Summary Accounting & Control LECTURES
Lecture 1
Accounting is a formal written way that other people use to arrange ….. now and history, value
transactions
Accounting? accountants are very boring and not being emotional
Performance management systems:
- Performance evaluation
The firm’s goals: economical goals
- We look at the world like firms have their own goals: we like to understand the firm as it has
certain goals not only people have goals, also organisations.
o Profit organisations should make a profit
o Value we believe that organisations should create value
o Customer satisfaction organisations should create customer satisfaction
o Innovation every organisation wants to innovate
o Growth every organisation wants to grow
o Greening we have environmental goals, reach them
o Survival every organisation wants to survive
Economic perspective: there is one fundamental goal
- Value inflow into an organisation should be higher than the value outflow of an organisation
o Value inflow > value outflow
o Cash inflow > cash outflow - - > value in monetary terms
Important for the survival of the organisation
How do we get to satisfy this basic condition of ‘value’?
The firm’s periodic goals:
- Tax authority: payment of duties & taxes
- Customer: good products & fair prices
- Society: contribution to well being
- Shareholder: dividend & share price growth interested in the dividend they get
- Banks: (re)payment of interest & loans
- Employees: salary payments
So what is missing: logical value creation.
So we need something that is more timestamped. For managers this means that they need to make
sure that the return in a certain year is higher than the investments in a certain year.
- Return > investment.
Accounting is the way in which firms express the value inflows and outflows:
- Revenues > costs per period (also known as expenses)
So:
- Long term: value inflow > value outflow difference = value added
- Periodical: revenues > expenses difference = profit
,Investors are not just interested in profit, but rather how much that profit is as a percentage of
invested capital.
- They often call that: return on capital employed (ROCE)
- Return on capital employed (sometimes called ROI = return on investment)
o ROCE = profit : capital employed
Profit = revenues – costs of the firm
Capital employed = the capital invested in, and used by the firm
Firms try to satisfy their shareholders by earning enough profit to ensure that the return on capital
satisfies the shareholders (called the cost of capital)
- So return on capital > costs of capital
Why do we use yearly cycles in economics?
- To make it comparable to each other, because of seasonal differences.
- It comes from farming society, we need to get all 4 seasons in one year/ in one cycle.
Emphasis on what you can measure is a dominant …..
What do companies say about this value logic?
- Dia 18
Value creation is the most important, for shareholders but also for the internal company.. that they
know how to measure and onder welke naam ze het naar buiten brengen
(Economic Value Addes - ROI – ROACE – EBIT-COCE)
But (1)
- Shareholder value myth companies should produce shareholder value. It is a legal
obligation for companies. (how putting shareholders first harms investors, corporations and
the public)
But (2)
- This is all very nice but how do we make sure that all managers behave in line with value
creation?
o Cutting it up in periods and a yearly cycle
But (3)
what we see behind this firm, this is an organisation consisting
of individual units.
How do we make sure that in an organisation structure we
create value?
- Build structures
- And apply controls
o This adds up to value creation
Performance management & management control
But (4)
- This is all very nice but what does this kind of logic presupposes about the organizational
structure?
, o Not just take an organisation structure as given, but realise that other organisation
structures can create value more than others
o Hierarchy/ structured but now we are more living in a world with more complex
structures and no hierarchy.
The world is changing rapidly
People having goals etc. is also changing
People make decisions on technology they do not understand
changes the way of auditors and controllers
Continuous development of though:
Goal alignment is no automatism: doelen bepalen is geen automatisme
- Causes:
o The nature of manager (they are people)
o They nature of managerial work (which is complex)
- Managers may suffer from:
o Lack of direction people inside the firm do not know what to achieve
o Lack of motivation people working in the firm do not care about how good they
are doing, they just get paid and it is okay
o Lack of ability people inside the firm are sometimes just unable to do something
o (lack of coherence)
- These are often called ‘’management control problems’’ as they may cause a misalignment
between what the manager does and what the manager should do.
SO: why is this agile transformation a problem people are very complex.
Examples of misalignments:
- Bad company results (low financial results in annual reports)
- Destruction of shareholder value (decreasing share prices)
- Bankruptcy (insufficient cash to run the business)
- Toxic culture and unhappy people
So, we need systems for goal alignment:
- Systems that help select ‘the right people’
- Systems to help these people ‘take the right decisions’
- Systems that reward these people for achieving ‘the right results’
Together they form a ‘package’
, Process of control can be explained by a cybernetic circle.
Without a goal, nothing can be in control. So we need a goal and a process to achieve the goal.
Example:
Management control as enabling or coercive?
- Problem with control (go away from step down control)
o What we believe that control systems do is maybe not take the best of the people
involved.
o Het moet geen controlling system worden, want dan …. Dia 32
If you overly focus on functional mechanical hierarchical control, it comes at
a certain cost.
Not just stick on the goal, because people want freedom and creativity.
Some application for the control cycle:
- A sales manager in a for-profit firm
- A judge in a court
- A manager of a nuclear power plant
- A manager public services of a local municipality
- A manager of the crime investigation squad
- A manager of the fashion design department at H&M
What kind of package should we have?
- A package that people are paid for input, throughput or output?
o Input controls / output controls
- What does it cost to implement the control and what is the return?
- Sometimes, output is not easily measurable
The challenge is to create a coherent management control package
This is truly a challenge as it requires us to consider techniques and how people will use them
Central questions in theory and practice
- What are the pros and cons of each of these types?
- How do they enhance or inhibit individual and organizational performance?
- What is performance anyway?
