The Impact of Management Control Systems on Organizational Performance
Chapter One
Objective Of This Study
The broad objective of the study is to investigate the impact of management control system on the organizational performance in Nigeria. The specific objectives are to:
- Determine if there is correlation between management Control System and performance of organizations?
- Ascertain the relationship between effective management control system and inefficiency in organization.
- Determine the relationship between effective management Control and productivity.
- Investigate the differences in the performance of organization with effective management control system and the performance of organizations with ineffective management control system.
CHAPTER TWO
LITERATURE REVIEW
Literature Review
As a starting point for the literature review, one may ask the following: Are there scholarly definitions of the construct dubbed “management control systems” in the current literature? I explore the answer to this question and review the current quantitative and nonquantitative research on management control systems.
The Concept of Management Control Systems
Determining what management control systems (MCS) actually means appears to be an appropriate starting point for a review of the literature on the MCS construct (Libby, R., Libby, P., & Short, 2003). This way, scholars are armed with the knowledge of what other scholars’ definitions of the MCS construct are, and they thereby gain a deeper understanding of the construct. A plethora of definitions of MCS exists as a construct embedded in the managerial accounting discipline. Libby et al. (2003) define MCS as a system that provides the information needed by business owners and senior managers in making decisions pertaining to new investments, leasing, purchasing, advertisement and promotion expenses, and other activities. Anthony (1965) defined MCS as the processes that allow managers to secure resources and then deploy them effectively and efficiently in the accomplishment of the organization’s objectives. Similarly, Simons (1995a) defined MCS as the means by which managers successfully implement strategies by using formal information-based routines that allow them to utilize managerial procedures to maintain or alter patterns in organizational activities. However, Simons (1995b) also argued that the most important fact is not the identification of the types of controls firms use but rather how they are used, thereby referring to his levers of control framework in which he distinguishes between the diagnostic and the interactive use of controls. In the same vein, Thoren and Brown (2004) cautioned that the difference between diagnostic and interactive control systems is not their technical design features but rather the ways managers use these systems. The ways corporate managers use MCS may in fact be the key factors underlying the differential variations in organizational performance across companies that design and implement MCS. To address this empirical question, Lee et al. (2013) investigated the association between organizational culture and the implementation and use of MCS. Lee et al. concluded that the missing linchpin was differences in organizational culture across firms.
With these scholarly opinions on the definitions of MCS in mind, I shift attention to another conceptual issue scantly discussed in the management control literature: How does the need for MCS arise in organizations? This question may be reframed as follows:
What structural events occur in organizations to necessitate the design and use of MCS? This critical question is inescapable if one wants to understand the root causes of management control design and use in the organization.
Root Causes of the Need for Management Control Systems
Management control systems (MCS) are designed and used as strategic variables in response to two systemic disequilibria or misfits (Simons, 1995a, 1995b). The first disequilibrium or misfit is internal to the organization because it arises when organizational employees pursue their own self-interest to the detriment of organizational interests (Cuguero-Escofet & Rosanas, 2013). Once this divergence of interests occurs, management enlists tangible and intangible tools to bring employees’ interests in alignment with organizational interests (Bisbe & Malagueno, 2012; Chenhall, 2003). The collection of tools or mechanisms employed by management for this specific purpose is called management control systems (Merchant & van der Stede, 2007; Simons, 1995b). Absent the disequilibrium or misfit between employees’ interests and organizational interests, the strategic need and use of MCS would be nonexistent internally in the organization.
The theoretical situation in which there would be a fit (congruence) between employee goals and organizational goals is portrayed in Figure 4.
CHAPTER THREE
RESEARCH METHODOLOGY
Introduction
In this chapter, we would describe how the study was carried out.
Research design
An analysis of the social research methodologies suggests that survey is the handy tool for managers to collect primary data using questionnaire and interviews about the perceptions and attitudes of the respondents. “It is noted somewhere that questionnaire approach is the “most frequently used mode of observation in the social sciences because surveys are reportedly the excellent vehicles for measuring attitudes in large populations” (Sekaran, 2003:257).
Sources of Data
The data for this study were generated from two main sources; Primary sources and secondary sources. The primary sources include questionnaire, interviews and observation. The secondary sources include journals, bulletins, textbooks and the internet.
Population of the study
A study population is a group of elements or individuals as the case may be, who share similar characteristics. These similar features can include location, gender, age, sex or specific interest. The emphasis on study population is that it constitute of individuals or elements that are homogeneous in description (Prince Udoyen: 2019). In this study the study population constitute of all the entire staff of Alo Aluminium.
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
INTRODUCTION
This chapter is about the analysis and presentation of data collected from the field through questionnaire. The analysis of the data with particular question immediately followed by the presentation of findings.
As mentioned in chapter three, 50 questionnaires were administered and 50 were retrieved and necessary analysis was carried out on them and presented as follows:
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
Introduction
This chapter presents a summary, conclusion and recommendations of the findings and end with areas of further research.
summary of major findings
The study investigates the effect of management control system on organizational performance. The hypotheses indicate that there is significant relationship between management control system and organizational performance. The findings result shows that management control system contribute to organizational performance; the result revealed that the calculated t-statistics for the parameter estimates is (t = 3.653), P < 0.01 which is greater than tabulated t statistics (1.9960) at 0.01 level of significance. Therefore, the Null hypothesis is rejected and Alternative hypothesis is accepted, that is there is significant relationship between management control system and organizational performance of SMEs.
