Abstract
Budgetary slack is a heavily researched topic in the field of management accounting, but the heterogeneous nature of prior research blurs our understanding of this important topic. In this paper, we provide a structured overview of research on budgetary slack published in top-tier accounting and business ethics journals and reach the following conclusions: Participative budgeting can create or reduce budgetary slack. Less slack is created under truth-inducing pay schemes compared to slack-inducing schemes. Additionally, slack creation is affected by budget users’ risk attitudes and information asymmetry. Information asymmetry increases budgetary slack, but that effect is influenced by multiple factors, including budgetary participation and information systems. Fairness and reputation concerns decrease budgetary slack, but ethics concerns do not. Finally, the analysis revealed that social norms decrease slack and peer influence moderates the effect. We show that research in this field focuses mainly on psychological perspectives to analyse individuals’ budget-related behaviour. Experimental research was determined to be the most frequently used research method. An analysis of current experiments shows growing numbers of investigations of budgetary slack as a proxy of honesty in managerial reporting.
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Notes
Within these journals, we searched for “slack”, “budget slack”, “budgetary slack”, “honesty”, and “honest reporting”.
The sample was determined in June 2014 and updated in January 2018.
Analytical, archival, experimental, and survey-based studies are easily distinguishable. Field studies and archival research differ based on the manner in which archival work is a part of field studies. Framework-based studies differ from reviews based on the development of new perspectives, whereas review articles mainly serve to structure the previous literature (Hesford et al. 2007).
The articles are ordered alphabetically to offer a reference book setting for research methods and samples.
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Appendices
Appendix 1
Illustration by variables
Variables | |||||
|---|---|---|---|---|---|
Paper | Dependent | Intervening | Moderator | Independent | Antecedent |
Onsi (1973) | Slack attitude | Several managerial behavioural variables (e.g. slack manipulation, slack detection) | |||
Cammann (1976) | Subordinate responses to uses of control systems | Subordinate participation and job difficulty | Superior use of control systems | ||
Collins (1978) | Budgetary response attitudes (positive, negative) | Attitudes towards budget characteristics | Personal flexibility, perceived budget characteristics (e.g. accuracy), demographic variables (e.g. age) | ||
Belkaoui (1985) | Budgetary slack creation | Self-esteem feedback | |||
Merchant (1985) | Propensity to create budgetary slack | Importance of meeting budget, participation, technology, ability to detect slack | |||
Young (1985) | Amount of budgetary slack, importance of being seen as a hard worker, degree of social pressure felt | Risk-aversion, private information | Budgetary participation | ||
Chow et al. (1988) | Budgetary slack, performance | Information asymmetry | Pay scheme (truth-inducing, slack-inducing) | ||
Simons (1988) | Firm performance | Budget goal tightness | Business strategy, internal organizational conditions | ||
Waller (1988) | Budgetary slack | Risk-neutrality, risk-aversion | Pay-scheme | ||
Dunk (1990) | Managerial performance | Agreement on evaluation criteria | Participative budgeting | ||
Waller and Bishop (1990) | Managers’ misrepresentation, resource consumption | Unit profit scheme, unit profit-plus-penalty scheme, Groves scheme | |||
Kim (1992) | Budget preferences (tight, safe) | Status relative to average performance, dispositional risk attitude | |||
Dunk (1993) | Budgetary slack | Budgetary participation, information asymmetry, budget emphasis | |||
Giroux and Shields (1993) | Level of governmental expenditures | Audit, budget, city manager and certificate of achievement, political competition, total debt | |||
Shields and Young (1993) | Firm-wide performance | Participative budgeting, budget-based incentives | Information asymmetry | ||
Young et al. (1993) | Budgetary slack, performance | Intragroup cooperation, intergroup competitive feedback | |||
Chow et al. (1994) | Subordinate misrepresentations | Pay scheme (profit sharing, single-subordinate truth-inducing scheme, Groves scheme) | |||
