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Model Syllabus 5
Accounting 537Management Control Systems
(Evening)
Marshall School of Business, University of Southern California
Professor Kenneth A. Merchant
Office HOH 606
Telephone (213) 821-5920
E-mail kmerchant@marshall.usc.edu
Class Hours Tuesday, 6:309:30 p.m.
Classroom JKP 202
Office Hours By appointment. Arrange by e-mail. I will do my best to accommodate your
schedule.
Honor Code Students are expected to adhere to, and will be bound by, the University and
School policies governing academic integrity.
Course Objectives
This graduate course is designed to broaden and deepen your conceptual and technical
understanding of management control systems (MCS). MCS are considered broadly to include
everything that managers do to ensure good performance or, more specifically, to ensure that the
companys strategies get implemented effectively. But the emphasis in the course is on financial
controls, which dominate in importance at managerial levels in all but the smallest
organizations. Using financial controls require managers to make decisions about: (1)
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implications of the SarbanesOxley Act of 2002, enterprise risk management, and corporate
governance.
The course is built around a textbookMerchant and Van der Stedes Management Control
Systems. The text is supplemented with a short monograph (de Kluyvers A Primer on
Corporate Governance):
Grading
Project 1 50 points
Projects
The projects will involve group analyses of cases that are supported by data provided on Excel
spreadsheets. The first project is a budget stress-testing exercise. The second involves
comparative performance evaluations of a large number of bank branches. Some groups will be
Class Participation
I assign a material proportion of the grade based on class participation for several reasons.
First, it improves my grading accuracy. I think I can learn more from hearing you share your
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ideas in a long series of classes than I can from reading what you write in a few short exam
sessions.
But perhaps more important than that, grading class participation motivates class participation,
Class participation evaluating 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) Do the class members make points that are especially pertinent to the discussion? Do they
(2) Is there continuity in one’s contribution from what has been said previously during class, or
are the comments disjointed, isolated, or tangential? The best class contributions are those that
(3) Do the comments reflect a willingness to put forth new, challenging ideas or are they
always agreeable and “safe”?
Participation will be evaluated based on a near-continuous scale, the end points of which can be
described as follows:
Outstanding Contributor: This person’s 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.
Unsatisfactory Contributor: This person may be absent from class or someone who rarely
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Final Exam
E-mail Questions
On the bottom of many of the class assignments, you will see that I have included an e-mail
question. Prior to noon, before each of our classes, please send me an e-mail message or
private Blackboard posting answering the question(s) for that days class. This is not intended to
Schedule of Classes
Week 1
Topic: The Control Function of Management
In this first session, we will go over the syllabus and get to know each other. Then I will provide
a general lecture on managers control options. Finally, we will discuss some control vignettes
and a case.
Reading: MV, Chapters 1, 2, 3, 4
Prepare for Class: Case: Atlanta Home Loan
Assignment Questions:
1. Identify the devices (controls) that Al Fiorini used to control his business both before and
2. What went wrong? Did Al use the wrong types of controls? Did he use the right types of
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Week 2
Topic: Results Controls
In the first part of the class, we will discuss a control system evaluation case. Two young and
inexperienced MBA graduates purchase a small aviation company that is in financial trouble.
They have to make a number of control-related judgments and possibly implement a new
Reading: MV, Chapters 5, 6, 16
Prepare for Class: Cases: AirTex Aviation
Puente Hills Toyota
Kooistra Autogroep
Assignment Questions: AirTex Aviation
1. Did AirTex need a new control system at the time of the takeover?
2. Evaluate the control system that Frank and Ted implemented. Should anything have been
done differently?
Assignment Questions: Puente Hills Toyota and Kooistra Autogroep
2. When comparing the use of incentives in the two companies, do you believe that incentive
pay is truly effort-inducing; that is, does it drive employees to perform at their best? If you
3. What advice would you provide to the managers of these companies?
1. People are people. They respond approximately equally to many things, including incentive
systems.
