AF 436: ACCOUNTING FOR MANAGEMENT CONTROL

Introduction
Result controls have been commonly used to control the behaviors of employees at many
organizational levels (Merchent, 2012). There are three types of controls which are action, result
and people control. This assignments looks at the types of result controls employed in the
Haengbok Bancorp with reference to analysis of strengths and weaknesses and suggestions how
these controls can be best exercised to meet the organizational objectives. Haengbok Bancorp
clients are mostly small and medium entrepreneurs having international operations. It is facing
many challengers from its competitors namely the Bank of America who also pursues Korean
customer Nationality while at the same time, the opportunity also existed for the Bank as many
small businesses in New York had difficulty obtaining capital due to the financial crisis. Result
control systems in place is still causing deficiencies that hinders the achievement of
organizations objectives and desired result hence, the paper critically evaluates result control

Assignment 1

systems analysis and suggestions on the improvement likewise.

Ravinesh Chand
S11076854
student id | s11076854

1.) Types of Result control system critical analysis

Mini Profit Center
To begin with, from the perspective of monitoring and incentives a mini profit
center has been set up for each managers which credits the interest earned on loans and
deducting the expenses and cost of funding the loans. In financing loans the cost of funds
is the main input cost since the spread between the cost of fund and the rate charged to
borrowers heavily impacts the profit which is the desired result linked to the employee
rewards and benefits. This control method positively stimulates account managers
whereby they are willing to put more effort to generate more profits for Haengbok thus,
evaluation of mini profit center which considers interests, costs and expenses for each
loan profile as a basis of accounting measure is easily and highly controllable.
Advantages

The advantages of this system is trying to encourage more entrepreneurship so they

perform to their best level and be entitled to rewards. Since, the remuneration is
connected directly to the profit generated and the decisions, instructions made by Kim
always relates to the results to be achieved. Hence, greater incentives, increasing

potentials of account managers to achieve branch goals in order to grow rapidly.

There is a comprehensive freedom in the incorporation of different aspects of

performances
This system is more precise and easier to understand.

Disadvantages

One of the shortcomings is conflict of interest as the expenses contributed directly affects
the bonus of account managers. Account managers do not have the control on this direct
expenses being incurred in the company. The higher the expenses the lower the profit

hence, lower will be the returns in the form of less bonuses.

Conflict between the interest of company and interest of individual mini profit center.
Rationale for management is decentralized with limited control measures and very
difficult to define and virtually no oversight of how the work is done as each managers
work independently as a separate business.

Ravinesh Chand
S11076854

Cash Bonus Payout In addition, there is a 10% bonus given to the account managers based on
the earnings of a mini profit center distributed as soon as the end of year end, is no penalty if
there is loss however losses would not be tolerated for extended period of time. Bonus are based
off accounting profits. Managers might see this as a problem, because they are charged with the
expenses being incurred for the loan, but also includes the cost of funding the loans. The
managers have no direct control over these costs, because the costs are heavily influenced by the
rates set by HB head office in Korea. It is noted that managers had the free reign to go on
approach potential clients and try to get their business as long as they book good deals hence,
managers might focus issuing loans under $5 million because it has greater chances of being
approved and not have to be approved by HB in Seoul. This in turn enables managers to earn a
bonus by issuing smaller loans as oppose to fewer big loans.
Advantages

Greater motivations and incentives for the account managers to increase revenue and
reduce costs (yung, 2013). Paying bonuses is giving the account managers some level of
comfort and enables Haengbok Bancorp to retain them at the same time as they are
confident in their abilities thus account managers get motivated to extend their loan

portfolios to remain competitive with those of the established banks.

Very cost effective and the bonus system is appropriate as it will also enables to get a
feedback regarding the performances as higher performances leads to higher bonuses,
objective, easy to understand and highly controllable.

Disadvantages

One of the weakness is that it encourages manipulation whereby there is a possibility of

moving or shifting profits to the next year.

Encourages risk taking. It can lead to the cash flow problems due to the distribution of
cash bonuses.

Lastly, review routine has also been a basis for result control whereby the management
routine carries out a review of the national banks and external auditors. The advantages of
this system ensures identification of potential problems such as if any declining condition of
the business, treaty violations and failures on the uncertainty to pay and meet obligations.
Ravinesh Chand
S11076854

2.) Suggestions for Result Control Systems

Provision of Remuneration.
The basic salary given is still below the market average given the account manager who recruited
an experienced account manager. If they earn below the standard of the first operation, will
create demotivation and a desire to move to another banking company with a higher income. To
motivate and retain its account manager Haengbok Bancorp should raise the standard of basic
salary of an account manager. Thus the income is given as competitive with a bank that has been
qualified.

Giving bonuses change 10% stock option

To improve the welfare and appreciate the achievement of performance is given in the form of
cash at the end of the fiscal year. Bonuses should not be given entirely in cash as most bonus
could be converted into shares. This will induce account managers to consider long term
profitability and hence avoid risk taking behavior for short term profit. With share ownership, the
account manager will feel involvement with the company and they will try to improve corporate
value by increasing earnings through a mini profit center. In addition to short- term targets they
are pursuing to get a bonuses, they will also consider the companys long term targets so that
they can also receive dividends on shares they own. Also bonus should be based on each
managers ability to attract new customers and a percentage of revenue HB makes and managers
should operate as revenue center.

There is no penalty for damages (No loss penalty)

Account Managers are not charged on the total losses in the natural enterprise. However, if the
company losses, they also do not get the bonus which already is a penalty for them. At times
external environment also affects the return on investment.

Ravinesh Chand
S11076854

Action Controls Suggestions

Action controls are the most direct form of management controls enabling employees to act in
the organizations best interest (Merchent, 2012). For controls to work effectively and for
excellent performance of Haengbok Bancorp following actions controls has been suggested.

Loan Application
Bancorp Haengbok system used in Korea and New York is different hence there is a need to
develop standard loan application so as to obtain loan application with same quality and
procedures. Respective account managers hired were experienced and successful in America
with varied background and experiences. However for uniform results of any analysis of the
customer account managers should determine the composition of risk analysis and require
supporting documents hence, ensuring the ability of customers to repay their loans with interest.

Approval of loan.
Branch Credit committee consists of Kim, treasurer and two most of the experienced account
managers. Two account managers should be replaced by independent senior due to the fear of
collusion and if big loan is approved they will get great with the bonus anyway hence the in
depth risk analysis of the customer is ignored.

Ravinesh Chand
S11076854

Conclusion
To sum up, this assignment has discussed the result controls pertaining to the Haengbok Bancorp
with little bit of action control suggestions its effectiveness and analysis with reference to the
advantages and disadvantages.

Ravinesh Chand
S11076854

Bibliography
Merchent, K. A. (2012). Managment Control Systems: Performance Measurement,
Evaluation and Incentives. FT/ Prentice Hall.
yung, c. (2013, march 11). prezi.com/cxfi0bkdwzl2/cost-2_updated20130310/.
Retrieved from Google: https://prezi.com/cxfi0bkdwzl2/cost2_updated20130310/

Ravinesh Chand
S11076854