An Analysis of the Budgeting Process
“The great enemy of the truth is very often not the lie — deliberate, contrived, and dishonest — but the myth — persistent, persuasive and realistic.”
— John F. Kennedy, American president
Long after the advent of modern budgeting principles, it has ever since been accepted that the altering of budgets is a primary dilemma that may worsen if not complicate the practice of the allocation of resources. While at the same time, the hypothetical evidences that are suggested by the existence of budget padding are somewhat constrained by certain preferences for managerial theories and processes especially if it involves honesty.
In such instances where various high profile public accounting scandals and misled managerial reporting have catched the attention of the masses. Although in the recent months there was a generating widespread curiosity over such practices, the interest for responsible and accurate managerial reporting behaviors have long been in the limelight. One thing to consider is the existence of the primary capital budgeting processes wherein most managers opt to pad their proposed budgets out of fears that they would have insufficient funds for their own personal consumption and the consciousness towards these self-interests that managers may have, several companies address such incidences through the setting up of higher and stricter standards wherein the probability of such incidences could be limited and the costs of such deeds would be decreased.
So far, untried experiments often suggest that accurate managerial reporting choices may or may not be more off the conventional as compared to unadulterated self-interests would imply. Certain managers, when provided for with the apparent temptations or distractions to urge them into padding their budget proposals, are then protected in their readiness and willingness for that matter to swindle in reporting. It is therefore safe to say that, corporate budgeting may be both guided by the concern over padding and by a substantiated knowledge of a managers’ need to be truthful.
Knowledge thereof of this substitution, the owner designs a budgeting policy that weighs both subjects by means of the manager’s reports. Budget plans done by the owner of the company transmits expenditure to a manager contingent indicated on his report, but directly alters these expenditures through the insertion of additional expenses to budgets and thereby decreases the sensitivity of such transactions to the real reported amounts in order to lessen the ensnare of budget padding. This additional cushion that is particularly necessary in particularly instilling in honest reporting is then allayed by the manager’s intrinsic need for accuracy. Through such exploitation, the manager’s penchant for integrity, the owner is then capable to bind if not thwart budget padding and, as it would eventually turn out to be, boost productive competence.
Such tendencies of certain managers to pick out a managerial preference for honesty in budgeting continue even if there is still that same chance that the manager will act entirely in consonance of his own benefits. If that is the case, even if there only exists a part or a segment of the managerial talent pool that has completely no apprehension for the urgency of being true as possible and proposals remain twisted towards the padding of budget proposals, the company can thereby propose an agreement that intends not to take advantage of the best intentions of a manager from which honesty matters the most while at the same time tolerating the resulting chance of misrepresentation by a self-interested manager. At that particular situation, the proprietor of the firm will then draft a contract wherein it would particularly specify that the budgetary transfers therein that the manager would have a predilection to be completely honest, and at the same time setting standards in order to minimize the negative implications of the action if the manager does otherwise. The greater the incidence of budgetary padding among budget proposals, the greater the likelihood that the manager would have honesty preferences and the greater of a parody is deemed worth bearing on the sidelines. This provides an avenue for the existence of a balanced scrutiny of existing managerial reporting that are distinct from the conservative understanding. In this particular scenario, the uncommon but large scale mistreatments in managerial accounts reporting are in fact an analytic of the general incidences with much higher liking for honesty, and not just a sign of a universal difficulty. Through analyzing the major role and importance of the managers’ inherent preference for honesty in the face of an imperfect information, there are a couple of instance through which this could be applied. One is the fact that there is still a vast body of texts that examines capital budgeting when firms are able to hold private information. The result here is connected with a certain representation as the manager is unspecified to be unconcerned with being honest in conducting budget proposals and expanding such a model with a basic perspective for sincerity in outputs consents to recognition of the most feasible budgetary transfers and cost-hurdles that are tailored to such preferences (Baiman, 1989). The next stream of research is the investigational substantiation that holds up the occurrence of integrity of the preference in managerial decision-making. A need to be honest can be a factor in managerial decision-making wherein the location here explicitly knows such a desire to be honest and reveals the best possible contracts in which to exploit such partiality is yet to symbolize integrity itself (Butler, 2003).
