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Management Accounting Research 21 (2010) 56–75

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Management Accounting Research

j o u r n a l h o m e p a g e : w w w . e l s e v i e r . c o m / l o c a t e / m a r

Beyond budgeting or budgeting reconsidered? A survey of North-American budgeting practice

Theresa Libby a,∗, R. Murray Lindsay b

a School of Business and Economics, Wilfrid Laurier University, Waterloo, ON, Canada b Faculty of Management, University of Lethbridge, Lethbridge, Alberta, Canada

a r t i c l e i n f o

Keywords: Budgets Beyond budgeting Survey of budgeting practice

a b s t r a c t

Budgets have historically played a key role in management control; however, recently they have become the subject of considerable criticism and debate. Some argue that the problems with budgeting stem from the way budgets are used (Horngren et al., 2004) while others argue that budgeting processes are fundamentally flawed (Hope and Fraser, 2003a). Hansen et al. (2003), among others, have called for a systematic examination of these issues against empirical evidence. In this paper, we present the results of two surveys of mid- to large-sized North-American organizations to 1) update the literature on North-American budgeting practices, 2) collect empirical evidence to assess the criticisms, and 3) begin to identify strong tendencies or patterns in budgeting practice to inform

future academic research. Overall, we find for the majority of firms that budgets continue to be used for control purposes and are perceived to be value-added. While problems exist

nizatio udgets

with budgets, orga than abandoning b

I believe that budgeting provides managers with a won- derful opportunity to rejuvenate their organizations. There is no other managerial process I am aware of that translates qualitative mission statements and corporate strategies into action plans, links the short term with the long term, brings together managers from different hierarchical levels and from different functional areas, and at the same time provides continuity by the sheer regularity of the process (S. Umapathy, Current Budgeting Practices in US Industry, 1987, xxii).

Not to beat around the bush, but the budgeting process

at most companies has to be the most ineffective prac- tice in management. It sucks the energy, time, fun and big dreams out of an organization. It hides opportunity and stunts growth. It brings out the most unproductive behav- iors in an organization, from sandbagging to settling for mediocrity. In fact, when most companies win, it is in spite

∗ Corresponding author. E-mail addresses: [email protected] (T. Libby),

[email protected] (R.M. Lindsay).

1044-5005/$ – see front matter © 2009 Elsevier Ltd. All rights reserved. doi:10.1016/j.mar.2009.10.003

ns are adapting their use to account for these problems rather altogether.

© 2009 Elsevier Ltd. All rights reserved.

of their budgets, not because of them (Jack Welch, Winning, 2005, 189).

1. Introduction

The budget has historically played center stage in most organizations’ systems of management control (Otley, 1994). However, recently it has been the subject of con- siderable criticism (Hansen et al., 2003). Budgeting has been deemed “broken” (Jensen, 2001), “a thing of the past” (Gurton, 1999), or an “unnecessary evil” (Wallander, 1999). European surveys also report a growing dissatisfaction among organizations with their budgeting systems (Neely

et al., 2003; Eckholm and Wallin, 2000).

The case against traditional budgeting has been argued most forcefully by Hope and Fraser (2003b) as part of the Beyond Budgeting Roundtable (BBRT).1 The authors argue

1 Members of the Beyond Budgeting Roundtable (BBRT) are individu- als and organizations who are interested in managing without budgets. Membership in the BBRT is worldwide with the largest membership base in Europe.

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T. Libby, R.M. Lindsay / Manageme

hat budgeting systems often result in dysfunctional behav- or and consume large amounts of management time.2

dditionally, they often impede firms from being flexible nd adaptive in the increasingly unpredictable environ- ents facing contemporary organizations; and they are

isconnected from strategy and thus out of sync with com- etitive requirements.3

Of course, this is not the first time budgeting practices ave been criticized. However, there is a difference this ime. In the past, criticisms of “traditional budgeting” were ypically made by academics and were often exaggerations f “current worst practice” that had long been singled out or criticism. Improvements could be made or problems voided (Horngren et al., 2004). On the other hand, the eyond Budgeting message originates from practice and he BBRT does not believe the solution lies in improving raditional budgeting; instead, their view is that the budget hould be eliminated as it is fundamentally flawed (Hope nd Fraser, 2003a,b).

Three points are noteworthy about this turn of events. irst, the overwhelming thrust of academic research into udgeting has been in the areas of participative budgeting nd reliance on budgetary targets for performance evalua- ion (Hartmann, 2000). This research has arguably become isconnected from the concerns raised by practitioners Hansen et al., 2003). The fact that such academic research as found mixed results (Kren and Liao, 1988; Shields and oung, 1993; Hartmann, 2000) and appears to have stalled uggests it may be useful to consider practitioner views to enerate new research perspectives on budgeting.

Second, Hope and Fraser’s argument is presented as universal prescription. It seems difficult to accept that

o many organizations would continue to use budgeting or control purposes (i.e., for managerial motivation and erformance evaluation) if it was fundamentally flawed Hannan and Freeman, 1989). Either previous research ndicating extensive use of budgeting in practice (e.g., mapathy, 1987) is no longer accurate and/or budgeting ractices have evolved. However, other than Epstein and anzoni’s (2002) working paper, there is very little recent

vidence regarding whether and how firms are adapting heir budgeting systems. Further, there are examples in the iterature in which highly successful firms utilize budget- ng extensively for both planning and control (Knight, 1992, imons, 1987, Knight and Dyer, 2005). One can only won- er why these firms have been so successful and innovative

f budgeting is inherently flawed.

