment is establishment of objectives, linked at different levels and internally consistent. Risk assessment is the identification and analysis of relevant risks to achievement of the objectives, forming a basis for determining how the risks should be managed. Because economics, regulatory and operating conditions will continue to change, mechanisms are needed to identify and deal with the special risks associated with change.
Objectives must be established before MANAGERS can identify and take necessary steps to manage risks. Operations objectives relate to effectiveness and efficiency of the operations, including performance and financial goals and safeguarding resources against loss. Financial reporting objectives pertain to the preparation of reliable published financial statements, including prevention of fraudulent financial reporting. Compliance objectives pertain to laws and regulations which establish minimum standards of behavior.
The process of identifying and analyzing risk is an ongoing process and is a critical component of an effective internal control system. Attention must be focused on risks at all levels and necessary actions must be taken to manage. Risks can pertain to internal and external factors. After risks have been identified they must be evaluated.
Managing change requires a constant assessment of risk and the impact on internal controls. Economic, industry and regulatory environments change and entities' activities evolve. Mechanisms are needed to identify and react to changing conditions.
**C. Control Activities
Control activities are the policies and procedures that help ensure management directives are carried out. They help ensure that necessary actions are taken to address risks to achievement of the entity's objectives. Control activities occur throughout the organization, at all levels, and in all functions. They include a range of activities as diverse as approvals, authorizations, verifications, reconciliations, reviews of operating performance, security of assets and segregation of duties.
Control activities usually involve two elements: a policy establishing what should be done and procedures to effect the policy. All policies must be implemented thoughtfully, conscientiously and consistently.
**D.Information and Communication
Pertinent information must be identified, captured and communicated in a form and time frame that enables people to carry out their responsibilities. Effective communication must occur in a broad sense, flowing down, across and up the organization. All personnel must receive a clear message from top management that control responsibilities must be taken seriously. They must understand their own role in the internal control system, as well as how individual activities relate to the work of others. They must have a means of communicating significant information upstream.
Control systems need to be monitored - a process that assesses the quality of the system's performance over time. Ongoing monitoring occurs in the ordinary course of operations, and includes regular management and supervisory activities, and other actions personnel take in performing their duties that assess the quality of internal control system performance.
The scope and frequency of separate evaluations depend primarily on an assessment of risks and the effectiveness of ongoing monitoring procedures. Internal control deficiencies should be reported upstream, with serious matters reported immediately to top administration and governing boards.
Control systems change over time. The way controls are applied may evolve. Once effective procedures can become less effective due to the arrival of new personnel, varying effectiveness of training and supervision, time and resources constraints, or additional pressures. Furthermore, circumstances for which the internal control system was originally designed also may change. Because of changing conditions, management needs to determine whether the internal control system continues to be relevant and able to address new risks.
***Components of the Control Activity
1.Internal controls rely on the principle of checks and balances in the workplace. The following components focus on the control activity:
2.Personnel need to be competent and trustworthy, with clearly established lines of authority and responsibility documented in written job descriptions and procedures manuals. Organizational charts provide a visual presentation of lines of authority and periodic updates of job descriptions ensures that employees are aware of the duties they are expected to perform.
3.Authorization Procedures need to include a thorough review of supporting information to verify the propriety and validity of transactions. Approval authority is to be commensurate with the nature and significance of the transactions and in compliance with COMPANY policy.
4.Segregation of Duties reduce the likelihood of errors and irregularities. An individual is not to have responsibility for more than one of the three transaction components: authorization, custody, and record keeping. When the work of one employee is checked by another, and when the responsibility for custody for assets is separate from the responsibility for maintaining the records relating to those assets, there is appropriate segregation of duties. This helps detect errors in a timely manner and deter improper activities; and at the same time, it should be devised to prompt operational efficiency and allow for effective communications.
5.Physical Restrictions are the most important type of protective measures for safeguarding COMPANY assets, processes and data.
