Honesty in budgeting: a review of morality and control aspects in the budgetary slack literature

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

  1. 1.

    Within these journals, we searched for “slack”, “budget slack”, “budgetary slack”, “honesty”, and “honest reporting”.

  2. 2.

    The sample was determined in June 2014 and updated in January 2018.

  3. 3.

    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).

  4. 4.

    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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Keywords

  • Honesty
  • Budgeting
  • Budgetary slack
  • Managerial reporting

JEL Classification

  • M41