Beyond Budgeting Roundtable: No Risk in Abolishing Budgeting


Within a short period, budgeting has been removed from its important position as the control system in most organizations and has been subjected to considerable criticism too. Budgeting has been termed as ‘broken’ ‘a thing of the past or an ‘unnecessary evil’. Recent surveys have evidenced this turn of events by reporting an escalating dissatisfaction among firms with their budgeting systems. “Beyond Budgeting” is the new approach to management control developed by (Hope & Fraser, 1997, 2000, 2003). Beyond Budgeting Roundtable (BBRT) is the program from Consortium for Advanced Manufacturing International (Europe) and this organization argues that business organizations of today are to become flexible and responsive to address unanticipated changes, hyper-competition and increasingly inconsistent customers. They argue that this requires more effective strategic management and the replacement of the command and control design of most organizations with the dispersion of more authority to the front line,” (Murray, 2003). There are issues faced by the organizations in the budgetary control processes due to the behavioral patterns of the individuals as well as the reactions of the organizations for such behavioral aspects (Argyris, 1952; Lowe and Shaw, 1968; Schiff and Lewin, 1970; Otley, 2001; Llewellyn, 1998; Van der Stede, 2000). These issues have made traditional budgeting outdated.

In the present day business context, the ideology of BBRT is gaining momentum and several large European organizations like Handelsbanken, Volvo, Ericsson, Boots, SKF, Borealis and Schlumberger have either dispensed with the process of generating budgets or are in the process of abandoning budgeting (Murray, 2003). This new perspective towards budgeting can be considered as quite a turn of events. Budgeting has been subjected to criticism for a long. However, the criticisms that are raised now are from different angles. While criticisms in the past focused on poor practices within the realm of budgeting tradition, current criticisms are different in the sense that with the changed management models to meet the competitive business environment the answer for improvement in organizational performance cannot be found in improving the budgeting process but in abolishing it. Budgeting is considered an unnecessary evil. This paper strongly supports the view of BBRT and provides a critical analysis of budgeting and its utility as a control tool. The clarity and cogency of the viewpoint of BBRT substantiate the abolishing of budgeting, which deserves serious consideration.

Traditional Budgeting model

Before considering the usefulness and the reasons for abolishing budgeting is attempted, it is important that the traditional budgeting is defined and its salience explored.

A budget represents a financial and/or quantitative statement. A budget is prepared just before the start of the next accounting period or another predetermined period. The objective of budgets is to decide in advance of various policies the organization would like to pursue during the period for which the budget is prepared. This definition provides the salient features of budgeting technique. The main element of budget is the expression of the organizational policies in monetary or quantitative terms and the budgets are to be prepared in advance for the period to which it pertains. The budget is usually prepared for a definite period and before the preparation of the budget, it is important that the organization lay down the organizational objectives broken down into different quantitative and/or monetary elements. The main emphasis of budgeting in a business organization is to provide for the decisions in advance of the course of action that the organization wishes to follow in future. Budget should also specify the results expected of such courses of action.

Objectives of Budgeting

Budgeting has certain definite objectives to achieve, as it represents a blueprint of the anticipated plan of action or operation. Budgets express plans covering the entire organization and all its functions like purchase, production, marketing and the like. A budget is considered as an official declaration of the organizational policies defining the organizational objectives for the understanding of the organizational members at all levels. Ensuring coordination of the business as a whole is another objective of budgeting. The process of budgeting takes into account factors like probable production capacities and marketing potential and coordinates them towards achieving the overall organizational objectives. In such coordination, it becomes important that budgeting consider the availability of all other resources like materials and labor so that it can balance the objectives and make them achievable. Budgeting encourages team spirit and it involves different people to solve a common problem. Budgeting is to be regarded as a better means of communication, as it is expected to pass on complex plans laid down by the top management through various functional departments to ensure prompt action.

Budgeting and Control Function

The budgetary control is defined to include the processes of planning, controlling, coordinating, and motivation through the monetary expression of organizational objectives communicated to different departments within the organization. Budgeting usually takes the form of quantitative and monetary plans drafted for a period of one year. Budgetary control is the organizational planning process translated into monetary objectives. The essence of the budgetary control process is the influencing of the management behavior by establishing set performance standards and monitoring the achievement of the standards established.