Nouri (1994) | Budgetary slack | Organizational commitment | Job involvement | ||
Todd and Ramanathan (1994) | Performance in the not-for-profit sector | Police operations; budgetary measures | |||
Lal et al. (1996) | Budgetary slack | Importance of meeting budget, participation, technology, ability to detect slack | |||
Magner et al. (1996) | Budget utility, job-relevant information | Budget quality | Budgetary participation | ||
Nouri and Parker (1996) | Budgetary slack | Organizational commitment | Budgetary participation | ||
Van der Stede (1997) | Corporate performance | Corporate diversification; internal control system | |||
Nouri and Parker (1998) | Job performance | Budget adequacy, organizational commitment | Budgetary participation | ||
Collins et al. (1999) | Budgetary effort | Budget game (devious, incremental, economic) | Locale (United States and Latin America) | ||
Walker and Johnson (1999) | Subordinates’ participatory budget estimates | Budget-based incentive compensation scheme | |||
Chow et al. (2000) | Subordinates’ misrepresentation | Groves scheme, Osband and Reichelstein scheme, non-mechanistic superior, linear profit sharing scheme | |||
Douglas and Wier (2000) | Budgetary slack | Information asymmetry, incentive to create budgetary slack, ethical position (relativism, idealism) | Budgetary participation | ||
Fisher et al. (2000) | Budgetary slack, subordinate performance | Budget setting: unilaterally, negotiation process (agreement, behaviour, structure) | |||
Shields et al. (2000) | Job performance | Standard tightness, Standard-based incentives, job-related stress | Participative standard setting | ||
Van der Stede (2000) | Managerial short-term orientation | Rigid budgetary control, budgetary slack | Business unit competitive strategy; past business unit performance | Business unit past performance and competitive strategy | |
Evans et al. (2001) | Managerial reporting honesty | Preferences for wealth and honesty: contract design | |||
Van der Stede (2001b) | Budgetary slack | Budgetary controls, associated incentives | Corporate diversification, business unit strategy | ||
Fisher et al. (2002a) | Budgetary slack, subordinate performance | Information asymmetry, justice and fairness considerations | Negotiation process | ||
Fisher et al. (2002b) | Subordinate’s initial budget proposals, slack, performance | Using budgets for performance evaluation and resource allocation, information asymmetry | |||
Leone and Rock (2002) | Managers’ discretionary accrual choices | Budget ratcheting | |||
Stevens (2002) | Budgetary slack | Reputation and ethical concerns | Level of information asymmetry | ||
Webb (2002) | Budgetary slack | Reputation concerns, variance investigation | |||
Lau and Eggleton (2003) | Propensity to create budgetary slack | Information asymmetry, budget emphasis | Budgetary participation | ||
Davila and Wouters (2005) | Budget emphasis | Budgetary slack | Demanding conditions | Alternative goals | |
Douglas and Wier (2005) | Budgetary slack | Budgetary participation, incentive to create slack, ethical ideology | |||
Davis et al. (2006) | Budgetary slack, perceived responsibility for budget recommendation | Obedience pressure to create slack | |||
Hannan et al. (2006) | Managerial honesty | Information system precision | Information system existence | ||
Indjejikian and Matêjka (2006) | Organizational slack | Information asymmetry between corporate headquarter and business unit manager; managerial accounting system | |||
Parker and Kyj (2006) | Job performance | Vertical information sharing, organizational commitment, role ambiguity | Budget participation; | ||
Douglas et al. (2007) | Budgetary slack, budgetary participation | National culture | Ethical position | ||
Arnold et al. (2008) | Misreporting | Groves mechanism, profit sharing | Communication | ||
Rankin et al. (2008) | Budgetary slack | Final budget authority (superior, subordinate), mode of budget communication (offer, factual assertion) | |||
Schatzberg and Stevens (2008) | Budgetary slack, effort | Rejection power, pair rotation, experience, concerns for fairness and ethics | |||
Zhang (2008) | Reporting honesty, whistleblowing | Perception regarding the fairness of the principal, communication among agents | Peer reporting system | ||
Huang and Chen (2009) | Attitudes towards the budgetary process | Budgeting games (devious, economic) | Leadership behaviour (contingent reward, contingent punishment) | ||
