Business Risk Management is a process, carried out by the board of directors of an entity, the administration and other personnel, applied in establishing strategies for the entire company, designed to identify potential events that may affect the entity, and manage the risks to stay within your risk appetite and provide reasonable assurance regarding goal achievement.
The risks are:
… Uncertain future events that could influence the achievement of an organization's objectives, including strategic, operational, financial and compliance objectives. ”
… Specific events whose occurrence affects the expected results, causing losses or unfavorable results ”.
… The exposure to the possibility of damage or loss and the degree of possibility of that loss ”.
With this approach to risk management in companies, the vision of Internal Control has been developed to three more components than those proposed in its first version of COSO. Establishing Objectives, Identifying them and Preparing the response to this risk that allows the elaboration of the proper control activities and channeling supervision for that reason, this second vision is more accepted, which is already taking more advanced steps when it speaks of management or corporate governance and therefore of the risks in that approach.
In this work we reflect on the Function that the auditor should develop when faced with entities that have worked with this approach and those that are on that path.
Introduction
Contemporary organizations face the difficult challenge of change. Over the past fifty years, business organizations have focused on profit maximization as a number one priority. Today, the organization has changed again. Various stakeholders, both inside and outside it, press in different directions. In this sense, organizations must become "good corporate citizens", capable of satisfying social and financial interests to achieve success.
On the other hand, the environment of the organizations has undergone changes. Technological advances, improvements and modifications in managerial techniques, as well as the context of globalization in which they are inserted, force organizations to reward the way they carry out their activity. To develop their businesses and maximize profits, business organizations have to know how to adequately balance and satisfy the needs of the different stakeholders for which the management team must respond.
Management develops a corporate vision and mission statement based on the interests of those involved. Management analyzes the external and internal competitive environment and, taking this analysis into account, draws up the general corporate strategy. This strategy is broken down into specific goals and objectives, the entire organization is informed and then implemented. The goals and objectives, once identified on a broad spectrum, should be broken down individually. Likewise, identifiable “progress markers” should be developed for each one, based on the expectations and hypotheses elaborated by the management regarding the environment. To determine if the strategy works correctly, it is necessary to develop an effective system of performance indicators with the aim of compiling,articulate and disclose information on the results of the implementation of the corporate strategy to achieve the desired goals and objectives.
Historically, companies have generally used financial performance indicators when evaluating a company's strategy. However, the ability to manipulate these indicators through a variety of accounting options, such as amortization or inventories and pension estimates and the costs of liabilities, undermines the benefits and purpose of these performance evaluation systems. when it comes to accurately determining whether corporate strategy is effective. Furthermore, in today's information-based economies, human capital and knowledge management cannot be included in financial statements, nor can they be collected by traditional performance measurement systems.
For these reasons, it is essential to use additional indicators to assess the validity and effectiveness of the implementation of the corporate strategy. The Balanced Scorecard (CMI) provides a mechanism to measure the validity of the corporate strategy and the effectiveness of its implementation by using indicators in four linked perspectives.
The present work tries to state the general aspects of this Management Model and the role of the auditor in the application as an advisor and its repercussion in his subsequent work, taking into account the new actions in the country to perfect the state company and make it more efficient.
Development
Theory on the Strategic Process and its Evaluation.
The corporate vision is operationalized through the establishment of a mission that, in turn, aims to guide the entity's goals and objectives. The achievement of these corporate objectives and goals, meanwhile, leads to the design of strategies as a result of an evaluation of the external context and the internal environment in which the organization operates. In this sense, the fundamental role that management accounting must play is to measure and evaluate the success or failure of strategies to achieve organizational objectives and goals and, therefore, the degree to which the mission is fulfilled. and corporate vision. On the other hand, management accounting can play another important role in this area by identifying development opportunities for the organization.
