Issues in Fit Food Inc
Significant part of the behavioural displacement can be related to results control system that is in place. FFI is evaluating the divisional personals’ performance based on their achievement of Annual Operating plans; some of those are like
•Achieving 7% divisional growth rates
•Bonuses based on achievement (upto 150%)of annual operating plans and no bonuses on failure
•Stock options offered to corporate managers and divisional presidents
•Sean’s (founder & chairperson) call for better financial performance during those peak recessionary period(2008-2009)
These quantitative results controls can be related to those behavioural displacements. As a result presidents of Drink division and Cookie division have involved in those unacceptable fraudulent practices of aggressive revenue recognition, prepaying expenses and capitalising parts costs.
Since the CFO has the information about those fraudulent practices he should initiate the process of restating those prior year financial statements accordingly and those restatements require public disclosures. It is a serious issue for a listed company. Worse impacts would include lost of investor confidence, as a result share value deteriorates.
Suggestions : controls
1.Instead of determining a target based on investor’s expectations, during the recession time company should have adjusted its targets according the economic condition. May be keeping the same market share or little above that could be a better option. It might create BUDGET SLACK. However that slack can reduce the tension, and stress for those managers and build an environment to change from there. Since 2008 was the peak recession time the AOP ‘s growth rate has to be altered and it can be changed into sustainability
2.Controls should balanced with those quantitative and qualitative results oriented controls. In this case most of controls such as achieving 5% divisional growth and bonuses of 150% when divisions exceed the AOP has lead many issues . gamesmanship , manipulated financial statements, and unethical behaviour of divisional managers are some to be named; therefore FFI should introduce various control methods which include the measurement of their performances and ethical behaviour. Such control methods would include rather than just checking increase in sales, it should increase in actual sales. Solid sales, numbers have to be real and should not be manipulated towards the end of the period. An increase in market share, customer retention 1.Results controls should be tight results control
Personal control :
1.Replacement of managers
Removal / replacement of those managers in cookie division and drink division including the presidents of both divisions are the first step to re build the confident in the company. Even the chair Sean needs to be replaced; however it is question since he is the founder he may have the controlling rights over the company.
2.Replacing external auditors.
Because they are the ones first to know about those accounting frauds in the organisation. However they have failed. They have not had a good audit plan and scope. This could have happened due to the following reason too. since the FFI is a public company and it needs a clean opinion to keep its position in the listing. Therefore auditor might have asked to provide such an opinion based on promises such as FFI is going to implement a tighter internal control policies so it prevents most of the fraud. Further auditor has already been intimidated about cancellation of the contract based on the price it charged. Therefore auditor may not be performing well planned audit instead providing a lower service which is not good for all those three parties (auditor, users and audtiee)
Action Control :
Separation of duties : since FFI is one company several division it can have one administrative division. Since all the changes have to be done by those people who different from those divisional staff, divisional heads’ data management actions would not remain secret as earlier Second thing one storage facility for all division. Have the same effect. That data management can be controlled
The direct costs of this may include delay in processes and a system should be created for fast communication
2.Pre action reviews
Though there are several discussions and reviews held regarding the approval of AOP, the quarterly performance review meetings are seems to be very brief. Regardless of whether the target has been achieved or not every item has to analysed thoroughly and plans for rest of the period should be altered accordingly to achieve a real performance
Unlike the current system divisional managers bonuses should not be purely based on achieving AOP profit. It has to include the strategies used in achieving profit, closing stock, new product developments, and effective sales
However costs associated with each option has to be analysed before the decision.
Since all the divisions are managed by humans. Certain level goal incongruence is present in any divisionalised organisation. It is impossible to eliminate it totally. Though a very minimal level of date manipulation and game playing activities are possible since those number in the financial statements are not perfect in real world