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9
Model Syllabus 1
Accounting 476Performance Measurement
Issues
Leventhal School of Accounting, University of Southern
California
Professor Kenneth A. Merchant
Office HOH 606
Telephone (213) 821-5920
E-mail kmerchant@marshall.usc.edu
Course Objectives
This course is designed to broaden and deepen your conceptual and technical understanding of
accounting as it is used for management purposes. The emphasis in the course is on financial
controls, which dominate in importance at managerial levels in all but the smallest
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
The course is built around a textbookMerchant and Van der Stedes Management Control
Systems. The text will be supplemented with some additional materials that will be distributed
via Blackboard.
The focus of most of the classes will be on a case that brings the topics to life and provides
issues for us to discuss. The readings are intended to provide background that is useful for
Grading
In-class quizzes 50 points
E-mail questions and class participation 50 points
Final exam 100 points
Total 200 points
The quizzes will be given in a few classes on an unannounced basis. As protection against the
possibility of a bad day or an unlucky absence, in computing my course grades I will disregard
the lowest quiz score.
On the bottom of many of the class assignments, you will see that I have included an e-mail
question. Prior to noon before our class pertaining to that assignment, please send me an e-
mail message answering the question(s) for that days class. This is not intended to be a time-
consuming obligation. Your answers should be briefthree sentences or less for each
question.
Your answers to the e-mail questions serve multiple purposes. First, they help me to get to know
you and to see how you think. Second, these messages open the communication channels
example, they help me both to judge the mindset of the class and to find people with unique
perspectives. Finally, the questions are functional because they encourage good advance
preparation. The regularity with which you input your e-mail question answers on a timely basis
and the quality of your answers will form part of your participation grade.
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
11
participation encourages students to be well prepared and thus to become active, rather than
passive, learners. Participation provides students with the opportunity to gain from the
Class participation evaluations will be based primarily on the quality of the participation in
classroom discussions. To be clear on what I am looking for regarding class participation, and to
further aid in your preparation, I have listed below some characteristics of effective class
participation:
(1) Does the student make points that are especially pertinent to the discussion? Do they
(2) Is there continuity in ones contribution from what has been said previously during class, or
are the comments disjointed, isolated, or tangential? The best class contributions are those
(3) Do the comments reflect a willingness to put forth new, challenging ideas or are they
always agreeable and safe?
(4) Is the participant able and willing to interact with others by asking questions, providing
supportive comments or challenging constructively what has been said?
Your participation will be evaluated on the basis of a near-continuous scale, the end points of
which can be described as follows:
Outstanding Contributor: This persons contributions reflect exceptional preparation, and the
ideas offered are always substantive and provide major insights and direction for the class. If
this person were not a member of the class, the quality of the discussions would be diminished
significantly.
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
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Schedule of Classes
Session 1
Topic: Performance Measurement and the Control Function of Management
In this first class, we will go over the syllabus and get to know each other. Then I will provide a
general lecture on management controls and the control uses of performance measures that we
will focus on in this course. Finally, we will discuss a short case that will set the stage for our
further discussions.
Reading: MV, Chapter 1
Session 2
Topic: Results Controls
In this class, we will examine and critique the performance measurement and incentive system
used in a business with which all of you have some familiarityautomobile retailing. The
company is privately held, and it makes use of some nonfinancial performance measures. In
Reading: MV, Chapters 2 and 9
Prepare for Class: Case: Puente Hills Toyota
Assignment Question: Evaluate the performance measurement and incentive systems used at
Puente Hills Toyota. What changes would you recommend, if any?
E-mail Question: As a first approximation, which of the following statements do you believe is
most correct, and why:
Session 3
Topic: Financial Responsibility Structures
The focus of this session is on one of the main management control system choicesdesign of
the organizations authority and financial responsibility structures.
Reading: MV, Chapter 7
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
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Prepare for Class: Case: Kranworth Chair Corporation
Assignment Questions:
1. Identify the most important key recurring decisions that must be made effectively for KCC
to be successful. In KCCs functional organization, who had the authority to make these
decisions? Who has the authority to make these decisions in KCCs new divisionalized
organization?