Strategy has been defined in multiple ways and from different perspectives, including the one that states that «strategy is the art of creating value. It provides the intellectual framework, conceptual models, and administrative approaches that enable managers to identify opportunities to deliver greater value to customers and deliver it in exchange for more profit. ”
Measurement and Control of Strategic Performance
Dixon and other specialists believe that performance measurement systems should:
i) be consistent with the organization's objectives, goals, critical success factors and programs and achieve mutual support among them;
ii) transmit the information through the smallest and simplest group of indicators possible;
iii) reveal how effectively clients' needs and expectations are met, focusing on those indicators that they can perceive;
iv) Provide a set of indicators for each organizational component that allows all members of the organization to understand how their decisions and activities contribute to its overall performance; and
v) support organizational learning and continuous improvement of the organization. Most research on this topic is currently geared towards new approaches that incorporate multidimensional performance measurement indicators, both financial and non-financial.
The use of non-financial performance indicators has been designed to complement traditional financial performance indicators. Its development has been a consequence of the need to respond to the approach that indicators of a financial nature tend to be "delayed", while indicators of a non-financial nature tend to be more "advanced" and more customer-oriented in the context of corporate strategies.
The Balanced Scorecard
However, according to the Kaplan and Norton criteria, the orientation towards integrating approaches, as is the case of the WCC, is what should guarantee that “managers do not have to choose between financial or operational indicators because no indicator per se can express performance in its entirety or focus its attention on the key areas of the organization. Therefore, managers need a balanced presentation of financial and non-financial indicators. " For example, the authors use the example of a pilot trying to successfully pilot an airplane using a single gauge, say speed. Just like in a business, the pilot will need to take into account fuel, altitude, wind speed, and other indicators. Therefore, in the complex environment of contemporary business, managers,like pilots, they require detailed information on different indicators to pilot their organization.
In this sense, the CMI developed by Kaplan and Norton relates the performance measurement indicators with four basic dimensions:
i) financial perspective;
ii) customer perspective;
iii) internal business perspective; and
iv) learning and growth perspective.
The financial perspective includes the "lagged" indicators associated with historical information from the financial statements and is intended to detect whether the strategy is contributing to the basic functioning of the organization. These indicators tend to focus on the analysis of sales growth, the return of capital, the increase in market share and other elements of interest of an economic-financial nature, such as the value of the shares measured through updated cash flows. In this sense, the indicators associated with the financial perspective are crucial instruments in evaluating this type of strategy.
The customer perspective is vital, considering that the core of any strategy is to consolidate the value proposition to the customer, which includes the mix of product, price, service, image and relationships. Kaplan and Norton argue that companies tend to differentiate the value proposition through operational excellence, greater intimacy with the customer or product leadership, aspects that will affect the target segments, as well as the particularities of the product and the setting of prices. Therefore, the indicators to be included in this perspective are the degree of customer satisfaction, market share, customer profitability, in addition to customer acquisition and retention.
The perspective related to the internal business process is oriented towards what must be done to satisfy the needs of customers. His approach focuses not only on financial or cost measurements, but also in terms of quality, time and flexibility. The main benefits in this sphere occur at different times:
i) short-term benefits, when improvements in operational efficiency are obtained;
ii) medium-term benefits, when growth in sales levels is generated through the development and strengthening of customer relationships; and
iii) long-term benefits, when the innovation processes in the organization are consolidated. Among the indicators included in this perspective, production efficiency, reprocessing levels, cycle times, productive performance and unit cost can be highlighted.
The learning and growth perspective considers the skills of the workers, the technology, the culture and the organizational climate necessary to support the strategy. The ability to align the human factor and information technologies with critical internal business processes and with the value proposition to the customer is a key element in this direction.
The WCC is prepared using a "strategic map", the essential purpose of which is to achieve a close link between the four perspectives that make up this instrument. The result can be used to evaluate the management hypotheses about the development of the corporate strategy, in essence, to verify the validity of the strategic decisions. It can also be used in evaluating the effectiveness of management's implementation of the corporate strategy. This is achieved by connecting the indicators associated with the different perspectives with the productivity and growth objectives and others that the company has set itself.
