Other Unpublished Work | 2008

Accounting, Risk Management and the Aftermath of a Control Debacle

by Anette Mikes

Abstract

Despite the widespread adoption of risk management systems in the financial services industry, recent control debacles highlight the apparent lack of top managerial attention to risk controls. Yet in order to understand the workings and uses of risk controls (or any other control innovation), one needs to take a closer look at the multiple control package that accommodates these. Taking a multiple control perspective, this paper investigates a control debacle and its aftermath in a financial services company. The study unravels the workings of a set of accounting and risk controls, put in place to control the troubled insurance division of the group, and discusses how and why particular management control systems shift into (and out of) top managerial focus. The study investigates Simons' (1990, 1991) argument that it is top management's knowledge of key strategic uncertainties that motivates their choice of control systems to be used interactively. The case offers a two-step-theory to explain why top managers' choice of interactive controls changes over time. First, behind the various control systems there are active controller groups who, in competition for executive-level visibility, further their particular framing and solutions for organizational issues (agenda building). Second, top management's interactive use of a particular control system sends a signal to external stakeholders as well, about the internal control style and management priorities of the firm. Therefore, the control choice is motivated both by the relevance and the institutional appropriateness of particular controls. As external requirements change, and the definition of institutional appropriateness shifts as well, new organizational control groups get the opportunity to become implicated in interactive control and agenda setting. In the special case of conflicting control systems (when managers have to choose between alternative representations of the underlying firm performance) the selection becomes more complex, as the competing controller groups strive to demonstrate higher informational relevance and greater institutional appropriateness. In this case study institutional appropriateness was the stronger requirement—the lack of it prevented the otherwise informationally relevant risk control system from prevailing as an interactive control system.

Keywords: Risk Management; Governance Controls; Management Systems; Accounting; Conflict and Resolution; Trends; Financial Services Industry;

Citation:

Mikes, Anette. "Accounting, Risk Management and the Aftermath of a Control Debacle." 2008.