Budgetary Slack: The Interaction of Ethics, Risk and Information Asymmetry

• In Event: Emerging Research and Research Interaction 3

Abstract

Participative budgeting has been widely accepted as a best practice in management planning and control for decades in many US companies. In theory, employees that participate in goal setting should experience greater goal congruence with management and be able to set realistic goals based on their superior understanding of the performance levels that are possible. In reality, many organizations that employ participative budgeting find that performance-based pay schemes often provide incentive for the creation of budgetary slack, defined as the difference between planned performance targets and real performance capability (Douglas and Wier, 2000). Budgetary slack may also be motivated by employees’ desire to mitigate the uncertainty surrounding operating goals and associated budgeting targets (Dunk 1995).


Prior research has identified a number of factors that influence the creation of budgetary slack, the most salient of which include pay scheme (e.g., Chow et al. 1988, Waller 1988), information asymmetry (e.g., Chow et al. 1988), risk (e.g., Dunk 1995, Waller 1988, Young 1985), and personal characteristics of the participants (e.g., Stevens 2002, Douglas and Wier 2000). The role of ethics as a personal characteristic has gained traction in recent studies as an important influence over the budgeting process and a factor contributing to the creation of budgetary slack (Hobson et al. 2011, Stevens 2002, Douglas and Weir 2000). No prior studies have examined the combined effects of three of most important influences – opportunity, risk and ethics.


This paper extends the research on the moral content of participative budgeting by examining the interaction of ethics, risk and information asymmetry. Additionally, it examines the influence of gender differences related to risk response and personal values affecting moral judgments. It further contributes to the literature on budgetary slack by suggesting an organizing framework which can be used to classify and understand the factors contributing to budgetary slack.


Budgetary slack is understood to have detrimental effects on organizations by undermining management’s ability to effectively plan operations and efficiently manage resources. The benefit of the study to accounting research and practice is to provide a better understanding of the factors that contribute to the creation of budgetary slack, and thus, improve organizations’ ability to avoid it.

Authors

• Stephanie Weidman, Rowan University

• Larissa S Kyj, Rowan University

• Yang Yang, Rowan University