Management Accounting For Beyond Budgeting

Case Study 1: Beyond budgeting or budgeting reconsidered? A survey of North-American budgeting practice

Discuss about the Management Accounting for Beyond Budgeting.

Topic: Beyond budgeting or budgeting reconsidered? A survey of North-American budgeting practice

Author’s Thesis: This article is based on the key role of budgeting in management control in an organization. In this paper the author has considered two arguments related to budgeting and surveyed two organizations to find the evidence for the arguments and has concluded which argument is supportive. The first arguments given in this article is that the problems with budgeting arise from the manner budgets are utilized and the second arguments is that budgeting processes are basically imperfect.

The 3 main objectives of the study were to make literature on North-American budgeting practices up to date, to gather evidence to evaluate the criticisms and to determine trends in budgeting practice to provide base for future academic research. This shows author’s concern for future studies on budgeting (Libbya & Lindsay, 2010).

As per the author, budgeting is one of the most wonderful opportunities for the managers to rejuvenate their organizations. Budgeting process is one of the most ineffective practices of the management as it consumes a lot of energy and time. Budgeting hides opportunities, big dreams and stunts growth (Hansen, Otley, & Stede, 2003; Merchant, 1990; Shields & Young, 1993).

All main ideas of the paper

To conduct the study a web based survey was conducted with the senior managers of the selected organizations. It is the best methods to collect the data from such huge audience as it saves time and cost both. Author selected two countries to analyze the trends: the selected organizations were based on US or Canada only, it must have at least 100 people employed, it must be large enough to have financial budgeting system. The questionnaire of the survey consisted of close ended and open ended questions.

To present the evidence of the arguments the author selected a huge sample size for the survey. A total of 2583 CMA members and 13,712 IMA members were selected in the target sample. Canadian survey was conducted first and based on the analysis of the Canadian survey, US survey was modified. Modifications were made to improve some measures, to eliminate non-discriminating questions and to add some new questions as per the Canadian analysis.

A total 558 respondents submitted the response for the survey out of which 346 were CMA members and 212 were US members. Out of the total respondents 51 percent of the respondents were from manufacturing industry and 49 percent of the respondents were from service industry. This shows the reliability of the data in terms of diversified industries. It means the results of the study can be applied in both the industries.

Strengths and weaknesses of the paper

To make the research reliable the author has performed primary research. Secondary research was not present in the paper. Secondary research must be present in this type of research as it provides the past scenarios related to the arguments presented in the research. Lack of secondary research has made the survey questionnaire less targeting towards the main problem.

Case Study 2: Paying People to Lie: the Truth about the Budgeting Process

The author has measured the budgeting on various parameters like company’s brand value, strategy, fixed performance contracts, adaptability etc. this shows that author interpret their arguments with supportive information. The material provided by the author was authentic, clear and accurate. The work of the author is satisfactory.

Title: Paying People to Lie: the Truth about the Budgeting Process

 Author’s Thesis: This article is based on a situation where employees in an organization lie to their superior and subordinates to achieve targets in the decided budgeting schedule. The author of the article tries to understand the reason behind this situation and then recommended some suggestions to overcome these situations. In this article the author has used real budgeting process of a company for the whole year. Presenting the whole year budget planning process before analyzing the situation is a good approach of the author. To realize the arguments the author has considered some imaginary situations that frequently occurs between a manager and his subordinates. To make his research more reliable and consistent the author has used proved statements from reliable and trusted sources like statement from the book of Adizes (1989), where he stated that the people who tells  a lie most about their inability to do, get more rewards as compared to others (Jensen, 2003).

Jensen used graphical representation of parameters like salary & bonus and performance of the employees measured by the % of budget on various schemes like curvilinear bonus schemes, fundamental sources of the incentives, pay-for-performance scheme etc. Finally, on the basis of the analysis of all these graphs Jensen stated that if manager’s compensation is independent of the budget then they have no momentary incentives to lie, to game or to omit information. This shows that Jensen performed a deep analysis at each and every level of the company from lower management to top management. Finally Jensen recommended that organizations must stop to indulge budgets or targets in the compensation formulas and promotion systems for employees and managers. Jensen supported the argument that eliminating budget and target from the organization ultimately improves integrity in the organizations. Jensen supported the statement that employees lie and in revert they get rewarded; this destroys the value of their organization (Jensen, 2003).

Other studies related to the topic was conducted by Hope and Fraser (1997), Kersnar (1999), Lester (2000), and Thomas (2000) where they conducted a study on a number of Scandinavian companies including Svenska Handelsbanken wherein they supported the argument that organizations abandoned budgeting to avoid the damaging effects of the behavior it encourages.

Strengths and Weaknesses of the research paper

This research paper has used all the theoretical aspects to prove their arguments that no practical analysis has been performed by the author to gain the actual insight of the situation that most of the companies face due to budgeting and setting targets. Although Jensen’s theoretical work is very reliable and accurate, each term related to the topic has been explained very clearly but absence of actual situation makes a weak point for the research paper as the experts believe on the factual data and practical analysis of current circumstances. Hence overall the research is theoretical significant but it could be made more reliable by adding some current situations (Jensen, 2003).

