CHAPTER 3

Action, Personnel, and

Cultural Controls
  Management Control Systems
› Results Controls
› Action Controls
› People Controls
 Controls can focus on:
› the results produced RESULTS CONTROLS

› the actions taken

ACTION CONTROLS

› the types of people

employed and their PEOPLE CONTROLS
shared values and
norms
Action controls
Ensuring that employees perform (or do not perform)
certain actions known to be beneficial (or harmful) to
the organization
Prevention / detection
Most action controls are aimed at preventing
undesirable behaviors

Effectiveness of action controls

They are feasible only when the managers:
1. know what actions are (un)desirable
• Difficult in highly complex and uncertain task environments
(e.g., research engineers or top-level managers
2. and have the ability to insure that the desired actions will occur
• For example, effectiveness of organizational procedures?
Personnel control
Are design to make it more likely that employee will
perform the desired tasks satisfactory on their own
Ex: experienced, honest & hard working.

Cultural controls
Are designed to encourage mutual monitoring, exist to
shape to organization behavioral norms and to
encourage employees to monitor and influence each
others behaviors (the dominant form of control)
1) behavioral constraints
2) Pre- action reviews
3) Action accountability
4) Redundancy
Basic forms of action control …

1. behavioral constraints
it is a negative form of action control . They make it
impossible or difficult for employee to do thing that
should not be done .

Physical constraints
Ex: Including locks, computer passwords, access limit to certain
areas.
Some behavioral constraint devices are technically
sophisticated and often expensive such as magnetic
identifications card or fingerprint/eyeball pattern reader.
Administrative constraints:

A. Restriction of decision-making authority

limit on employees’ ability to perform all/ a portion of a specific act; to

minimize the risk that untrained employees will make mistakes.

(Ex: low grade manager can only approve $1000 expenditures, while
med-grade manager can approve $10000 expenditure )

B. separation of duties (dividing up tasks)

To accomplish sensitive duties thus Making its impossible or difficult for

one person to complete certain task alone . different persons for
positions that closely related

(Ex: checks receiver must be separated from the accountant who make
the payment entries in the account receivable ledger).
 Is one of the basic requirements of Internal control
The effectiveness of separation of duties is limited, it does
not prevent the collusion between two or more employee
, or with third parties or with the top management, the
causes of fraud.

behavior-shaping constraint, also sometimes referred to as a forcing

function or poka-yoke "mistake-proofing", is a technique used
in error-tolerant design to prevent the user from making
common errors or mistakes. Where a certain action must be
completed before the next step performed .Ex: microwaves, it is
impossible to start the microwave while the door is still open
- Its difficult to make behavioral constraints foolproof where
employees are disloyal, deceitful.
2. Pre- action reviews
(Review/modification/approval)

Scrutiny of the action plans of the employees being

controlled (approval/checking made by the
supervisors about certain proposals). A common form
of pre- action review take place during planning and
budgeting process .

3. Action accountability
it is a negative form of action control . They make it
impossible or difficult for employee to do thing that
should not be done .
Holding employees accountable for the actions they take.
Its implementation requires:

1.Defining of actions which is good/bad

2.Communicating the definitions to employees (work rules)

3.Observing / tracking what happens

4.Rewarding good actions, or punishing

Administratively
work rules, policies and procedures, codes of conduct.
Ex: such as 1. McDonalds prescribe & communicate in writing how to handle
cash/how to hire personnel, 2. nurses using pre-operative checklist 3.
department stores personnel also have set of procedures they are expected
to follow .
Socially
The desired action do not have to be in written form, they can
communicated face to face in meetings.
Sometimes the action desired are not communicate explicitly at
all, lawyers, Doctors & manager are held accountable for their
actions that involve professional judgment and they should act
professionally.
Action accountability to be effective individuals must understand
what is required and feel reasonably sure their action will be
noticed with rewards or punishments .
Direct observation / supervision; product line
Periodic tracking (e.g., retail stores “mystery shoppers”);
Examine Evidence of actions taken (e.g., activity reports).