Third, too much emphasis may have been placed by

ope and Fraser (2003b) on the assertion that budgeting ystems are inherently antithetical to successful adaptation n uncertain or unpredictable environments (see Hansen

2 The dysfunctional effects of using budgetary targets for performance valuation have been discussed extensively in the accounting literature. xamples include Jensen (2001) on the problems with budget-based ncentive contracts, Van der Stede (2000) on budgetary slack and manager hort-termism, and Merchant (1990) on budgets and earnings manage- ent. 3 See Libby and Lindsay (2003a,b) for an outline of the BBRT’s case

gainst traditional budgeting and the suggested replacement manage- ent model.

unting Research 21 (2010) 56–75 57

et al., 2003). For example, the BBRT’s exemplar case – Han- delsbanken (see Lindsay and Libby, 2007) – was not located in an industry (banking) that needed to adapt quickly or where revolutionary change was occurring. On the other hand, Simons’ (1987) Codman & Shurtleff case depicts a Johnson & Johnson subsidiary placing extensive reliance on budgeting in a highly innovative industry. Considerations other than environmental uncertainty or unpredictability would seem to be involved.

Taken together, these points suggest that we do not pos- sess a robust understanding of budgeting that is capable of explaining the mechanisms or processes giving rise to satisfactory or unsatisfactory consequences of budgeting systems. Yet, it is such knowledge that underlies the acqui- sition of deep theory (Bunge, 1997, 2003). The purpose of this paper is therefore to undertake a step forward in the development of such understanding. It presents the results of two largely descriptive surveys of budgeting practices in North-American companies for the purpose of determining whether any strong tendencies or patterns exist in bud- geting practices, manager beliefs about budgeting, and key outcomes associated with budgeting systems. Discovering such ‘facts’ or patterns is a necessary first step because they often enable doubts to be raised concerning conventional wisdom (Mintzberg, 1979, 1983). In addition, their discov- ery provides a reliable basis for theorizing efforts aimed at understanding how and why those facts came to be (Fiske, 1986; Kaplan, 1998; Haig, 2005; Hambrick, 2007).

Within this overall aim, the paper has four specific objectives. First, we update the literature in terms of cur- rent budgeting practices in North America. The most recent extensive study of North-American budgeting practices was conducted over twenty years ago by Umapathy (1987). Given the changes in the competitive environment since then, Umapathy’s results may no longer represent bud- geting practices utilized by contemporary North-American organizations. Second, we investigate budget managers’ overall perceptions, views and control uses of budgeting as well as their plans for budgeting in the future. Third, we examine the extent to which practitioners identify with some of the key criticisms that have been levied at budget- ing as summarized by Hansen et al. (2003) and determine how firms might be using budgets in ways that may over- come them. Finally, in attempting to identify avenues for future research, we examine factors associated with assess- ments of overall budget value and other key outcomes.

In the next section we outline our research method, describe the sample and provide basic sample statistics. Section 3 of the paper presents the survey results. Section 4 follows with a discussion of the study’s major findings and conclusions.

2. Method

2.1. Sample selection and survey design

We gathered data via a web-based survey of man- agers holding senior positions in medium to large-sized organizations. The sample came from the 2003 member- ship directory of CMA Canada and the 2004 membership directory of the Institute of Management Accountants

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ferences in conducting the Canadian and US surveys may

58 T. Libby, R.M. Lindsay / Manageme

(IMA). To be included in the sample, individuals must have been employed in a for-profit organization employing at least 100 people located in the United States or Canada (but outside of Quebec).4 In addition, we selected poten- tial respondents based on holding the positions of Vice President, Chief Financial Officer, Controller, Director of Budgeting or Division Manager. We chose these criteria to ensure that the target group of organizations was large enough to have formal budgeting systems and so that man- agers we contacted would have considerable experience in establishing and using budgets. The final target sample consisted of 2583 CMA Canada members and 13,712 IMA members.

We distributed the survey to CMA Canada members fol- lowing Dillman’s (2000) recommendations. We contacted individuals first via a pre-notice letter signed by the presi- dent of CMA Canada and sent by post. This letter described the survey’s objectives and encouraged members to partic- ipate. It also provided a web address for the survey and a password. The purpose of the password was to limit access to only those in the target group. This letter was followed by two dedicated email reminders sent by the CMA orga- nization at two-week intervals to all individuals included in the target sample.

We used a different method to distribute the IMA survey due to constraints imposed by the IMA. We first contacted targeted respondents via a dedicated pre-notice email signed by the Executive Director of the IMA. This email described the survey objectives and encouraged members to participate. It also provided a web address for the survey and a password. This email was followed by one reminder email sent after two weeks to all individuals included in the sample. The reminder email was included as a component of the regular weekly emails that the IMA sends to all of its members.

The Canadian survey took approximately 30 min to complete. The welcome page explained the survey objec- tives, provided a link to definitions of all variables used in the survey and provided contact information for possible assistance. Respondents selected a user name and entered the password provided by the researchers to access the sur- vey. Responses could be saved, which allowed respondents to leave the survey as required and return to the section where they had left off.