Case Study 3: Is the annual budget really dead?

Topic: Is the annual budget really dead?

Author’s Thesis: The purpose of study was to assess the validity of the criticism as seen by chief financial officers and other high-ranking officers in large Finnish companies. Bo-GoÈran Ekholm and Jan Wallin argued that in this age of information, the traditional budgeting is incapable of meeting the demands of the current competitive environment.

The motive of the author for considering this topic is the little interest of the other experts in analyzing the reason behind this situation (Ekholm & Wallin, 2000).

A very few evidence is available till yet in case of Sweden companies. Author has presented his arguments from both perspectives: theoretical and practical. To present the arguments from theoretical perspectives Ekholm and Wallin presented statements from various proved studies like Hope and Fraser (1997: 20), Gurton, (1999), Porter (1996) etc. finally on the basis of the theoretical evaluation they stated that situation is dualistic because on the one hand they found that traditional budgeting is considered as a tool for maintaining internal effectiveness while on the other hand they found that it has apparently lost its active strategic role during the 1990s (Ekholm & Wallin, 2000).

To find more evidence on the role of traditional budgeting Ekholm and Wallin conducted a primary research to get the first hand results. To get the actual insight of the company’s situation this research paper is focused on some very relative research questions which have not been answered yet by the previous researchers. A total of five research questions have been prepared on the basis of which a survey was conducted with 650 Finnish companies including some world-class companies such as Nokia, UPM-Kymmene, Stora Enso etc. this shows that this research paper has actually done some relevant work. Finally, on the basis of both theoretical and practical study Ekholm and Wallin argued that only small number of company were thinking of scraping the annual budget entirely. Although the firms have monitoring systems, continuous forecasts, and balanced scorecard, they still believe that annual budget is important in ensuring internal effectiveness. It also helps in informing stockholders and other stakeholders (Ekholm & Wallin, 2000).

Gafvelin and Kamola (1996), Lindvall (1997), and Glader, Johansson, Nilsson, Nilsson, and Samuelson (1996) supports the arguments that most of the Swedish firms use budgets as it is the primarily instrument that helps a company to achieve its internal effectiveness. Although they argued that budget does not offsets to any external effectiveness.

Strengths and Weaknesses of the Study

Overall the research paper is reliable to consider the arguments and to use them in the future studies. Ekholm and Wallin addressed all the previous questions which were not referred till yet by any of the researcher. This research papers has strongly presented all the arguments by providing enough evidence from both primary and secondary research. All the sources used by the author are credible and trusted (Ekholm & Wallin, 2000).

Topic: New Ways of Setting Rewards: The Beyond Budgeting Model

Author’s Thesis: Principles enables leaders to break free from the contracts and move to a more lean, ethical and adaptive organization. Hope and Fraser tried to come out of the budgeting model to know the new ways of setting rewards for the managers and other employees in the organization. Hope and Fraser have focused on the various incentive schemes and their effect on the overall performance of the employees and managers. As per the current available data some people believes that incentives is one of the most powerful way to improve the individual performance while other believes that it is an unnecessary bribe that force people to do what they don’t want to do (Hope & Fraser, 2003).

To reach to a trustful conclusion Hope and Fraser have considered various academic debates on the effectiveness on incentive schemes on the overall performance of the employees and the organization. Hope and Fraser have used graphical representation to show the impact of total salary and bonus on the performance outcome. In their research paper they considered some facts like why traditional approaches fail, beyond budgeting model etc. to come to a reliable solution. They argued that goal of the organizations are disconnected from the rewards. To prove their statements Hope and Fraser used a performance appraisal formula for a particular business unit. Overall by considering all the previous debates and current scenarios they concluded their final statement (Hope & Fraser, 2003).

Using the Hope and Fraser work it is possible to show that budgeting model is not the only way to reward the people but there are some other approaches also that depends upon the company, strategy, and prevailing culture (Hope & Fraser, 2003).

Kohn and some other researchers argued that motivating people by giving incentives is not an amount of motivation rather it is a type to deal with the weaken interest of the employees towards the task itself (Kohn, 1993). On the other hand McGregor’s “Theory Y” stated that people are motivated by self-esteem and the personal development not with the incentive schemes (McGregor, 1960). Jensen and Murphy stated that virtually there was no link between amounts paid to the employees and how well their companies performed for shareholders. To prove this evidence they conducted a survey in the year 1998 involving 771 companies of the UAE. Out of all companies more than two-third agreed with the fact that they did not see any connection between incentives and financial results (Murphy, 1990).

Strengths and Weaknesses of the Study

No primary research was conducted by the researchers. Evidences and facts have been collected from the debates and theoretical facts. Data used by the researchers was not robust enough to explain the complex issues related to the approaches beyond the budgeting model. Available evidences were not strong enough to justify the statement of the researchers. Limited sources were used for defining the statements. Research could be made more impressive and significant by doing a little more research (Hope & Fraser, 2003).

