Teaching managerial responsibilities for internal controls: Perception gaps between accounting and management professors

An organization needs a proper managerial tone to maintain a sound control environment. However, managers cannot support a control environment they do not understand. This misunderstanding generates a perception gap between corporate managers and auditors concerning internal control responsibilities, which may extend to academia as well. This research examines the perceptions of accounting and management professors concerning the understanding of who is ultimately responsible for establishing and maintaining internal controls over financial reporting and finds a statistically significant difference of opinion between the two groups. A large number of management professors surveyed relegate this role to internal auditors instead of management. These findings indicate management professors may not be fully aware of the responsibilities placed on managers of publicly traded companies for internal controls over financial reporting by the Sarbanes–Oxley (SOX) Act of 2002. The survey also finds a statistically significant difference in the perceptions of accounting and management professors concerning where the topic of internal controls should be taught and who is most qualified to teach internal controls to non-accounting business majors. This disconnect between management and accounting professors could potentially generate a business curriculum that leaves non-accounting business majors with little or no exposure to the roles and responsibilities of managers concerning internal controls over financial reporting. This research highlights the important role of accounting professors to help minimize this disconnect and provides specific recommendations to improve the exposure necessary for non-accounting business majors.     

The dilemma of implementing controls: The case of managerial accounting

Managerial accounting contains a technical theory of control. Whenever this technical theory of control is correctly implemented to deal with issues that are embarrassing or threatening, the players activate their personal-human theory of control in order to remain “in control”. The correct implementation of the personal-human theory of control necessary inhibits the effective implementation of the technical theory and vice versa.     

The making of an expert

Popular lore tells us that genius is born, not made. Scientific research, on the other hand, reveals that true expertise is mainly the product of years of intense practice and dedicated coaching. Ordinary practice is not enough: To reach elite levels of performance, you need to constantly push yourself beyond your abilities and comfort level. Such discipline is the key to becoming an expert in all domains, including management and leadership. Those are the conclusions reached by Ericsson, a professor of psychology at Florida State University; Prietula, a professor at the Goizueta Business School; and Cokely, a research fellow at the Max Planck Institute for Human Development, who together studied data on the behavior of experts, gathered by more than 100 scientists. What consistently distinguished elite surgeons, chess players, writers, athletes, pianists, and other experts was the habit of engaging in "deliberate" practice--a sustained focus on tasks that they couldn't do before. Experts continually analyzed what they did wrong, adjusted their techniques, and worked arduously to correct their errors. Even such traits as charisma can be developed using this technique. Working with a drama school, the authors created a set of acting exercises for managers that remarkably enhanced executives' powers of charm and persuasion. Through deliberate practice, leaders can improve their ability to win over their employees, their peers, or their board of directors. The journey to elite performance is not for the impatient or the faint of heart. It takes at least a decade and requires the guidance of an expert teacher to provide tough, often painful feedback. It also demands would-be experts to develop their "inner coach" and eventually drive their own progress.     

The effect of auditor IT expertise on internal controls

Material weaknesses in internal controls related to information technology (IT) represent unique threats to organizations. Utilizing the external auditor as an example of an externally observable governance mechanism, we investigate if firms with revealed IT internal control deficiencies employ a strategy of disassociation with their current auditor. Our tests show that prior evidence of disassociation strategies hold in both IT and non-IT contexts. Of particular focus to our study, we document a positive association between firms that report IT material weaknesses and subsequent auditor dismissals or switching. We next investigate the potential internal control benefits of switching to auditors with greater expertise in environments that emphasize the importance of IT. We argue that greater audit firm IT expertise promotes improved internal controls for their clients, especially those controls that are dependent on IT. We find that clients that switch to auditors with greater IT expertise, relative to their former auditor, have a greater likelihood of material weakness remediation within one year of reporting control weaknesses. Complementing these findings, we find that audit IT expertise is negatively associated with both non-IT and IT material weaknesses in an ex ante reporting setting. Prior literature takes a longstanding interest in both the incentive for developing auditor expertise and the effects of that expertise. We contribute to this literature stream by providing additional evidence related to a specific type of expertise.     

ControlML: A domain-specific modeling language in support of assessing internal controls and the internal control system

In this paper, we refine and extend an earlier language design to introduce a domain-specific modeling language (DSML) for internal control modeling as an extension to an enterprise modeling method. The language is aimed at supporting the assessment of a firm's internal control system through the use of conceptual models of internal controls. In the paper, we report on the design of the modeling language, on its integration with the enterprise modeling method, present the language specification, and discuss language applications in the context of the assessment of an internal control system.     