We organized the survey into several sections and each section dealt with a specific theme. Once respondents com- pleted a section, they could not return to it. Where possible, we drew or adapted measures from prior studies. We also developed new measures as required. Ten individuals with a similar profile to potential survey respondents pretested a preliminary version of the survey. Based on the pretest feedback, we shortened the survey, clarified some ques-

tions and changed the terminology to better reflect usage of some terms by practitioners. In addition, we tested the integrity of the process used to assign participants to one of the three different versions of the survey.

4 Due to financial and time constraints the survey was not translated into French making it unfeasible to survey CMA members located in Que- bec.

unting Research 21 (2010) 56–75

The assignment process requires some explanation. After answering a few questions at the start of the survey, the software assigned participants to one of two groups depending upon whether they reported using the budget for control purposes (i.e., for managerial motivation and performance evaluation) or not. If the respondent indicated that budgets were used for control in his/her organization, an automated algorithm built into the web site randomly assigned the respondent to one of two different versions of the survey.5 While containing some overlapping ques- tions, the two different versions contained version-specific questions so that we could collect a considerable amount of data concerning budgeting practices while limiting the time required for any one respondent to complete the sur- vey to no more than 30 min. Consequently, reported sample sizes will not always add to the total number of respon- dents.

We conducted the US survey several months after the Canadian survey. The US survey instrument was modified based on an analysis of the Canadian data. Modifications were made to eliminate non-discriminating questions, to improve some measures, and to add new questions based on what we learned from analyzing the Canadian data. Appendix A lists, in the order that they are discussed in the paper, the survey questions and their related scales as well as any differences between the Canadian and US surveys.

2.2. Sample statistics

Respondents submitted 558 surveys through the web- based system. CMA Canada members completed 346 of these surveys (response rate = 13.6%) while IMA mem- bers submitted 212 of these surveys (response rate = 1.5%). Table 1 shows that respondents had been employed on average 4.8 years in their current position and 7.9 years with their current company. Job titles spanned the list pro- vided with the most frequent titles being Controller (44.6%) and CFO (26.6%). Approximately 51% of responding orga- nizations were from the manufacturing sector and 49% were from the service sector. In addition, 46% of respond- ing organizations were stand-alone companies while 55% were divisions of larger organizations. These statistics were similar across the Canadian and US samples. However, dif- ferences existed with respect to size. The average Canadian respondent had divisional revenue in the $10–$50 mil- lion range while the average US respondent was larger with mean divisional revenues in the $50–$100 million range.

Although we can only speculate why the response rate was lower in the US sample, we believe the following dif-

have played a role: (i) we used different methods to con- tact potential respondents in the pre-notification stage (postal mail vs. email); (ii) we found it difficult to spec-

5 In total, 21% of respondents indicated that the budget was not used for control purposes. These respondents were assigned to a third version of the survey. This paper reports results only for respondents indicating budgets were used for control in their business units.

T. Libby, R.M. Lindsay / Management Accounting Research 21 (2010) 56–75 59

Table 1 Descriptive statistics for survey respondents.

Canada US Combined sample

Number of respondents 346 212 558

Mean years of employment: In current position 4.4 yrs 5.3 yrs 4.8 yrs With current company 7.6 yrs 8.5 yrs 7.9 yrs

Job titles (frequency): Chief Financial Officer (CFO) 30.0% 22.0% 26.6% Managing executive 5.2% 5.1% 5.2% Business controller 48.4% 39.6% 44.6% Director of budgeting 5.6% 13.8% 9.1% Other 10.8% 19.5% 14.5%

100.0% 100.0% 100.0%

Economic sector (frequency): Manufacturing 50.9% 50.6% 50.8% Service 49.1% 49.4% 49.2%

100.0% 100.0% 100.0%

Corporate structure (STRUCTURE) (frequency): Stand-alone unit 46.6% 44.1% 45.5% Division of a larger organization 53.4% 55.9% 54.5%

100.0% 100.0% 100.0%

Business Unit Revenues (SIZE) (frequency): Less than $1 million 5.4% 1.9% 3.8% $1–10 million 21.0% 12.6% 17.1% $10–50 million 34.4% 28.3% 31.6% $50–100 million 16.1% 13.6% 14.5% $100–500 million 14.5% 22.6% 18.3% $500 million–$1 billion 4.8% 7.5% 6.1%

i U t m a C f C U n o t g t l i d c m

e t b a l f c i o

$1–5 billion 3.2% Greater than $5 billion 0.6%

100.0%

Mean Business Unit Revenues $10–50 million

fy as meaningful a target group of respondents in the S study as in the Canadian study since the categoriza-

ions in the Canadian population databases were much ore homogenous and fewer in number; and (iii) we sent different number of follow-up reminders (two in the

anadian study vs. one in the US study) and we used dif- erent types of reminders in each case (dedicated in the anadian study vs. part of a routine communication in the S study). We find this last difference to be particularly oteworthy. Unlike the Canadian survey where the bulk f responses occurred after the two follow-up reminders, he one reminder that occurred in the US survey did not enerate any new responses. It is important to note that he IMA members received reminder as part of the regu- ar weekly email sent to all members containing several tems of news and announcements; consequently, respon- ents might have deleted the email without reading its ontents, or the item might have been “lost” in the larger essage. We report the results separately for each country when-

ver possible. Since there is no reason a priori to expect he results to differ, agreement across the two surveys can e taken as an important measure of their replicability nd generalization across North-American firms. Nonethe-

ess, the possibility that a common non-response bias actor influencing both samples cannot be ruled out. In all ases, when comparable country data are not reported, it s because the specific data was collected in one country nly.