2. To work well, a companys incentive system must be tailored in many ways to fit the
specific desires of various employee groups.
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Week 3
Note: The names of the individuals working on the two group projects are due to me by the
start of this class. The optimum (and maximum) group size is four. Groups of three are
permissible. Please have a representative send me an e-mail message with the names of
the individuals in your group.
Topic: Financial Responsibility Structures and Problems caused by
Interdependence
The focus of the first part of this session is on one of the main management control system
choicesdesign of the organizations authority and financial responsibility structures. Some of
Reading: MV, Chapter 7
Prepare for Class: Cases: Kranworth Chair Corporation
Zumwald, AG
Assignment Questions: Kranworth Chair Corporation
1. Identify the most important key recurring decisions that must be made effectively for KCC
to be successful. In KCCs functional organization, who had the authority to make these
decisions? Who has the authority to make these decisions in KCCs new divisionalized
organization?
4. Assume that the R&D function is to be decentralized (given to the divisions). Would this
necessitate changes to KCCs performance measurement and incentive system? If so, which
and why? If not, why not?
Assignment Questions: Zumwald, AG
1. What sourcing decision for the X73 materials is in the best interest of:
a. The Imaging Systems Division?
b. The Heidelberg Division?
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2. What should Mr. Fettinger do?
E-mail Question: Is a transfer price just a cost allocation with a profit margin tacked onto it?
Explain.
Week 4
Topic: Budgeting or Beyond Budgeting
Planning and budgeting processes are important, and often complex, elements of companies
management control systems. In the first part of this class, we will examine a somewhat typical
company process and focus particularly on the issue of how challenging annual budget targets
should be.
Reading: MV, Chapters 8 and 9
Prepare for Class: Cases: HCC Industries
Statoil
Assignment Questions: HCC Industries
1. Draw a diagram of HCCs budget process. Make the x-axis the months of the year. Make
the y-axis the levels in the HCC organization. Who does what when?
3. 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?
4. What should Andy Goldfarb do now?
Assignment Questions: Statoil
1. Statoil managers claim that their company no longer prepares a budget. What do they mean
by that claim?
2. Why did Statoil decide to abandon budgeting?
3. Describe the new processes that Statoil implemented to replace the budget. What are its
strengths and weaknesses?
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5. The Beyond Budgeting approach is still relatively rare outside Europe. Why? Is there
something about non-European cultures that limits its applicability, or are other companies
just slow to catch on to an innovation that has started in Europe?
E-mail Question:
Mike Pelta, general manager of Hermetic Seal, is quoted in the case as saying he has not missed
Week 5
Topic: The Planning Role of Budgets: Business Stress Testing
Planning is decision making in advance. Using the financial statement format in a future-
looking sense (i.e., budgeting) allows managers to anticipate what might be coming their way in
various plausible scenarios.
Case: VisuSon, Inc.
The assignment is posted on Blackboard.
Week 6
Topic: Summary Financial Performance Measures: Advantages and Limitations
There are many forms of summary financial performance measures. Are some better than the
others?
Reading: MV, Chapter 10
Prepare for Class: Cases: Behavioral Implications of Airline Depreciation Accounting Policy
Choices
Berkshire Industries, Inc.
Assignment Questions: Behavioral Implications of Airline Depreciation Accounting Policy
Choices
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1. What are the behavioral implications of each of the three depreciation-related accounting
policy choices:
a. depreciation patterns (i.e., straight-line vs. accelerated);
b. estimated useful lives; and
c. residual values?
Consider, at a minimum, the effects of each of these choices on decisions regarding:
2. Assume that in a particular US airline company there is a conflict between the benefits of
conservatism vs. liberalism in depreciation accounting. That is, for this company,
conservatism in depreciation accounting is greatly preferred for financial reporting purposes
3. If the managers of a particular airline do not want to maintain a third set of books, should
they tend to be conservative or liberal in their aircraft depreciation accounting?