Experiences with EXGAME: an expert system for playing a competitive business game

This paper looks at expert systems in management, by using a business game as an experimental vehicle. An expert system called EXGAME was developed to play a business game, which is normally played by students, with minimal human intervention. This paper concentrates on the effectiveness of EXGAME as compared with human players for tasks at different levels. EXGAME was able to replace human players in decision making at the operational level, and indeed outperform them. However, it proved to be impractical to replace human input at the strategic level. The paper also sheds some light on the problems of trying to build an expert system when there is no real expert. A combination of a modular knowledge-base structure and a process of ‘learning by experimentation’ was effective in this case; it is suggested that this may be an appropriate development strategy in other similar situations. © 1998 John Wiley & Sons, Ltd.     

The evolution of pay premiums for managerial attributes

This paper proposes and estimates an interactive fixed effects model of executive compensation, which allows for time-variant pay premiums for unobserved manager attributes. We find that two managerial traits can explain executive compensation over time: talent and conservatism. The market premium for talent is higher in bull markets, as the higher marginal productivity of human capital during these periods increases the demand and thus the price for talents. Such pay premium is concentrated among top talented managers, who earn a premium about five times that of median talented managers. The pay premium for conservatism is linked to the equity market risk premium, with conservatism being discounted (compensated) during the low (high) risk premium periods. We show that risk-taking managers are rewarded during the early period of our sample. However, after the periods characterized by higher risk premium, such as the financial crisis, conservatism becomes a more desirable trait.     

Determinants of human resource investment in internal controls

Using the unique reporting environment in Korea, this study investigates the determinants of human resource investment in internal controls for 1352 listed firms disclosing the number of personnel who are in charge of internal control-related tasks (IC personnel) from 2005 to 2008. We find that the number of IC personnel within a firm and several key departments increase with firm size, number of employees, complexity and for Chaebols, and decrease in rapidly growing firms. Additional analysis reveals that the factors influencing internal control systems have an accentuated effect on firms with relatively larger firm size.     

The illusion of managerial control

The design and implementation of organizational control systems based on a cybernetic model stand in need of revision. The revision is required by increasing numbers of reports of system ineffectiveness and, in some cases, failure. The paper suggests that a major reason for current difficulties resides in the “illusion of control” implied by theory and implemented in practice. An alternative definition of organizational control based in the concept of “multirationality” is proposed.     

A graphical approach to teaching the relationship between the evaluation of internal accounting controls and substantive audit testing

This note reviews auditing theory and professional standards describing the relationship between internal accounting control systems and substantive audit testing. It presents three graphical models that may be used to illustrate to students the basic theoretical relationships and to clarify some points in the professional literature that may be confusing to students and practitioners. We have found these graphical models to be a useful teaching tool. They permit students to extend beyond mere verbalizations to a visualization of the theoretical concepts involved. The final model enhances the students ability to analyze and learn major concepts.     

Impact of FDICIA internal controls on bank risk taking

The Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991 was designed, among other things, to introduce risk-based deposit insurance, increase capital requirements, and improve banks’ internal controls. Of particular interest in this study are the requirements for annual audit and reporting of management’s and auditor’s assessment of the effectiveness of internal control for banks with $500 million or more in total assets (raised to $1 billion in 2005). We study the impact of these requirements on banks’ risk-taking behavior prior to the recent financial crisis and the consequent implications for bank failure and financial trouble during the crisis period. Using a sample of 1138 banks, we provide evidence that banks required to comply with the FDICIA internal control requirements have lower risk taking in the pre-crisis period. Specifically, the volatility of net interest margin, the volatility of earnings, and Z score show less risk-taking behavior. Furthermore, these banks are less likely to experience failure and financial trouble during the crisis period.     

略论内部控制审核与会计报表审计的关系

2001年6月,财政部发布《内部会计控制规范》,要求各单位建立适合本单位业务特点和管理要求的内部会计控制制度,并提出,单位可以聘请中介机构或相关专业人员对本单位内部会计控制的建立健全及实施进行评价,接受委托的中介机构或相关专业人员应当对委托单位内部会计控制中的重大缺陷提出书面报告.     

The emergence of management controls in an entrepreneurial company

The dilemma faced by founders of entrepreneurial companies is how to scale their business while staying in control. While the accounting literature has found that financial controls are important to rapidly scale a business, we do not know how these controls emerge in entrepreneurial companies in relation to other management controls. Using a case study of an entrepreneurial company that rapidly scaled its business, this study examines the management controls that emerged to become a package of controls. We highlight the importance of the management control package remaining in balance, with controls working together interdependently in a complementary fashion.     

