Regulatory pressure and intervention in Management Control Systems in financial services : from diagnostic ratios to interactive beliefs?

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Master Thesis

Executive Master of Finance & Control

Regulatory Pressure and Intervention in Management

Control Systems in Financial Services

from diagnostic ratios to interactive beliefs?

Frits Keustermans, MSc. (1020623)

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List of figures and tables

Figure 1: Strategic responses to institutional pressures (Oliver, 1991) ... 9

Figure 2: Conceptual research model...10

Figure 3:Levers of Control Framework (Simons, 1995) ...12

Figure 4: Model of strategic responses to uncertainty (Oliver 1991)...15

Figure 5: Model of strategic responses for risks to be avoided (Oliver, 1991) ...16

Figure 6: Model Culture and cooperation (author’s interpretation, based on Birnberg & Snodgrass, 1988)...17

Figure 7: Model of strategic responses to a focus on core values (Oliver, 1991)...18

Figure 8: Rebalancing measures (Ittner and Larcker, 2003) ...19

Figure 9: Key figures for the three PPs (annual reports) ... 20

Figure 10: Research model...21

Figure 11: Development of understanding of the case... 22

Figure 12: Triangulation in data collection ... 25

Figure 13: External approach for MCS intervention when facing new regulations... 26

Figure 14: Levers of control and new regulations... 27

Figure 15: Financial reporting and new regulations; manager vs. accountant for PPA ... 28

Figure 16: Financial reporting and new regulations; manager vs. accountant for PPB ... 30

Figure 17: Financial reporting and new regulations; manager vs. accountant for PPC ... 32

Table 1: From predictive factors to intervention focus...10

Table 2: Dates and times of interviews... 24

Table 3: Coding interventions (based on Merchant & van der Stede (2012) and Simons (1992)) ... 59

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1. Executive Summary

In times of turbulence and financial crisis, society increasingly is demanding accountability and transparency from Financial Services (FS) companies. Currently, this ongoing process manifests in more regulation for the companies operating on the financial markets. In this study an approach is presented to assess the impact of increased regulation on Management Control Systems (MCS) in FS. Under increased regulation' the following can be conceived (among others); intensified reviews by De Nederlandsche Bank (DNB, the Dutch Central Bank) and the Autoriteit Financiële Markten (AFM, Authority Financial Markets), raising the pension age to 67, obligatory funding of at least 105% of the pension fund liability, regular assessment of the buffers built to finance the fund’s revaluation and indexation ambitions, Wet Financiële Transacties (WFT, Law on Financial Transactions), Alternative Investments Fund Management Directive (AIFMD), and Solvency requirements. All these regulations aim to enhance transparency and accountability in FS in order to stimulate effectiveness and better decision making on the financial market.

Little is known however on how FS companies incorporate these regulations in their internal processes. In this study a framework to link response strategies to regulatory pressure to intervention in MCS is developed. An explanatory case study is performed for 3 pension providers (PPs), confronted with regulatory pressure described above. In order to fulfill the demands of the regulators and their clients, the PPs are challenged how to implement these regulations in their daily business. The option investigated in this qualitative study is to intervene in the MCS. It is confirmed, financial indicators are not sufficient to meet stakeholder demands. To be able to be in-control an MCS is inevitable. In this study, it is argued that the ISAE report of the PPs (International Standard on Assurance Engagements) is an important element of the MCS because of their obligation to show their management is ‘in-control’. Taxonomies for both a response to regulatory pressure, and the types of controls to be amended are derived from literature and linked as conceptual research model to find how the management of the PPs respond to increased regulatory pressure by redesigning their management control systems. Interviews are held and triangulation of results is performed to establish validity of the responses. The managers’ responses are checked and complemented with the view of the accountant, site visit observations, open and closed-end questions, a feedback session, and publications by the PPs.

Results of this study suggest that intervention in an MCS can be linked to regulatory pressure. The links identified in this study provide a framework subject to further research. Responses given vary in degree of activeness, and interventions are be made in multiple ways by the PPs. Where management of larger PPs tend to react more actively, potentially in an effort to leverage the size of their company,

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PPs in this study do perceive risk when new regulations are imposed. Also a link of regulatory pressure to strategic uncertainty is recognized in this study. When linked to response strategies, more passive responses mean a ‘just have to comply’ approach rather than a true strategic view. According to the managers interviewed, implementation methods mostly ask for top down initiatives, but needs to be complemented with daily involvement. Support is found for the propositions in the framework introduced by this study. But leadership styles, company culture and interdependencies of departments and processes are expected to influence the link between regulatory pressure and intervening in the MCS.

The framework developed in this study provides a solid base for future research. A link is presented between 2 fields of research that were not often related in theory before. It’s propositions are founded in the established theory and find support in a first exploration among pension providers. Interviews show first indications how to refine the framework and triangulation with other data sources and environments point at possible confirmations or contradictions to be studied.

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2. Introduction

Currently, in times of a financial crisis and a stagnating world economy, the financial sector finds itself at the heart of the debate. Many questions are raised on the sector’s function, role and responsibility within the economic system of society. A key question in this debate is how things could have gone so terribly wrong despite the fact all financial services (FS) companies are required to have control measures in place. Regulators seek answers for this question by intensifying their supervision and by imposing new regulations. However, the success of this strategy remains questionable. This study explores options for reacting to regulatory pressure and links them to intervention strategies deemed appropriate by management of their MCS.

Setting the stage

All financial institutions have a regulatory duty to have a management control system (MCS) in place and this system should be verified periodically by an independent accountant. Recent financial scandals, such as Enron and WorldCom, have highlighted the possibilities for financial accounting reports to give misleading signals (D Otley, 2007). Also in the Netherlands, recent events as the nationalization of ABN Amro, profiteering insurances, Libor manipulation by Rabobank and others, and the potential sale of customer data by ING, proof to be still possible within the boundaries set by their MCS. Addressing the shortcomings in management control systems is a hallmark of legislation such as Basel III and the Sarbanes-Oxley Act. The latter requires greater disclosure of potential risk by financial companies and puts more emphasis on risk management (D Otley, 2007). Central banks as the FED, ECB and DNB are increasingly defining rules and regulations on amount of assets to be hold, checks and balances to be implemented and stress tests to be performed (Alfaro & Drehmann, 2009; Borio, Drehmann, & Tsatsaronis, 2014). This study focusses on the end of the crisis where FS companies were affected after the first impact was for banks. Among these are the PPs. PPs have an important societal role in securing income in an aging society. The role of the PPs is growing more important. Among the most important changes are the growth of pension funds into huge pools of capital and the expanded influence that pension fund management practices now have on the larger economy (Johnson & de Graaf, 2009). They are placed under scrutiny from regulators, but also need other FS companies to operate, which makes them susceptible for new regulation, both directly and indirectly.

