Management Control and

Information Systems
Ethics in Management Control System

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

1
School (IBS) Hyderabad
 Etymology
The term ethics is derived from the Latin word ‘ethicus’
meaning manners or character.

Ethics deals with morality and rules regarding behaviour

and conduct.

In an organizational set-up, ethics can be defined as the

rues or standards governing the conduct of individuals
and organizations.
Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business
2
School (IBS) Hyderabad
MANAGEMENT CONTROL AND ETHICAL ISSUES IN DIFFERENT FUNCTIONS

Budgetary Slack:

In most organizations, budgets are used to set performance targets

and measure actual performance.

The budgets are usually finalized by the top-level management of

the organization.

This aspect of the budget gives the management a free hand to

include the performance measures they think are desirable in the
budget.
Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business
3
School (IBS) Hyderabad
MANAGEMENT CONTROL AND ETHICAL ISSUES IN DIFFERENTFUNCTIONS

Budgetary Slack:
At the lower levels of management, managers whose
performance incentives may be tied to their meeting
these targets, would try to bargain for a budget which is
more easily achievable while at the same time being
congruent with the expectations of the top management

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

4
School (IBS) Hyderabad
MANAGEMENT CONTROL AND ETHICAL ISSUES IN DIFFERENTFUNCTIONS

Budgetary Slack:

Budgetary slack is a deliberate understatement of revenues

and/or overstatement of expenses in the budget.

In other words, the manager is understating his/her productive

capacity.

Budgetary slack is caused by managerial intention rather than

by an unforeseen error in the estimation process.
Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business
5
School (IBS) Hyderabad
MANAGEMENT CONTROL AND ETHICAL ISSUES IN DIFFERENTFUNCTIONS

Budgetary Slack:

The primary aim of creating budgetary slack is that

managers – as rational self-seeking maximizers – seek to
achieve both their individual/personal goals and the
organizational goals.

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

6
School (IBS) Hyderabad
MANAGEMENT CONTROL AND ETHICAL ISSUES IN DIFFERENTFUNCTIONS

Budgetary Slack:
Whether the manager feels that creating slack is ethical or unethical
depends on his/her personality traits (related to honesty and fairness)
and the extent of open communication possible between the manager
and his/her supervisors regarding the ability and the support necessary
to achieve the desired objectives.

The slack created by managers may also be used for the organization’s
benefit during bad times.

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

7
School (IBS) Hyderabad
MANAGEMENT CONTROL AND ETHICAL ISSUES IN DIFFERENTFUNCTIONS

Managing Earnings:
Finance managers can face an ethical dilemma in the preparation
of the annual financial statements of an organization.

They may find themselves under the pressure from the top
management to ‘manage the earnings’ of the organization, so that
its reported financial performance is different – usually more
robust than the actual performance.

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

8
School (IBS) Hyderabad
MANAGEMENT CONTROL AND ETHICAL ISSUES IN DIFFERENTFUNCTIONS

Managing Earnings:

Some of the ways in which earnings can be managed do

conform to the generally accepted accounting principles and
the managers are free to exercise that choice.

However, it may misguide the organization’s stakeholders who

use the financial statements to assess the financial strength of
the organization, and may also have legal implications.

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

9
School (IBS) Hyderabad
MANAGEMENT CONTROL AND ETHICAL ISSUES IN DIFFERENTFUNCTIONS

Managing Earnings:

A factor to be considered is the objective behind managing

earnings, i.e., whether it is used to gain rewards for oneself or
to help the organization in maintaining its creditworthiness.

Corrupt managers tend to manage earnings for personal

benefits. They try to show higher earnings in order to show
that budgeted targets have been achieved

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

10
School (IBS) Hyderabad
MANAGEMENT CONTROL AND ETHICAL ISSUES IN DIFFERENTFUNCTIONS

Managing Earnings:

To prevent managers from resorting to such actions, an

organization should have audits and other control mechanisms
in place to identify any occurrence of enhanced earnings and
take remedial action before the financial statements are made
public.

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

11
School (IBS) Hyderabad
MANAGEMENT CONTROL AND ETHICAL ISSUES IN DIFFERENTFUNCTIONS

Ethical Issues in Operations:

Productivity and quality are two important aspects in

operations management.

They have to be interconnected in the organizational context

and both should be considered in the strategic planning
process. Better quality leads to more efficient utilization of
resources thus boosting productivity.

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

12
School (IBS) Hyderabad
MANAGEMENT CONTROL AND ETHICAL ISSUES IN DIFFERENTFUNCTIONS

Ethical Issues in Operations:

Bad quality can lead to managers budgeting for slack in

their operations, either in terms of consuming more
resources, providing for greater lead times or accepting
relatively poor quality.

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

13
School (IBS) Hyderabad
MANAGEMENT CONTROL AND ETHICAL ISSUES IN DIFFERENTFUNCTIONS

Ethical Issues in Operations:

On the quality front, quality issues that cannot be detected by
consumers in the short-term are the aspects where the operations
manager may try to minimize the costs incurred.
Another ethical issue is that of the safety of employees. If an
organization focusses only on gaining maximum profit at minimum costs
without taking social responsibilities into consideration, the
organization may tend to have unhealthy/dangerous working conditions.

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

14
School (IBS) Hyderabad
MANAGEMENT CONTROL AND ETHICAL ISSUES IN DIFFERENTFUNCTIONS

Ethical Issues in Operations:

The operations manager should take care that the job design, facility
layout and location etc.,are appropriate. He/she should also see to it
that the air and noise pollution levels are maintained below the
specified level so that they do not harm the employees. Further, ethical
issues arise due to loss of important and confidential information and
theft by employees. Proper security and surveillance techniques should
be put in place to curb such activities.