Maas and Matějka (2009) | Data misreporting, local decision-making support | Role conflict, role ambiguity | Emphasis on the functional responsibility of business unit controllers | ||
Hannan et al. (2010) | Budgetary slack, superior’s willingness to reject projects | Span of control | |||
Hartmann and Maas (2010) | Budgetary slack | Controller involvement in management, machiavellianism | Social pressure to create budgetary slack | ||
Matuszewski (2010) | Honesty in managerial reporting | Participant remuneration, horizontal equity of salary | |||
Nikias et al. (2010) | Budgetary slack | Aggregation and timing of budgetary reports | |||
Anderson and Lillis (2011) | Business strategy, budget culture, cost management practices | Corporate frugality | |||
Bouwens and Kroos (2011) | Effort reduction | Target ratcheting | |||
Brüggen and Luft (2011) | Misrepresentation of private information | Level of competition | |||
Hobson et al. (2011) | Moral judgments regarding budgetary slack | Pay scheme, personal values (e.g. traditional values) | |||
Church et al. (2012) | Honest reporting, budgetary slack | Awareness of misreporting, other employees’ preference for honesty | Shared interests | ||
Turner and Guilding (2012) | Biasing of capital budgeting cash flow forecasts | Locus of power between hotel owner and operator; emphasis attached to the payback investment appraisal method; adequacy of funds allocated to the furniture, fittings, and equipment account; challenge in accessing reserve account funds; remaining length of management contract; emphasis on financial versus non-financial factors in investment appraisal | |||
Arnold and Schreiber (2013) | Superior/subordinate payoff, slack creation | Reputational aspects, level of social content | Audits in a fixed/random matching setting | Subordinates’ past norm violations | |
Maas and van Rinsum (2013) | Reporting honesty | Control system design | Impact on peers | ||
Brink et al. (2014) | Budgetary slack | Final budget authority | Cost system information | ||
Brown et al. (2014) | Honest budgetary reporting | Ranking | |||
Church et al. (2014) | Opportunistic reporting | Honesty preference | Discretion in information acquisition | ||
Heinle et al. (2014) | Budgetary slack, firm performance | Top-down/bottom-up budget Paradigms; information asymmetry between principal and agent | |||
Kramer and Hartmann (2014) | Budgetary slack; managerial performance | Social/economic exchange with the company | Top-down versus bottom-up orientation | ||
Newman (2014) | Managerial reporting honesty | Tightness of informal cost targets (tight, moderate, loose) | |||
Schreck (2014) | Honesty in managerial reporting | Rivalry | Gender | Competition | |
Arnold (2015) | Negotiation agreement, subordinate effort, budget commitment | Exogenous constraints | Opportunity costs, financial pressure, budget imposition, favourable budgeting process perceptions | ||
Arnold and Artz (2015) | Firm performance | Target flexibility | Predominant use of targets for decision making | Target difficulty | |
Arnold and Gillenkirch (2015) | Superior’s task outcome | Budget negotiation | Performance evaluation, planning | ||
Cardinaels and Yin (2015) | Honest cost reporting | Social norms, trust | Incentive contract versus fixed-salary contract | ||
Chen et al. (2015) | Accuracy and optimism of forecasts | Performance-based incentives | Forecast type, | ||
Clor-Proell et al. (2015) | Employee fraud | Budget goal difficulty | Promotion availability | ||
De Baerdemaeker and Brugeman (2015) | Budgetary slack | Affective organisational commitment, autonomous budget motivation | Participative strategic planning | ||
Douthit and Stevens (2015) | Budgetary slack | Superior rejection authority | Honesty preferences in participative budgeting | ||
Brüggen and Luft (2016) | Cost underestimation | Changing versus continuing superiors | |||
Cardinaels and Jia (2016) | Honest reporting | Audits | Incentives, peer behaviour | ||
Eskenazi et al. (2016) | Ability to withstand pressure to misreport | Managers’ personal versus organizational interest | Neurobiological aspects | ||
Guo et al. (2017) | Misreporting | Vertical pay dispersion | |||
Abdel-Rahim and Stevens (2018) | Honesty in managerial reporting | Perceived information asymmetry | Information system accuracy | Information system precision | |