- And crucially: how can the accounting system help (or hinder) the functioning of this system
Accounting mission:
Lecture 1
Accounting is a formal written way that other people use to arrange ….. now and history, value
transactions
Accounting? accountants are very boring and not being emotional
Performance management systems:
- Performance evaluation
The firm’s goals: economical goals
- We look at the world like firms have their own goals: we like to understand the firm as it has
certain goals not only people have goals, also organisations.
o Profit organisations should make a profit
o Value we believe that organisations should create value
o Customer satisfaction organisations should create customer satisfaction
o Innovation every organisation wants to innovate
o Growth every organisation wants to grow
o Greening we have environmental goals, reach them
o Survival every organisation wants to survive
Economic perspective: there is one fundamental goal
- Value inflow into an organisation should be higher than the value outflow of an organisation
o Value inflow > value outflow
o Cash inflow > cash outflow - - > value in monetary terms
Important for the survival of the organisation
How do we get to satisfy this basic condition of ‘value’?
The firm’s periodic goals:
- Tax authority: payment of duties & taxes
- Customer: good products & fair prices
- Society: contribution to well being
- Shareholder: dividend & share price growth interested in the dividend they get
- Banks: (re)payment of interest & loans
- Employees: salary payments
So what is missing: logical value creation.
So we need something that is more timestamped. For managers this means that they need to make
sure that the return in a certain year is higher than the investments in a certain year.
- Return > investment.
Accounting is the way in which firms express the value inflows and outflows:
- Revenues > costs per period (also known as expenses)
So:
- Long term: value inflow > value outflow difference = value added
- Periodical: revenues > expenses difference = profit
,Investors are not just interested in profit, but rather how much that profit is as a percentage of
invested capital.
- They often call that: return on capital employed (ROCE)
- Return on capital employed (sometimes called ROI = return on investment)
o ROCE = profit : capital employed
Profit = revenues – costs of the firm
Capital employed = the capital invested in, and used by the firm
Firms try to satisfy their shareholders by earning enough profit to ensure that the return on capital
satisfies the shareholders (called the cost of capital)
- So return on capital > costs of capital
Why do we use yearly cycles in economics?
- To make it comparable to each other, because of seasonal differences.
- It comes from farming society, we need to get all 4 seasons in one year/ in one cycle.
Emphasis on what you can measure is a dominant …..
What do companies say about this value logic?
- Dia 18
Value creation is the most important, for shareholders but also for the internal company.. that they
know how to measure and onder welke naam ze het naar buiten brengen
(Economic Value Addes - ROI – ROACE – EBIT-COCE)
But (1)
- Shareholder value myth companies should produce shareholder value. It is a legal
obligation for companies. (how putting shareholders first harms investors, corporations and
the public)
But (2)
- This is all very nice but how do we make sure that all managers behave in line with value
creation?
o Cutting it up in periods and a yearly cycle
But (3)
what we see behind this firm, this is an organisation consisting
of individual units.
How do we make sure that in an organisation structure we
create value?
- Build structures
- And apply controls
o This adds up to value creation
Performance management & management control
But (4)
- This is all very nice but what does this kind of logic presupposes about the organizational
structure?
, o Not just take an organisation structure as given, but realise that other organisation
structures can create value more than others
o Hierarchy/ structured but now we are more living in a world with more complex
structures and no hierarchy.
The world is changing rapidly
People having goals etc. is also changing
People make decisions on technology they do not understand
changes the way of auditors and controllers
Continuous development of though:
Goal alignment is no automatism: doelen bepalen is geen automatisme
- Causes:
o The nature of manager (they are people)
o They nature of managerial work (which is complex)
- Managers may suffer from:
o Lack of direction people inside the firm do not know what to achieve
o Lack of motivation people working in the firm do not care about how good they
are doing, they just get paid and it is okay
o Lack of ability people inside the firm are sometimes just unable to do something
o (lack of coherence)
- These are often called ‘’management control problems’’ as they may cause a misalignment
between what the manager does and what the manager should do.
SO: why is this agile transformation a problem people are very complex.
Examples of misalignments:
- Bad company results (low financial results in annual reports)
- Destruction of shareholder value (decreasing share prices)
- Bankruptcy (insufficient cash to run the business)
- Toxic culture and unhappy people
So, we need systems for goal alignment:
- Systems that help select ‘the right people’
- Systems to help these people ‘take the right decisions’
- Systems that reward these people for achieving ‘the right results’
Together they form a ‘package’
, Process of control can be explained by a cybernetic circle.
Without a goal, nothing can be in control. So we need a goal and a process to achieve the goal.
Example:
Management control as enabling or coercive?
- Problem with control (go away from step down control)
o What we believe that control systems do is maybe not take the best of the people
involved.
o Het moet geen controlling system worden, want dan …. Dia 32
If you overly focus on functional mechanical hierarchical control, it comes at
a certain cost.
Not just stick on the goal, because people want freedom and creativity.
Some application for the control cycle:
- A sales manager in a for-profit firm
- A judge in a court
- A manager of a nuclear power plant
- A manager public services of a local municipality
- A manager of the crime investigation squad
- A manager of the fashion design department at H&M
What kind of package should we have?
- A package that people are paid for input, throughput or output?
o Input controls / output controls
- What does it cost to implement the control and what is the return?
- Sometimes, output is not easily measurable
The challenge is to create a coherent management control package
This is truly a challenge as it requires us to consider techniques and how people will use them
Central questions in theory and practice
- What are the pros and cons of each of these types?
- How do they enhance or inhibit individual and organizational performance?
- What is performance anyway?
- And crucially: how can the accounting system help (or hinder) the functioning of this system
Accounting mission:
