Question Comment on the “tightness” of the control system used by Fit Food, and the effects of this in terms of the (internal) cost and benefits to the organization regardless of whether the accounts are acceptable for publication. Tight Result Controls Fit Food measures the performance of each division based on their achievement of annual operating plans such as divisional growth rate to 7% and profit targets. Division who achieved their growth rate / profit target were rewarded with bonuses and stock option offered to corporate managers and divisional presidents. Fits Food Inc. D not have a very tight result control over the following: Desired results were not defined and it was difficult for employees to understand the desired results. Division managers wanted increase in their expense budget to achieve sales target while corporate wanted to squeeze expenses to generate increased profit. Result controls were loose. The result control lacked congruence and completeness. Divisions were given sales/ growth rate targets while the performance measure was based on profit earned. Bonuses were tied to profit targets instead of revenue measures. Data
Manipulation in terms of shipping moratorium, building accounting reserves against accounts receivables and inventory balances and expenses prepaid, generous discounts, delivery without proper written authorization from customers and capitalizing parts cost, for the achievement of the target profit and qualify for the bonuses. Financial decisions made by Divisional heads, who are weak in accounting and financial knowledge, instead of SCOFF. Economic conditions, such a demand for the product and demand for reduced price from buyers were not considered whilst setting the growth rate target which resulted n accounts manipulation.
The “no excuses management” has also forced the divisional heads to move to unethical acts. Focus is on short run profit only at the expense of long run goals. Cost (l internal) Direct out of pocket costs – cash bonuses paid out to personnel on the hiring testing achievement of the profit targets. Cost of internal audit staff for the documentation and works to comply with laws and regulations. Time spend by the each divisional personnel on the planning and budgeting activities, which are difficult to quantify. Behavioral displacement is present in result control i. E. Visional personnel were focusing more on the areas measured (performance).
Bonus and stock options created room for manipulation for result to look favorable such as aggressive revenue recognition, prepaying expenses and capitalizing machine parts cost in Drink and Cookie division. Loose result control had created room for manipulation of accounts for favorable results the long run. Negative Attitude – performance evaluations are perceived as being unfair since it is measured in terms of profit instead of revenue. Benefits The required growth rate would ensure that each division performance are up o standard, work harder and perform in the best interest of the company to achieve the required targets.
Cash bonuses would motivate employees and division heads to work towards the required result and qualify for the bonuses. Result control alignments the individual goals with Fit Food Inc. Goals. Tight Action Control Pre-action reviews – many discussions were held between the corporate and division management on the development & approval of the Annual Operating Plans (POP) – tight action control. Behavioral constraints such as administrative constraints were present in Fit Food Inc. Here decisions were stricter to President and Head of Department of their respective divisions as the performance measures were the important form of indicators to determine if results are achieved. Low level staffs did not have the authority to violate the constraints such as the junior accountant in the Cookies & Crackers Division was unduly pressured to make accounting entries that she felt were not good practice. Employees were informed of the desired results and its rewards and punishments. The effectiveness of the action tracking system where the decrease and increase in the accounting reserve was noticed by the auditors.
Fits Food Inc. Did not have a very tight action control over the following The quarterly performance review meetings were quick and reviews were not detailed thus desired results were not clear. Pre-actions are required for the price discounting (5% – 20%) beyond acceptable range as too much discount will result in negative impact. Pre-action also required on the number of days given to the customers to pay for their invoices and without incurring interest. The “no excuses management” may have sent a wrong signal to the divisions in terms of achieving target profit at any cost even to some extend for acting unethically.
Means- ends inversion – the divisional heads lack of understanding of the definition of (UN)desirable actions induces them to pay more attention to what they do and not what they are trying to achieve. Cost (Internal) Operational delays – meetings held quarterly would cause delay in decision making processes that would require urgent attention for the achievement of Fit Food Inc. Targets. Negative attitudes – the production team at Sport & Energy Drink Division were unhappy with the shipping moratorium as it would cause scheduling problems, overtime costs to accelerate production and to ship the orders.
Moreover, customer complaints on shipment delays and product outage can force customers to switch to Fit Food competitors which would affect Fit Food Inc. Profit targets. Benefits Pre-action reviews guided the divisional employees of their action to achieve desired result. Action controls are inexpensive to implement and will control expenses such as all decisions relating to expenses should be approved/ consulted with the CEO or the SCOFF for better understanding of its impact in achieving the profit targets. Such tight controls will ensure that the Fit Food Inc. U objective is achieved. Tight Personnel & Cultural Control An employee with ethical values understands the consequences of their action e. G. Junior accountant being pressured to make accounting entries. Fits Food Inc. Did not have a very tight personnel/cultural control over the following: The five board of directors were suggested by Sean and approved by the nominating and governance committee. Rewards (bonuses) are given when a division achieves its profit target but this system encourages free riding. Non- performance also get rewards.
Personnel control should be tightened to ensure hat the individuals (employees) goals are aligned with that of Fit Food Inc. Goals. Employees with ethical values understand the consequences of their action but follow the order even though they are unethical. Divisional heads following other division strategy to achieve target such as generous discounts and payment terms even though it affects the end result in the long run. Divisional heads were acting unethically in make decisions that were not in the favor of Fit Food Inc. In the long run. Cost (Internal) Free rider problem.