Lathan Industries, Inc., is a “bottom-line” company that places great emphasis on meeting its budget. Budget proposals are submitted by managers throughout the organization, and the final budget is approved by the CEO only after extensive review and discussion by a budget committee composed of senior executives. Division managers are evaluated on budget conformity, and bonuses are paid for meeting or exceeding sales quotas and keeping costs at or below budgeted levels.
Required: What internal control issues might arise from Lathan Industries’ emphasis on budget conformity? How can an organization balance the need to achieve its strategic and operational plans with the need to promote an effective control environment?