An Integer Goal Programming Methodology for Multiple Objective Cost/benefit Analysis of Internal Accounting Control Systems
Robinson, Michael Alan
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Permalink
https://hdl.handle.net/2142/71360
Description
Title
An Integer Goal Programming Methodology for Multiple Objective Cost/benefit Analysis of Internal Accounting Control Systems
Author(s)
Robinson, Michael Alan
Issue Date
1981
Department of Study
Accountancy
Discipline
Accountancy
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Business Administration, Accounting
Abstract
In recent years, several developments have led to increased interest in the design and evaluation of internal accounting control systems. The purpose of this research is to propose and demonstrate the use of a systematic, comprehensive methodology to aid in the analysis of such systems in an environment of conflicting managerial objectives and complex interrelationships among system components. The methodology is intended primarily as a managerial decision-making aid and documentation of control system analysis, and also may prove to be useful to independent auditors in their preliminary evaluations of internal control.
Both academic and professional accountants agree that the costs of internal accounting controls should not exceed their expected benefits. Costs are incurred in installing control features, performing control procedures, searching for errors when their existence has been detected and making necessary corrections. Benefits are achieved in the prevention, or detection and correction, of errors and irregularities which cause losses (exposures). Comparison of control costs and benefits is complicated by two factors: (1) managerial control system objectives of cost minimization and effectiveness maximization often conflict, and (2) interrelationships among controls, groups of related controls, exposures and causes of exposures are very complex. For these reasons, a systematic, comprehensive methodology is required for control system analysis.
In the research, a review of published approaches to the design and evaluation problem is followed by development of the Goal Programming model for analysis of internal accounting control systems. First, the model's components and their interrelationships are discussed. Next, an example situation, with assumed parameter values but no real-world referents, is presented. The goals and constraints of the model are then developed, both in abstract form and as they relate to the example situation. The example model is then solved and results interpreted. The solution demonstrates that optimization of management's top priority control selection objective requires simultaneous analysis of causes linked by common controls instead of independent analyses of causes.
A case study which demonstrates the application of the model in a realistic decision-making context is then presented. After the case situation is summarized, the exposure, causes and controls, and their interrelationships, are discussed in detail. The relationships of the controls to the situation data flow are then used to divide them into groups for possible implementation. The situation is then modeled and the solution is presented and analyzed. The solution demonstrates not only that the Internal Accountng Control model can be used to assist management in realistic control implementation situation, but also that optimization of management's top priority control objective may prevent the optimization of one or more other objectives.
Sensitivity analysis on the Goal Programming model's initial solution is then discussed and demonstrated. First, the types of changes in parameter values and model structure which management may desire to make after the initial solution has been obtained are outlined. Then, example analyses based on the case study are presented, and the changes in model output analyzed. The analyses demonstrate the usefulness of the model as an analytical tool and as a source of documentation of the costs and benefits of assuming one hierarchy of management objectives instead of another.
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