Altenburger (2017) | Budget reporting honesty | Dissent | Injunctive social norms | ||
Brink et al. (2017) | Reporting honesty | Codes of conduct, monitoring, penalties, Machiavellianism | |||
Brown et al. (2017) | Honest reporting | Participative budgeting, budget framing | |||
Brunner and Ostermaier (2017a) | Sabotage in capital budgeting | Distrust, intent to punish | Factual assertion | Intent to be honest, reciprocity | |
Brunner and Ostermaier (2017b) | Managerial honesty | Peer influence: | |||
Chung and Hsu (2017) | Firm profit | Honest reporting | Trust versus optimal hurdle contract | Cognitive moral development | |
Appendix 2
Current experiments illustrated by variables
Variables | ||||
|---|---|---|---|---|
Paper | Dependent | Intervening | Moderator | Independent |
Davis et al. (2006) | Budgetary slack: inflation of budget estimate; Perceived responsibility for budget recommendation: 100% allocation method | Obedience pressure resulting in no obedience, total obedience, zone of compromise | ||
Hannan et al. (2006) | Managerial honesty: The cost report made by the manager, the proportion of cost reports falling within the range of the information system signal | Information system precision: precise (0.25 lira range for actual cost), coarse (0.5 lira range for actual cost) | Information system existence | |
Arnold et al. (2008) | Misrepresentation | Groves mechanism, profit sharing | Communication | |
Rankin et al. (2008) | Budgetary slack: reported cost minus actual cost | Final budget authority (superior, subordinate), mode of budget communication (offer, factual assertion), | ||
Schatzberg and Stevens (2008) | Slack: Expected production less self-set budget divided by expected production; Low Effort: Time producers provided low effort | Rejection power (0 or 1), pair rotation (0 or 1), experience (0 or 1), fairness concerns (1–7), ethics concerns (1–7) | ||
Hannan et al. (2010) | Superior’s willingness to reject projects: cost threshold above which projects are rejected; Budgetary slack: mean reported cost | Span of control: low span (eight superiors, eight subordinates), high span (four superiors, 12 subordinates) | ||
Hartmann and Maas (2010) | Budgetary slack: likelihood for slack creation in the scenario | Controller involvement in management: high, low (embedded in the scenario); Machiavellianism: Mach IV scale (Christie and Geis 1970) | Social pressure to create budgetary slack: high, low (embedded in the scenario) | |
Matus-zewski (2010) | Honesty in managerial reporting: change in honesty; Differences between first and second half of the experiment in the portion of the payoff available (difference between maximum cost a participant could have reported and actual cost) that the participant did not claim | Pay of each participant: participant salary variable (no change, increased, decreased); Horizontal equity: salary changes (increased: inequitable to equitable; decreased: equitable to inequitable; no change: equitable) | ||
Nikias et al. (2010) | Creation of budgetary slack: proportion of slack retained = \( ({\text{budget}} - {\text{actual}}\;{\text{cost}})/50 - {\text{actual}}\;{\text{cost}} \) | Aggregation and timing of budgetary reports (for two projects): aggregate (subordinates observe each project’s cost and submit one budget), sequential (subordinates observe costs and submit individual budgets sequentially), delayed treatment (subordinates observe both costs before providing individual budgets) | ||
Brüggen and Luft (2011) | Misrepresentation of private signal: the agent’s revenue prediction minus his or her private signal of the most likely revenue; Misrepresentation of expected revenue: the agent’s revenue prediction minus the expected revenue conditional on his or her private signal; Actual misrepresentation as a percentage of possible misrepresentation | Level of competition generated by capital rationing: Principals could accept three, no more than two, or no more than one project | ||
Hobson et al. (2011) | Moral judgment regarding budgetary slack: 1 “strongly disagree” to 7 “strongly agree” in response to the question: “To have set the budget significantly below the forecast of productions would have been unethical” (Stevens 2002) | Pay scheme: slack inducing, truth-inducing; Personal values: traditional values, responsibility, empathy [measured by Jackson Personality Inventory-Revised questionnaire (Jackson 1994)] | ||