For most organizations, the budgetary control process is considered as the main integrative control tool from the overall control perspectives of the organization (Otley, 2001). The assumption behind such a view can be seen from the fact that the budget is the easiest and effective way of representing the organization’s overall business plan and in addition, the budget can be used as the controlling and monitoring tool for mitigating the complex issues of the business plan. From this viewpoint, budgeting can be seen as the link for the overall attainment of the organizational performance standards. As Campbell (1985) states, it is essential that every budgeting system is customized and the success of such budgeting is measured by the extent to which it can motivate the individuals to offer their maximum contribution in achieving the organizational objectives. Past research has focused on the shortcomings and challenges of using budgeting as a process for management control (Hansen et al., 2003; Lukka, 1988)

Traditionally, centralized control has been identified to be one of the important objectives of budgeting. Budgeting is expected to exercise centralized control through delegated authority and responsibility. Since budgets are drawn and grouped based on the responsibilities of different functional departmental and divisional heads, they are expected to aid decentralization. Budgets are considered as the means of exercising managerial control and enable the management to measure performance of every business unit or division of the organization. The managers can take corrective action, as and when they observe any deviation in the actual performance as compared to budgets.

Institute of Cost and Management Accountants defines budgetary control as “the establishment of budgets relating the responsibilities of executives to the requirements of a policy and the continuous comparison of actual with budget results, either to secure by individual action the objective of that policy or to provide a basis for its revision.” (FAO Corporate Documentary Depository, 2001) When the contributions from budgeting process to the organizational performance are considered budgets represent the control mechanism in most firms. Therefore, it can be argued that eliminating budgeting process would mean loosening the control on business processes. In the traditional budgeting process a top-down (hierarchical) approach is used for where the principle of “command and control” takes the central focus. In this process, decisions, resources, and rewards flow down. On the other hand, information, which is mostly exceptions, flows upwards. “The role of line management is simply to operate the established facilities, systems, and personnel according to senior management’s rules, regulations and pre-determined targets. Valued rewards then follow from doing so,” (Murray, 2003). According to Wallander, (1999), budgets that create vertical command-and-control and responsibility centre-focused budgetary controls are incompatible with organizational designs, which are flat or value chain-based. Such controls act against empowering the employees from making the decisions.

Advantages of Traditional Budgetary Control System

Profit planning and controlling are the two important objectives of traditional budgeting system. Achievement of these objectives results in certain distinct advantages. By effective planning and controlling of the revenues and expenditure, budgetary control focuses on the maximization of the earnings of the organization. Budgeting ensures that capital and resources are allocated to the best and most profitable opportunities. Budgeting enables employees at all levels to understand the objectives and policies of the company and acts as a tool for evaluating the effectiveness of these policies on a periodic basis. By adopting well-designed budgets, the companies are able to plan their expenditure and financing of the business. This ensures better and economical utilization of the funds at the disposal of the company. Budgeting apart from functioning as a control measure enables the organization to coordinate the functions and performance of various branches and divisions of the organization closely. This enhances the cooperation among the organizational members.

Issues with traditional budgeting Process

Budgets can be considered as a ‘fixed performance contract’. Committing to and meeting the budget targets by supervisors and employees represents accepting a “performance contract” entered into between an employee and a manager. Budgeting by the very nature implies that the employee will be recognized and rewarded for his/her performance only when the budgeted targets are met. This implication is made in either an implicit way or it is made explicit. Those employees who perform to meet the targets can expect a better evaluation of their performance and rewards and recognition in return from the organization. Employees can also feel motivated intrinsically with the sense of satisfaction of having achieved the set targets.