The coming together of these two incentives and the consideration of the effects on the most advantageous budgeting policies can be seen as a motive for dishonesty. According to the model, budgetary movement are recognized in order to decrease the manager’s advantages from the padding made which, in turn, persuades the manager to hesitate even before laundering even more finances. An evident consequence of this optimum agreement is the fact that when confronting a manager whose credibility is uncertain and whose integrity has already been tattered by such an incident, the company then persuades that possibility of honesty but is submissive to the information that padding may or may have already appeared. Yet opposing to the conventional perception, the degree of balance in budget padding is not importantly monotonic in either of the case in which the level of information irregularity or the frequency of managers who value their honesty towards their outputs (Evans, 2001).
In certain outputs such as this, instinctive technical of the indenture in which a preference for candor is disregarded, in this sense, the paper illustrates the high tendency and that there is a general motive for all the results of the two modes of studies.
Additional efforts to model inherent preferences that includes corporate honesty itself, but this time in the incidence of motivational concerns that may also include several studies about the subject matter, some studies looks onto the main devise that was used in contracts that aids in drawing out information whether a manager is really honest or simply just has a point to prove. There also exists a location in which agents are reputed to be also merely open or self-regarding. In this particular situation, accounting and control systems may improve the requirement for honest managers and employees as well but can also assist attract such persons. The current setting goes in line with the spirit of such research, but only concentrates on the situation whereas each employee considers things that are both for him or herself and takes in the form of perquisites and the morality that it exudes honesty, and how the most feasible contracts can solve both issues therein (Mittendorf, 2006).
The utilization then of managerial accounting data in helping towards the reduction of transaction expenditures or contracting costs that mainly depend on both the uniqueness of the accounting information and on the partiality of the constricting parties. A great deal of the existing text on accounting and contracting takes for granted the utility function of representing preferences for affluence and leisurely joy. Though, a much bigger array of accounting-related performance can be put in plain words by the use a broader depiction of company favorites, including the certain issues of fairness and moral consideration. The grounds for additional investigation are projected (Hannan, 2003).
Several reasons as to why there still certain managers who resort to padding up their budget proposals can thereby be summarized through these points. One is for their specific needs. Most managers who commit dishonesty in the preparation and presentation of their outputs are mostly providers for their family. While it remains to be immoral in the sense that it is tantamount to theft, they would have no choice but to do it for their family. Second, is for the fact that managers bloat their budget proposals because for the reason that they know that everybody is doing it. This peculiar assumption is then magnified onto becoming more of a habit that would eventually become part of their lifestyles (Fischer, 2004).
Furthermore, there are instances wherein the justification of such incidents goes back to the lapses of the firm itself in providing for the basic needs of its employees. Some, if not most employers only consider into making profits while letting go of the fact that its employees are a vital factor in achieving this particular company goal. The firm then should be able to recognize the need for compensating the labor that their employees provide for the company, the pressure of the drag of communal standard that results to an open incentive given to one specific sector that can have a potential overflow on the enticement of another.
In the real world, however, what is indicated as the fear of having budget slash in certain budget proposals that managers submit, most of this may also be considered to be for the benefit of the company even. The primary rationale for this basically, the padded up costs that most managers attach to their proposals serve mainly as a buffer cost in case there are fluctuations in prices of the materials, the costs of transporting the materials to the intended project site. Furthermore, concluding that these incidents are a common reality that we ought to face and resolve, the reasons as well as the rationale behind it should be well taken into consideration for it to be resolved by firms who encounter problems such as this.
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EVANS, J., L. HANNAN, R. KRISHNAN, AND D. MOSER. (2001) Honesty in managerial reporting. The Accounting Review.
FISCHER, P. A. S. H. (2004) Optimal contracting with endogenous reporting norms. Pennsylvania State University.
HANNAN, R., B. RANKIN, AND K. TOWRY. (2003) Managing impressions: The effect of noncontractible information on honesty in managerial reporting., Georgia State University.
MITTENDORF, B. (2006) Capital Budgeting when Managers Value Both Honesty and Perquisites. Yale School of Management.