1. Were Berkshires motivations for a new incentive system reasonable? If so, what were their
main options for a new system? Was an economic profit-focused system a reasonable
choice?
2. Evaluate the Berkshire Industries new incentive plan. What changes would you
recommend, if any?
3. What, if anything, should Mr. Embleton do about the problems caused by performance
shortfalls in the Spirits Division? Explain.
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Week 7
Topic: Combinations of Measures: KPIs, Dashboards, and Balanced Scorecards
The focus of this session is on the concurrent use of multiple performance measures. The most
popular combination-of-measures system is marketed as Balanced Scorecard. But some
variations are given alternative names, such as dashboards, KPIs, and performance prisms.
Reading: MV, Chapter 11 (and 17)
Prepare for Class: Cases: Catalytic Solutions, Inc.
Boston Lyric Opera
Assignment Questions: Catalytic Solutions, Inc.
Evaluate the CSI performance measurement and compensation systems. What changes would
you suggest be made, if any? Explain.
Assignment Questions: Boston Lyric Opera
1. The Boston Lyric Opera (BLO) working group selected eight customer objectives for its
three strategic themes (described in the case and summarized in the Customer row of
Exhibit 5 of the case):
a. Develop loyal and generous supporters
2. What changes were required to adapt the Balanced Scorecard to a nonprofit organization?
3. What are the benefits from developing the Balanced Scorecard at BLO? What challenges
and barriers must Del Sesto and Dahling Sullivan overcome to capture these benefits?
4. Are the departmental managers, artistic leaders, and employees at the BLO more
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Week 8
Topic: Performance Evaluations: Adjusting for the Effects of Uncontrollables
In the first part of 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?
I will dismiss class early to allow you to start working on the second group project, which is due
for presentation in class next week.
Reading: MV, Chapter 12
Prepare for Class: Cases: Olympic Car Wash
Beifang Chuang Ye Vehicle Group
Assignment Questions: Olympic Car Wash
E-mail Question:
Some companies make performance evaluation and bonus adjustments to protect managers from
Week 9
Topic: Performance Evaluations: Group Project 2
In the first part of this class session, your groups will present the findings of the performance
Week 10
Topic: The Role of Controllers and Control Impacts of the SarbanesOxley Act
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Reading: MV, Chapters 13, 14, 15
Prepare for Class: Cases: Don Russell: Experiences of a Controller/CFO
Pacific Sunwear of California, Inc.
Assignment Questions: Don Russell: Experiences of a Controller/CFO
1. Does Don have the power to force ETI’s 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?
2. Are earnings management practices as took place at C&S and ETI smart? Are they ethical?
3. Does Don Russell have an obligation greater than that of other employees to try to ensure
that his corporation acts ethically?
Assignment Questions: Pacific Sunwear of California, Inc
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 two years of the audit
evidence of control system flaws or largely irrelevant technical violations? Another way to
3. PacSun executives seem convinced that the costs of complying with SOX were greater than
the benefits to the company. Why did PacSun not benefit from the compliance process to
the same extent as some other companies? Or were their compliance costs too high?
E-mail Question: If the SarbanesOxley law had been passed prior to the time of the events
described in the Don Russell case, would it have prevented the problems faced at ETI?
Week 11
Topic: Enterprise Risk Management
Our focus in the first part of this session is broadly on systems of corporate governance and the
roles and obligations of boards of directors. Then we will focus on enterprise risk management,
a newly developing tool aimed at helping board members and managers address all the various
kinds of risks that the company might face.
Reading: deK, Chapters 1, 2, 3 and 6, particularly pp. 107108, and Appendix C.
Prepare for Class: Cases: Entropic Communications, Inc.
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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?
Assignment Questions: Financial Reporting Problems at Molex, Inc.
1. What was the financial reporting problem at Molex? How would the correction of the
problem be recorded in Molexs financial statements?
2. What factors do you think influenced managements decision not to raise the issue with the
auditors?