Title: Budgeting Gamesmanship

Author’s Thesis: The thesis of this research is related to the budgeting gamesmanship at the product level in several large, diversified companies. The reason to choose this research topic is that Christopher K. Bart analyzed the limited attention of the business writers and other academics from the games that managers play with their budgets. Only a few studies have been conducted on the topic and out of which very few were qualitative. Hence, to add some significant evidences and statements Christopher K. Bart has chosen this topic for the research. The purpose of the author to conduct this research is to present an argument that builds on the past researches. The language of the author used in the paper is objective. The charts used in the research paper are prepared as per the information collected from the managers of all the eight firms. The charts properly presented the whole information (Bart, 1988).

To effectively reach to supportive statements the researcher conducted primary research. Through past researches, the researcher has tried to verify the facts and interpret the opinion of various experts. The intended audience was clearly defined by the author. The intended audience for the research was all the product managers from eight diversified firms. An in-depth interview was conducted with each of the manager. In the final conclusion the author argued that product managers do indeed play games in their budgets. Apart from this, the author has also highlighted the facts that contribute to and facilitate the playing of budgeting games and those that frustrate and constrain their occurrence. This shows the efficiency of the author to clearly state their arguments (Bart, 1988).

A study was conducted by Derek Teshun Huang (2003) on budgeting gamesmanship of managers in firms operating in various sectors of the economy. Through this research they argued that budgetary gamesmanship behavior was related to the organizational culture and performance measurement system (Huang, 2003).

As per Odia and Okoye (2012) budgeting gamesmanship is not new. It is a routine behavior adopted by the managers to cope up with pressure during the budgetary negation process. According to them budget games are a way to achieve the set targets (Odia & Okoye, 2012).

Strengths and Weaknesses of the Study 

Data used in the study is consistent, reliable and precise. The research study is quantitative in nature and this saved the overall time and cost. No secondary information was used in the research. A total first hand primary research was conducted by the researcher. No evidences were available from the secondary research yet the research has focused on the issues that were not discussed in the secondary research (Bart, 1988).

References

Bart, C. K. (1988). Budgeting Gamesmanship. The Academy of management Executives, 2(4), 285-294.

Ekholm, B.-G., & Wallin, J. (2000). Is the annual budget really dead? The European Accounting Review, 9(4), 519–539.

Gafvelin, S., & Kamola, A. (1996). ‘Budget – till vilken nytta?’ Magisteruppsats vid Fo¨retagsekonomiska institutionen. Uppsala university.

Glader, M., Johansson, C., Nilsson, J., Nilsson, G., & Samuelson, L. (1996). ‘Ekonomistyrning i svenska borsforetag’, Rapport fran sektionen for redovisning ochnansiering. Stockholm School of Economics.

Hansen, S., Otley, D., & Stede, W. V. (2003). Practice developments in budgeting: an overview and research perspective. Journal of Management Accounting Research.

Hope, J., & Fraser, R. (1997). ‘Beyond budgeting: breaking through the barrier to ‘‘The Third wave”. Management accounting, 75(11).

Hope, J., & Fraser, R. (2003). New Ways of Setting Rewards: The Beyond Budgeting Model. California Management Review, 45(4), 104-119.

Huang, D. T. (2003). Budgeting Gamesmanship In Managers. Pan-Pacific Management Review, 6(1), 17-32.

Jensen, M. C. (2003). Paying People to Lie: the Truth about the Budgeting Process. European Financial Management, 9(3), 379–406.

Kersnar, J. (1999). ‘Re-inventing the budget’. CFO Asia.

Kohn, A. (1993). Why Incentive Plans Cannot Work. Harvard Business Review, 71(5).

Lester, T. (2000). ‘Monday management: managers count blessings as budgets begin to lose currency – some firms long for freedom from the burden of budgeting. Irish Times.

Libbya, T., & Lindsay, R. M. (2010). Beyond budgeting or budgeting reconsidered? A survey of North-American budgeting practice. Management Accounting Research, 21.

Lindvall, J. (1997). Det budgetlo¨sa fo¨ retaget’. Balans, 1, 27-30.

McGregor, D. (1960). The Human Side of Enterprise. McGraw-Hill.

Merchant, K. (1990). The effects of financial controls on data manipulation and management myopia. Accounting, Organizations and Society.

Murphy, K. J. (1990). “CEO Incentives—It’s Not How Much You Pay, but How. Harvard Business Review, 68(3).

Odia, J., & Okoye, A. (2012). Budget Gamesmanship. JORIND, 10(3).

Shields, M., & Young, S. (1993). Antecedents and consequences of participative budgeting: evidence on the effects of asymmetrical information. Journal of Management Accounting Research.

Thomas, T. (2000). ‘Toss your budget out the window’. Business Review Weekly.