Church et al. (2012) | Honesty: \( 1 - [({\text{budgeted}}\;{\text{cost}} - {\text{actual}}\;{\text{cost}})/ ( 6 0 0 0- {\text{actual}}\;{\text{cost)]}} \); Slack: \( {\text{budgeted}}\;{\text{cost}} - {\text{actual}}\;{\text{cost}} \) | Awareness of misreporting: knowledge: whether the manager’s report and actual cost are known to the assistant; Other employees’ preference for honesty: 1 “The budget should not be inflated” to 11 “The budget should be inflated to the full extent” | Shared interests: no-sharing condition (division manager keeps the entire amount of slack), sharing condition (slack is split equally between division manager and assistant) | |
Maas and van Rinsum (2013) | Reporting honesty: Overstatement is calculated as report (number of correct answers) minus score (actual number of correct answers), Dishonesty is Overstatement/(100 − Score) | Control system design: Open/closed information policy | Impact on peers: Inclusion of a group performance-based element in the participants’ pay function relating to the average reported score of all other participants | |
Brink et al. (2014) | Budgetary slack \( ({\text{budgeted}}\;{\text{cost}} - {\text{actual}}\;{\text{cost}}) \) | Final budget authority (superior, subordinate) | Cost system information (public and verifiable, private), | |
Brown et al. (2014) | Honest budgetary reporting \( [({\text{Budget}}\;{\text{request}} - {\text{Project}}\;{\text{cost}})/({\text{Revenue}} - {\text{Project}}\;{\text{cost}})] \) | Ranking: firm profit, own compensation, both firm profit and own compensation, randomly | ||
Church et al. (2014) | Opportunistic reporting \( [({\text{reported}}\;{\text{bonus}} - {\text{actual}}\;{\text{bonus}})/(25 - {\text{actual}}\;{\text{bonus}})] \) | Honesty preference: Low, moderate, high (according to opportunistic reporting) | Discretion in information acquisition (present/absent) | |
Newman (2014) | Managerial reporting honesty: honesty defined as \( 1 - [({\text{budgeted}}\;{\text{cost}} - {\text{actual}}\;{\text{cost}})/(\$ 30 - {\text{actual}}\;{\text{cost}})] \) | Tightness of informal cost targets: moderate (near the mean of the cost range), loose (at the upper end of the cost range), tight (at the lower end of the cost range) | ||
Schreck (2014) | Honesty in managerial reporting: honesty defined as participants overstatements relative to the maximum potential overstatement | Rivalry (lower honesty preferences): Subjects do not compete for scarce resources but for their position in a ranking; Expected monetary benefits of lying | Gender: male, female | Competition (economic pressure to lie): no competition treatment (every project receives funding), economic pressure treatment (subjects compete for scarce financial resources), no rivalry |
Arnold (2015) | Negotiation agreement; subordinate effort: performance divided by capability; budget commitment | Exogenous constraints: superior opportunity cost/financial pressure | Opportunity cost: superior’s working time is (not) independent of the negotiation length; Financial pressure: superior’s payoff is (not) independent of subordinate’s and superior’s total performance; Budget imposition, favourable budgeting perceptions | |
Arnold and Gillenkirch (2015) | Superior’s task outcome (Potential subordinate bonus based on the subordinate’s estimated performance capability; Realized planning error) | Budget negotiation (subordinate’s initial budget proposal, estimate of his performance capability, performance; superior’s initial counteroffer) | Performance evaluation budget, planning budget (separate/single budget setting) | |
Cardinaels and Yin (2015) | Honest cost reporting \( [({\text{mean rep. costs}} - {\text{mean act. costs}})/(\hbox{max. rep. costs pos.}- {\text{mean act. costs}})] \) | Social norms and trust: (7-point Likert scale ranging from “fully disagree” to “fully agree”) | Incentive contract versus fixed-salary contract | |
Chen et al. (2015) | Accuracy of forecasts (difference between forecast and actual performance), optimism of forecast (excess of forecast over the actual performance) and performance (number of correct answers) | Performance-based incentive (present/absent) | Forecast type (disaggregated/aggregated) | |
Clor-Proell et al. (2015) | Employee fraud: distance between reported costs and actual costs | Budget goal difficulty: high/low cost goal | Promotion availability: not available, available after each round, available at the conclusion | |