However, the use of budgeting as fixed performance contract results in certain deficiencies in the functioning at the organizational level. This can make the organization inherit certain disadvantages of budgetary gaming. The sales manager may deliberately make a lower estimate for the sales and with a view to meet the sales budget may overstate or understate sales towards the end of the budget period by manipulating the delivery of orders. In order to meet the expense budget target, the divisional managers may present a fat budget for expenses. There may also be a tendency to spend the total budgeted amount within the budget period, so that they may be able to get the same budget allotment of expenses for the next period. In their pressure to meet the budget targets, the managers may lose focus on organizational goals. For instance, the divisional manager may decide to spend more on revenue items like traveling at the cost of research and development, which is detrimental to the progress and growth of the organization. There may be undue influences on the distributors and dealers to order and take delivery of merchandise before the current budget period expires and they may be offered large discounts so that the sales budget can be met. The divisional or functional managers tend to manipulate the profits for the period by booking next year’s expenses within the current budget period when the divisional head is not confident of meeting the next year’s budgeted profits. Divisional managers may also defer the next year’s revenue by requesting customers to delay delivery. The divisional manager may hold back the profits when he/she does not anticipate meeting the target for the year so that he/she can get reduced targets for the next budget period.

Jensen (2001, 2003) offers an explanation that the managers resort to budgeting games because of the traditional link between the budgets and the performance bonuses. Normally in a pay-for-performance bonus system the managers will be rewarded only for attaining the minimum targets. This also will be capped after reaching the maximum levels fixed. Hence the managers, in this case, would involve themselves in budget gaming and diversions to maximize their performance incentive. Therefore, in this system, the managers will be motivated to reach the minimum budgetary standards by adopting any necessary means and would try to keep their performance under the maximum levels as far as possible (Jensen, 2001). The solution to mitigate this problem is to follow a linear pay-for-performance system in which the managers are rewarded based on actual performance instead of the considering the budget targets (Jensen, 2003).

“The problems with fixed budget targets at the individual level seem to translate to the organizational level as well.” (Murray, 2003) The result is that the organizational efficiency is diminished over time as the performance is mostly stuck to meeting the budgeted targets. The approved budget targets become the foundation on which the divisional managers commit to performing. “With the penalty for falling to meet the numbers playing out in the newspapers almost every day, and generous incentive compensation to fuel the fire, all too often these ambitious goals lead to corporations “managing” earnings in ways that destroy long term corporate value.” This behavior among the managers would probably lead to outright accounting and financial frauds as were witnessed in the case of Enron and WorldCom debacles. The temperament of senior management is transferred down the line with the subordinates picking up the culture of making the numbers. The budgeting game thus becomes the usual practice and accepted as the norm as the way of doing the business.

Behavioral Aspects of Budgetary Control

When the individuals and their behavior have started increasingly affecting the budgetary control process, there are circumstances in which the changing budgetary control and performance expectations affect the employee behaviors (Simons, 1995). However, it so happens that many organizations adopt somewhat a mechanistic approach to the budgetary control process without the requisite consideration of the behavioral aspects of the human beings involved in the whole process. It is often forgotten that the goals and objectives of the organization have to be accomplished with the help and support of the human beings associated with the organization concerned. Therefore, it becomes vitally important that the effect of individual behavior on budget and the effect of budgets on the individuals’ course of action have to be perceived carefully to attain the objectives of the organization without much pressure on employees and executives at any level of the organization. However, the pressure on individuals that is being exerted by the budgetary process for meeting the performance standards affects the performance of the individual employees, which is one of the major limitations of the traditional budgeting. Such pressure itself becomes detrimental in maximizing the contribution of the individual employees. The norms and standards of performance are fixed at a level that the employees find difficult to attain without extra effort. Any unattainable standards fixed by the budgetary process will lead only to frustration among the employees.

In the early research by Lowe and Shaw (1968), the process of budgetary control was considered as element of behavioral theory in which the budgets pose as enablers executing the resolutions of the coalitions and conflicts of the management. Because of the fact that there are certainly human factors involved in the budgetary control process, the budgets are often developed in many organizations through a complicated and complex process. The social scientists have made an extensive study into the behavioral aspects involved in the budgeting. Based on these studies budgeting has been construed as a method of communicating the goals of the organization to the employees at the appropriate levels. The objective of such communication is to achieve the desired goals of the organization by facilitating, coordinating, and controlling the different sections of the organization. In order to carry out this process effectively it is vitally important for managers to develop suitable attitudes and ideal strategies, which will have the effect of cultivating and maintaining supportive and cooperative relationships with the employees at all levels of the organization. It is important that the budgets be not considered mere computational tools for effectively controlling the expenses of an organization. However, in practice this has been the case in that budgeting has been considered more as a ritual than a control mechanism for improving the organizational performance.