Action accountability is usually implemented with

negative reinforcements, action are more often linked
with punishment than with reward.
Ex ( anyone late on a shift, loses a day’s bonus).
4. Redundancy (backup)

Assigning more people (or machines) to a task than

necessary. Ex: backup” people or facilities.

it increases the probability that a task will be

satisfactorily accomplished. Its common in computer
facility , security functions but its rarely used in the
other areas because its expensive

Assigning more than one employees to the same task

can result in conflict, frustration and boredom.
1.Behavior conctraints Primarily directed at one control
problem: eliminate motivational problems. Employee
who engage in undesirable behaviors can prevented
from doing so.

2.Pre- action review address all three control problems:

they involve communication to the employee about
what is desired

PROS:
 Alleviate (minimize) lack of direction;
 Provide motivation;
 Mitigate personal limitations.
 Prevent mistakes or harmful actions from happening
3.Action accountability : addresses all three control problems.
desired action can help provide direction and alleviate the
type of personnel limitation by increase the expertise and
skills . and reward or punish help provide motivation .

4.Redundancy: limited in addressing the control problems:

its helping in accomplish particular task
 Provide motivation, and perform satisfactory
 Overcome personal limitations.
 also: rather costly
Types of action Lack of direction Motivational Personal
controls problems limitations
Behavioral X
constraints
Preaction review X X X
Action X X X
accountability
redundancy X X
 Prevention VS detection
Action control can serve to prevent or detect undesirable
behavior,
- Prevention: none of the costs of undesirable behaviors will be incurred.
- Detections: they applied after the occurrence of the behavior . And
can be effective if the detection is made in timely manner and
correction of effects of harmful action .

Most action control are aimed to prevent undesirable behavior .

exception of action of accountability control because this type of
control designed, to motivate employees to behave
appropriately.
it can’t be verified whether, the appropriate actions were taken
,until evidence of action is gathered.
 Prevention VS detection

Type of action
controls
Prevention Detection
Behavioral Locks on valuable assets, N/A
constraints separation of duties

Preaction reviews Expenditure approvals N/A

budget reviews

Action accountability Pre-specified policies linked Compliance-oriented

to expectations of rewards internal audits, cash
and punishments reconciliations
Peer review

Redundancy Assigning multiple people to N/A

an important task
 Conditions determining the effectiveness of
action controls

-knowledge of the desired actions

Lack of knowledge, as to what action are desirable is the

constraint use of action control, and knowledge is often difficult
to obtain . most organizations do not have good idea, on how
employees in this role, should best spend their time.

knowledge of the desired actions can be discovered in 2 ways:

analyzing the actions/results patterns in a specific situations /
similar situations over time to learn what actions produce the best
results.
Or to be informed by others(consultants),who have detailed
knowledge of best practice for strategic decisions
Ability to ensure that desired actions are taken
managers are able to ensure, that the desirable actions are
taken(undesirable actions do not occur).

The effectiveness of the behavioral constraints and pre-action

reviews varies directly with the reliability of the physical devices /
administrative procedures the organization has in place to ensure
that the desired actions are taken.
action tracking often provides a significant challenge that must be
faced in making action-accountability controls effective.

The criteria that should be used to judge are:

precision, objectivity, timeliness, understandability.

•Precision: supervisor can distinguish good, from bad

actions. for ex: can examine if sales people spend
enough time on market development activities.
•Objectively:

freedom from bias, reports of action prepared by

those whose actions are being controlled cannot
be relied upon, self reports are not objective.

most company use direct supervisor and internal

auditor to provide objectively check on such
report.
without objectively can’t be sure whether the
action report reflect the actual action taken .
Timeliness

 If the tracking of actions is not timely,

interventions are not possible before
harm is done.
 Motivational effect of the feedback &
rewards is lost, when tracking is delayed.
•Understandability :

employee can easily understand prescription to

show up to work on time, if the employee do
not understand the detail procedures , the
behavior will be unsatisfactory.