E-mail Question: ERM is currently one of the hot topics in management. Virtually every
Week 12
Topic: Fiduciary Obligations of Board of Directors
In this class, we will discuss two cases with corporate governance issues.
Reading: deK, Chapters 8 and 9
Prepare for Class: Cases: Vector Aeromotive Corporation
Golden Parachutes?
Assignment Questions: Vector Aeromotive Corporation
1. Why did Vector Aeromotive have a board of directors before it went public? How (if at all)
2. Evaluate the board composition and actions. All things considered, did the board act
properly? Did the board members choose the optimal time to terminate Gerry Wiegert?
3. What should the board members do now (March 22, 1993)?
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Assignment Questions: Golden Parachutes?
1. If the proposed severance agreement is implemented, who benefits and who loses?
2. Should the compensation committee approve the severance agreement as is? Should some
of the elements of the agreement be modified? Or should DTI not have a severance
agreement?
3. Suppose that you, as Dennis Feingold, object strongly to at least some of the elements of the
E-mail Question: Identify the ethical issues you see in these cases? What makes them ethical
issues?
Week 13
Topic: Industry ApplicationsA Family Business and a Family Medical Practice
In this session, we will practice applying knowledge we have gained in earlier sessions. First,
we will examine a proposal to change a sales incentive program. Then we will consider how to
motivate doctors in a family medical practice.
Prepare for Class: Cases: Houston Fearless 76, Inc.
Family Care Specialists Medical Group, Inc.
Assignment Questions: Houston Fearless 76, Inc.
1. Why are Houston Fearless 76, Inc. (HF76) managers unhappy with the companys existing
sales incentive plan? Are weaknesses in this plan a major cause of the companys
performance problems?
4. Would you make any changes to the system providing bonuses to sales assistants? If so,
what?
Assignment Questions: Family Care Specialists Medical Group, Inc.
1. What purposes are served by the FCS physician compensation system? Must some of the
compensation be made performance-dependent?
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2. Is the current system an improvement over the QIIP that it replaced? Explain why, listing
3. Are the incentives provided by the existing system balanced or are some forms of
initiative rewarded more generously than others? In particular, compare the average reward
4. What are the major constraints on the design of any physician compensation system for
FCS? In particular, how should FCS decide the appropriate reward, if any, for higher
performance?
5. What changes to the FCS physician compensation system, if any, would you recommend to
Dr. Samaniego?
Week 14
Topic: Industry Applications: A Billings Scorecard and Control of a Not-for-
Profit Organization
In the first part of 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. In the second part, we will discuss some control issues in a setting with which you
all have some familiarityUSC.
Reading: MV, Chapter 17
Prepare for Class: Cases: Game Shop, Inc.
University of Southern California: Responsibility Center
Management System
Assignment Questions: Game Shop, Inc.
1. Why was GSIs production quality control performance so much better than its billing
performance?
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?
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3. GSIs 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
because this companys culture is metrics centric. What are the advantages and
Assignment Questions: University of Southern California: Responsibility Center Management
System
1. Using the terminology that we used in this course, what would you call USCs
responsibility centers? Are they revenue centers? Profit centers? Something else?
2. The RCMS seems to be working reasonably well. USC has used it for over 25 years, and
seemingly nobody wants to abandon it. What makes it effective?
3. Consider each of the criticisms of RCMS:
a. Does it sound plausible that the RCMS could have been causing, or at least contributing
4. What should be done now? Does the RCMS create perverse incentives? If so, how? If not,
why not?
E-mail Question:
Would you include billing performance among a short list of critical success factors for GSI?
Week 15
Topic: Industry Applications: A Hedge Fund
In the first part of this session, we will discuss issues related to performance evaluation and
incentive compensation in a hedge fund, with our primary focus on the role of the hedge fund
analysts.
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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?
2. Evaluate the Raven performance evaluation and incentive compensation system. What
changes would you recommend, if any?
E-mail Question: Employee compensation levels in this industry are higher than in most other