Lars Östman towards a general theory of financial control

 

 

Ongoing processes and transformation 

 

A present structure satisfies present functions for many people and organisations, and there 

are also incentives for fundamental changes that may improve, more or less radically, the 

quality and quantity of functions for the future, and also modify the distribution of wealth. 

While functions are satisfied at present, the economic system is rapidly transforming, both 

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nationally and globally, including structure in vertical and horizontal terms. Organisations 

are exposed to this development, which means opportunities and uncertainties, and often 

genuine uncertainty for the future. How will identified conditions move and what will be the 

result? What impact would different actions have?  To  what  extent  is  it  possible  to  grasp 

courses of decisive events even with hindsight? Organisations may make changes in their 

structural conditions and their financial control system, and they make certain specific 

decisions, given the structure and control system as they are. 

For an organisation, the financial situation at any given point in time is part of a structural 

course that can be affected only to a limited extent by this entity. For many activities, costs 

rise gradually in relation to output or possible prices. Ongoing steps in the course may be 

conceived and described only partially. This is especially true of a turning point and what is 

later regarded as a temporary rise or fall. However, surpluses or costs often develop 

systematically, due to a number of factors outside the range of specific activities. It is 

common to find long, structural courses of events in which surpluses decrease or costs rise in 

a problematic manner. Such cost processes are important continuous driving forces for 

action, both in business groups that face international competition and in public sector 

organisations.    Of course, radically new products and new technical solutions present the 

hardest prediction problems. Not only are fundamental issues uncertain in themselves. 

Predictions are also required about what other people believe, what they in turn think about 

the beliefs of everybody else and to what extent this will form the basis of their actions.  

Analyses, information and debates about an organisation have two important conditions. 

The first, uncertainty and risk, is shared by everybody, even central executives.

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 Normally, 

uncertainty is greater or at least different for external parties; in that sense there is 

information asymmetry. The second condition is possibilities of observation. What could be 

noticed about the current situation and output, where could it be observed and how could it 

be expressed? Some circumstances are easily captured, some get major exposure and still 

others can be conceived only close-up. Measurability varies. Quality differences, in a non-

subjective form, can be attached only to some output, and in certain respects.  

Scarcity and the availability of alternatives appear for individuals, for organisations, for 

nations, for large collectives that have evolved such as Western countries together or for the 

entire unique and global system, ultimately concerning physical and biological conditions for 

the earth as a settlement. Scarcity of a certain kind can change – decrease or increase: 

innovations can make a profound difference or, instead, resources of limited magnitude are 

disposed of gradually. Alternatives can be easy to find or good substitutes may be lacking. 

Many goal conflicts in such cases concern social relations, so they are a matter of judgement 

about social order and common systems. Sometimes, relations between two parties are 

important for both, which is a prerequisite for real reciprocity. At other times, there is no 

balance. A function is significant for one party, but an individual relation is not decisive for 

the other party. In part, laws are constructed to counteract such imbalances. However, many 

relationships are not basically social. Physical and biological processes go on, irrespective of 

human perceptions and standpoints about any relations. In all courses concerning social or 

natural systems, a great deal is going on without very noticeable signs. Some forces are not 

evident until limits have been reached; before that, they may be given only minor attention.  

                                                            

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 Often distinctions are made between risk, uncertainty and genuine uncertainty. I use the term “uncertainty” as 

a general expression for various kinds of unknown or unpredictable states, irrespective of what type of variable 

is concerned.  When I make a distinction, “risk” refers to a future state where something specific may occur; 

sometimes probabilities are attached or can be attached to this.    

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Each interest is a potential driving force or obstacle for an organisation, of varying power 

and visibility. To an important extent, dependencies and underlying forces can be captured 

by identifying the various sub-processes that may arise around these interests, which are 

partially in conflict with each other, and exploring how such sub-processes are 

interconnected: between principals, board and central executives, the internal vertical 

process, the internal horizontal process, between organisation and workers, between 

organisation and buyers/users. Sooner or later, long-range cost processes tend to cause one 

interest to stand in opposition to another. 

Some of those who control an organisation and its parts have direct contact with activities 

and direct experience of them. However, much influence is exercised at a distance. To some 

extent, this is natural. The role of a board, for example, is mainly to influence, without 

having direct and continuous contact with the activities to be controlled. Board members 

should contribute other perspectives than those given by people in operative units. In 

democracies, ultimate decision-makers – the voters – are at a considerable distance from 

activities, with a few personal and occasional observations of results as exceptions.