Term
| 4 pillars of COCO framework |
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Definition
| Purpose, commitment, capability, monitoring and learning |
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Term
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Definition
goal/objective. goal of whole organization - strategy
goal for specific control system - control objective
assess risks
policies
plans
targets |
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Term
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Definition
ethics
hr policies
authority
trust |
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Term
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Definition
skills
communication
information
coordination
controls |
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Term
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Definition
Effectiveness and efficiency of operations
Reliability of internal and external reporting
Compliance with applicable laws and regulations and internal policies |
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Term
| COCO (monitoring and clearing) |
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Definition
environment
monitor
assumption
reassess
follow up
management |
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Term
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Definition
Markets deal with the control problem through their ability to precisely measure and reward individual contributions
Permits each to pursue non-organizational goals, but at a personal loss of reward
Disadvantage - Contributions need to be measurable and a norm of reciprocity |
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Term
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Definition
3 ways organization can deal with a control
-Market control
-bureaucratic control
-culture/clan control
never a pure market of any one control (formal and informal controls as well) |
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Term
| Ouchi (Bureaucratic Control) |
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Definition
a mixture of close evaluation with a socialized acceptance of common objectives
explicit rules of monitoring
rules
compliance (supervisors can direct)
disadvantage - high administrative costs, heavy reliance on monitoring and correcting affects peoples autonomy negatively affecting motivation |
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Term
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Definition
selects and socializes individuals so that their objectives line up with the organizations objectives
internalization of objectives (ceremonies/stories/rituals)
social agreement on values/beliefs |
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Term
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Definition
selects and socializes individuals so that their objectives line up with the organizations objectives
internalization of objectives (ceremonies/stories/rituals)
social agreement on values/beliefs
disadvantages - cannot cope with heterogeneity, cannot deal with high turnover |
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Term
| 5 components of COSO framework |
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Definition
control environment
risk assessment
control activities
information and communication
monitoring |
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Term
| COSO (control, operating, environment) |
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Definition
elements:
-integrity/ethical values
-incentives/temptations
-providing/communicating moral guidance
-commitment to competence
-management philosophy/operating style
-organizational structure
-assignment of authority/responsibility
-human resource policies and practices |
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Term
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Definition
determine goals and objectives
identify risks that threaten goals
stated/implied risk, internal/external factors, entity to
activity level
analyze risks (likelihood/magnitude) |
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Term
| financial reporting objectives |
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Definition
existence or occurrence
completeness
rights and obligations
valuation or allocation
presentation and disclosure |
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Term
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Definition
process designed to provide reasonable assurance regarding the achievement of objectives in:
-effectiveness/efficiency of operations
-reliability of financial reporting
-compliance with applicable laws and regulations |
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Term
| COSO (control activities) |
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Definition
manage or reduce risk
preventative/detective |
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Term
| COSO (information and communication) |
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Definition
info: must be captured in form and timeframe that allows people to carry out responsibilities (internal/external, flow up and down, formal and informal
communication: employees and stakeholders must know what is expected of them, cmn channels should be open, clear, and timely |
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Term
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Definition
process that assesses system quality over time (internal and external), ongoing, separate evals
control systems dynamic |
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Term
| Costs of Quality Categories |
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Definition
internal failure costs - does not meet customer needs, inefficient processes
external failure costs - failure to meet customer needs, lost opportunities for sales rev
appraisal costs (inspection) costs
prevention costs |
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Term
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Definition
authorization of transactions
segregation of duties
adequate records
security of assets
independent check and reconciliations |
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Term
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Definition
| “greatest good for the greatest number of people” |
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Term
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Definition
| fairness in the process of deciding/doing/distributing |
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Term
| distributive/outcome justice |
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Definition
| equality of outcome/result |
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Term
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Definition
| ethical if the public would think its right |
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Term
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Definition
Shows how this slippery slope might actually occur
Self-justification is not just a coping mechanism, it can lead people to do really bad things (e.g. Enron) |
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Term
| examples of internal controls |
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Definition
| monitoring, risk management, processes decision rights, etc. |
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Term
| How to infer objectives/strategy |
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Definition
refer to organizational statements
judge using experience (customer perspective/working experience, business press)
deduce from control system |
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Term
| The greater magnitude of the potential loss, the riskier the prospect is for: |
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Definition
risk seeking behavior
risk adverse behavior
risk neutral behavior
risk is a subjective construct (differing opinions) |
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Term
| framework: objective - ______ - control |
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Definition
risk
connection of these helps in designing/evaluating controls |
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Term
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Definition
leading indicators (early warning signals)
measures of events/triggers
internal: operational/organization issues
external: macroeconomic, industry, or geography factors
the further back you think, the better
ex: sales reductions <- demand trends <- oil price |
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Term
| key performance indicators |
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Definition
| lagging indicators of performance, backward-looking |
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Term
reinforcing loops (R)
balancing loops (B) |
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Definition
positive reinforcement
negative reinforcement |
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Term
| How something will affect a control system ? |
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Definition
identify control weaknesses
think of potential controls that will mitigate identified risk
-ensure effectiveness
consider cost-benefit tradeoff
-ensure efficiency
consider how potential new control will affect entire control system
-ensure you identify and understand all reinforcing and balancing loops |
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Term
| Basis for analysis and improvement of process |
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Definition
costs/time demands
-how expensive and how long
organizational burden on people
-who does the work? is the allocation aprop/efficicient
value assessment
-does each step add value? what kind?