Relation between management control and regulation

According to a recent OECD study, short term regulatory action has taken diverse forms, some corrective (leading ultimately to increases in contributions), some lenient (allowing temporary reduction in statutory contributions). Going forward, however, there is a general consensus among

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objective of benefit security without jeopardizing plan continuity. (Blome, Fachinger, Franzen, Scheuenstuhl, & Yermo, 2007). Benefit security and plan continuity can be objectives for the regulators, but do these align with those of their managers? If so, why could their current management control systems not prevent the current financial crisis? These questions lead regulators to intensify regulation. It is not surprising that the interrelated failings in the global financial markets are difficult to untangle and therefore to address, particularly since the economic crisis is not yet past and the regulatory challenges continue to evolve (De Graaf & Williams, 2009). This study explores regulatory directions in the Netherlands and different options to respond for management of FS companies. However, it remains questionable whether a management response to increased regulatory pressure leads to redesign of their control systems, if is the right approach, if it is enough, or may be too much? This leads to the main research question for this study:

How does the management of pension providers respond to increased regulatory pressure by redesigning their management control systems?

This study aims to contribute to theory by linking options to respond to regulatory pressure to possible interventions in MCSs by construction of a conceptual model and formulation of theory based propositions in chapter 3. In chapter 4 the research design of this case study is developed. Evaluation of the responses of interviewing managers and accountants of three Dutch PPs (in the remainder of this study these the management of the PPs is referred to as ‘the management’) is done in chapter 5. Conclusions and suggestions for further research are presented at the end of this study in chapter 6.

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3. Theoretical Background

In this chapter a conceptual model and theoretical propositions are developed to evaluate the relation between responses to institutional pressure and interventions to change the MCS as deemed appropriate by management in the pension sector in the Netherlands.

New regulation in the pension sector in the Netherlands

Specifically for the pension sector, three explanatory factors are generally mentioned for the financial crisis. First, there is the demographic factor: low fertility combined with reduced mortality leading to rising dependency burden. Second, there are the allegations against the pay-as-you-go system. This way of financing pensions is deemed unsustainable with the current rates of replacement and the expected rates of dependency. Finally, there is the view that the problem is essentially of political nature. It is based on the argument that suitable reforms are available, but that they are blocked by entrenched interests (Cremer & Pestieau, 2000). As a result, in the Netherlands regulation is also increased and supervision is intensified for the pension sector. DNB checks them more frequently, more strictly, and with a wider scope. Funding requirement for the Dutch system feature a requirement to fund at least 105% of the pension fund liability in nominal terms (excluding both salary projection for revaluing accrued benefits and indexation of benefits in payment) and regular assessment of the buffers built to finance the fund’s revaluation and indexation ambitions (Blome et al., 2007). The Dutch government increased pension age recently to 67 and capped the amount of pensions to be received. This intensified regime is facilitated by a considerable extension of regulations and financial supervision. Moreover, in 2007 the introduction of the Wet Financiële Transacties (Wft, ‘law on financial transactions’) placed more financial instruments and financial companies, which until recently were outside supervision, under the financial supervision (Kleist, 2008). Not only nationally, but also The EU adopted additional regulation for investments by means of the AIFMD in July 2013 (Zepeda, 2014). Research by van Dam on legal liability arising from regulation confirms FS companies are very cautious about their relationship with the regulator so as not to disrupt that relationship (van Dam, 2006). A sound MCS should contribute to this end. This study aims to deepen the understanding of the nature of management responses to increased regulatory pressure and the potential effect of this response on control systems for the three PPs in the Netherlands. It aims to contribute by linking management responses to intensified regulations to the types of controls used in the MCS. In the next paragraph the conceptual research model for this study is developed.

Towards a conceptual research model

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learned from the failures of their peers. They could have chosen a response tactic that fits their response strategy. Oliver proposed five categories of strategic responses that organizations could make in response to institutional pressures (Oliver, 1991).

Strategic responses varied with respect to level of resistance to those pressures from passive to active

and are labeled as acquiescence, compromise, avoidance, defiance, and manipulation. Acquiescence is a passive strategy because, in using it, a firm agrees to institutional pressures. The other four strategies represent increasingly active responses to these institutional pressures (Clemens & Douglas, 2005; Oliver, 1991), see Figure 1. Oliver’s responses are related to personal behavioral threats of the management. The content of the MCS could be altered as result of the chosen strategic strategy. Each strategy comprises of three possible tactics which are input for the questionnaire by asking the respondents to rate the effectiveness of these tactics in dealing with regulatory pressure (see appendix 1). The question arising is whether the response tactics fits the initiated interventions in the MCS. This leads to the conceptual research model for this study.

The conceptual research model is used to study different response strategies by managers to regulatory pressure. These response strategies could mean the management of the PPs changes the way they control their organizations. Response tactics the management uses as a result of their response strategy to regulatory pressure, can be related to the type of controls they use to steer their processes. Tension exists however, to what extent the response tactics match the intervention focus in redesigning the MCS. For this purpose, the institutional antecedents (Oliver, 1991) can be linked to intervention focus (Simons, 1995) by means of the predictive factors, see Table 1 for the mapping constructed. Per response strategy high estimates on predictive factors of Oliver are related to Simons’ MCS intervention focus as best fit per predictive factor (e.g. efficiency can be explained as a focus on performance, thus critical performance would be the most logical intervention focus for an

a cq u ie sc e n ce co m p ro m is e a v o id a n ce d e fi a n ce m a n ip u la ti o n Regulatory pressure

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acquiescing response to regulatory pressure) . This mapping of predictive factors facilitates plotting of the propositions as developed later in this study.

Predictive factor High estimate for response strategy Best fit MCS intervention focus

Legitimacy Acquiescence Core values

Efficiency Acquiescence Critical performance variables

Multiplicity Compromise, defy Strategic uncertainties

Dependence Compromise Strategic uncertainties

Consistency Acquiescence Critical performance variables

Constraint Avoid, Manipulate Risks to be avoided

Coercion Acquiescence Risks to be avoided

Diffusion Acquiescence Core values

Uncertainty Avoid Strategic uncertainties

Interconnectedness Compromise Core values

Table 1: From predictive factors to intervention focus

Redesigning the MCS is studied as a concept that sets a focus on critical performance in the financial sector as a starting point. Alternative standards for management control are defined using Simons Levers of Control Framework in the remainder of this chapter in an effort to identify links between the response strategy and tactics of the management and the possibilities to redesign their MCS, as summarized by the conceptual model of this study in Figure 2.