6.Documentation and Record Retention is to provide reasonable assurance that all information and transactions of value are accurately recorded and retained. Records are to be maintained and controlled in accordance with the established retention period and properly disposed of in accordance with established procedures.
7.Monitoring Operations is essential to verify that controls are operating properly. Reconciliations, confirmations, and exception reports can provide this type of information.
Internal accounting control is a series of procedures designed to promote and protect sound management practices, both general and financial. Following internal accounting control procedures will significantly increase the likelihood that:
1 financial information is reliable, so that managers and the board can depend on accurate information to make programmatic AND other decisions
2 assets and records of the organization are not stolen, misused, or accidentally destroyed
3 the organization s policies are followed
4 government regulations are met.
Developing an Internal Accounting Control System
The first step in developing an effective internal accounting control system is to identify those areas where abuses or errors are likely to occur. A Guide for Management, includes the following areas and objectives in developing an effective internal accounting control system:
1 Cash receipts
To ensure that all cash intended for the organization is received, promptly deposited, properly recorded, reconciled, and kept under adequate security.
2 Cash disbursements
To ensure that cash is disbursed only upon proper authorization of management, for valid business purposes, and that all disbursements are properly recorded.
3 Petty cash
To ensure that petty cash and other working funds are disbursed only for proper purposes, are adequately safeguarded, and properly recorded.
To ensure that payroll disbursements are made only upon proper authorization to bona fide employees, that payroll disbursements are properly recorded and that related legal requirements (such as payroll tax deposits) are complied with.
5 Grants, gifts, and bequests
To ensure that all grants, gifts, and bequests are received and properly recorded, and that compliance with the terms of any related restrictions is adequately monitored.
6 Fixed assets
To ensure that fixed assets are acquired and disposed of only upon proper authorization, are adequately safeguarded, and properly recorded.
Additional internal controls are also required to ensure proper recording of SALES and other revenues, accurate, timely financial reports and information returns, and compliance with other government regulations.
Achieving these objectives requires your organization to clearly state procedures for handling each area, including a system of checks and balances in which no financial transaction is handled by only one person from beginning to end. This principle, called segregation of duties, is central to an effective internal controls system. Even in a small nonprofit, duties can be divided up between paid staff and volunteers to reduce the opportunity for error and wrongdoing. For example, in a small organization, the director might approve payments and sign checks prepared by the bookkeeper or office manager. The board treasurer might then review disbursements with accompanying documentation each month, prepare the bank reconciliation, and review canceled checks.
The board and executive director share the responsibility for setting a tone and standard of accountability and conscientiousness regarding the organization's assets and responsibilities. The board, usually through the work of the finance committee, fulfills that responsibility in part by approving many aspects of the internal control accounting system. Common areas requiring board attention include:
1 Check issuance
The number of signatures on checks, dollar amounts which require board approval or board signature on the check, who authorizes payments and financial commitments, etc.
How payments made in cash (for admissions, raffles, weekly collection plate, etc.) will be handled, etc.
If and when the general fund can borrow from restricted funds, etc.
4 Approval of plans and commitments before they are implemented
The annual budget and periodic comparisons of financial statements with budgeted amounts, leases, loan agreements, and other major commitments.
5 Personnel policies
Salary levels, vacation, overtime, compensatory time, benefits, grievance procedures, severance pay, evaluation, and other personnel matters.
The Accounting Procedures Manual
The policies and procedures for handling financial transactions are best recorded in an Accounting Procedures Manual, describing the administrative tasks and who is responsible for each. The manual does not have to be a formal document, but rather a simple description of how functions such as paying bills, depositing cash, and transferring money between funds are handled. As you start to document these procedures, even in simple memo form, the memos themselves can be kept together to form a very basic Accounting Procedures Manual. Writing or revising an Accounting Procedures Manual is a good opportunity to see whether adequate controls are in place. In addition, having such a manual facilitates smooth turnover in financial staff.
