Running Head: RESPONSIBILITY ACCOUNTING

Responsibility Accounting: JPMorgan Chase Vrushali Soni Northwest University

RESPONSIBILITY ACCOUNTING According to Zimmerman (2010, p. 149), a firms organizational architecture is a threelegged stool that constitutes of the following: 1. A system that measures performance 2. A system that rewards and punishes performance 3. A system that assigns decision rights

Performance evaluation is based on financial and non-financial performance measures of individuals. One such performance measurement method is Responsibility Accounting. The result of the performance evaluation method decides whether a person will receive rewards or punishment. Many firms favor the use of responsibility accounting and its characteristic of charging a person for all those expense that are directly or indirectly under his/her control. The decision rights are linked with knowledge (p.234) and therefore appropriate decision-making responsibilities are allotted to people with relevant knowledge of that specific field. Despite of relevancy between knowledge and decision rights of a person, sometimes the predictions/decisions turns out to be tremendously wrong (Zimmerman, 2010). One such example is of James Dimon, the CEO of JPMorgan Chase. Last year his performance evaluation earned him a base salary of $1.5 million, stocks worth $17 million and a cash bonus of $4.5 million. This year in the month of May there was a huge trading loss of approximately $5.8 billion and Mr. Dimon was held accountable for this loss (Fitzpatrick, Kapner and Lublin, Sep. 9, 2012). After this bad fiscal year, the board of Directors of JPMorgan is now considering to revise their pay scheme of all executives including the CEO. Mr. Dimon is expected to pay the price of trading losses that sums up to $5.8 billion. Along with Mr. Dimon, four other executives are held responsible for this loss and therefore the board is planning to drop the bonuses of all executives (Fitzpatrick, et. al, Sep. 9, 2012). Another reason for the management and pay scheme reevaluation is that the shareholders are highly disgruntled with Mr. Dimons handling of financial crisis. In order to convince them the board of Directors docked the bonuses of executives (Fitzpatrick, et. al, Sep. 9, 2012).

RESPONSIBILITY ACCOUNTING

Discussion: In the case of JPMorgan Chase the Board of Directors had to solve two purposes: 1. To control the employees from making risky decisions 2. To convince the investors that appropriate measure are taken against wrong decisionmaking. These two purposes were solved by docking executives bonuses, revising the pay scale, and charging Mr. Dimon with the complete amount of trading losses. This however cannot predict that in future no such misfortune will occur. It is similar to the fact that one cannot predict the next five-year budget very accurately. Nevertheless, this step can at least give directions to other executives for safe trading/investment decisions.

RESPONSIBILITY ACCOUNTING References

Fitzpatrick et.al. (September 9, 2012). Banks Rethink Executive Pay. Retrieved from http://online.wsj.com/article/SB100008723963904442737045776380519806204 14.html?mod=WSJ_mgmt_LeadStoryCollection Zimmerman, L. (2010). Accounting for Decision Making and Control. University of Rochester. McGraw Hill.