10.1% 6.4% 4.3% 2.2% 100.0% 100.0%

$50–100 million

3. Results

3.1. North-American practitioners’ perceptions of budgeting

3.1.1. Should budgets be abandoned or improved? In a recent review, Hansen et al. (2003) observe that

the dissatisfaction with budgeting in practice is occurring on two fronts: those that wish to abandon budgeting alto- gether and those that wish to improve it. For example, Hope and Fraser (2003b) report several case studies of European companies that have successfully abandoned budgets for control purposes. On the other hand, Eckholm and Wallin (2000) report that only 15% of the Finnish companies they surveyed indicated they planned to abandon traditional budgeting whereas 61% aimed to improve the current bud- geting system and 24% reported they would continue to use their current budgeting system without changes. This divergence motivated us to investigate the situation that exists in North-American firms.

To examine this issue, we asked respondents to report whether they continue to use budgets for “control” pur- poses, where control was defined in the survey as “the use of budgets for managerial motivation and as a stan-

dard for performance evaluation.” Table 2 shows that 277 of respondents (80%) in the Canadian sample and 163 of respondents (77%) in the US sample indicated that budgets were used for control purposes in their organiza- tions. This result is comparable to Umapathy (1987) who

60 T. Libby, R.M. Lindsay / Management Acco

Table 2 Use of budgets for control* .

Canada US Total

Freq % Freq % Freq %

Are budgets used for control? Yes 277 80% 163 77% 440 79% No 69 20% 49 23% 118 21% Total 346 100% 212 100 558 100%

If use budgets for control: Do you plan to abandon the use of budgets for control?

Yes 2 1% 2 1% 4 1% Possibly 18 6% 4 2% 22 5%

The key criticisms were:

1. Budgeting consumes a lot of managerial time which makes it a costly process and the benefits may not be worth the cost.

No 257 93% 157 97% 414 94% Total 277 100% 163 100 440 100%

* “Control” was defined in the survey as “the use of budgets for manage- rial motivation and as a standard for performance evaluation purposes.”

reported that 83% of his sample used budgets for control purposes.

Within the group using budgets for control, 94% indi- cated they were not planning to abandon the use of budgets for control in the near future while 5% indicated they were possibly considering doing so, and only 1% indicated that they were definitely planning to do so within the next two years. Results were similar across the Canadian and US samples.

Additionally, we asked the Canadian respondents within this group whether they planned to make changes to their budgeting systems over the next two years. We found that 46% of respondents planned to change or adapt their budgeting systems within the next two years. The most important reasons cited for making changes are con- sistent with those reported in other surveys of practice (e.g., Ekholm and Wallin, 2000; Neely et al., 2003):

• preparing budgets is time consuming and the benefit may not be worth the cost;

• the lack of flexibility inherent in budgeting does not fit well with a constantly changing environment;

• budgets can be manipulated and provide incentives for the “wrong” (i.e., self-interested) behavior on the part of managers;

• budgetary reporting is not meaningful to front-line employees;

• budgeting eliminates the drive for constant improve- ment; and

• the budget is not aligned with strategy.

We also asked these respondents to indicate the types of changes they might make in open-ended response boxes. The following main categories of responses were obtained:

• incorporate a bottom-up orientation and gather more information from front-line managers;

• use rolling forecasts; • better align strategic planning with budgeting;

• prepare less detailed budgets initially and update them

regularly using ongoing forecasts.

In conclusion, these results suggest that the traditional use of budgets for control purposes will not soon be elim-

unting Research 21 (2010) 56–75

inated. As well, most firms in our sample planned to improve their budgeting systems, not abandon them. The US respondents provided further evidence on this issue by indicating their degree of agreement with the following statement: “The problems with budgeting are more to do with how they are used and some of the roles they are asked to play; budgets have the potential to be extremely useful if used appropriately.” The median level of agreement was 5 (agree) on a 6-point scale, with 88% of respondents agreeing or strongly agreeing with this statement (n = 78).

3.1.2. Are budgets value-added? Notwithstanding recent criticisms, the vast majority of

companies in this study reported that they will continue to use budgets for control purposes, presumably because the benefits of doing so outweigh the costs. That is, they believe budgets and the budgeting process are value-added. In this subsection, we specifically examine this conjecture.

We asked respondents to evaluate the degree to which the overall budgeting system was value-added by assign- ing a “grade” between 0 and 100 to their budgeting system. In assigning the grade, we asked respondents to consider “the amount of management time spent on the budget- ing process, as well as the budget system’s effectiveness in assisting the business unit to achieve its various objectives and any dysfunctional behavior that it may have caused.”6

Fig. 1 presents the results for the two samples. In both samples, the median score was 70 out of 100

corresponding to the scale anchor of “good value.” Bud- geting systems were rated as providing positive value (i.e., score greater than 50) in approximately 90% of the firms across the two samples. Moreover, “good value” or greater was reported in 50 and 64% of the Canadian and US firms, respectively, and 25% reported at least “very good value.” These results would seem to be supported by the degree of agreement by American respondents to the question “Budgets are indispensable; we could not manage with- out them.” The average response on a six point Likert scale was 4.2 (“somewhat agree”). Fifty percent of respondents agreed or strongly agreed with the statement; only 15% disagreed or strongly disagreed.