Maintaining Effective Controls
The FINANCE/ACCOUNTING director is commonly responsible for overseeing the day-to-day implementation of these policies and procedures.
The auditor's management letter is an important indicator of the adequacy of your internal accounting control structure, and the degree to which it is maintained. The management letter, which accompanies the audit and is typically addressed to the board as trustees for the organization, cites significant weaknesses in the system or its execution. By reviewing the management letter with the executive director, asking for responses to each internal control lapse or recommendation, and comparing management letters from year to year, the board has a useful mechanism for monitoring its financial safeguards and adherence to financial policies.
As your profit changes and matures, and your funding and programs change, you will need to periodically review the internal accounting control system which you have established and modify it to include new circumstances (bigger staff, more restricted funding, etc.) and regulations (such as receiving federal awards with increased compliance demands.)
Internal Controls Simplified
ACCOUNTING INFORMATIONS USED AS CONTROLS:
-Control Cash Drawers And Credit Cards
-Control Cash Receipts And Deposits
-control system to Manage Problem Checks
-control system to Manage Wire Transfers
-Control to Cheque Signing Authority
-control system to Manage Check Requests
-control system to Manage Bank Account Reconciliations
-control system to Manage Petty Cash
GENERAL & ADMINISTRATIVE
-control system Manage Chart of Accounts
-system to Control Files And Records Management
-control system to Manage Travel And Entertainment
-system to Control Management Reports
-system to Control Period-End Review & Closing
-control system to Manage Controlling Legal Costs
-control system to Manage Taxes And Insurance
-system to Control Property Tax Assessments
-control system to Manage Confidential Information Release
-system to Control Documents
INVENTORY & ASSETS
-to Manage Inventory Control
-to Manage Inventory Counts
-to Manage Fixed Asset Control
-to Manage Customer Property
-to Control Fixed Asset Capitalization & Depreciation
-to Control Vendor Selection
-to Manage General Purchasing
-to Manage Project Purchasing
-to Control Receiving And Inspection
-to Manage Shipping And Freight Claims
-to Control Accounts Payable And Cash Disbursements
-to Control Point-Of-Sale Orders
-to Manage Sales Order Entry
-to Manage Sales Order Acceptance
-to Control Customer Credit Approval And Terms
-to Manage Shipment Of Goods
-to Control Invoicing And Accounts Receivable
-to Manage Progress Billing
-to Manage Sales Tax Collection
-to Manage Account Collections
-to Control Customer Returns
-total sales expenses
-territory sales expenses
-product development costs
-sales promotion expenses
-trade promotion expenses
-trade spend expenses
Accounting Forms applied to the
-Sample Account Codes
-Account Collection Control Form
-Accounts Receivable Write-Off Authorization
-Asset Disposition Form
-Bad Check Notice
-Bank Wire Instructions
-Bill Of Sale
-Budget vs. Actual Report
-Capital Asset Requisition
-Check Signing Authority Log
-Daily Cash Report
-Daily Flash Report
-Daily Sundry Payable Log
-Department Reporting Summary
-Document Change Control
-Entertainment And Business Gift Expense Report
-Inventory Count Sheet
-Inventory Inspection Levels
-Master File Guide Index
-Material Return Notice
-New Vendor Notification
-Order And Arrival Log
-Phone Confirmation Checklist
-Purchase Order Follow-Up
-Purchase Order Log
-Receiving and Inspection Report
-Records Retention Periods
-Request For Credit Approval
-Request For Document Change
-Returned Goods Authorization
-Sample Sales Order
-Sample Bank And Book Balances Reconciliation
-Tax Calendar of Recurring Monthly Dates
-Travel And Miscellaneous Expense Report
-Travel Arrangements Form
-Vendor Survey Form
-Week Cash Flow Report
-Weekly Financial Report
-Wire Transfer Form