If Budgets Lead to Bad Behavior, Why do Companies Still Use Them?

What is it about?

Control systems based on budget targets and budget-based incentives have long been criticized as promoting budget games. Yet, Libby and Lindsay's (2010) survey findings indicate that, on average, North American companies are obtaining "good" value from budgeting.The objective of the current study is to provide some insight into the antecedents of budget value (and gaming) using survey data collected from a sample of senior business unit managers with budget responsibility. Results indicate that a senior managers trust in lower levels of management (i.e., superior trust) exhibits a substantial positive direct and indirect (through budget games) relationship with budget value. Moreover, while budget emphasis was found to have a negative indirect association with budget value (through budget games), it had a larger positive direct relationship, resulting in an overall positive influence on budget value. Further, gaming behaviors increase with the use of budget-based bonuses, especially for capped versus non-capped bonus plans.

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Why is it important?

This study complements the recent work in management accounting examining trust and formal controls (e.g., Bol and Lill 2015; Coletti, Sedatole, and Towry 2005; Hartmann and Slapničar 2009). We find that superior trust is a substantial contributor to budget value. This finding suggests the importance of promoting trusting relationships through such practices as careful hiring and promotion practices, training, mentoring, and giving attention to the type of work experience received by subordinates. In addition, by using a mediation model to estimate indirect effects, we show a powerful mechanism – subordinate involvement in decision making – by which superior trust increases budget value.

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