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The links are plotted as propositions (indicated as p#) the propositions are theory based and explained in the remainder of this chapter. In the next section the historical focus on critical performance variables by FS companies is explained.

Focus on critical performance variables

A redesign of a management control systems could mean a lot of things. A common denominator can be found in the fact they focus on keeping the company in control. Good control means that management can be reasonably confident that no major unpleasant surprises will occur (Merchant & van der Stede, 2012). But as described above, unpleasant surprises did occur. Therefore, in the Netherlands, licenses to operate for FS companies depend on the ability to demonstrate that the FS company has appropriately addressed risks within its business model (Neretina, Sahin, & De Haan, 2014). In order be in-control PPs, as other FS companies, aim to mitigate risks by implementing management control frameworks. Most control frameworks in financial services are based on the COSO model (COSO, 1992). A very brief summary of COSO could be the following. Control frameworks fit business processes, are tied to risks in these processes identified in a risk assessment, specify objectives to be met related to the risks, underpinned by controls and activities aiming to mitigate (part of the) risks by reducing the chance on fraud, perverse behavior and incentives, and failures to the lowest possible or to limit its impact and ensures compliance with applicable law and regulations.

However, the COSO framework leaves room for interpretation. In addition management can prioritize other items over a well-functioning management control system. Management control systems are the formal, information-based routines and procedures managers use to maintain or alter patterns in organization activities (Simons, 2000). Maintaining or altering patters in organization activities could be a management response to increased regulatory pressure. To clarify and categorize management interventions, this study uses the Levers of Control (LOC) framework by Simons, see Figure 3. The ellipses depict the intervention focus for the MCS and are related to management responses to regulatory pressure (See Figure 3). A shift in intervention focus is identified with help of Merchant’s control elements (See Appendix 2: Coding tables for answers to the questionnaire and (Merchant & van der Stede, 2012)).

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Historically, FS companies are likely to focus on critical performance variables. Profit after taxes, return on investment, working capital ratios, earnings per share and many more financially oriented KPI’s are paramount in decision making for business strategy. Diagnostic control systems focus on what Kenneth and Merchant define as result controls. Result controls are indirect controls with a focus on the outcome or consequences of actions rather than actions or decisions themselves linked to accountability by rewarding and punishing individuals for generated results and empowering employees to take whatever actions they believe will best produce the desired results. Pay-for-performance is a prominent example of a result control because it involves rewarding employees for generating good results. Advantages of result controls could be they allow for decentralization, autonomy, and the implementation of incentive systems, However, the recent financial crisis has thrown performance, into sharp relief, where rather than producing good results, pay-for-performance systems were said to have bred “bonus cultures” of breed and short-termism (Merchant & van der Stede, 2012). Also in the longer run bonuses can work adversely, since the number of uncertainties increases (De Graaf, 2014)

This would leave management of FS companies with an interesting challenge. Pay for performance might incentivize best since goal congruency is created between the company’s goals and the goals of the individual. Merchant and van der Stede argue this can be summarized as ‘what you measure is what you get’. They attribute the design of the desired performance dimensions is critical to employees in shaping their views of what is important and argue congruency is one of the main determinants of the effectiveness of result controls (Merchant & van der Stede, 2012). But the

Strategic Uncertainties Critical Performance Variables Core Values Risks to be Avoided Business Strategy Interactive Control

System Diagnostic ControlSystem

Belief System Boundary System

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lacking and failed in abstaining FS employees to pursue activities harmful to economy and society at large. FS managers might have defined result (and result controls) too narrowly. The result itself could be more than Earnings Before Interest and Earnings per Share and the controls might not cover fully the desired behavior and compliancy to regulations. This is confirmed by Hall who argues inadequate attention devoted to the detailed practices through which accounting information, as generated by critical performance variables, is actually used by managers in their work. Because managers primarily use accounting information to develop knowledge of their work environment rather than as an input into specific decision-making scenarios. On the other hand Hall argues accounting information is just one part of the wider information set that managers use to perform their work, it is imperative to consider its strengths and weaknesses not in isolation but relative to other sources of information at a manager’s disposal (Hall, 2010). This would mean the purpose of the information out of critical performance variables might not be well understood, and the information itself might not be sufficient in address all control issues at the manager’s plate. As Hall suggests, critical performance variables should be considered relatively. Accounting Information Systems (AIS) should provide the information on the financial performance indicators. According to theory, AISs are implemented into organizations to serve two functions: (a) to facilitate decision making or what is often referred to as decision management and (b) to control behavior. Accounting, it is argued, serves the decision management function by providing information to reduce ex ante uncertainty (Abernethy & Vagnoni, 2004; Zimmerman & Yahya-Zadeh, 2011). Thus, financial reports should include this information that enables the management to steer their companies. The design criteria of this information in AISs, adopted from Abernethy and Vagnoni, influences the decision making by managers and can substantiate P1:

P1: When the management perceives performance variables as critical due to regulatory pressure, the greater the likelihood they use on diagnostic control systems to facilitate decision making.

In the next section it is argued that next to critical performance variables, risk avoidance, strategic uncertainties and core value can guide direction for management responses to challenged posed by the financial crisis and intensified regulations.

Alternative management responses defined

Simons LOC framework could be an answer to the challenge addressed by Hall and be impacted by intensified regulation. It shows critical performance variables are certainly not the only route to a management control system. Regulatory pressure could be related to other issues in Simons’ framework more prominently, asking for other management control systems. Strategic uncertainties could be initiated by the imposed regulation itself, are the financial companies able to stay in business? Core values can be at the very start of the crisis asking for more regulation, since moral

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been insufficiently addressed by the managers of the financial service companies. This study uses and extends the Levers of Control Framework to investigate if regulatory pressure creates a sense of urgency among managers of the PPs to change their control framework. Regulatory pressure could have created momentum for managers of the PPs to focus on other elements than financial results in their AIS.

The object of intervention, the ‘management control framework’, can be conceived broadly. For FS companies it is vital to demonstrate to their clients and the regulators they are in-control. A widely used standard to do this is an ISAE 3402 report. This ISAE report deals with assurance engagements undertaken by a professional accountant in public practice to provide a report for use by user entities and their auditors on the controls at a service organization that provides a service to user entities that is likely to be relevant to user entities’ internal control as it relates to financial reporting(IAASB, 2011). Because of the close relation for FS companies between management control and the ability to demonstrate this to both clients an regulators, for this study the ISAE reports of the FS companies is considered as their current management control system complementing their AIS. In the ISAE report, PPs include a framework of objectives for their processes, for which controls are defined; the MCS. In responding to regulatory pressure, it could be imperative for managers to redesign this MCS. Implementation of this response is considered in the next section.