Those who have used the WCC as an instrument of control and strategic evaluation point out that its ability to "align and focus" with the corporate strategy constitutes its two main advantages. This has been achieved by following five basic principles:
i) translate the strategy into operational terms, that is, prepare an «strategic map» of the organization;
ii) align the organization to the strategy through the elaboration of its own CMI design in each department or strategic business unit;
iii) make the strategy the daily work of all, so that each worker understands the strategy and leads the business towards the real contribution. In many organizations, management compensation and stimulation mechanisms associated with balanced scorecards are linked;
iv) make strategy a continuous process, integrating budgeting as part of the strategic process. The link between budgets and MICs creates opportunities similar to those of “zero base” budgets, whereby managers can strategically assess and assess whether each proposal is in line with the organization's overall strategy;
v) mobilize leadership for change, which presupposes a sense of belonging and active involvement of the management team. The strategic process requires virtually changes in each of the parts of the organization and team work to coordinate these changes. The following graph shows the relationship that the CMI may have with this strategic vision of the entity
Cuban experience of applying the CMI. Steps to follow.
In Cuba, since the 90s of the last century, work has been carried out to improve the company, fundamentally the Cuban state company, which is the majority in our country; and in search of better results, different Management models have been evaluated that would allow it, and the management by Objectives and the Management for values began to be used with more insistence, at another time in that decade and taking into account the changes suffered in the The country is inserted in an international market that requires equality in language and terminology, which is why a process of business improvement begins, which today covers more than 25% of the country's state companies, but which in turn must be perfected in which refers to corporate management models.
At the beginning of the century in 2002, a new Law was passed that obliges entities to work with the integral approach of Internal Control, as stated in the COSO Report, and is aimed at entities subject to improvement that their Management Systems must complete in their organizations. Quality that allows reaching levels of efficiency and effectiveness.
In any of these alternatives, the entrepreneur's work is essential and the need to do a lot in a short time with an integrating sense forces them to look for instruments that alert them to the problem situations of the entity with a strategic and corporate sense, hence the The need to consider the implementation of Balanced Scorecards with the characteristics that Cuban companies require, bearing in mind that it is an open and centralized economy that responds to the interests of society as a whole.
The steps described below constitute a first experience of approach to generalize the implantation of the WCC in Cuba.
The steps of the process of creating a balanced scorecard.
| He passed |
Description |
Purpose |
Process |
Weather |
|
| Stage 1.- define the measurement architecture. 3 weeks | |||||
|
one |
Select the organizational unit. | Define and clarify the uen on which to start the cmi | After consultation with senior management, the architect must define the business unit for which a high-level scorecard is appropriate. The initial scorecard process works best for an uen and the ideal would be one that engages in activities across the value chain: innovation, operations, marketing, sales, and service. | ||
|
two |
Identify the links between the corporation and the uen. | Guide the development process of the cmi so as not to optimize the work of the uen at the expense of the rest of the uen or the corporation. | Once the uen has been defined and selected, the architect should find out and be informed of the uen's relations with the other uen and with the organizational and corporate division. The architect interviews the key senior management of the division or divisions and the corporation to find out: The financial objectives of the uen.
