Rendell Case

UNIVERSITY OF THE PHILIPPINES

CESAR E.A. VIRATA SCHOOL OF BUSINESS

BA 226 - CONTROLLERSHIP

Group Activity for Module 4: Management Accounting

Rendell Company

Submitted to:

Prof. Jan Michael Reyes

Submitted by:

Group 7

 Alcantara, Marie Charmaine

Cao, Carlos Ibarra Rev

Cayanan, Joseph Gabriel

Chan, Angelica

Flores, Rhea

Ramirez, Margie Anne

Villar, Christian         

21 October 2015

Group # 7                                                                                                                              BA 226 – Controllership

Alcantara, Marie Charmaine                                                              Group Activity for Module 4

Cao, Carlos Ibarra Rev                                                                    RENDELL COMPANY Cayanan, Joseph Gabriel                                                                     22 October 2015

Chan, Angelica

Flores, Rhea

Ramirez, Margie Anne

Villar, Christian          

1. What is the organizational philosophy of Martex with respect to the controller function? What do you think of it? Should Rendell adopt this philosophy?         

In terms of the controller function, the organizational philosophy of Martex is to have a solid line or direct reporting relationship between the division controller and the corporate controller, as illustrated below. This is generally the case when following a functional organizational structure.

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        With this kind of setup where the division controller reports directly to the corporate controller, the division controller can perform his assigned functions in a manner that is not biased to the division. Conflicts of interest and information asymmetry would be reduced. The division controller can also monitor and ensure the accuracy of financial reporting. Reports would be more reliable and transparent, thus allowing for better decision making by the top management. The “fats” in the divisional expense budgets would also be minimized. Moreover, possibility of reporting misleading information and concealment of unfavorable information would also be minimized. This would result to a more objective report on the business unit’s budget and performance.

Furthermore, this arrangement would lead each division’s goal to become more congruent or aligned with the corporate goals. This is further supported by the uniform and centralized accounting system and the pre-determined financial objectives for each division -- which are (i) growth in dollar sales and (ii) a specified rate of profit as a percent of sales. Lastly, the profit sharing scheme for managers and controllers also allows for some goal congruence between them. This setup motivates people to take into consideration the best interest of the organization by aligning their personal self-interest with the company’s interest.

One weakness of this setup is that the divisional controller might be treated as a “spy” by the division manager rather than a trusted aide -- which might lead to conflicts between the two resulting to a dysfunctional working relationship. However, this should not be too much of a problem if the division manager has nothing to conceal.

The philosophy being used by Martex seems to be effective for the company as it results to more objective or reliable reports and it supports the achievement of goal congruence.

The group thus believes that Rendell should gradually adopt Martex’s philosophy of having the division controller directly reporting to the corporate controller. A gradual transition is important because there would most likely be resistance to change by the Division Managers who have been used to the current reporting system in Rendell for so long. Mr. Fred Bevins, the controller, is willing to adopt such a change because (i) he wants to introduce more modern control techniques and (ii) he believes that he would be able to get more reliable information and reports. He, however, must be able to justify and implement this critical change in such a way that its benefits would be emphasized and conflicts would be minimized.

2. To whom should the divisional controllers report in the Rendell Company? Why?

Rendell’s divisional controllers should report to Mr. Bevins, the corporate controller, to ensure the integrity of the analysis which is free from possible manipulations. An unbiased report from the division controller would provide an objective perspective to the corporate controller, who will communicate to the president the financial status and other adverse issues found in the operations and control systems, an example is the hidden “fats” in the divisional expense budgets. The corporate controller would also be able to perform a sound analysis based on the unbiased reports to be provided by the divisional controllers. This would aid the top management in making an informed decision.  

This change is a must to safeguard against possible connivance between the division controller and the division manager. The current division controller-division manager relationship is being detrimental or slowly creating a bubble in the form of the hidden “fats”, which could potentially cause a huge financial fraud within the company. The introduction of modern control measures would eventually pop this growing bubble via whistleblowers. Division controllers reporting to Mr. Bevins would mitigate this risk. This would provide a better check and balance mechanism, and result to more transparency within the company.