Implementing alternative management responses

When management responds to regulatory pressure, the tactic could mean to change their MCS. To what extent do these tactics align with the focus of the intervention? In this section, implementation guidelines are presented for each of the control levers, leading to a proposition per control lever that link response strategy (Oliver, 1991) to the implementation focus (Simons, 1995) to the change in the MCS (See Appendix 2: Coding tables for answers to the questionnaire and (Merchant & van der Stede, 2012)). The propositions are plotted in underlying theoretical models.

Strategic uncertainties

The objective of controls addressing strategic uncertainties is to ensure the performance of the strategy (Tessier & Otley, 2012). Strategic uncertainties can arise from many situational factors that affect MCS choices. Examples of factors that could trigger interventions by management are differences in aspects of national culture; differences in the structure, stability, size, growth, competition and regulation of industry and market; differences in aspects of the ownership, size, strategy, and culture of the organization; differences in production or service process complexity, technology, interdependence, or routineness; and differences in management and employee experience, skills and training (Chenhall, 2003). Of course, this list is incomplete and even if it was not, this study cannot address all of the items in it. Most important for the research question

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the institutional factor relating to uncertainty as ‘context’. More specifically, what is the environmental context within which institutional pressures are being exerted? This makes this factor a contingency for PP managers. Next to assessment of contingencies, vision for the future is the other aspect that is defined by Simons as the joint function for managers addressing strategic uncertainties (Simons, 1995). Dealing with uncertainty in knowledge intensive firms, such as financial services, requires MCS to enhance knowledge integration (Ditillo, 2004). Knowledge integration is facilitated by interactive control systems. Knowledge integration should facilitate research and development of innovative products. The distinctive feature of R&D tasks which potentially influences the effectiveness of accounting controls is, at least in some cases, their lack of routineness (Abernethy & Brownell, 1997). Interactive control systems are aimed at measuring and steering operational processes so they contribute to the company’s strategy. Simons defines interactive control systems as formal information systems that

managers use to involve themselves regularly and personally in the decision activities of subordinates. Key elements of management responses to strategic uncertainties would be assessment of contingencies, vision for the future, knowledge integration, personal involvement and a regular routine. All these would work out best in a situation where perceived uncertainty is high and interconnectedness is high. Compromising response strategies can be related to tactics of ‘balance’, ‘pacify’ and ‘bargain’. Respectively, balancing of expectations of multiple constituents, Placating and accommodating institutional elements, or negotiating with institutional stakeholders (Oliver,

1991). All of these tactics do require regular involvement by the management and provoke support for emergence of new initiatives. These insights formulate P2:

P2: When the management perceive strategic uncertainty due to regulatory pressure, the greater the likelihood they use interactive control systems to create internal commitment to accommodate institutional elements.

Figure 4: Model of strategic responses to uncertainty (Oliver 1991)  Avoid  Acquiesce  Compromise High Moderate H ig h M od er at e Uncertainty In te rc on n ec te d n es s L ow  Defy  Manipulate Low

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Risk to be avoided

Risk management is an integral part of management control. Managers should periodically assess risks for their business processes. Risk assessment is the identification and analysis of relevant risks to achievement of the objectives, forming a basis for determining how the risks should be managed (COSO, 1992). Risk management is becoming an increasingly sophisticated and central function within financial institutions. In pension funds, risk management involves the measurement and assessment of pension fund risks and the design, monitoring and revision of the fund’s parameters (contributions, benefits, and investments) in order to

address these risks in line with the funds’ objectives (Blome et al., 2007). Anticipation and proactivity are two important traits for managers in this process. Simons defines these as boundary systems. These can be very important in the whole process of risk management, but equally run the risk of preventing managers potentially taking actions that may, in fact, be necessary and appropriate (David Otley, 2003). The institutional factor Oliver mentions here is labeled ‘content’; to what norms or requirements is the organization being pressured to conform? (Oliver, 1991). Boundaries set by regulators can be discretionary constraints and can be inconsistent with the organization’s goals. Compliance in this view is a loss of discretion and an admission of limited autonomy. (Pfeffer & Salancik, 1978). Next to obeying rules and accepting norms, labeled ‘comply’, Oliver identifies ‘habit’ and ‘imitate as possible response tactics in this perspective. Habit lets the manager follow invisible, taken-for-granted norms, whereas imitate lets the manager mimic institutional models. These tactics refer to a situation where compliance is imposed on the organization, and thus to be adhered to by managers. Adherence in the organization is likely to be enforced by boundary setting, linked to punishment when crossing these. This is reflected by P3:

P3: When management perceive risks to be avoided due to regulatory pressure, the greater the likelihood they use boundary control systems to facilitate compliance.

 Defy  Manipulate High Moderate H ig h M od er at e

Consistency with organizational goals

D is cr et io n ar y co n st ra in ts im p os ed  Acquiesce L ow  Avoid Low  Compromise

Figure 5: Model of strategic responses for risks to be avoided (Oliver, 1991)

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Core values

Recently integrity and ethics of FS employees are often related to the financial crisis and increased the need for supervision and regulation. Integrity and ethics are part of the control environment (COSO, 1992). Culture and values of the employees play an important role in knowledge intensive firms. Culture is defined as a filter for perceiving the environment. In that sense, culture is a conceptual system which, when combined with personality, sets the action and decision premises for individuals within a given culture group. In this way, culture can be viewed as one of the forces guiding human decision making (Birnberg & Snodgrass, 1988). This guidance serves both internally within the organization, as well as externally in relation to the organization’s constituents.

Internally, group dynamics are important in cultural control. Autonomy, strong social relations, interesting work tasks, integrity and self-respect can play a role (Alvesson & Kärreman, 2004). Conflicts between professional and corporate ideals often make people unwilling to sacrifice professional values and autonomy for increased financial rewards (Covaleski, Dirsmith, Heian, & Samuel, 1998). Here, the bonus culture by Merchant and

van der Stede would be disputed. Managers must analyze the core values to understand the extent to which they are in tune with the desired strategic direction (Simons, 1995). Understanding of key values and promoting them via tone at the top would be key element for leveraging the potential of core values internally. This interplay is simplified by Birnberg to the set of norms and values which the managers and workers bring to the job, rather than the norms and values which management and/or the workers develop in their work environment (Birnberg & Snodgrass, 1988), see Figure 6. This requires internal cooperation. Cooperation refers to the group or cultural norm that causes the individual to be concerned about the effects his or her actions have on the welfare of others. Cultural controls allow a certain (minimal) deviation from

the abovementioned internal goal-congruence of the employees. Cultural controls are designed to encourage mutual monitoring, a powerful form of group pressure on individuals who deviate from the group norms and values. Therefore, cultural controls effectively work in groups with high emotional ties and/or a high degree of reciprocal dependency (Strauß & Zecher, 2013). The other factor is the amount of homogeneity of the organizational culture. The presence of a homogeneous culture should mean that the workers possess a common set of values.