. Decisive corporate issues. . Links with other uen |
||
| Stage 2.- Build consensus around strategic objectives. 4 weeks | |||||
|
3 |
Conduct the first round of interviews | Introducing the cmi and learning about the organization's strategy, as well as translating it into objectives and indicators | The architect prepares basic information material and background on the cmi, as well as documents on the vision, mission and strategy of the company and the uen. You should also look for information on the eu sector and competitive environment, customer preferences and technological developments. This material is given to each manager of the uen. Afterwards, he conducts a 90-minute interview with each manager where he obtains: strategic objectives, proposal of cmi indicators by perspectives. Although the interview is not structured, if questions and potential answers should be brought | ||
|
4 |
Synthesize the information collected | Obtain a list and classification of the objectives of the four perspectives. | The architect and other members of the design team meet to analyze the interview responses, highlight themes, and develop a tentative list of objectives and indicators for the first meeting. You can see the personal resistance and the change in the processes that will follow the introduction of the cmi. It must be determined if the information obtained represents the uen strategy and if the objectives in the four perspectives are linked in a cause-effect relationship. This can serve as a basis for discussion in the next step. | ||
|
5 |
Conduct executive workshop: first round | Identify between three and four objectives for each perspective, preparing a description for each objective and a list of potential indicators for each objective. | The architect leads a meeting with the senior management team to gain consensus at the cmi. It facilitates the debate on the mission and strategy statements and then seeks answers to the question: to what extent would my performance vary with the owners, clients, internal processes and for my ability to grow and improve? Each perspective is treated in sequence and shows the proposed objectives, their classifications and quotes from the interviews. After all the objectives have been discussed, the group selects the best 3 or 4 and writes a description of them. A session can be held to find the indicators by objective. The executive team is then divided into 4 subgroups, each responsible for one of the perspectives and with a group leader. | ||
| Stage 3.- select and design indicators. 6 weeks | |||||
|
6 |
Hold meetings of each subgroup. | Refine the expression of strategic objectives. Identify the indicators that communicate the intention of each objective, its sources of information and the actions that make it accessible, as well as the links between the indicators and their influence. | The architect works with the subgroups during several meetings, in which he tries to achieve the proposed purposes. In conducting these meetings you are inspired by the underlying structures for the four perspectives, as well as the links between the indicators, both within and across the perspectives, which describe the cause-effect relationships that underlie the strategy. most cmi will be deeply inspired by core performance indicators, the art of defining indicators for a cmi lies in performance indicators. These are the indicators that make things happen, that allow the core indicators of results to be achieved. | ||
|
7 |
Conduct executive workshop: second round. | Prepare a brochure to communicate the intentions and content of the CMI to all workers | Senior managers, their direct reports and middle managers are involved in this workshop and the vision, strategy statements, objectives and provisional indicators for the CMI are discussed. The result of the subgroups should be presented by the head of each subgroup, not by the architect or by internal or external advisers to the subgroup. Participants comment on the proposed indicators and begin to develop an implementation plan. | ||
| Stage 4.- Prepare the implementation plan. 3 weeks | |||||
|
8 |
Develop the implementation plan | Develop the basis for the start of the IMC implementation plan, | A team made up of the leaders of each subgroup formalizes the goals and develops an implementation plan. This includes the link of the indicators with the databases and information systems, communicating the CMI to the entire organization and seeking the development of second level indicators. | ||
|
9 |
Conduct executive workshop: third round. | Agree on the implementation program, communicate the CMI to the workers, integrate it into a management philosophy and develop an information system to support it. | The senior management team meets a third time to reach a final consensus on the vision, objectives and measurements developed in the first two workshops and to validate the goals proposed by the implementation team. The executive workshop also identifies preliminary action programs to achieve the goals. This process usually ends by aligning the various change initiatives of the unit with the goals, indicators and goals of the CMI. | ||
|
10 |
Finalize the implementation plan. | Integrate the cmi to the organization's management system. | For a cmi to create value, it must be integrated into the organization's management system. It is recommended that you start using the cmi within 60 days. It is obvious that a phased introduction plan will have to be developed, but the “best available information” must be used so that the resulting agenda is consistent with the scorecard priorities. In the end, the management information systems will be able to process level. |
This scheme responds to an assessment of the steps that we have studied as fundamental elements to implement a command board in Cuban entities.
Steps to follow to advise entities in the application of the Balanced Scorecard from the Auditor's Vision.
The 14 steps for the implementation of the CMI derived from the present research in the hotel activity are listed below. If a consultant is used in the implementation of the CMI, the preparation will be carried out by the consultant and the implementation team will be formed in step 2. If a consultant is not used, then an implementation team must be formed that has a Leader. This team will then take part in the process from its preparation step.
Step 1: Preparation
A. Summary of the environment in which each company operates as:
• Analysis of the Medium or PEST analysis (Government, technology, society, economy, law, culture, international risk, finance), • Assessment of the specific country and industry, • SWOT analysis evaluation - specific industry and company, • Analysis of Porter's five forces, • Strategic map and analysis of the main competitors, • Analysis of key factors for success (in conjunction with stakeholder analysis), WCC Research and analysis of best practices in the industry.