2. Did KCC top management go too far in decentralizing the corporation? Did they not go far
enough? Or did they get it just right? Why?
E-mail Question: The vast majority of corporations are decentralized to a considerable degree.
What kinds of organizations are best run in a largely centralized manner, and why?
Session 4
Topic: Performance Targets
Annual financial performance targets are an important outcome of companies planning and
budgeting processes. How challenging should these targets be, and how should achievement of
the targets be linked to various forms of rewards, such as incentive compensation and job
retention?
Reading: MV, Chapter 8
Assignment Questions:
2. Should HCC managers have expected that the MPS target-setting philosophy would be
equally effective in all four operating divisions described? If not, what explains the
differences?
3. What should Andy Goldfarb do now?
E-mail Question:
Mike Pelta, general manager of Hermetic Seal, is quoted in the case as saying he has not missed
a budget in his 33 years as a manager. How do you think he did that? Does this record suggest
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
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Session 5
Topic: Performance Measures
Todays discussion focuses on a company that does not place much emphasis on financial
measures of performance. Why? What do they do instead?
Reading: MV, Chapters 10 and 11
Prepare for Class: Case: Catalytic Solutions, Inc.
Session 6
Topic: Performance Evaluations
In this class, we will continue our discussion of performance evaluations. How can/should firms
deal with the effects of uncontrollable events that often obscure managers impacts on
performance measures?
Reading: MV, Chapter 12
Prepare for Class: Case 1: Olympic Car Wash
Assignment Question: How large should the bonus pool be for the Aalst location?
Prepare for Class: Case 2: Beifang Chuang Ye Vehicle Group
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
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Session 7
Topic: Enterprise Risk Management
Our focus in this session is on enterprise risk management, a newly developing tool aimed at
helping companies address all the various kinds of risks they might face.
Reading: MV, Chapter 13
Prepare for Class: Case: Entropic Communications, Inc.
Assignment Questions:
1. Why did Entropic implement a formal enterprise risk management (ERM) process?
2. Do you think the company realized the benefits of ERM as envisioned by COSO? Why or
why not?
3. What changes would you suggest for making the ERM process at Entropic more effective?
E-mail Question: ERM is currently one of the hottest topics being written about in
management, accounting, and corporate governance practitioner journals. Virtually every
Session 8
Topic: Management Control Impacts of the SarbanesOxley Act of 2002
In this session, we will focus on the benefits and costs the SarbanesOxley Act of 2002 (SOX)
from the corporate perspective.
Reading: MV, Chapter 13
Prepare for Class: Case: Pacific Sunwear of California, Inc.
Assignment Questions:
1. Evaluate the process that PacSun went through to comply with SOX, and particularly SOX
Section 404. Was that process as effective and efficient as it could have been?
2. Are the significant deficiencies that were identified in each of the 2 years of the audit
evidence of control system flaws or largely irrelevant technical violations? Another way to
phrase this question might be: should disclosure of these deficiencies have had a negative
effect on PacSuns stock price?
E-mail Question: Judging now with some benefits of hindsight, was SOX a good law?
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
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Session 9
Topic: Earnings Management and the Roles of Controllers and CFOs
In this session, we will examine some of the important roles that controllers and CFOs play in
their organizations, particularly in times of stress.
Reading: MV, Chapter 14
Prepare for Class: Case: Don Russell: Experiences of a Controller/CFO
Assignment Questions:
1. Was Don Russell a good controller for Cook and Spector, Inc.? Why or why not?
2. Does Don have the power to force ETI top management to make a correcting accounting
entry? If not, what should he do? If so, should he force the entry to be made, and how large
should it be?
E-mail Question: Was Don Russell a good controller for Cook and Spector, Inc.? Why or why
not?
Session 10
Topic: Financial Reporting Problems and Corporate Governance
In this class, we will focus on the roles of various parties when financial reporting problems are
discovered.