In conclusion, it appears that the majority of firms in our sample are finding ways to obtain considerable value from their budgeting systems. This supports the earlier finding that the bulk of firms are not considering abandoning the use of budgeting for control purposes.

3.2. The criticisms of budgeting

Hansen et al. (2003) summarized several criticisms of budgets and/or assumptions underlying the use of budgets identified from the academic and practitioner literatures.

6 Respondents considered each of these issues in some depth in earlier sections of the survey before being asked the value-added question in an attempt to get them to fully reflect on their response.

T. Libby, R.M. Lindsay / Management Accounting Research 21 (2010) 56–75 61

F unt the s objectiv g 0 to 100

2

3

4

s A p t

3

a t t W fi t t w

a r r

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ig. 1. Are budgets value-added? Budget value measure: “Taking into acco ystem’s effectiveness in assisting the business unit to achieve its various rade would you assign to the, budgeting system/process?” Grade (from

. Budgets inhibit firms from adapting to changes in a timely manner due to their fixed nature.

. The budgeting process is disconnected with strategy thereby putting it out of kilter with the competitive demands facing firms.

. The use of the budget as a fixed performance contract leads to unreliable performance evaluation and pro- motes budget gaming.

In this section, we examine the extent to which uch criticisms are shared by respondents in our North- merican sample of firms using budgets for control urposes. We also examine whether firms are taking steps o mitigate some of these criticisms.

.2.1. Criticism 1: budgets take too much time to prepare We asked respondents to indicate how many weeks the

nnual formalized budgeting process takes to complete in heir business unit (FIRM WEEKS). Table 3 (Panel A) shows hat the median response in the Canadian sample for FIRM

EEKS was 6 weeks (std. dev. = 4.7; n = 102). About 30% of rms took 4 weeks or less to prepare the budget while 31% ook 9–16 weeks and about 5% took more than 16 weeks. In he US sample, median firm weeks to budget were some-

7

hat higher at about 10 weeks (std. dev. = 6.6; n = 77). Survey respondents were also asked to indicate the

mount of time the average manager spent on budget- elated tasks in a year (e.g., developing the budget, evisions, reports, variance analysis). Table 3 (Panel A)

7 We further explored the discrepancy between FIRM WEEKS in the two amples by dividing firms into two size categories (small vs. large) using 50 million or less as “small” and greater than $50 million as “large.” The orrelation between business unit size and firm weeks to budget is r = 0.17 n the Canadian sample (p < .06, one-tailed) and r = 0.29 in the US sample p < .01, one-tailed) providing some evidence that differences in business nit size may be driving this result.

management time spent on the budgeting process, as well as the budget, es and any, dysfunctional behavior it may or may not cause, what overall ).

shows the median amount of manager time spent on budgeting-related tasks (MANAGER TIME) was three to four weeks in both samples (std. dev. 1.4 in the Canadian sample, n = 235; std. dev. = 1.5 in the US sample, n = 80). Assuming the average manager works 48 weeks per year, this represents approximately six to eight percent of the average manager’s time.

The time spent on budgeting may be driven by the extent of detail required and the number and level of people involved in preparing the budget. We describe this con- struct as “touch” in budgeting and measure it by asking respondents to indicate the extent of effort and involve- ment managers in their business unit devote to developing budgets (TOUCH). The scale was anchored from 1 (light) to 5 (heavy).8 Table 3 (Panel A) shows that the median score in the Canadian sample was 4.0 (std. dev. = 1.4, n = 110), near the ‘heavy’ end of the scale. Results are similar in the US sample (median score = 4.0, std. dev. = 1.1, n = 83). A reason- ably heavy degree of touch in developing budgets appears to be the norm.

We correlated the degree of touch in budgeting (TOUCH) with the time managers spend on budgeting (MANAGER TIME) as well as the total number of weeks it takes the business unit to prepare the budget (FIRM WEEKS). As one might expect, the correlation was positive in the Cana- dian sample for MANAGER TIME (r = 0.19, p < .01, n = 104) and FIRM WEEKS (r = 0.39, p < .01, n = 104).9 The results are

qualitatively similar in the US sample.

Overall, we find that the total number of weeks taken to complete the budget and the time spent by the managers in preparing the budget are significantly less for this sample

8 We reverse coded the question appearing in Appendix A for analysis purposes.

9 All significance tests reported in this paper are one-tailed unless oth- erwise noted. One-tailed tests are used when a priori reasons exist for specifying the direction of a relationship.

62 T. Libby, R.M. Lindsay / Management Accounting Research 21 (2010) 56–75

Table 3 Criticisms of budgeting* .