Impact of an audit reporting expert system on learning performance: A teaching note

Audit reporting is a complex process, requiring knowledge of various reporting issues and corresponding report formats. To address the difficulty of presenting audit reporting concepts to students, the authors constructed and used an audit reporting system, named AUDPORT, in their first-level auditing classes at two major state universities. This paper reports the use of AUDPORT as a teaching aid and its impact on students' performance.     

Accounting for expenditure on software development for internal use

The methods accepted by Australian, International, U.S. and U.K. Accounting Standards for the treatment of expenditure on software development are inconsistent, and permissive. A host of methods for recording capitalized software in terms of those standards is identified by reference to an illustrative case study. It is questionable whether many in-house developed software applications satisfy the professionally endorsed definition of 'asset'. Moreover, even if accounting standards significantly reduce the range of options for capitalizing expenditure on software development, there would still be many values which could be assigned to capitalized software. That suggests that those 'measures' are not reliable, so that it would be inappropriate initially to recognize software expenditure as an 'asset'. It is contended that expensing all outlays on software development as they are incurred (accompanied by reporting that expenditure as a line item in statements of financial performance, and expanded disclosures in notes) is likely to provide a clearer and more useful report on business operations than the alternative of capitalization, amortization and subsequent assessments of whether or not recorded values should be adjusted for 'impairment'.     

A validated expert system for decision making in corporate recovery

This paper describes INSOLVE—an expert system for corporate recovery decisions. INSOLVE was built to understand the decision-making processes of corporate recovery experts who deal with companies in financial difficulties. INSOLVE has been developed using a multi-phase process similar to that widely adopted in software engineering. The expert system is described in terms of the assessment task and interpretation models of CommonKADS. The detailed results of the validation of INSOLVE with 17 experts show that it is an accurate model of human expertise in this domain. Copyright © 1999 John Wiley & Sons, Ltd.     

The expectancy–valence theory revisited: Developing an extended model of managerial motivation

This empirical study examines the relationship between managerial perceptions of elements of the performance measurement, evaluation and reward system (PMERS) and motivation. An extended version of the traditional expectancy–valence (E–V) model is developed to conceptualise the process of motivation at the middle management level. Based on this model, the direct effect of and interplay between the value of rewards, the attainability of targets, the accuracy of measures used to gauge achievement, the transparency of the performance–rewards relationship and managerial motivation are examined. Using structural equation modelling (SEM), the perceptions of 200 plus middle managers in a large, successful company in the financial services sector are analysed. The observed data generally provide a good fit with the structural model. The findings indicate that both extrinsic and intrinsic rewards have a significant positive impact on managerial motivation. However, the value of extrinsic rewards is significantly affected by other elements of the PMERS design, namely the accuracy of the performance measures and the transparency of the performance measures–rewards link. This has important implications for the design of extrinsic reward schemes, and the utilisation of alternative motivational drivers potentially present in the middle manager's job environment.     

Equity culture development in Central and Eastern Europe: The role of institutional and managerial factors

In this paper we argue that the development of equity culture in the CEECs is dependent on the presence of a combination of factors stemming from the external institutional and internal managerial environments of the firm. We adopt an inductive approach by firstly analysing two levels of data followed by a conceptualisation based on gained results. We examine data for ten CEECs (all current EU members) for four years 1996, 2000, 2004, and 2008. To examine the characteristics of the institutional and managerial environments of the CEECs and assess their similarities to four benchmarks (UK, USA, Germany, and Japan) we apply a Co-Plot methodology. We find that the presence of an advanced and well developed institutional framework together with the existence of specific managerial conditions is a necessary condition for equity culture development. One could argue that in the CEECs the transition process of institutional conditions necessary for the development of a sound financial system is in place but with some limitations. Furthermore, we find that managers in countries with the best potential for equity culture development are highly motivated, high-skilled people with international corporate experience.     

The prevention of excess managerial risk taking

Executives with poor prior performance may be inclined to take excessive risk in the hope of meeting performance targets, in which case a compensation contract featuring severance pay can be optimal. While prior work has shown that severance can induce managers to take positive NPV risks, we show that it can also keep them from taking negative NPV risks. We show that severance should be contingent on results: complete failure should nullify any payments. We also show that mandating a firm size that is larger than first-best, while costly, can help screen for good managers.