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

15
School (IBS) Hyderabad
MANAGEMENT CONTROL AND ETHICAL ISSUES IN DIFFERENTFUNCTIONS

Ethical Issues in Human Resource Management:

Lack of job security and increased risk of unemployment: Outsourcing of
business activities and downsizing are common phenomena in business
world today. Sue to these factors, employees face a greater risk of
losing their jobs today leading to a sense of insecurity in them.
Organizations sometimes take advantage of this situation by recruiting
employees on contract, paying them low wages and setting stringent
performance standards.

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

16
School (IBS) Hyderabad
MANAGEMENT CONTROL AND ETHICAL ISSUES IN DIFFERENTFUNCTIONS

Ethical Issues in Human Resource Management:

Excessive scrutiny and control: Organizations nowadays adopt various
forms of scrutiny and control over employees, right from the selection
stage to their performance on the job. PIP
Psychometric tests are commonly used when selecting employees; at
work, security devices watch over every action of the employees. There
is a growing feeling that the extent of freedom employees are given for
decision making is gradually being curtailed.

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

17
School (IBS) Hyderabad
MANAGEMENT CONTROL AND ETHICAL ISSUES IN DIFFERENTFUNCTIONS

Ethical Issues in Human Resource Management:

Discrimination: Discrimination can be of various kinds ranging from
sexual, religion, caste, nationality, education etc. Further, the absence
of proper performance appraisal policies leads to ethical problems.

Qualitative measures used for performance appraisal may result in

biased evaluations wherein undeserving candidates are rewarded
instead of deserving candidates

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

18
School (IBS) Hyderabad
REGULATING ETHICAL CONDUCT

Code of Ethics:
An organization’s code of ethics is a document which gives details about
the expected behaviours from each level of management. This code lists
the policies that are in place related to ethics and also the methods for
implementing them. It is also concerned with the reputation of the
organization and puts down rules and penalties regarding employee
behaviour which may tarnish the reputation of the organization. An
organization must update its code of ethics as often as necessary, so as
to ensure that it remains capable of dealing with new types of unethical
practices that may arise over time in the business environment
Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business
19
School (IBS) Hyderabad
REGULATING ETHICAL CONDUCT

Code of Ethics:
The code of ethics of an organization also covers the relationship of the
top management with the employees, the relationship of employees
among themselves, bribery, disclosure of confidential information,
customer relationships, accounting and legal and political actions. It
should be comprehensive and should try to cover all aspects of the
organization.

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

20
School (IBS) Hyderabad
REGULATING ETHICAL CONDUCT

Ethics Committee:
In order to regulate ethical conduct, one of the best practices followed
by organizations is conducting an Ethics Committee. It should be a high
powered one at board level. Some of the responsibilities of
the Ethics Committee are as follows:
Ascertaining that all employees are appropriately trained in the
Organization’s Code of Ethics.

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

21
School (IBS) Hyderabad
REGULATING ETHICAL CONDUCT

Ethics Committee:
Communicating the importance of ethical values and ethical business
practices
Establishing proper systems for monitoring the ethical implications of
activities and
performance and penalizing unethical activities if any.
Creating avenues for employees to openly discuss ethical issues that
they face, for example – creating and maintaining an ethics hotline.

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

22
School (IBS) Hyderabad
REGULATING ETHICAL CONDUCT

Ethics Committee:
Reviewing the code of ethics periodically and revising it as and when
required.

Ethics Training for Employees:

Ethics training for employees is the basic process by which the ethical
conduct and decision making power of employees can be improved. It
should help employees decide on the ethical implications of
their decisions and actions.

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

23
School (IBS) Hyderabad
REGULATING ETHICAL CONDUCT

Ethics Training for Employees:

The ethics training program should be such that it strengthens the
organization’s stand on ethics, given the employees guidelines about
bringing to light wrong behaviour, and also makes them aware of the
likely penalties for wrongdoing. When designing the ethics training
program, it is necessary that the organization provide for modules
catering to all levels of employees. Organizations should devise the
training program in such a way that the core values of the organization
are clearly communicated. It is also necessary that senior managers
actively participate in the training program to highlight the significance
of ethics and values to the organization.
Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business
24
School (IBS) Hyderabad
REGULATING ETHICAL CONDUCT

Whistleblowing:
Whistleblowing is the act whereby an employee of an organization
informs the higher authorities or public about the unethical practices
taking place in an organization. Whistleblowers have helped a lot of the
organizations in tracking and curbing unethical practices which would
otherwise have damaged the reputation of the organization and also
caused harm to the well-being of other employees. Sometimes the
whistleblowers in an organization try to bring the problem to the notice of
the authorities within the organization first; if the problem persists they
may decide to report it to external authorities
Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business
25
School (IBS) Hyderabad
REGULATING ETHICAL CONDUCT

Whistleblowing:
Despite its benefits as a control mechanism, whistleblowing is not an
easily accepted approach in organization. In some organizations,
whistkeblowers’ reports may be overlooked by the concerned people
and the unethical practices in the organization may be continued.
Often whistleblowers are perceived as a threat to the top management
and this may lead to the whistleblower being reprimanded for his/her
act.

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

26
School (IBS) Hyderabad
REGULATING ETHICAL CONDUCT

Ethics Committee:
Reviewing the code of ethics periodically and revising it as and when
required.

Ethics Training for Employees:

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

27
School (IBS) Hyderabad
Project Operation and Management Control

Thank You

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

28
School (IBS) Hyderabad