Median Std. dev. Observed Min Observed Max N

Panel A: “Budgets take too much time to prepare” FIRM WEEKS

Canadian sample (in weeks) 6.0 4.7 1 20 102 US sample (in weeks) 10.0 6.6 2 36 77

MANAGER TIME Canadian sample (in weeks) 3–4 1.4 <1 > 16 235 US sample (in weeks) 3–4 1.5 <1 >16 80

TOUCH in budgeting (1 = light to 5 = heavy) Canadian sample 4.0 1.4 1 5 110 US sample 4.0 1.1 1 5 83

Median Std. dev. Observed Min Observed Max N

Panel B: “Budgets impede adaptability” PREDICTABILITY of external environment (1 = easy to predict; 3 = somewhat predictable; 6 = impossible to predict)

Canadian sample 2.8 0.7 1.3 4.8 110 US sample 3.0 0.6 1.5 5.0 78

RELIANCE on budget to adapt relative to other approaches (1 = no reliance; 3 = moderate reliance; 5 = exclusive reliance) Canadian sample 3.0 1.1 1.0 5.0 121

EFFECTIVENESS of budget in adapting to change (−3 = highly ineffective; 0 = neither effective nor ineffective; +3 = highly effective) Canadian sample 1.0 1.4 −3.0 +3.0 98

Canadian sample Methods of Adaptation (frequency of response)

Strongly disagree (1)

Moderately Disagree (2)

Some what disagree (3)

Neutral (4)

Some what agree (5)

Agree (6)

Strongly agree (7)

N

Panel B – continued – “Budgets impede adaptability” It is somewhat easy to obtain new resources outside of the budgeting process to deal with market changes

9.3% 14.8% 11.0% 6.5% 18.5% 22.2% 17.6% 108

“Fast-track” approval processes exist to ensure resources are available on a timely basis for important initiatives not incorporated in the approved budget.

8.3% 6.4% 11.0% 10.1% 26.6% 21.1% 16.5% 109

Method of updating operating budget Canadian sample (N = 109) US sample (N = 87) Budgets are fixed. No changes made to them 44.0% 51.2% Budgets are revised during the year 56.0% 48.8%

a. At next formal budget review 47.6% 27.5% b. On an ad-hoc basis 32.7% 52.5% c. When next rolling budget prepared 19.7% 20.0%

Median Std. dev. Observed Min ObservedMax N

Panel C: “Budgets are rarely linked to strategy” LINKAGE (The budget is linked to strategic objectives)

Canadian sample 1 = Strongly disagree to 7 = Strongly agree (includes a neutral point of 4 = neither agree nor disagree)

5.0 1.6 1.0 7.0 133

US sample 1 = Strongly disagree to 6 = Strongly agree (respondents forced to take a position as no neutral point included in this scale)

5.0 1.1 2.0 6.0 81

Budget is linked to strategy implementation Canadian sample 1 = Strongly disagree to

7 = Strongly agree (includes a neutral point of 4 = neither agree nor disagree)

5.7 1.4 1.0 7.0 133

US sample 1 = Strongly disagree to 6 = Strongly agree (respondents forced to take a position as no neutral point included in this scale)

5.0 0.9 1.0 6.0 83

Budget emphasis Canadian sample (N = 109) US sample (N = 87)

Panel D: “Use of fixed performance contract” Budget emphasis low 48.3% 29.8% Budget emphasis high 51.7% 70.2%

Performance evaluation in the high-budget-emphasis group: Actual financial performance rigidly compared to budget 12.2% 16.9% Budget target adjusted subjectively at the end of the year 33.8% 23.7% Both budget target and other subjective factors used 23.0% 20.3% Budget target adjusted for uncontrollable budget variances 25.7% 32.2% Budget target adjusted at year-end using formula established at beginning of the year 5.4% 6.8%

* Appendix A includes the full measures for all of these scale items.

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to achieving strategic objectives/targets.” We designate this variable LINKAGE. Table 3 (Panel C) shows the median score for LINKAGE was 5 (somewhat agree) in the Cana-

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f firms than those reported by Hope and Fraser (2003b) i.e., 12–20 weeks and 20–30% of managers’ time) or by mapathy (1987) (i.e., 21–40% of managements’ time).

ncreased time for both samples is associated with the size f the business unit and the level of “touch” in preparing he budget. This begs the question whether “touch” adds rganizational value. We explore this issue further at the nd of this section.

.2.2. Criticism 2: budgets impede adaptability Hope and Fraser (2003a) assert that the new com-

etitive environment is characterized by unpredictability; rices and margins are constantly under pressure, product

ife cycles are shorter and customer tastes are fickle. This ituation leads to the importance of becoming adaptable nd flexible. They argue that budgeting is antagonistic to hese requirements because, once set, budgets are not typ- cally changed resulting in plans and targets that quickly ecome out of date.

To explore this assertion, we asked respondents how asy it is when setting the budget to anticipate or predict hanges in the external environment for the budget period.

e adapted this measure from Govindarajan (1984) and mapathy (1987). The scale ranged from 1 (easy to predict)

o 6 (impossible to predict). Table 3 (Panel B) shows that the edian response for this scale, called PREDICTABILITY, was

.8 in the Canadian sample (std. dev. = 0.7; n = 110) and 3.0 n the US sample (std. dev. = 0.6; n = 78). These scores fall at he “somewhat” predictable anchor on the scale.