Coordinate to stimulate sharing common set of values Motivate to avoid conflicts between professional and corporate ideals High Low H et er og en eo u s H om og en eo u s

Value placed on cooperation

C

u

lt

u

re

Figure 6: Model Culture and cooperation (author’s interpretation, based on Birnberg & Snodgrass, 1988)

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Organizations that are highly cohesive and that have strong internal cultures may be more prone to resist external expectations and beliefs of constituents (Oliver, 1991). It requires a continuous evaluation of the alignment of institutional constituent objectives and the objectives of the organization. Accordingly, the choice between acquiescence and more resistant strategies will depend on the degree to which the organization agrees with and values the intentions or objectives that institutional constituents are attempting to achieve in pressuring the organization to be more socially or economically accountable. In this perspective, employees can be seen as

one of the constituents. Similar to P2, Compromising response strategies can be related to tactics of ‘balance’, ‘pacify’ and ‘bargain’. Respectively, balancing of expectations of multiple constituents, Placating and accommodating institutional elements, or negotiating with institutional stakeholders (Oliver, 1991). Interventions focusing on core values and constituents are addressed in P4.

P4: When the management perceives a focus on core values due to regulatory pressure, the greater the likelihood they use belief systems to shape values and criteria.

The alternative management responses focus on the content of the matter to be implemented. The propositions developed are substantiated by questions as found in appendix 1. The evaluation of actual method of implementation shapes the last proposition for this study.

 Avoid  Compromise High Moderate H ig h M od er at e

Multiplicity of constituent demands

D ep en d en ce on in st it u ti on al co n st it u en ts  Defy  Manipulate L ow  Acquiesce Low

Figure 7: Model of strategic responses to a focus on core values (Oliver, 1991)

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Evaluation of the implementation method

Whereas the alternative management responses provide guidance for the content of the measures, rebalancing relates to proportions, interdependencies, and continuous improvement of interventions. According to Ittner and Larcker, doing right and doing wrong is the simple premise of rebalancing (Ittner & Larcker, 2003), see Figure 8.

The power of this model lies in the focus it has on linking financial and non-financial measures. Both are needed but need to reinforce each other rather than contradict. For this study this means the MCS complements performance data out of the AIS. In P5 the best implementation method to do this, according to Ittner and Larcker, is suggested.

P5: In redesigning their MCS because of regulatory pressure, the management use information based causal models continually refined by actions based on these findings.

This study’s research design is explained in the next chapter. Afterward the results of the proposition evaluation are presented.

DOING WRONG

• Not linking measures to

strategy

• Not validating the links

• Setting the wrong

performance target

• Measuring incorrectly

DOING RIGHT

• Develop a causal model

• Gather data

• Turn data into information

• Continually refine the model

• Base actions on findings

• Assess outcomes

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4. Research Design

To study the potential change in control systems in the previous chapter propositions are developed. In this chapter the research scope is explained and the research design is presented.

Research Scope

To mitigate the effect of sub-industry differences, which could bias our research question to be answered, this study focusses on pension providers. The pension sector has gained increased attention because of the aging of the workforce and its increasing amounts of funds to be administered and invested. Three different Dutch PPs are the scope of this study. They all administer pensions in the Netherlands and have an in-house asset management department. See Figure 9 for key figures of the three PPs.

PP 2013 2012 Operational result (€ 1000) A 193000 222000 B 94 1017 C 4651 4597 Balance total (€ mln.) A 4629 5221 B 12 12 C 174 118 Employees (FTE) A 3848* 4117* B 120 114 C 1179 1068

* only available in #persons

Figure 9: Key figures for the three PPs (annual reports)

-100% -90% -80% -70% -60% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% PP-A PP-B PP-C

% change in key figures for three PPs (2013 vs. 2012)

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Research design

In the introduction the conceptual research design is developed. In this section is outlined how this conceptual research design is based research questions and can be linked to the research model. For the research design of this study a 4-step approach is taken based on Verschuren and Doorewaard comprising of the following steps (Verschuren & Doorewaard, 2000);

1. Research objective, 2. Research model, 3. Research questions, 4. Research definitions.

This study uses the responses to institutional pressure developed by Oliver and Simons LOC framework to evaluate the potential change in management control systems, complemented with theoretical insights from other prominent MCS scholars such as Merchant and Van der Stede. In the development of the propositions, various other scholars are used to model and found the propositions and to link them to regulatory pressure.

Research Objective

The research objective of this study is to contribute to our understanding of the response to intensified regulation on by an evaluation of interventions to redesign management control systems. This is done for a scope in the Dutch pension sector as defined above. For the PPs propositions are formulated to evaluate how they relate to the intervention focus.

Research Model R eg u la to ry p re ss u re Closed questions questionnaire AIS Critical performance variables MCS relevant decision variables Implementation method PPA Qualitative analysis feedback Overview and evaluation of interventions in relation to propositions PPB PPC Response strategy and tactics

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This study is conducted in a structural way using the research model above. In this research model a broad outline is sketched using literature constructs and practical insights. In the research model the technical design of this study is described, see Research Figure 10.

In this study a questionnaire is developed containing both closed and open-ended questions. All questions are founded in theory presented in chapter 3. The closed questions are used to enable distinct choices for respondents for particular control types or response tactics. The open ended questions are used to gain additional insight on the specific area of questions. Reflection is facilitated by a feedback request on the preliminary results to all respondents. Interviews with the accountant of the PPs are also conducted for triangulation purposes; counterbalancing the management views. In figure a visualization is made of the understanding developed in this study.

Research Questions

This study explores regulatory directions in the Netherlands and different options to respond for management of FS companies. However, it remains questionable whether a management response to increased regulatory pressure leads to redesign of their control systems, if is the right approach, if it is enough, or may be too much? This leads to the main research question for this study:

FS company A

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How does the management of pension providers respond to increased regulatory pressure by redesigning their management control systems?

This study aims to contribute to theory by linking options to respond to regulatory pressure to possible interventions in MCSs. In order provide an answer to the question above, an understanding is needed of concepts in literature, the research method needs to be developed and practice needs to be linked to theory. This is done in a 3-step approach using, theory, practice and analysis by support of the following sub-questions:

1. What are the relevant theoretical insights on responses to institutional pressure and the design and use of management control systems? This question is answered in chapter 3. 2. What interventions are possible for redesigning the MCS of PPs? Propositions are developed

in chapter 3.