Also in analyzing the management control system and performance in Alo Aluminium. Findings indicated that the management controls used in Alo Aluminium were ineffective and unsatisfactory; The result revealed that the calculated t-statistics for the parameter estimates is ( t = 0.439), P < 0.01 is less than tabulated t statistics ( 1.9960) at 0.01 level of significance. Therefore, the Null hypothesis is accepted and Alternative hypothesis is rejected, that is management control system in Alo Aluminium does not lead to frauds.
This studies received support by Coopers and Lybrand (1993) who argued that there was need to consider whether the following control objectives are met; management conveys the message that integrity and ethical cannot be compromised, the organization structure provides a moral framework for planning, directing, and controlling operations, management ensures that appropriate responsibility and delegation of authority is assigned to deal with goals and objectives and the Board of Directors and audit committee are sufficiently independent from management to construct a challenge to management decision and take an active role in ensuring that an appropriate “tone at the top exists”. The findings revealed a low level of organizational performance in Alo Aluminium. Findings are in agreement with studies by Brown (1996) who argues that performance measures in organizations must focus attention on what makes, identifies and communicates the drivers of success, support organizations learning and provide a basis for assessment and reward. Furthermore, Dixion (1990) adds that appropriate performance measures are those which enable organizations to direct their actions towards achieving their strategic objectives. This is because according to him a firm’s performance is central to the future well being and prosperity of any enterprise.
The results in the table above indicate a significant positive relationship between management controls and organizational performance of ALO ALUMINIUM Also with the value of R in the model it shows that there is significant relationship between the dependent variable and independent variable at 0.01 level of significant (r = .063,P < 0.01). The overall regression model is statistically significant in term of its goodness of fit (F = 13.346, P < 0.01). These findings, relate well with previous studies by Coso (1992) who provided a criteria against which effectiveness of management controls can be assessed. He contends that management control can be judged effective if the entity’s operations objectives are being achieved; published financial statements are being prepared, reliable and applicable laws and regulations are being complied with. Accordingly, the effective functioning of components of control system provides a reasonable assurance regarding achievement of one or more of the stated categories of objectives to ensure high levels of organizational performance.
Conclusion
From the findings, it is concluded that; the findings shows the overall regression model which is statistically significant in term of its goodness of fit that is there is a significant relationship between management control system and organizational performance of Alo Aluminium.
The following conclusions were made from the investigation carried out to evaluate the effect of management control on organizational performance in Alo Aluminium:
We can conclude further from the study that there exists a high positive correlation between management control system and organizational performance. Though controls were observed to be generally effective, there were some lapses noted in the area of asset numbering.
On the issue of segregation of duties, the research shows that the duties of all staff are dully segregated so that no one staff carries one transaction from the commencement to conclusion. Practice of good corporate governance by this bank is not yet at its best, they can still do better.
Recommendations
A system of effective controls is a critical component of business management and a foundation for the safe and sound operation of organizations. A system of strong management controls can help to ensure that the goals and objectives of an organization are met, that the bank will achieve long-term Profitability targets, and maintain reliable financial and managerial reporting. Such a system can also help to ensure that the bank will comply with laws and regulations as well as policies, plans, internal rules and procedures, and decrease the risk of unexpected losses or damage to the bank’s reputation. The following recommendations are proffered for tackling the deficiencies noted in the findings from the study. These are aimed at improving the management control system of banks in Nigeria.
- To examine the effectiveness of management controls used in Alo Aluminium, the management of Alo Aluminium should design more effective management control systems by ensuring that adequate asset listings is done by management, capital assets purchased are approved by appropriate level of management and asset numbering is done to show location and protection of the assets.
- To establish the level of performance in Alo Aluminium, the management of Alo Aluminium should ensure that it strengthens strategies aimed at improving organizational performance in all categories of staff and this should continuously be used to ensure that performance levels are satisfactory.
- To establish a relationship between management control and performance in Alo Aluminium, the management of Alo Aluminium should appreciate these findings on the relationship between management controls and organizational performance to ensure its continued production in a competitive industry in Nigeria Sme.
- Staff of the Internal Control department should be adequately remunerated. They bear high level of risk. Most people look at them as the police of the organization and therefore they are always at threat. It is unfortunate that most banks pay greater attention to marketing at the detriment of Internal Control consequently marketing officers are most rewarded. And Internal Control staffs are often regarded as non-contributive staff. This notion is wrong because a single fraud that goes undetected can write-off the fortune of the bank. Therefore Internal Control staff should be duly motivated to put in their best. In view of the undeniable importance of management control system in an establishment such as bank, the management should not allow itself to be mis-directed by the criticisms that are leveled against the management control system, for instance, control not being cost effective among others. They should note that there is a great need for the presence of an effective management control system in the banks. According to J. Santocki, poor management control system or total absence of it, will lead to a chaotic situation in the company and this will lead to errors and fraud, unreliable and inaccurate record keeping and an eventual liquidation of the company.
- The board of directors should have responsibility for approving and periodically reviewing the overall business strategies and significant policies of the bank; understanding the major risks run by the bank, setting acceptable levels for these risks and ensuring that senior management takes the steps necessary to identify, measure, monitor and control these risks; approving the organizational structure; and ensuring that senior management is monitoring the effectiveness of the management control system.
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