1. Did AirTex need a new control system at the time of the takeover?
* “The management system that was in place was one woman who magically kept everything in her head. There was limited and almost incomprehensible formal system.” Sarah Arthur, the company’s accountant, had complete autonomy over the company’s information, and she kept this information private.
* AirTex was in need of a more formalized accounting system, since accounting was a central department of the company, and profitability was a key measure to ensure the success of the company at the time of the takeover.
* Also, Ted and Frank had plans to dispose of Sarah Arthur, who was acting ...view middle of the document...
He was only there strategically. It lacked a lot of the controls. There wasn’t a motivation to perform.
* Departments don’t have motivation to do things differently.
* Culture is very intimidating; everyone was scared of approaching Sarah.
* Although net income is important, in small companies, cash flow is also extremely important
* They bought the company more on the potential. They saw aspects of the company that could be managed better.
* They had to let Sarah Arthur go because their philosophy was decentralization and Sarah Arthur ran a tight ship and personally oversaw controls
2. Evaluate the control system that Frank and Ted implemented. Should anything have been done differently?
* Make the system wear the black hat
* Use system to make employees do the “right” thing
* Personnel/Cultural Controls: Frank and Ted chose to keep the current employees, as they felt there wasn’t enough time to completely turn over the workforce. Furthermore, Frank and Ted provided an environment that was encouraging and supportive. Ted chose to be an “emotional leader” as opposed to a “task leader”. He also set up his office with a blackboard to accommodate teaching. This encouraged managers to seek him for advice when they encountered a problem and he was willing to provide mentoring and training.
* Frank and Ted recognized that their employees were experienced and motivated to succeed in their roles. As a result, Ted decided to take a backseat approach in terms of his management style. He didn’t possess industry knowledge as of yet, and he realized that his value-add to the company was his management skills.
* Results Controls: Ted and Frank adopted a decentralized organizational structure. Each operating activity would be its own profit centre, which gave managers a chance to earn 10% of their profit centre profits.
* This bonus aligns their employees’ interests with the overall objective of the company to increase profitability. This control is also supplemented by the personnel/cultural control promoting encouragement and support. The success of this control is contingent on the knowledge and motivation of the employees. The 10% bonus probably wasn’t enough to incentivize managers but it was to get information from them
* However, Ted should not have immediately given the department heads access to their receivables, since it is one of the key metrics of the company’s profitability. Although he established a procedure for collections and was...