3. What response tactics to regulatory pressure are used by the management of the PPs? Analysis of results is performed in chapter 5.

4. How do response tactics link to interventions implemented by managers of the PPs? Analysis of results is performed in chapter 6.

5. How do these response tactics and interventions support the propositions developed? The fit of the response tactic and interventions is linked to the propositions is presented to the conclusion in in chapter 7.

These five sub-questions are formulated to lead to an answer for the main research question which is derived from the research objective. Together with suggestions for further research, the conclusion forms chapter 7.

Research method

In this research, first a literature review is conducted to identify and understand the core concepts of management control frameworks. This understanding facilitates categorization of these frameworks and conceptualization of possible interventions in an effort to address shortcomings in light of the financial crisis. The literature review aims to answer research question 1 and 2.

This study is designed as a hierarchical comparative case study. In such a study, separate cases are studied independently in an effort to provide a profound comparison of determinants of the research object (Verschuren & Doorewaard, 2000). For this study, propositions derived from theoretical insights from the literature review are evaluated with case study insights for PPs.

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As appears from the research addressed above, other controls could be complementary to critical performance variables, such as people controls. These elements are evaluated for each PP studies in a structured in-depth interview is conducted with management containing questions (see appendix 1) substantiating the propositions developed. In the interviews conducted is related to the to the aspects of the conceptual research model, see Figure 2 and the research design, see Figure 10. In the interviews both closed-end as well as open ended questions are used to facilitate clear distinction between choices and to enrich the results. Feedback of findings is performed to clarify interpretation and gather more qualitative data. This sections aims to answer research question 4.

Research question 5 is addressed in the last section of this study. A synthesis is provided of the findings from the interviews is performed and an answer is provided to the main research question is presented. In this manner, the determinants of control frameworks are linked to response tactics and interventions deemed necessary by the management. An evaluation of the match between response tactics and the intervention focus is provided in this study to help managers to focus on key aspects of change. A discussion of the results limitations of this research is included as well as suggestions for future research.

Data collection and triangulation

This study is designed as a case study. In depth interviews are conducted with a limited number of respondents. In Table 2 an overview is presented of the interviews conducted.

In order to substantiate results and to establish validity of this study triangulation is performed. Central question here is whether the findings of the study are true and certain. "True" in the sense of your findings accurately reflecting the real situation. "Certain" in the sense of your findings being backed by evidence. Triangulation can be defined as method to establish the validity of a qualitative study by the use of multiple data sources, methods, investigators, theories or environments (Guion, Diehl, & McDonald, 2011). The use of multiple methods, or triangulation, reflects an attempt to secure an in-depth understanding of the phenomenon in question. Objective reality can never be captured. We only know a thing through its representations (Denzin, 2012).

For this study data triangulation, environmental triangulation and methodological triangulation is used. Interviews are checked with annual reports and ISAE reports (data triangulation). In the interviews, open ended and closed end questions are asked and a feedback session on the answers is

Interview with Date Time

Manager PPA 17 November 2014 11:00-12:00

Accountant PPA 4 November 2014 16:00-17:00

Manager PPB 4 November 2014 10:30-11:30

Accountant PPB 21 November 2014 9:00-10:00

Manager PPC 3 November 2014 10:00-11:00

Accountant PPC 24 November 2014 10:00-11:00

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the accountants as well as the management and by performing site visits observing the employees of the PP-managers by the author of this study (The PPs in this study are clients for which I work in yearly ISAE engagements). See Figure 12 for an overview of the data collection as conducted for this study. In the next chapter the results are analyzed. In this analysis triangulation is used consistently to check the responses from the respondents. Result are related and checked in accordance to the number of stars (*) in Figure 12. For example claims from the manager are checked with claims from the accountant as environmental triangulation (***). In this way, three types of triangulation are performed and the validity of the results is established. Figure 12: Triangulation in data collection

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5. Analysis of case study results

For the PPs in this study, the interviews conducted are grouped per PP. The response to the questions asked, see appendix 1, and is analyzed for the manager and the accountant. Results are described, inconsistencies are interpreted and different answers to the same questions are identified. First, overall results are presented to identify similarities and differences among the PPs. Secondly, the results per PP are discussed separately. All results from the interviews are triangulated with other sources and settings. In the section of feedback and additional insights open ended questions are addressed. In this way, an understanding is developed how management of the PPs responds to increased regulatory pressure by redesigning their management control systems.

Overall results

As mentioned in the annual report of PPB “Remarkably, we have to put a lot of effort in compliance with regulations and its bureaucracies. This hampers our options to improve our services. An example is the request of the AIFMD permit” (PPB, 2013a). When faced with new external regulations, the management of the PPs interviewed for this study react differently in the scope of redesigning their MCS when they are confronted with new regulations. Within their organization, 3 of respondents believe they need completely new processes, where one manager wants to the minimum necessary at the lowest aggregation level according dependent on the nature of the change in the control framework, The other two managers want to either define new controls or to define new objectives. Planning, resource allocation, hiring of external experts, all can vary as a result of the chosen approach.

Also the external responses differ over the PPs. As can be observed in Figure 13, half of the respondents focus on stakeholder consultation when faced with new external regulation. Two respondents believe the rules and requirements can be contested, and one respondent argues their role is to shape values and criteria by using influence. PPA considers successful implementation of new regulations (EMIR) as one of the highlights of their stakeholder driven transformation program in 2013. (PPA, 2013b). When linking the LOC framework to the introduction of new regulations, the responses show mixed results. In Figure 14 can be observed respondents can hardly agree

Figure 13: External approach for MCS intervention when facing new regulations

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the introduction of new risks by the new regulations. Attention to core values are the least related to new regulations and strategic uncertainty is attributed by half of the respondents to the introduction of new regulations. Interwestingly, in their ISAE reports, all 3 PPs have separate sections on codes of conduct and all relate this directly to regulations. PPC most explicitly mentions “From employees it is expected they behave in letter and spirit of law and regulations” (PPC, 2013b). In a site visit at PPC, employees of the investment administration add they feel their daily business becomes increasingly difficult because of all the new regulations. The IT department notes the in-house developed pension administration can hardly keep up with all the new regulations. In the sections in the remainder of this chapter, results are analyzed per PP.

Results PPA

For PPA, both the manager and the accountant believe it is necessary to design new processes since they perceive new risks when faced with new regulations. According to both respondents (manager and accountant), regulatory pressure means PPA should implement new processes in their MCS to address this new risk. However, in PPA’s ISAE report, tax reclaims (due to regulatory changes) have been implemented as a new objective under the corporate actions process (PPA, 2013b). The preferred method of implementation of new processes differs however. Where the manager would like to contest the rules and amend the requirements, the accountant believes the stakeholders should be consulted to balance expectations.

