Kế toán, kiểm toán - Chapter 12: Incentive issues

1Incentive IssuesCHAPTER 12PowerPoint Presentation by LuAnn BeanProfessor of AccountingFlorida Institute of Technology© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Managerial Accounting 11E Maher/Stickney/Weil2CHAPTER GOALChapter 12 discusses issues in design and use of management performance evaluation and incentive plans to motivate managers to act in the organization’s best interests. Good performance evaluation and incentive plans induce “win-win” results if they avoid incentives for fraudulent financial reporting.☼☼3PAY INCENTIVESManagers receive bonuses for performance that may be based on divisional or corporate results. Bonuses may be based on annual performance or on performance over several years and may be paid immediately or deferred and spread over several years.LO 14What forms do divisional incentives take?Divisional incentives can be cash or profit sharing for short-term performance; stock or stock options as deferred compensation; and special awards.LO 1MANAGERS WANT TO KNOW!How will performance be evaluated?Performance can be evaluated based on accounting numbers, returns to stockholders or both.5DESIGNING INCENTIVE COMPENSATIONManagement must ascertain two things in designing incentive systems:What behavior does the system motivate?What behavior does management desire?LO 1WARNING! Rewarding managers for performance reflected in annual accountingnumbers gives managers incentives totake actions that make the numbers lookgood but not actions that benefitthe organization. 6INCENTIVES and PRODUCT LIFE CYCLEA major problem with short-run incentive plans is that managers are penalized for developing products that might produce long-run benefits. Under U.S.GAAP, firms write off research and development costs when incurred. IFRSs do not require as much write-off as U.S. GAAPLO 17PRODUCT LIFE CYCLE: StagesFour stages of the product life cycle are:Design and development: low sales but high research, design and development costsGrowthMaturityDecline LO 18EXPECTANCY THEORY: DefinitionMaintains that people act in ways to obtain rewards they desire and prevent penalties they wish to avoid.LO 29AGENCY THEORY: DefinitionDeals with relations between supervisors and workers and assumes employees will not necessarily behave as their employers desire.LO 210EXHIBIT 12.2LO 2The objective of a good incentive compensation is to minimize agency costs. 11What are extrinsic rewards ?Extrinsic rewards come from outside the individual, i.e., the supervisor, etc.LO 2MANAGERS WANT TO KNOW!What are intrinsic rewards ?Intrinsic rewards come from inside the individual such as satisfaction for a job well done.12BALANCED SCORECARD: DefinitionIs a model of lead and lag indicators of performance including both financial and nonfinancial performance measures.LO 313BALANCED SCORECARD PERSPECTIVESFour perspectives of the balanced scorecard approach are:Learning and growthInternal business and production process perspectiveCustomer Financial LO 314INCENTIVE QUESTION 1Should rewards be based on current or future performance? An advantage to basing on future performance is the “golden handcuffs” that tie managers to the company. Most companies use a combination of current and deferred rewards.LO 315INCENTIVE QUESTION 2Should rewards be based on division or company-wide performance? When based on the manager’s responsibility center alone, it focuses the attention without considering the impact of their actions on the whole company. Most companies use both.LO 316INCENTIVE QUESTION 3Should rewards use a fixed formula or subjective judgment in providing rewards? The advantage of a formula-based plan is that managers know what is expected and what reward they will get if they meet expectations.LO 317INCENTIVE QUESTION 4Should rewards be based on accounting results or stock performance? Tying managers’ compensation to stock performance loads uncontrollable risk on them. Using EVA both focuses managers on creating value for shareholders and relies on nonstock performance measures.LO 318INCENTIVE QUESTION 5Should rewards be based on absolute or relative performance evaluation? Relative performance compares divisional performance with other divisions in the same industry with less than optimum comparisons.LO 319INCENTIVE QUESTION 6Should rewards be cash, stock or prizes? Many companies use a combination because of the different (current vs. deferred) methods of reward. Expectancy theory finds prizes more attractive and more motivating.LO 320FRAUDULENT FINANCIAL REPORTING: DefinitionIs intentional conduct resulting in materially misleading financial statements.LO 421TYPES OF FRAUDFraudulent financial reporting usually falls into two categories:Improper revenue recognitionFirm reports profit in wrong accounting periodOverstating inventoryIncreases reported earnings in period of overstatement In absence of continuing overstatement, must result in reduced earnings in next periodLO 422INTERNAL CONTROL: DefinitionIs a process designed to provide reasonable assurance that an organization will achieve its objectives in (a) operating effectiveness and efficiency; (b) reliability of financial reporting; and (c) compliance with applicable laws and regulations.LO 523INDEPENDENT AUDITORSIndependent audits Are required by the SEC for firms selling securities across state linesHelp prevent fraud through reviews of internal controlsLO 524CORRUPTIONAccording to economists, three elements that must be present for corruption to occur are: Individual must have discretionary power to award contract or rightsEconomic benefits are associated with discretionary powerLegal system must be unlikely to detect wrongdoingLO 525End of CHAPTER 12