¶ … Beacon College, as a small institution, has encountered problems regarding its overall governance standards and accounting oversight. The empirical facts suggest that the entire organization did not have a culture of challenge and innovation. This seems at odds with the overall mandate of the college however. As a liberal arts college, it is by definition innovative and challenging. However, the empirical facts suggest that management was satisfied with the status quo. In any organization, one individual should not have all the information pertaining to a critical subject. This creates information asymmetry where the individual can use their informational knowledge to direct action from others who do not have access to the information. This appears to be an early problem of Beacon College. The CFO did not divulge information in a transparent manner and as a result, the overall financial performance of the organization suffered. Management was unable to make critical decisions regarding the future of the college. Department leaders did not have complete control of their expenses. As a result the overall viability of the college as a going concern was threatened.
The financial results suggest that the organization was spending money in a wasteful and inefficient fashion. This may have contributed to the overall lack of desire for change within the college. Management and department heads were engaged in wasteful spending that was not being properly checked....
Due to this lack of oversight, the department heads continued to spend money for the benefit of their own departments, at the expense of the college as a whole. Although not explicitly stated in the case, it is entirely possible that management used money for their personal benefit and therefore lacked the incentive to change the overall budgeting process. The empirical facts suggest this. Chart 1 below indicates the overall budgeting surplus before and after the financial change. Notice the dramatic increase in surplus once management was aware that they were being watched and monitored. The college not only lowered its wasteful spending but it also generated an addition surplus to be used for other, more profitable endeavors. The mere fact that knowing management was now evaluating expenditures ultimately helped improve the overall financial position of the college.
Notice a nearly 6 fold increase in surplus the year that budget requirements were used. In fact, the surplus derived from the 1986-87-year is in excess of all the previously reported years combined. This was not a chance occurrence. Instead, it represents a distinct focus on cost control and revenue productions.
The empirical facts also suggest that the entire organization does not have proper corporate governance mechanisms in place. Management, particularly lower level management did not want to challenge established conventions. These individuals however, possessed the information needed to arrive better-informed decisions. The department leaders did not have proper expense control mechanisms in place and were aware of their circumstances. In an effort to maintain the status quo, very few individuals actually challenged the CFO or top-level management regarding this inconsistency. The Board further exacerbated this problem. For example, the board was entirely too late in implementing a change to the overall budgeting process. This delay was…
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