Budgeting and Social-Psychological Problems

Until the beginning of the year 1950, the literature and practice of accounting had considered budgeting only as a technical phenomenon. However, during the course of time, various studies have found that even the organizations with good technical budgeting backgrounds suffered from the challenges and issues posed by the social-psychological events underlying the budgeting process. As early as 1952, Argyris (1952) conducted a study into the psychological aspects of budgeting. The objective of his study was to explore and report on the nature and effects of undesirable social-psychological events on budgeting. Based on the study, Argyris (1952) identified that the different ways of exerting pressure to achieve budgetary standards had resulted in stress, interpersonal conflicts, and distrust among employees disturbing the work harmony. The effects of such pressure have been found in dysfunctional behavior like gaming, lower efforts, and poor communication among the employees. The most important findings of the study are:

  • Budget pressures force the employees to unite against the management and their activities in this respect place the supervisors under severe tension
  • The finance people have the feeling of success only by finding faults with the technical and production people in any organizational setting
  • The budgets in the perspective of the supervisors are only the problems to their departments despite the fact that the management considers them as the stimulators for organizational performance
  • The budgets have always served as means of expressing their own style of leadership

With a view to avoiding the above social-psychological problems connected with the budgets, there are three basic business principles that can be adopted to improve the utility of the budgets. The first principle is that the staff and managers should understand that good attitudes are the basis for successful budgeting. Therefore, it is important that the managers explain this aspect in detail to the staff to make them understand that budgeting is the effective way for efficient corporate planning and control. The second principle is that the organizations should never try to use the budgets to pressurize the employees. The budgets are to be regarded as the tools that have the supervisors and not the clubs that are held over their heads. Thirdly, there should be an active participation and support from the top management on the budgeting process. This alone would help the budgeting the chances of higher level of motivation among the employees. Such an involvement from the top management should instill an attitude of ‘let’s do it together instead of pressurizing the employees that it is, their responsibility and not doing it may lead to unpleasant consequences. However, these conditions are highly idealistic and the budgeting process can never adopt these principles to make the employees stress-free.

Some researchers like Caplan (1966) and DeCoster & Fertakis, (1968) worked further on the findings of Argyris’ to report on some other plausible explanations for the dysfunctional behavior caused by the budgeting. Past research on organizational theory has reported that individuals tend to identify themselves with their immediate groups rather than with the organization itself when it comes to the question of competition for funds, or recognition and authority between different departments. There is a different perspective on the social-psychological effects of budgets. It identifies the leader behavior as the main reason for the budget-related pressures and their negative impact on the organizational performance. The survey conducted by the past researchers shows that that leadership behavior both in respect of initiating structure which is work-related and consideration structure which is employee-related were positively associated with the pressures of budgeting. In both instances, the supervisor had to adjust his behavior to deal with situations caused by budget-induced pressures. If one considers the cost-benefit of such mental stresses on the part of the supervisor in the matter of achieving the budget targets, budgeting would prove a meaningless exercise unworthy of all the mental stress both for the supervisors as well as for employees.

Budget bias is one of the important elements in the behavioral aspects of budgeting process. Budgeting bias (or slack) is defined as “the extent to which a forecaster adjusts his forecast due to his own personal interests and perceptions and independently of factors which might influence the actual result” (Lowe and Shaw, 1968). The authors have identified the reward system as the major source of budget bias. The other causes are the recent company practices and norms, and insecurity feeling of the managers. While reward systems result in a downward bias, the company norms and insecurity feeling causes upward budget budgeting bias. Studies have proved that while the top management recognizes the existence of budgeting bias they are unable to take serious steps to counter bias and such attempts vary depending on the knowledge of the top management about the actual situation that had led to the creation of the budgeting bias and the frequency of forecasting trials (Lukka, 1988). Both budgets slack signifying the downward biasing and also upward biasing are considered by the managers to be the part of a legitimate budgeting game in which things like compensation strategy and intentional mistakes including deliberate avoidance of corrections occurred during the time of budget preparation were the ways in which the budgeting game is played.

