The effect of internal control on management performance
Basically, controlling in organizations forms part of the requirements toward the sustainability of the organization. Simons (2005) suggested that the strategies the management employs shall feature the accountability system that defines roles, rights and responsibilities which impacts directly on the performance of every employee. Therefore, the varying requirements for control mechanisms to which the employee behaviour could be adapted. The necessity of modifying the employee behaviours is central on providing services to the general public which is within the realm of bureaucratic context. There are different internal control mechanisms that the management is making sense of.
The three-step control process is measurement of actual performance, comparison of actual performance against a standard and taking action to correct deviations or inadequate standards. In the first step, two factors are considered as the sources of what will be measured and the control criteria to be used. Information on actual performance could be acquired through personal observations and reports which include oral and written and even statistical reports. Control criteria are generally divided into two: employees and budget wherein the former sub-criteria are satisfaction, turnover and absenteeism while on the latter are cost, output and sales. In the comparison phase, industry standards will be the basis of comparisons to determine whether actual performance is of acceptable range and the amount it specifically deviates itself from the standard. When the range of actual performance is unacceptable, managerial actions will be considered through corrective actions or revisions of standards if necessary.
Control is important because it single-handedly links with the effectiveness of other managerial functions such as planning. When it comes to planning, it determines whether activities are on to achieving goals and accomplishing objectives. Control mechanisms keep the plans running smoothly and up to date. Control is also important in employee empowerment wherein performance of the employees could be properly managed. Performance is controlled in terms of appraisal, lessening haphazard decisions on allocation of positions/job titles. Nonetheless, control mechanisms are also important in keeping a balance within the workplace especially since controlling means to minimize unethical decisions of the employees and the organisation as a whole. As such, control is very important because if you cannot control the internal processes, constraints on cost, time and objectives will follow.
Budgets are used as financial controls of organisations while balance scorecards are used as performance controls. Financial controls are part of performance controls wherein the first provides quantitative metrics and second qualitative metrics. Budgets are used to develop sound financial strategies specifically those that will impact the overall performance of the organisation. Budgets are also used to effectively allocate resources to sub-units within the organisation. There are financial risks that the organisation subjects itself into and through proper budgeting, these risks could be minimised. Balanced scorecard, on the other hand, measures how the organisation performs when it comes to financial aspects and also in terms of customer, internal processes and people. For each factor, objectives, progress and actions are measured. Scorecards are used as internal control assessment, improvement and reporting system. Through this, performance is monitored and corporate strategies are revised based on the results of the scorecard.
Taking it from a competency framework, organizational policies on internal control is one of the most fundamental policies that could provide a sustainable organization. The overall internal control structure is integrated through a closed-loop approach wherein functions are integrated to one another. Internal control policies and procedures ensures proper authorization of all instructions, segregation of compatible duties, appropriate designation and maintenance of records and documentation and controlled access to both assets and records. The least amount of the internal control mechanisms for the overall operational responsibility of the management will focus on the top management or on the CEOs, due to fact that he or she is the primary person or authority who is accountable for the organizational controls and procedural controls of the corporation. In sum, the top management must control processes within the organization before it can be said that it is performing optimally.
Reference
Simons, R. (2005). Levers of Organization Design: How managers use accountability systems for greater performance and commitment. Boston: Harvard Business School Press.
Credit:ivythesis.typepad.com
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