Importance of Control Systems in Managing Business - Case Study Example

? Importance of Control Systems in Managing a Business 7 May Management Consultant Empowerment Services May 7, 2013 Amanda Smith Owner Smith's Accounting and Tax Service Dear Miss Smith: I have completed the review of the management issues of your company. Smith's Accounting and Tax Service is a promising business because of access to lucrative clients. Nevertheless, as a young firm, it is essential to apply basic management functions that will help you operate it with success. The underlying issue of your firm is the lack of a comprehensive and integrated control system that guides the four management functions: planning, organizing, controlling, and leading. This letter discusses your organization’s management issues and offers recommendations. While describing your firm’s management issues, let me illustrate the four basic management functions of organizations, so that you can have a deeper appreciation of my analysis and recommendations. After each management function, I will point out the organizational issues that are applicable to every function. The first management function is planning, which refers to setting organizational goals and identifying how they can be efficiently and effectively achieved (Griffin, 2012, p.7). Since you have a new firm, we will include planning the communication of vision, mission, and strategies as part of the planning stage. In terms of the planning function, the main issues of your firm are: 1) Lack of clear organizational and individual goals; 2) Absence of control measures for these goals; 3) and Need for discussion of standards and target outcomes that are related for every organizational and individual goal. The second management function is organizing, which pertains to organizing the people and resources needed to execute organizational plans (Griffin, 2012, p.7). It pertains to allocating activities and resources among different goals. The primary organizing issue in your firm is poor segregation of functions due to limited employees and absence of job design and descriptions, as well as lack of organized human resource management functions, including recruiting, selecting, training, developing, and terminating employees. The third management function is leading, which refers to the set of leadership activities and styles that motivate people to perform their roles and responsibilities (Griffin, 2012, p.7). People are not naturally motivated to promote organizational interests, and in organizations, employees need strong leaders who can inspire them to align their individual interests with that of the organization (Griffin, 2012, p.7). In the area of leadership, the main issues of your firm are poor communication of vision, mission, business strategies, and goals, and absence of motivation strategies for employees. The fourth management function is controlling, or monitoring the organization’s timely and ethical attainment of predetermined goals (Certo & Certo, 2012; Griffin, 2012, p.7). Controlling affects the rest of the management functions because it helps measure how well/poorly planning, organizing, and leading have been conducted (DuBrin, 2012, p.541). Controlling directly affects planning because planning sets the goals and standards of achieving them (DuBrin, 2012, p.541). Controlling helps managers understand if the plans are properly and timely implemented. Accurate and relevant information is important because it enlightens managers on the present state of the organization, and exposes problems and issues that must be resolved. This information is also used to create or change business strategies, as well as reward people for achieving or surpassing goals (DuBrin, 2012, p.541). Controlling is likewise related to organizing because it measures and monitors if the organization of resources is appropriate to the needs of the business. Controlling affects leadership too because it tells leaders where the organization is in terms of vision, mission, and goals. It assists managers in becoming aware of emerging problems, especially people management issues. Controlling also measures the effectiveness of the control system through auditing and other internal control measures. For your organization, the main controlling issue is the existence of informal systems of report, problem analysis, planning, and controlling. Internal audit is not practiced too, which is important to any organization, specifically accounting firms. After discussing these issues, several recommendations are provided, which follows the Committee of Sponsoring Organizations of the Treadway Commission (COSO)’s report, Internal Control over Financial Reporting-Guidance for Smaller Public Companies (Guidance). This Guidance is used as the framework because it covers core challenges for small businesses, which also affect Smith's Accounting and Tax Service. The Guidance also follows current accounting principles in the U.S. These small business challenges are: 1) Segregating management and accounting duties; 2) Developing effective auditing functions; 3) Managing different levels of control; 4) Implementing information management controls; 5) Documenting the design and implementation of controls. (Rittenberg, Martens, & Landes, 2007, p.47) These challenges are directly or