Reading: MV, Chapter 15
Prepare for Class: Case: Financial Reporting Problems at Molex, Inc.
Assignment Questions:
1. What was the financial reporting problem at Molex? How would the correction of the
problem be recorded in Molexs financial statements?
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
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E-mail Question: If Molex changes auditors, would you expect that event to have a significant
negative effect on the stock price? If so, why? If not, why not?
Session 11
Topic: Industry Application: A Sales Incentive System
In this class, we will discuss the merits and demerits of a proposed new sales incentive system
that includes an interesting truth-inducing feature.
Reading: MV, Chapter 2
Assignment Questions:
1. Why are Houston Fearless 76, Inc. (HF76) managers unhappy with the companys existing
sales incentive plan? Are weaknesses in this plan a major cause of the companys
performance problems?
2. Evaluate the new incentive plan being contemplated. What modifications would you make
to the proposed new plan, if any? How would you address the unresolved issues?
E-mail Question: Is extra 5% bonus attached to the truth-inducing feature of the proposed
new incentive plan large enough to motivate the salespeople to improve the accuracy of their
sales forecasts? If not, is this element of performance worth paying out more money?
Session 12
Topic: Industry Application: A Billings Scorecard
In this class, we will discuss an innovative results-control approach to solution of a problem that
is usually addressed with development and enforcement of sets of policies and procedures.
Assignment Questions:
1. Why was GSIs production quality control performance so much better than its billing
performance?
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2. Evaluate the billing improvement effort and each of the elements of the system that
emerged. Comment specifically on the billing scorecard, detention meetings, P-CARs, and
any other system elements that you believe are relevant.
a. In considering the scorecard, be sure to address the following questions: What are the
scorecard and each of its measures trying to accomplish? Are these the right measures?
Does each measure add unique value? Are the measures weighted appropriately in
importance? Are the business unit grades generally consistent across measures? Can
any of the measures be distorted or gamed?
3. GSIs ultimate goal is perfection. Can this system be used to achieve billing perfection as
it is designed, or will changes have to be made, or might even a totally different approach be
necessary? Explain.
4. The Billing Scorecard is a results-accountability approach to address the problem, chosen
E-mail Question: Would you include billing performance among a short list of critical success
factors for GSI? If so, why has it apparently not received much attention from management up
until now? If not, why all the concern now?
Session 13
Topic: Industry Application: A Bank
In this session, we will focus on the performance measurement/management control challenges
in the wholesale banking industry.
Reading: MV, Chapter 10
Prepare for Class: Case: Haengbok Bancorp
Assignment Questions:
1. Evaluate Haengbok Bancorps system of controlling the behaviors of the account managers
in the Los Angeles branch. What changes would you suggest be made, if any? Explain. In
2. Discuss the FETC loan application situation and the effects that outcome might have on the
account managers behaviors and performances? Does this example illustrate a problem that
needs to be fixed? If not, why not? If so, how would you fix it? Explain.
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
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Session 14
Topic: Industry Application: A Hedge Fund
In this class, we will discuss issues related to performance evaluation and incentive
compensation in a hedge fund. Our primary focus will be on the role of the hedge fund analysts.
Reading: MV, Chapter 9
Prepare for Class: Case: Raven Capital, LLC
Assignment Questions:
1. Assume the role of a Raven portfolio manager who has to allocate a bonus pool to the four
analysts working primarily for him. Assume a 20% incentive fee for Raven. Use 30% of the
incentive fee as the bonus pool to be allocated to the four analysts whose backgrounds and
2009 portfolio performances are described in Assignment Figures A and B (posted
separately on Blackboard).
a. How would you allocate bonuses to these four analysts? What alternatives did you
consider? Why did you make the choices you did?
b. Is there any other information you would like to have had available before making your
decisions? If so, which?
2. Evaluate the Raven performance evaluation and incentive compensation system. What
changes would you recommend, if any?
E-mail Question: What could Raven management do to make it possible to evaluate the
analysts performances more objectively? Should they make these changes?
After we discuss this case, I will provide a brief review of the major themes of the course and will