Limitations of Budgeting on Motivating Employees

When the budget control is viewed as a game with the atmosphere created around the attainment of the budgetary standards the factors of motivation and job satisfaction are positively affected by the budget process. Collins et al., (1987) found that the subordinates increasingly use the different game-playing styles of their supervisors’ budgetary leadership style as well as the associated interpersonal stress, which go together with budgeting. These authors have identified the following different budgetary game styles:

  1. Devious game pattern – involving budgeting strategies that cannot be considered straightforward
  2. Economic game pattern – under this pattern the subordinates present the factual position of the budget-related issues, demonstrate that genuine requests would always be rewarded and also the subordinates invite their supervisors to assess for themselves the issues involved in attaining the budget standards
  3. Incremental game plan – the managers under this gaming style use the figures for the last budgeting period as the starting point for constructing the new one
  4. Time game pattern – people under this game pattern look for the appropriate time before they could make a request on the budget

Budget gaming cannot be taken to be positive and beneficial to the organizations in all cases where managers are employed to monitor and control the budgetary process. On a re-examination of the traditional relationship between the subordinates and the supervisors within the organization, it is found that apart from the budgets, people within the organization with the conflict between the individual goals and the organizational goals often cause malfunction in the budget process, which ultimately lead to the dysfunctional behavior within organizations. It is also found that the involvement of people who make and use the budgets is to be blamed for the dysfunctional behaviors in addition to the budgeting process itself. In the light of the results of the past research, budget games have increasingly been considered as issues that need to be dealt with rather than being supported by the top management.

The relationship between employee motivation and budgets has also received the attention of many research scientists in the area of accounting research. In order to analyze the impact of budgeting on the employee motivation the accounting theorists have taken the tool of expectancy theory of motivation. Expectancy theory of motivation assumes that the people select their actions based on the expectation that certain outcomes can be expected to result out of such actions and the personal satisfaction associated with the outcomes. The expectancy theory of motivation makes it clear that the budgets do not have much of an impact on the motivation of employees. There are two sources of positive motivation – one is the intrinsic satisfaction that can be gained by the employees from actually achieving the pre-fixed budget standards. The other source lies in the extrinsic rewards that may take the form of salaries, bonuses, increased promotional aspects and the improvement in the status which is associated with the attainment of budget goals (Emmanuel et al., 1990). Research studies report that better performance and higher level of employee satisfaction can be ensured by formulating difficult budgets, predictable reward structures and formal feedback results. However, it is also reported that despite the existence of a positive relationship between budget participation and performance, the relationship cannot be explained using the expectancy theory since the path identifying the relationship between them could not explain the impact of the relationship. The results of the studies confirm the utility of expectancy theory of motivation in developing varied models of budgetary motivations. However, the model has not fared well in predicting the performance of audit staff members. He found that while the expectancy model was not of much use in predicting the audit staff performance, it has played a significant role in predicting the employee job satisfaction and through this confirming the motivational effect of budgeting only on satisfaction.

Limitation of Adaptability

A fixed budget may not provide adequate support to the business for meeting the changing business environment. Traditional budgeting can result in coordination problems and/or inefficiencies in the business processes. The use of fixed budget also acts as a deterrent on increasing the flexibility and ability of the firm to garner new business opportunities or to meet the changes in customer preferences and needs. This situation can be explained by the practice that the introduction of any new ideas or practices should find a place in the budget. In general, most of the companies who adopt fixed budgets do not take any efforts to revise the budget within the fiscal year to meet any changes in the internal or external circumstances affecting the business.

Limitations on Strategic Alignment and Focus

In most of the organizations that adopt budgeting, budgets are mere representation of the operational details of the costs and revenue of the firms. They are not linked to the implementation of any long-term strategy. The implementation of strategy involves the consideration of certain non-financial value drivers, which are not part of any budgeting exercises. Consequently, people at lower levels of the organization do not understand how their work will be aligned with the achievement of overall organizational objectives. The subordinates are not given goals, which are linked to achieving the strategy.