indirectly related to the management issues of your firm. The main recommendation is to formulate a continuous and integrated control system, which is aligned with planning, organizing, and leading objectives and strategies. The five components of the system are: 1) risk assessment; 2) control environment; 3) control activities; 4) information and communication; and 5) monitoring (Rittenberg et al., 2007, p.47). The full range of recommendations follows: 1) Plan the control system, including standards and goals. a) The control system must include a financial control system (with budget plan) and internal auditing system, which consist of standards and deadlines too. b) The plan must have vision, mission, and goals that are clear to and understood by every employee through orientation. Their understanding can be tested through a simple comprehension test. c) The plan must include a workforce plan, as well as documentation of progress and problems. The workforce plan must be based on existing human resource of the company. 2) Organize resources with a financial (budget plan) and workforce plan. a) Lisa should be trained as general manager and HR manager because financial resources are limited. Evidently, your firm is too understaffed to manage core and non-core organizational activities. She should have an assistant who will take care of non-management tasks, such as answering calls and setting appointments, so that she can free to design and implement HR functions. b) The company must have clear job descriptions, so people will know their specific roles and responsibilities, which include recruiting new customers. You can develop these job descriptions through several job analysis strategies, such as having a checklist and observing employee activities. 3) Lead with competent assistants and create a motivation plan. a) Lisa should be trained as the HR manager, who will be in charge of managing the recruiting, selecting, training, and developing of employees. She should not handle accounting functions. Educating her about the people and technical sides of the business is critical to internal control because she is aware of her duties and responsibilities and existing controls (Yaghubi, Moradi,& Mazaheri, 2011, p.83). b) You can hire an internal auditor on a contractual basis, instead of keeping him/her on a monthly payroll. The auditor will be in charge of forming the internal control system and its maintenance (Verovska, 2012, p.242). c) Develop an effective communication system, where communication channels, goals, and deadline are clear and realistic. The management must receive timely and accurate information to help make operational and strategic decisions (Grollman & Colby, 1978, p.66) and for investigation purposes (Rittenberg, Martens, & Landes, 2007, p.48). d) Survey the source of motivation of employees and relate their motivation to rewards. e) Formulate a performance management system that has feedback and 360 degree evaluation measures. The performance management system can be handled by the HR manager and owner. 4) Create a comprehensive and continuous control system, which includes the financial control system. a) Determine specific financial reporting objectives that are based on existing legislation (Rittenberg, Martens, & Landes, 2007, p.47). This includes getting timely reports for cash status, revenues, and expenses. b) Prepare a budget plan and monitor it. c) Identify and evaluate the risks that can prevent the organization from achieving these objectives, such as management override (Rittenberg, Martens, & Landes, 2007, p.47). d) Create and implement a control environment that provides the direction for the organization and mitigates risks (Rittenberg, Martens, & Landes, 2007, p.47). e) Design control activities, specifically authorizations and completeness tests (Rittenberg, Martens, & Landes, 2007, p.47). f) Monitor the effectiveness of the parts and whole internal control system (Rittenberg, Martens, & Landes, 2007, p.48). g) Document activities and discussions. Use the information to regularly update strategic, operational, and tactical plans. These recommendations are based on my understanding of organizational conditions and resources. For anything else you would like me to add, please contact me. Thank you and I look forward to a face-to-face meeting if needed, so that we can further discuss the implementation plan for these recommendations. Respectfully, References Certo, S.C., & Certo, S.T. (2012). Modern management: Concepts and skills. Upper Saddle River, NJ: Prentice Hall, 2009. DuBrin, A.J. (2012). Essentials of management (9th ed.). Mason, OH: South-Western. Griffin, R.W. (2012). Fundamentals of management (6th ed.). Mason, OH: South-Western. Grollman, W.K., & Colby, R.W. (1978). Internal control for small businesses. Journal of Accountancy, 146(6), 64-67. Rittenberg, L.E., Martens, F., & Landes, C.E. (2007). Internal control guidance. Journal of Accountancy, 203(3), 46-50. Verovska, L. (2012). Internal control system as continuous basis of efficient and stable company development. Region Formation & Development Studies, 3(8), 240-246. Yaghubi, F.S., Moradi, M.A., & Mazaheri, M. (2011). Pathology of accounting systems and financial reporting of small business. International Journal of Business Administration, 2(4), 75-83. Read More