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In Figure 15, the manager appears to be less satisfied with the financial reporting than the accountant. The manager receives periodical reports, but he mentions these reports do not provide the precise information needed, whereas the accountant believes the reporting provide clear and sufficient information and are precisely what the manager needs. Both the manager and accountant agree the reports are timely. Despite the shortcomings addressed by the manager, he is still overall satisfied with his financial reports, in line with the accountant. These results from the closed questions are elaborated in the last paragraph of this chapter.

The focus of the current MCS of PPA is on risks to be avoided. The manager and accountant somewhat agree that because of new regulations the MCS should be changed. The manager feels the need to change towards critical performance variables. He wants more congruent and complete definition of the desired results. Where the accountant remains with risks to be avoided as focus of the new MCS focusing on administrative behavioral constraints. As response tactic to new regulations, the manager wants to challenge the regulator and the accountant chooses to comply for PPA.

If strategic uncertainty is perceived by PPA, the development of routines is important in changing the MCS. In site visits at PPA, it is observed employees tend to rely heavily on routines. New ways of working and IT-systems are embraced slowly and with skepticism. Some employees might feel their

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visible as a rise in automation costs in 2013 of 14% compared to 2012, the largest rise in the category ‘other business costs’ (PPA, 2013a). As a response strategy to strategic uncertainty because of new regulations, the manager chooses to assault the source of institutional pressure, and the accountant responds PPA mimics institutional models implemented via formal administrative procedures.

When the manager of PPA perceives risks because of new regulations, he chooses to balance the expectations of PPA’s stakeholders. He also considers this process to have room for negotiation, given his ‘bargain’ response tactic. The accountant keeps relying on boundary systems with frequent and detailed controls using a ‘comply’ response tactic.

In case new regulations would increase the focus on core values of employees, the manager and the accountant choose for norms and values to be developed within the company. The manager mentions this should be facilitated by stimulating of sharing a common set of values, but the accountant focusses on alignment of corporate and individual ideals. The response tactics both the manager and accountant mention in this context are ‘habit’ and ‘escape’. They both want to change goals, activities or domains and follow invisible taken-for-granted norms.

In general, the results suggest that the manager of PPA tends to rely more on active response strategy; defiance. The accountant believes the response PPA’s management can be characterized more as an acquiescing strategy.

Results PPB

The results of PPB show a different picture then for PPA. As can be observed in Figure 16, the manager and accountant only agree on the clarity of the information in the financial reports. The manager and the accountant of PPB agree the stakeholders should be consulted to balance expectations when the company faces new regulations. This is confirmed by the periodic meetings hosted by PPB in which they discuss developments with their clients and accountants. PPB also organizes meetings to inform participants in the funds they administers periodically. For the internal organization, the manager believes it is important to consider the nature of the change in relation to the control framework. This affects the way the new regulations are implemented. According to the manager, an impact assessment should be made in order to determine if new completely new processes are appropriate, or the new regulation can be covered in existing structures. The manager stresses to do doing the minimum necessary at the lowest aggregation level possible. The accountant here deems it appropriate to design new processes for new risks for each new regulation.

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The extent to which the financial reporting is adequate differs between the manager and the accountant.

Timeliness, content, accuracy and preciseness are all elements of the financial reporting the manager

and accountant cannot agree on. In general, the manager seems less satisfied than the accountant, except for the preciseness and content of the information.

The manager believes the current focus of the MCS is on risks to be avoided. This focus is not translated into the organization as PPA and PPC do. PPA and PPC chose for the three lines of defense model (business control, risk management and internal audit), where PPB opts for an independent control department responsible for all risk and control related issues directly reporting to the management (PPB, 2013a). The accountant believes the focus of the MCS is on critical performance variables. The manager and accountant both strongly agree the MCS needs to be adjusted when new regulation is effective for PPB. The manager remains with a risk-based approach, where the accountant advocates a redesign of the MCS that incorporates strategic uncertainties better. However, the questions to which elements the focus redesigning the MCS should be directed, indicate the manager, as well as the accountant, choose for elements related to diagnostic control systems. They also agree this is best done in a compromising response strategy by balancing the expectations of multiple constituents and placating and accommodating institutional elements.

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If strategic uncertainty is perceived by PPB, the manager chooses focus elements of the intervention that would mean a switch from a risk-oriented MCS to a more interactive MCS supported by elements of a belief system. In this situation, the manager deems it appropriate to assess contingencies and to communicate vision to the employees. The accountant relies on administrative procedures to address the strategic uncertainties in combination with negotiation with institutional stakeholders. The manager opts to mimic institutional models.

The perception of risks to be avoided because of new regulations would cause the manager of PPB to focus primarily on being compliant. Compliancy can be enhanced by implementation of policies. This is in line with PPB’s ISAE report. A search for the word ‘policy’ results in 73 hits for PPB, compared to 13 and 32 hits for PPA and PPC respectively (PPA, 2013b; PPB, 2013b; PPC, 2013b) . Obeying the rules is the most important aspect in this context. The accountant sees PPB focusing more on balancing expectations among constituents and seeking the dialogue with the regulator. The link to control elements in this situation, would be precise performance targets to the manager, where the accountant stresses the importance of frequent and detailed controls on boundaries set.

The manager and accountant agree attention to core values would mean for PPB it focusses on norms and values to be developed in the company. The accountant considers PPB uses a challenger to the regulator since PPB contests rules and requirements. The manager considers PPB as less active, since it is important to address core values in a way that stakeholders are consulted to balance expectations. The manager believes this process is best facilitated by aligning individual and corporate ideals, where the accountant chooses for a bottom up process of stimulating of sharing a common set of values.

Results PPC

For PPC, the manager and accountant cannot agree on any of the aspects of the financial reporting. The manager and accountant differ in views how to intervene in the MCS when PPC faces new regulations. The manager chooses adjustment of controls in existing processes and objectives, while the accountant suggest to change in the objective-level. The manager considers PPC to be able to contest the rules and requirements of new regulations in a defiance strategy, where the accountant considers an even more active role for PPC by a manipulation response strategy in which their role is to shape values and criteria by using influence. This strategy is also to be found in the annual report of PPC. One of the strategic routes of PPC is to engage proactively in dialogues about innovative solutions, where new pension rulings are a separate business case and compliance is a boundary condition (PPC, 2013a).

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Figure 17 shows the manager is not satisfied with the financial reporting in relation to new regulations. On all aspects he totally disagrees financial reports properly reflect new regulations for PPC. The accountant also is critical on the financial reporting for PPC, but is satisfied with their accuracy and timeliness. The annual report shows PPC has installed separate committees on financial aspects, such as an investment committee and valuation committee. PPC also considers financial reporting risk as a separate business risk (PPC, 2013a). Despite this attention, still the reporting is perceived insufficiently connected to new regulations by the PPC’s manager.