We explored this matter further in the US survey by ask- ng respondents to indicate their degree of agreement with he statement “It is difficult to set accurate budgets because f the unpredictability of factors influencing the busi- ess.” Fifty-four percent of respondents at least ‘somewhat greed’ with this statement and 24% “agreed” or “strongly greed” with it. The correlation between responses to this tatement and PREDICTABILITY was .34 (p < 0.01). Second, e asked whether “Budgets quickly become obsolete or

utdated as the year goes by.” Sixty-five percent of respon- ents at least “somewhat agreed” with this statement and 0% “agreed” or “strongly agreed” with it. The correlation etween responses to this statement and PREDICTABIL-

TY was .23 (p < .05). These findings suggest that Hope and raser’s (2003) assumption that the business environment s unpredictable, resulting in budgets quickly becoming out f date, seems valid for a significant number of firms, but it ould be a mistake to generalize it to the majority.

Next, we asked respondents in the Canadian sample to ndicate the degree to which they rely on the budget to dapt to market changes relative to other measures. Pre- umably, if the budget is ill-suited to this task we should not nd a lot of reliance on it. The RELIANCE scale ranged from 1 no reliance) through 5 (exclusive reliance). Table 3 (Panel ) shows the median score for RELIANCE is 3 (std. dev. = 1.1; = 121) indicating a “moderate” degree of reliance is placed n the budget for adapting to market changes relative

o other methods. For the 81% of Canadian respondents lacing at least some reliance on the budget for adapt-

ng to market changes, i.e., those selecting a score of 2 some reliance) or higher, we also examined the degree to hich the budget was perceived as effective in achieving

unting Research 21 (2010) 56–75 63

adaptation to market changes. The EFFECTIVENESS scale ranged from −3 (highly ineffective) through +3 (highly effective). We found a median effectiveness rating of +1 (std. dev. = 1.4; n = 98) reflecting that the budget is per- ceived to be “somewhat effective.” This rating does not reflect an overwhelming positive endorsement but neither does it suggest that the budget is totally ill-suited to the task of facilitating adaptation.

Taken together, these results imply that while the majority of respondents utilize budgets to help them adapt to market changes, there is recognition that budgets are only somewhat effective in this role, perhaps because they become quickly out of date for a non-trivial number of firms; consequently, firms need to augment the budget process with other approaches. Table 3 (Panel B) presents the results of further questions examining this issue that were identified in the literature. We examined whether Canadian respondent firms make it easy to obtain new resources outside of the budgeting process to deal with unforeseen opportunities designed to accomplish strate- gic initiatives (58% report at least “somewhat agree”)10

and utilize fast track processes to do so (64% report at least “somewhat agree”). In addition, 56% of the Canadian sample and 49% of the US sample allow some type of bud- get revision during the year. In Canada, the most common method of revising the budget was at the next formal bud- get review (48%) which typically occurred at the end of the month or the end of the next quarter. In the US sam- ple, adjustments occur most frequently on an ad-hoc basis (52.5%). Finally, approximately 20% of respondents in both samples report using rolling budgets-the approach recom- mended by the Hope and Fraser (2003b). This finding is similar to Umapathy’s (1987, 85) result of 21%.

In conclusion, Hope and Fraser’s (2003b) assumption that firms’ competitive environment is characterized by unpredictability is valid for many firms in our sample, although the claim is over-generalized. Additionally, our results lend support to their assertion that the budget- ing process is potentially weak in helping firms deal with adapting to change; however, firms appear to adjust budget targets in various ways to mitigate this concern and adopt processes to obtain new resources outside of the budget process when necessary.

3.2.3. Criticism 3: budgets are disconnected from firm strategy

Kaplan and Norton (2001) observe that the majority of firms they have worked with fail to link their budget- ing systems to achieving strategic objectives. Hope and Fraser (2003b) also share the view that budgets are typ- ically prepared in isolation from, and not aligned with strategy. To investigate this issue, we asked survey respon- dents whether “The budgeting process is explicitly linked

dian sample (std. dev. = 1.6; n = 133). Untabulated results

10 We reverse coded this question for the purpose of interpreting the results.

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64 T. Libby, R.M. Lindsay / Manageme

suggest that approximately 11% of the sample disagrees that the budget process is explicitly linked to achieving strategic objectives (a rating of 1 or 2 on the LINKAGE scale) while 48% agree (a rating of 6 or 7 on the LINKAGE scale). We observed qualitatively similar results in the US sample.

Second, we asked respondents to indicate their degree of agreement with three statements drawn from Kaplan and Norton (2001) concerning the degree to which budgets are linked to strategy implementation within their busi- ness unit. These statements consisted of: (i) “Setting the budget causes us to talk about and reflect upon our strat- egy”; (ii) “We sometimes change our strategy/tactics based on the feedback derived from going through the budgeting process”; and (iii) “Within the budget process, managers are expected to identify tactical initiatives to close the gap between current performance and the desired level of per- formance.” We averaged respondents’ agreement scores on these three items to create a measure of the degree to which budgets were linked to strategy implementation. Table 3 (Panel C) shows the median score on this measure was 5.7 (std. dev. = 1.4; n = 133) in the Canadian sample. This median score falls between the anchors “somewhat agree” and “agree” using a seven point scale. Untabulated results indicate that approximately 67% of the Canadian sample reported at least “somewhat agreeing” that concrete steps were being taken to link the budgeting process to strategy implementation.11 We observed similar results in the US sample.

