Mgmt controls visa-à-vis leadership failure in firms

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Just last week the University of Zimbabwe (UZ) held its first ever research week which was characterised by high-level technical dialogues around some pertinent issues.

People Management Issues with Robert Mandeya

The overall objective of the UZ research week was to provide a forum for communicating and showcasing research conducted by UZ academics and researchers. More importantly, this year’s research week came at a time when Zimbabwe needs practical solutions to the existing challenges.

On July 25, I was invited to the university to participate as a panelist on the high-level technical dialogue on the challenge of corruption. The dialogue which commenced soon after Professor Simon Mukwembi’s presentation on “Mathematical Methods in Corruption Management from theory to practice” was so intriguing as we explored Professor Mukwembi’s research on how Mathematics can be used to tackle the corruption problem in Zimbabwe. I will not delve deep into the intricacies of Mukwembi’s research but my contribution centered on locating his presentation into the management controls paradigm of organisational leadership.

The apparent lack of leadership accounting and management controls systems by those in leadership positions in our organisations seem to vindicate Mukwembi’s findings and his ultimate recommendations for the training of those in leadership in mathematical methods of tackling corruption in organisations.

My observation was that Mukwembi’s mathematical approach to corruption fighting requires leadership buy in and commitment to implementation thereof. As I see it, there is a palpable subversion of organisational management controls and an apparent lack of commitment to instituting and let alone implementing highly effective management control systems both in the public and private organisations in Zimbabwe.

In the absence of effective leadership and a proper culture of operational systems in an organisation even the most sophisticated and comprehensive set of management controls will fail to prevent and detect widespread and continued corporate-wide fraud, information manipulation and dishonesty. Mukwembi’s novel idea needs to be embraced at leadership level

If the cultural environment surrounding an organisation’s management control systems, is not fully supported at leadership level there will always be a weakening of the control systems in an organisation which gives rise to the opportunity for corruption in the organisation. Therefore there is need to incorporate the aspect of organisational culture in strengthening management control systems.

Research conducted by leading organizational psychologist Edgar Schein in 1986 also suggests that, a strong link exists between executive leadership actions and the nature of an organisation’s culture. This highlight the critical role that leadership and culture play in the success and effectiveness of management control systems within organisations. While many companies may claim to have sophisticated management controls, the ultimate effectiveness of such controls is highly dependent on an organisation’s culture and leadership. The perversion of this control infrastructure through some poor leadership practices by some in leadership positions will certainly compromise the effectiveness of management control systems in small, large or complex organisations.

Organisational fraud matrix

How fraud occurs within organisations can be understood by examining the elements that comprise such actions. At an individual level, SAS No. 99 (Consideration of Fraud in a Financial Statement Audit) issued by the Auditing Standards Board indicates that the occupational fraud triangle comprises three conditions that are generally present when a fraud occurs. These conditions include an incentive or pressure that provides a reason to commit fraud (personal financial problems or unrealistic performance goals), an opportunity for fraud to be perpetrated (weaknesses in the internal controls), and an attitude that enables the individual to rationalise the fraud. While the fraud triangle focuses on individual-level constructs of fraud, such as localised instances of cash or other asset appropriation by employees, the Enron example highlights fraud at the organisational level — systemic organisation-wide fraud and corruption.

The fraud triangle illustrates that the most important lessons from Enron lie in the way that a corporate culture championed by CEO Jeff Skilling overcame a sophisticated and widely lauded set of management controls and in the importance of carefully balancing the core concepts of leadership, organisational culture and control within organisations. Organisation-wide fraud is only possible when these three variables are configured in a way that enables — and even fosters — manipulation and fails to prevent compliance failure. The Enron case study above provide managers in other organisations important, yet largely untold, insights into how organisations collapse if leadership fail to recognise and respect management control systems.

The Enron case

Management controls refer to the tools that seek to elicit behaviour that achieves the strategic objectives of an organisation, such as budgets, performance measures, standard operating procedures and performance-based remuneration and incentives.

While Enron’s demise has been portrayed as resulting from a few unscrupulous rogues or “bad apples” (the phrase used by President Bush) acting in the absence of formal management controls, Enron featured all of the trappings of proper management control, including a formal code of ethics, an elaborate performance review and bonus regime, a risk assessment and control (RAC) group, a Big-5 auditor, and conventional powers of boards and related committees.

This control infrastructure was widely lauded right up until the demise of the company.

Mandeya is an executive coach in human capital development and corporate education, a certified leadership and professional development practitioner and founder of Leadership Institute for Research and Development (LiRD). — robert@lird.co.zw, info@lird.co.zw or +263772466925.

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