The action control system is not perfect, and to

make it near perfect, its costly, therefore some
managers use personal and culture controls, to
fill in the gaps.
These controls help employees to control their
own behaviors.
Pros and cons of action controls
PRO
 The most direct form of control
 Tend to lead to documentation
of the accumulation of
knowledge as to what works
best.
 Organizational memory
Cons
 Only for highly routines' jobs
 May discourage creativity,
innovation, and adaptation
 May cause sloppiness
 May cause negative attitudes

 An efficient way of coordination:  e.g., little opportunity for

creativity and self-
 i.e., they increase the actualization
predictability of actions and
reduce the amount of inter-  Sometimes very costly
organizational information
flows to achieve a
coordinated effort.
1. Clarify expectations: help ensure employees
understands what the organization wants
2. Help ensure that the employees are able to
do a good job (have the capability;
experience, intelligence and resources)
3. Increase the likelihood that each
employee will engage in self-monitoring
Generally, it is about …
“… finding the right people, giving them a good
work environment and the necessary resources”

 Selection and placement

 Finding the right people to do a particular job
 Training
 Give employees a greater sense of professionalism
 Create interest in the job by helping employees to understand
their job better
 Job design + provision of necessary resources
 So that motivated and qualified employees have a high
probability of success (e.g., equipment, staff support, freedom
from interruption)
Methods to implement personnel controls

1.selection and placement of employees

• Finding the right people to do a job and giving them a
good work-environment and the necessary resources
can obviously increase the probability that a job will be
done properly.
•Organization primary, focus on matching job
requirement with job applicants skills/experience. Or
references check for new employees.
some organization have restored and analyzing potential
employee to avoid high risk .
A well designed job allows motivated and qualified
employees a high probability of success.
Some job are too complex
Ex:(salespeople assigned too many accounts to handle effectively )

Resource needs are highly job-specific like (info,

equipment, supplies, staff support)
 Cultural controls are effective because
members of a group have emotional ties
and a sense of responsibility to one
another
 Cultures are built on shared ...
 traditions
 norms
 beliefs
 ideologies
 attitudes
 ways of behaving
 In addition to Results, Action, and Personnel
controls, Cultural controls exist to shape
organizational behavioral norms and to encourage
employees to monitor and influence each other’s
behaviors.
 Cultural controls are designed to encourage
mutual monitoring, its powerful for monitoring of
group pressure on individuals, who deviate from
the group norms and values; it is most effective
where members of a group have emotional ties to
one another.
 Cultural norms can be in written and unwritten
rules, however, communities social and pressure
are stronger than legal contracts.
 Cultures are built on shared relations, beliefs,
norms, values, ideologies, attitudes, and ways of
behaving.
 Managers can create and shape organization’s
culture by: (1) Codes of conduct (2) Group rewards
(3) Intra-organizational transfers (4) Physical and
social arrangements (5) Tone at the top.
 Codes of conduct
 Codes of ethics; corporate credos, mission statements, etc.
 Formal written documents with broad statements of
corporate values, commitments to stakeholders, and the
ways in which top management would like the firm to
function
 Fundamental guiding principles of the company

 Group-based rewards
 For example, profit-sharing, employee ownership of
company stock
 These are cultural controls (although of a results control
nature) because the link between group (individual)
performance and rewards is stronger (weaker)
 It is a formal written documents provide broad,
general statement of organizational values,
commitments to stockholders, and the way in which
management would like the organization to
function.
 It designed to help employees understand what
behaviors are expected, even in the absence of
rules.
 Major areas where codes focus in:
1- Purchasing guidelines 2- Information Security
3- Environment responsibility 4- Marketing
5- Product Safety 6- Workplace safety
7- Confidentiality of employee records
 To maximize effect of codes of conduct, they must
be reinforced through formal training sessions or
discussed among employees and their superiors.
 How the codes are drafted?
1- Top Management
2- Legal Department
3- Board of directors
 The codes are dynamic documents, they change if:
1. Specific incident within the company or industry
2. New leadership
3. New Laws
4. Change in business strategy
 Codes of conduct need to be supported by strong
leadership and proper tone from the top.
Ex: Enron managers bankruptcy in spite of their strong code of
conduct
 Group Rewards