Douthit and Stevens (2015) | Budgetary slack \( ({\text{reported}}\;{\text{cost}} - {\text{actual}}\;{\text{cost}}) \) | Superior rejection authority (factual assertion, salary authority; knowledge about superior’s endowment) | Honesty (agreement with the statement ‘‘I wanted both parties to have even payoffs,’’ on a seven-point Likert scale) | |
Brüggen and Luft (2016) | Cost underestimation: (a) subordinate’s private cost signal minus his or her cost forecast; (b) expected value of costs given the private signal minus the subordinate’s cost forecast; (c) percent understatement measure: subordinate’s actual understatement divided by the maximum possible understatement | Changing versus continuing superiors | ||
Cardinaels and Jia (2016) | Honest reporting: (1 − (true cost-reported cost)/(true cost − 500)) × 100 | Audit: The audit team’s detection probability increases with the level of deviation from a truthful report | Peer honesty: Message that a high/low number of peer managers report a cost number that equals the true cost of the investment; Incentive: 10% or 50% of the divison’s reported profit | |
Eskenazi et al. (2016) | Ability to withstand pressure to misreport (Scale from 1 “very unlikely” to 7 “very likely” whether they would engage in the action proposed by the BU manager) | Managers’ personal versus organizational interest | Neurobiological aspects (decrease in power of mu waves in the emotional expressions condition relative to the abstract shapes condition) | |
Guo et al. (2017) | Misreporting: reported slack \( ({\text{reported}}\;{\text{cost}} - {\text{actual}}\;{\text{cost}}) \) | Vertical pay dispersion (high: $25/$10; low: $25/$25, $10/$10) | ||
Abdel-Rahim and Stevens (2018) | Honesty: \( 1 - [({\text{budgeted}}\;{\text{cost}} - {\text{actual cost}})/6] \) | Perceived information asymmetry: Inverse of response to the exit questionnaire item “If the corporate headquarters’ cost system had generated an estimate of the actual cost within a wider (narrower) range, I would have felt more (less) flexible to increase my earnings by reporting a higher cost (7-point Likert scale) | Information system accuracy: high (90/10%), low (70/30%) | Information system precision: equal to 1 if the system is precise and 0 if coarse |
Altenburger (2017) | Budget reporting honesty: (1 − (budgeted costs − actual costs)/(maximum possible report − actual costs)) | Dissent: Minority shows different preferences than the respective majority | Injunctive social norms: Participants see statements regarding honesty or opportunism of five anonymous colleagues | |
Brink et al. (2017) | Reporting honesty: participants’ self-reports of the number of identified pairs of numbers that sum to 10, unsolvable task | Codes of conduct: Code, no code; Monitoring: No monitoring, monitoring and penalty, monitoring but no penalty; Machiavellianism: High/low measured using the average of the 20-question MACH IV scale | ||
Brown et al. (2017) | Honest reporting: (budget report − cost of production) | Participative budgeting: Subordinate/superior sets the budget; Budget framing: Honest, fair, preferred | ||
Brunner and Ostermaier (2017a) | Sabotage in capital budgeting: number of times a manager sabotages the investment divided by the number of times he can sabotage it | Distrust: Managers were asked to what extent they agree that the hurdle contract signals distrust; intent to punish: Managers were asked to state the extent to which they agreed that they intended to punish owners for distrusting them | Factual assertion (yes/no) | Intent to be honest: Managers were asked to state the extent to which they agreed that they intended to be honest with owners; Reciprocity: owner can (cannot) chose the hurdle contract |
Brunner and Ostermaier (2017b) | Managerial honesty: (reported cost − actual cost)/(100 − actual cost) × 100 | Peer influence: transparency: Managers know each other’s cost and report (full), managers learn each other’s report but not cost (partial) | ||
Chung and Hsu (2017) | Firm profit | Honest reporting: 1-payoff claim/payoff available | Trust versus optimal hurdle contract | Cognitive moral development: defining issues test |
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Daumoser, C., Hirsch, B. & Sohn, M. Honesty in budgeting: a review of morality and control aspects in the budgetary slack literature. J Manag Control 29, 115–159 (2018). https://doi.org/10.1007/s00187-018-0267-z
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DOI: https://doi.org/10.1007/s00187-018-0267-z