In addition, companies usually adopt distinct processes for long-term strategic planning and annual budgeting. The adoption of different processes would lead to the neglect of human and financial resources in the budget. This acts as a deterrent to using discretionary activities, which are designed to implement strategic initiatives. According to Kaplan and Norton (2001) the authors of the balanced scorecard approach, 60 % of the companies do not take the initiative of linking their strategies with the budgeting exercises. The executives do not find enough time to focus on formulating and implementing long-term strategies, because they spend more time in budget-related works. Top management teams of at least 85% of the companies spend less than one hour per month on strategies and their implementation (Kaplan & Norton, 2001).

Limitations of Hierarchy versus Process

Budgets essentially are based on the functional divisions and organizational structure of the firm. Therefore, the focus of budgets and budgeting process would be centered around prescribing and monitoring the performance of “functions, departments, cost centers and divisions” of the organization. Such a focus gives rise to a situation where numbers generated through budgets manage the organizational hierarchies and processes. However, in the present-day context the emphasis of the companies has been shifted to value creation as the basis for managing the business processes. Successful companies concentrate on managing the processes through a horizontal view of the organization where the customer interest takes the center space instead of taking a vertical hierarchy-based view. Concepts such as TQM have revealed that doing some activity or process would only result in costs and performance and for bringing permanent changes in the organization, it is necessary to make changes in the process.


Traditional budgeting has been criticized for causing failures when there is the necessity of creating a high-performance climate. This research has shown that the traditional budgeting process has serious behavioral and social-psychological problems resulting in mental stress for both the supervisors and employees when subjected to meeting the budget targets. Studies show that employee empowerment suffers a setback when linked with achieving the budget targets. On the contrary, empowerment becomes effective when the control is based on the corporate visions, values, and codes of conduct, rather than on the results, which is the cornerstone in the traditional budgetary controls. Second, since financial performance measures in the form of numbers become predominant in making people accountable under budgetary control, budgeting fails to make the people accountable for other value-based measures like customer satisfaction. Third, traditional budgets provide the organizational members with no scope for empowerment as budgeting provides little resource capabilities to them, when most of the resources are committed to the preparation of budgets and in following up their achievement.

Reflective Report


Developing a reflective report is similar to the reflective process. This process involves the returning of oneself to his experience and attending to the personal feelings so that he can narrate his experience and feeling. It also involves a final reevaluation of the experience.

The activity undertaken in this project is to investigate the usefulness of the budgeting process as a control tool in the hands of the companies in the modern business context. This brief is to provide a reflective report, which explains and critically assesses the work situation that includes a review of self and task-oriented skills. The research was done using secondary sources for the collection of data and information on the topic chosen for research. First, it was decided to visit local libraries to refer to various management accounting books to collect information on the topic, which will facilitate the research. However, during several visits it was possible to collect only basic information concerning the budgeting process, advantages and problems associated with budgeting from the textbooks, as it was not possible to find any latest book which looked at budgeting critically. In the process, I could develop a pattern of searching the required information from the available sources. Once I understood that the research could not progress further only by looking at books, I considered the option of using Internet search engines for collecting information from articles published in professional journals and books available online. This effort gave me enough resources to collect data for the research. However, there was one more problem encountered with the research. There are not enough resources, which are of recent origin. Most of the problems associated with budgeting and its control ability are behavior-oriented. Therefore, the research has to lean more towards behavioral aspects of budgeting to develop a critical review of the process. Moreover, some of the resources could not meet the time standards set for the dating of the resources. As a researcher, the study enabled me to acquire new skills of quickly reviewing the resources to assess the usefulness of the resource. It also helped me to develop a critical bent of mind of looking at an issue laterally from all angles.

The research report was prepared in a draft form and with a critical review of the report undertaken several times, the investigative report was trimmed to the present form.

On the reevaluation of the experience, I should say that the whole experience of researching the budgeting process and its usefulness as a management control tool was very new for me. The research gave me a deep insight into the budgeting process and helped me to understand several issues connected with budgeting, which I could not understand on a theoretical basis. For example, the behavioral approach to budgeting has provided me with entirely new ideas on the total budgeting process. After the completion of the research, I could feel that the traditional budgeting experience entailed enormous resources with inadequate returns on the investment. The resources have been over-utilized in the budgeting process, which could have been diverted towards formulating strategic plans and implementing them to meet the changing circumstances in the market and in the economy. The awareness is just emerging.


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