What factors affect control?

Although our generalizations about effective control systems provide guidelines, their validity is influenced by situational factors. What types of contingency factors will affect the design of an organization’s control system? These factors include size of the organization, one’s position in the organization’s hierarchy, and degree of decentralization, organizational culture, and importance of an activity.

Control systems should vary according to the size of the organization. A small business relies on informal and more personal control devices. Concurrent control through direct supervision is probably most cost effective. As organizations increase in size direct supervision is likely to be supported by an expanding formal system. Very large organizations will typically have highly formalized and impersonal feed forward and feedback controls.

The higher one moves in the organization’s hierarchy the greater the need for multiple sets of control criteria, tailored to the unit’s goals. This need reflects the increased ambiguity in measuring performance as a person moves up the hierarchy. Conversely lower level jobs have clearer definitions of performance which allows for a narrower interpretation of job performance.

The greater the degree of decentralization the more managers will need feedback on the performance of their employees decisions. Because managers who delegate authority are ultimately responsible for the actions of those to whom it is delegated they will want proper assurances that their employees’ decisions are both effective and efficient.

The organizational culture may be one of trust, autonomy and openness or one of fear and reprisal. In the former we can expect to find informal self control and in the latter externally imposed and formal control systems to ensure that performance is within standards. As the leadership styles motivation techniques, organizational structuring conflict management techniques and the extent to which organizational members participate in decision making the type and extent of controls should be consistent with the organization’s culture.

Finally, the importance of an activity influences whether and how it will be controlled. If control is costly and the repercussions from error small the control system is not likely to be elaborate. However, if an error can be highly damaging to the organization extensive controls are likely to be implemented – even if the cost is high.

A special Case of control: Sarbanes Oxley Act.

During the past several years much attention has focused on corporate scandals. Our literature has been filled with management practices at companies such as WorldCom, Enron and ImClone. What executives at these companies did may be questionable and some actions may have been illegal. For many the aftermath of these corporate scandals resulted in a lack of trust in management. But the larger issue focuses on the implications that such actions create for organizations. Let us briefly look at them.

In July 2002, President Bush signed into law the Sarbanes Oxley Act, which established procedures for public companies regarding how they handle and report their financial picture. The legislation also established penalties for noncompliance. For example Sarbanes Oxley requires the following:

The chief executive officer (CEO) and the chief financial officer (CFO) must personally certify the organization’s financial reports.

1) The organization must have in place procedures and guidelines for audit committees.
2) CEO and CFOs must reimburse the organization for bonuses and stock when required by restatement of corporate profits,
3) Personal loans or lines of credit for executives are now prohibited.

The penalty aspect of Sarbanes Oxley for noncompliance is getting executive’s attention. Failure to comply with the requirements stipulated under Sarbanes Oxley such as falsely stating corporate financial can result in the executive being fined up to $1million and imprisoned for up to 10 years. Moreover, if the executive action id determined to be willful both the fine and the jail time can double. Clearly, such penalties have people’s attention.