Where the manager believes the current focus of the MCS are risks to be avoided, the accountant considers critical performance variables as the focus of the MCS. They both strongly agree the MCS should be changed is situations of regulatory pressure. They also agree on the elements to be focused on for the intervention, namely congruent and complete definition of the desired results and understandable performance targets. However, the response strategies selected, ‘comply’ and ‘balance’, are theoretically not the best fit with diagnostic control systems.

In situations of strategic uncertainty related to regulatory pressure, the manager and accountant agree for PPC the response tactic ‘bargain’ is most appropriate. They both focus on the communication of vision which is a belief system element. Where the accountant considers formal administrative procedures as last element of focus in this context, the manager chooses for

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implementing a web-portal where employees find the latest version of policies for their area of expertise. They also are involved more actively in the different audits via a workplan shared via a digital environment to execute the controls as specified by different audits (e.g. ISAE). In this way knowledge integration and control-awareness are enhanced.

When new regulations are related to new risks for PPC, the manager and accountant both confirm their defiance and manipulation response strategies when asked for the management style for PPC. The manager and the accountant agree in the context of risk because of new regulation, the most appropriate response is to balance expectations of constituents and to follow up audit findings.

When attention to core values is related to regulatory pressure, the manager and accountant have different views on what would be the focus of the interventions but agree on the best response strategy. They both agree a compromising strategy would be most appropriate, but the manager chooses to focus on aligning individual with corporate ideals and norms and values to be developed in the company. The accountant believes interdependency of employees and reducing group pressure by peer monitoring is more important. This is confirmed by PPC’s ISAE report, where periodic team meetings are explicitly mentioned to measure progress, facilitate decision making, and monitoring follow up of actions (PPC, 2013b).

Implementation method

All respondents gather data, analyze reports, assess outcomes and monitor follow up actions when they changed their MCS. Causal models, and linking the measures implemented to strategy are only done by one of the respondents. Regulatory pressure is addressed ad hoc by most PPs since continual refinement of the approach is only done by 4 respondents. Validation of performance targets and measurements show mixed results.

After the results were analyzed as part of this study, they are presented in a feedback request to the respondents. In the next section, interpretation of this feedback is given to enrich the results of the questionnaire. This section also includes additional insights and examples provided by the respondents in the interview’s open-ended questions.

Feedback, additional insights and examples

The Directive on Alternative Investment Fund Managers (AIFMD) introduces harmonized requirements for entities engaged in the management and administration of alternative investment funds (AIF) addressed to professional investors in the EU (European-Commission, 2012). 4 Respondents mention AIFMD as most important new regulation with respect to financial reporting. The manager of PPA mentions AIFMD are documents for accountability purposes, while the

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the manager mentions the company’s legal structure is seriously affected because of AIFMD. PPB chooses to restructure their legal entities by splitting the current entity into 4 separate entities to distinct between the parts of the company that need to be AIFMD compliant, and other parts which do not. Besides raising PPB costs, this is not yet fully incorporated in PPB’s risk management structures and does not yet have a link to the company’s KPI’s. The accountant acknowledges these items by mentioning the risk appetite of PPB is not formally defined for new regulations. According to its accountant and its manager, the most important for PPB is to get AIFMD licensed in order to provide continuity of their business. Factors to consider in this process are the equity position and its resilience in relation to the client base. The manager of PPB has a wider perspective. She mentions the accountant could be right, but has no managerial perspective. Therefore, the accountant does not take into accounts the costs of adjustment, and does not have to realize a budget target, as given by PPB’s clients. For PPC AIFMD is not explicitly mentioned by the manager and accountant, but clearly, AIFMD impacts all the PPs severely since they all have an in-house asset management department.

The MCS is conceived differently by the managers interviewed. Both the use and scope of the MCS varies over the respondents. For PPA, the manager argues management control is broader than the ISAE report. Awareness plays a very important role in this respect according to this manager. In order to be able to select the right risks to be avoided, a top down approach should be chosen in setting performance targets. But the manager also notes bottom up approaches work better when strategic uncertainty is perceived because of new regulation. Similar to PPC’s manager who chooses a bottom up approach of control adjustment when faced with new regulation. Contingency assessment with a focus on data and information helps to implement the redesign in this situation. PPA’s accountant stresses here the importance of internal knowledge generation and sharing around the actual objective of the change in control because of new regulations. For PPC the accountant considers financial indicators to provide insight on key risks, but cannot indicate effectiveness of key controls in the processes. According to PPC’s accountant the financial indicators serve accountability purposes (similar to AIFMD for PPA), but being in-control is to be conceived broader. The manager considers the Balanced Scorecard used in the company as a very important steering mechanism in this context.

Strategic uncertainties because of new regulations make it more difficult to plan ahead according to the manager of PPB. Moreover, strategic uncertainties are not triggered by new regulation. The manager of PPB stresses it is difficult to identify the point where to start. Agreeing with the accountant, compliance risk would be the most logical. This is confirmed by internal risk assessment studies performed by PPB. According to the manager the most important here is to broaden the scope

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objectives of PPB and to formalize this feedback loop. In addition, the manager of PPC stresses decision making is mostly done based on business cases including an impact analysis, where the accountant is not present. In situations of strategic uncertainty, the manager of PPC questions whether formal administrative procedures are the best fit option to address new regulations. Literature confirms this statement and suggests to rely on interactive control systems instead where frequent dialogues with employees are key (see Figure 3). Redesign of the MCS because of strategic uncertainty should be process in the MCS itself according to the accountant of PPB. For PPC the manager makes a distinction by the size and nature of the changes to be made, also related to budgets (see above). Small IT-related changes can follow the company’s change process, where larger changes with a wider scope such as the Solvency Requirements are best implemented as a separate project. When risks are perceived because of new regulations, PPA’s manager mentions ‘trust’ as key word. Because society lost trust in the performance of the financial sector, he believes rebuilding it is essential in achieving long term objectives of new regulations. A top down approach necessary to things right in this context according to the accountant of PPA. Another top down program is initiated to focus more on soft controls. PPA aims to create a shared carry-out of core values.

PPB’s manager makes a distinction in the contestation of rules and requirements. She mentions this is merely done on the implementation process of the regulations, then on the requirements set by the regulations itself. With the aim of permanent alignment of stakeholder interests the implementation of regulations are challenged by PPB.

Regulatory pressure and intervention in Management Control Systems in financial services : from diagnostic ratios to interactive beliefs?

Master Thesis

Executive Master of Finance & Control