 is a type of cultural control rather than results control,

rewards provided based on collective achievement
encourages cultural controls: ( Bonus, Profit sharing,
based on entity performance – cost reduction or profit
increase - compensations, and ownership of
company’s stock).
 Group rewards can have a positive effect on motivation
and performance by:
 1- Encourage teamwork
 2- On-the-job training by experienced staff
 3- Peer pressure on individual employees to exert
themselves
 Evidence of success:

Open Book Management. (OBM).

 Create a clear line, between employees actions and corporate
financial performance.
1. Share companies financial information, and any other
information can help employees at work.
2. Train employees to understand these information, and how they
can contribute to companies performance.
3. Rewards linked to the company performance.
4. Cultural change from a Top-Down culture: to ensure that
employees understand both what the information means and
how they themselves can contribute to company performance
 Group rewards delegate the monitoring of employee’s
activities to employee’s coworkers ,which is The essence
of MUTUAL MONITORING.
Improve the socialization of individuals in an
organization
alleviate the formation of incompatible goals and
perspectives.
Improve identification with the organization as a
whole as
opposed to subunit identification
Mitigate fraud by preventing employees from
becoming too familiar with transactions.
 Physical and social arrangements
For example, office plans, interior decor, dress
codes and vocabulary, etc.
 Tone at the top
Top management statements & behaviors must be
consistent with the culture they are trying to
create.
Management cannot say one thing and do
another
Sometimes whistle-blowers are ignored regarding
ethics concerns, reports of malpractice.(Ex ;
ENRON )
 Employee rotation improves the socialization of
employees giving them better appreciation of
problems faced by different parts of the organization

 Transfers also can reduce employee fraud by

preventing employees from becoming to familiar with
certain entity's activities, colleagues, and transactions.
 Physical and social arrangements can also help in
shaping organizational culture.
 Physical arrangements: Office planes, Architecture,
and interior decor.
 Social arrangements: Dress codes, and Vocabulary.
 Management can not say one thing and do
another
 Management set the tone that honesty and
integrity are valued and rewarded by the
organization.
 Lack of Motivational Personal
Types of Control Direction Problems Limitations
Ways of effecting personnel controls
Selection and placement
Training
Job design & provision of resources
Ways of effecting cultural controls
Codes of conduct
Group rewards
Intra-organizational transfers
Physical & social arrangements
Tone at the top
 Organizations rely on some extent, on their
employees, to guide and motivate themselves.
 Hiring is the most important decision, hire the
smartest, most inspired people, give them the
resources, and get away from there way.
 The stronger the culture, the less need for policies
manuals, organizations charts, detailed
procedures, and rules.
 Personnel/cultural controls have several advantages,
over result and action controls:
1. They are usable to some extent, in almost every
setting.
2. Their cost is often lower than other forms of controls.
3. They usually produce fewer harmful side effects.
 The degree of personnel/cultural effectiveness can
vary significantly across individuals, groups, and
societies, some groups and societies have stronger
emotional ties among their members.
 People control …
 Must always be relied on, to a certain extent.
 Have relatively few harmful side-effects
 Involve relatively low out-of-pocket costs

 However, it is rare that people control will be sufficient;

hence, in most cases, it is necessary to supplement
them with…
 Action controls
 Results controls
 Soft controls(People/cultural) encourage self & mutual
monitoring.
 Orgs became flatter ,leaner with wider spans of control.
Done by: Hanan Abaza