control assessment
-where are controls? how can we test them? are they effective? |
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Term
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Definition
oval = start/finish
diamond = decision
rectangle = steps/tasks
circles = delays/breaks |
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Term
| industrial traditional model of a process |
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Definition
worker have few skills
little time or capacity for training
people work most efficiently when they have only easily understood task to perform |
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Term
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Definition
+
fewer handoffs
fewer missing inputs/unused inputs
reduce free rider problem
increased control
-
less expertise |
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Term
| worker-level decision making +,-'s |
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Definition
less waiting/fewer delays
expertise -> efficiencies
motivated workers (empowered)
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possible agency problems |
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Term
| parallel steps/natural order |
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Definition
+
less waiting
improved coordination
less rework
-
less room for error |
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Term
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Definition
| +less waiting specialization - potential for redundancy |
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Term
| aggregate/deferred monitoring |
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Definition
+
less waiting
lower costs
motivated workers
-
potential agency problems |
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Term
| minimized reconciliation +,-'s |
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Definition
+
lower costs
align decision rights with expertise
-
less room for error
potential agency problems |
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Term
| case manager (single point of contact) +,-'s |
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Definition
+
better coordination
customer service
-
need for broad expertise
greater costs and longer time
more handoffs |
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Term
| hybrid of central/decentral operations +,-'s |
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Definition
+
reduce agency problem (central)
align decision rights with expertise (decentral)
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greater costs (invest in technology)
misalign decision right with expertise (central)
potential agency problems (decentral) |
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Term
| owner-manager conflicts caused by |
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Definition
choice of effort
perquisite taking
differential risk exposure
differential horizons
overinvestment |
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Term
| incomplete contracts opens up room for |
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Definition
| contractual incompleteness -> imperfect behavior -> opportunistic behavior |
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Term
| agency costs can be limited by |
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Definition
appropriate incentives
monitoring mechanisms |
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Term
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Definition
out of pocket costs - monitoring costs
residual loss - the dollar equivalent of the loss in gains from trade that results from this divergence of interest with the agency relationship |
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Term
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Definition
limits of processing/foresight
unforeseen circumstances |
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Term
| organizational architecture parts |
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Definition
assignment of decision rights within the firm
methods of rewarding individuals
structure of system to evaluate performance of individuals and business units |
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Term
| principle challenge of designing firm |
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Definition
make sure decision makers have the relevant info to make good decisions and incentives to use info productively
info is expensive to share
info held by many different individuals |
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Term
| benefits and costs of decentralization |
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Definition
+
effective use of local knowledge
conservation of management time
training and motivation for local managers
-
incentive problems
coordination costs and failures
less effective use of central information |
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Term
| questions to ask regarding central/decentralization |
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Definition
where is the specific knowledge?
does empowerment=increased motivation?
to what extent are coordination advantages of centralization important?
rapid decision making important?
how big is the company? |
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Term
| types of decentralized units |
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Definition
cost center - incurs costs alone
revenue center - responsible for generating revenue
profit center - both revenues and expenses traced
investment center - functions as a single firm |
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Term
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Definition
initiation
ratification
implementation
monitoring
decision management - intitiation and implementation of
decisions
decision control - the ratification and monitoring of decisions |
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Term
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Definition
1. define cost objects
2. accumulate common costs to be assigned to the cost objects
3. choose an allocation base (gigs used, hours spent, etc.)
divide common costs by total allocation base, multiply by individual department allocation |
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Term
| 2 function of compensation contracts |
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Definition
motivate employees
effective risk sharing |
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Term
| 3 problems with performance measures |
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Definition
controllability
alignment
interdependency |
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Term
| subjective performance measures improve incentive contracts because |
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Definition
they mitigate incentive distortions
reduce risk (take out uncontrollable events) |
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Term
| subjective performance measures can improve incentive contracting by |
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Definition
inducing adaptive behavior
-additional relevant info that surfaces during contracting period can be exploited
limiting vulnerability to manipulation
-subjective performance eval happens ex post
reducing perceived unfairness |
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Term
| why subjectivity might suck |
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Definition
inaccurate assessment
-favoritism
-confrontation costs
-info gathering
-cognitive limitations
costly
-reduce incentives
-negatively affect perceived fairness
-start up suboptimal behavior
-lead to suboptimal personnel decisions |
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Term
| types of performance standards |
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Definition
time and motion studies
-expensive
-potential to suffer from bias
past performance
-ratchet effect (employees expected to better each time)
-leads to dysfunctional behavior
relative performance eval |
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