Evaluation of the strategic material that the company possesses, such as mission and vision statements and short and long-term strategies. Evaluation of financial statements and business structure, including reporting and performance systems. In addition, evaluation of the accounting system, human resources and computing, and performance measurement indicators, which includes the type of system, questions about specific accounting indicators used in the industry, and the current status of measurement systems and the use of the same. (Reports, who receives the reports, what do those people do with the reports).
Step 2: Determination of the action plan, including proposals for time and initial meetings with key individuals:
Development of the action plan and time and schedules of the proposed implementation. Presentation to the Board of Directors and clarification of doubts about the Questions and answers of the WCC, as well as the selection of an Implementation Team and leader.
Step 3: Development of a questionnaire for managers:
Development of the management questionnaire to identify the strategic objectives and values, the key stakeholders and their expectations and the decisive factors for success and performance measurement indicators that will allow the company's objectives to be controlled.
Step 4: Individual meetings with managers:
Meetings with managers of individual functions for the development of the mission and vision statement, development of a PVC according to the functional sphere and development of a PVC at entity level.
Step 5: Elaboration of the hotel client's value proposition:
Development of a PVC that includes the analysis of an individual PVC, team design of a PVC model for a hotel, and the link of the PVC with the vision and mission statements. Review of customer surveys.
Step 6: Design of the Entity's CMI:
Review of the vision, mission and PVC design and its link with the strategy and design of the WCC at a strategic level. Specifically, determination of the entity's general goals and objectives. With respect to each objective, the purpose of each objective and the steps to ensure that each objective is met, these aspects must be analyzed to choose the appropriate performance measurement indicators to achieve a specific operational or strategic objective, since each of they must address at least one of those functional business or strategic goals and objectives to be considered valid.
Step 7: Design of the CMI for each functional area:
Review of vision and mission statements at that level and design of the WCC at the functional level.
Step 8: Determination of acceptance parameters at each level:
Presentation to managers of the acceptance parameters table and design of acceptance parameters
Step 9: Defense of performance measurement indicators:
Defense of performance measurement indicators in the management team. Managers must defend the measurement objective, the indicator, the goal and, specifically, how it is linked to the corporate strategy.
Step 10: Data Collection:
Determination of where and who has access to the data, determination of a coordinator for data collection and determination of an organization chart for data collection
Step 11: Initial control meeting:
The main purpose of this meeting is to understand the relationship between the results and the parameters used in the traffic light system. This step includes a presentation by the data implementation and evaluation team.
Step 12: Collection and mapping of information:
Collection, mapping and continuous evaluation of information every month.
Step 13: Review of performance measurement indicators:
Review of performance measurement indicators every six months and after one year.
Step 14: Linking the WCC with the budget and compensation system:
Use of the WCC in the preparation and control of the organization's budget and in the compensation system
Conclusions.
The CMI is an effective tool for measuring the performance of the organization in correspondence with the corporate strategy. From the analysis of the reviewed literature it is concluded that the CMI allows to evaluate the corporate strategy by integrating the four perspectives of the CMI. The CMI can be used in any organization you want:
• Align their performance based on the implementation of strategic decisions.
• Guide and use your resources more efficiently.
• Link the organization's feedback system with strategic learning.
Each implementation of the CMI will be different and therefore the proposed steps will be an architectural design flexible enough to guide the implementation in a given organization. The specific conditions related to each implementation must be analyzed, which include:
• Country conditions (political, governmental, social, technological, economic, such as interest rates, inflation, unemployment)
• Activity sector (competitors, suppliers, customer power, others involved, degree of maturity of the sector and other distinctive characteristics)
• Characteristics of the organization (management capacity, corporate culture, financial conditions, willingness to change, organization of its internal processes, level of sophistication of information and accounting technologies, among others). This is evidenced when comparing the implementation in the hotel organizations studied.
It is important for the Auditors to cooperate in the preparation and implementation of CMI in different entities and to participate later in the moments of risk assessment and the determination of the scope of the audit and the goals to be considered, taking into account that more comprehensive vision that responds to the new expectations that auditors are currently asking for.
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