Third, we examined the importance of the budget rela- tive to other means for implementing business unit strategy. We asked respondents to allocate 100 points across the fol- lowing means that could be used to implement strategy: budgeting process, performance measurement and evalua- tion system, hierarchical authority structure, business unit culture and boundary systems.12

Fig. 2 indicates that organizations in both countries placed the greatest degree of reliance on the budgeting process, the performance measurement and evaluation system, and the hierarchical authority structure in imple- menting strategy (between 22 and 25 points out of 100). US companies rely on culture next (18 points) followed by boundary systems (12 points), whereas companies in Canada rely on these two mechanisms to a fairly equal amount (12 and 15 points, respectively). These results suggest that companies utilize a number of mechanisms for implementing strategy, all of which are important, although greater weight is placed on a subset of them,

including the budgeting process. The importance attached to the budget in implementing strategy is reflected by respondents’ perception of its usefulness. The budgeting process was rated by 64% of Canadian respondents as a

11 We performed a validity check on this result by correlating LINKAGE and the degree to which budgets were linked with strategy implemen- tation. The correlations were r = .64 (p < .001, n = 133) and r = .64 (p < .001, n = 83) for the Canadian and US samples.

12 The survey stipulated that boundary systems “give people the freedom to act within clearly delineated bounds as established by codes of conduct, mission statements, ‘stop-doing’ lists, and the communication of strategic themes” (Simons, 1995).

Fig. 2. How Strategy is implemented in responding organizations. Strat- egy implementation measure: “Please allocate a total of 100 points across the following elements of management control to reflect their relative importance in implementing strategy in your business unit”.

somewhat effective (46.3%) or effective (17.7%) method for implementing strategy.

In conclusion, these results indicate that that the criti- cism that budgets are not linked to strategy is unfounded for the majority of firms in our two samples. The budget- ing process is used in many firms to promote strategically focused behavior and is recognized as being an important mechanism for doing so.

3.2.4. Criticism 4: the use of budgets as fixed performance contracts

Hope and Fraser’s (2003b) most strident criticism is that budgets often serve as a “fixed performance contract.” Implicitly or explicitly, the nature of this contract is that if actual performance meets or exceeds a pre-specified budget target, performance will be deemed satisfactory (or better) and this will likely result in rewards. Hope and Fraser (2003a,b) argue that a fixed target represents a poor standard for performance evaluation when fac- tors underlying the budget may have changed during the budget period. Further, this inevitably leads to budgetary gaming by subordinates to increase the probability of receiving positive performance evaluations and associated pay increases (see also Welch, 2005)—a process Jensen (2003) refers to as “paying people to lie.” We undertook a number of analyses to investigate this criticism.

Performance evaluation. We asked respondents to rate the degree of emphasis placed on meeting budget targets in the performance evaluation process using a scale adapted from Van der Stede (2001). Table 3 (Panel D) shows that 52% of Canadian respondents and 71% of US respondents indicate that budget emphasis is high.13 For this group of respondents, we examined the prevalence of the use of fixed performance contracts. Our results indicate that only 12% of respondents in the Canadian high-budget-emphasis group and 17% of respondents in the US high-budget-

emphasis group report that actual financial performance is rigidly compared against the pre-established budget target with no allowance for changes occurring in the competitive environment during the year.

13 Appendix A lists the items making up the budget emphasis scale.

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This analysis suggests that the fixed performance con- ract is much less prevalent than what the BBRT would have s believe. If one combines these two findings with the arlier result that only 80% of Canadian respondents and 7% of American respondents use budgets for control pur- oses (see Table 2), then one can extrapolate that only 5% f Canadian firms (.80 * .52 * .12) and approximately 9% f American firms (.77 * .71 * .17) use a fixed performance ontract.

Table 3 (Panel D) shows 33.8% of firms in the Canadian igh-budget-emphasis group and 23.7% of firms in the US igh-budget-emphasis group adjust the budget target sub-

ectively at the end of the year to account for unexpected hanges in the external environment. In addition, 23.0% f firms in the Canadian high-budget-emphasis group and 0.3% of firms in the US high-budget-emphasis group use oth the budget target and other subjective factors to eval- ate performance at the end of the year. The remaining espondents indicate they either adjust the budget tar- et for the amount of any uncontrollable budget variances etermined at the end of the year (25.7% of the Canadian igh-budget-emphasis group and 32.2% in the US high- udget-emphasis group) or adjust the budget target at he end of the year for unexpected events using a for-

ula established at the beginning of the year (5.4% of the anadian high-budget-emphasis group and 6.8% of the US igh-budget-emphasis group).

In conclusion, the evidence does not support the BBRT’s ey assumption of the prevalence of the fixed performance ontract in practice. In fact, it is remarkable how few firms se the budget in this way for performance evaluation.

nstead, we find that subjectivity in performance evalua- ion or making allowances for non-controllable events is elatively widespread.

Budget gaming. The analysis now turns to determin- ng the extent to which certain budgetary games occur n our sample organizations. The list of gaming behaviors hown in Appendix A were drawn from Merchant (1985), mapathy (1987), and Bart (1988). We asked respondents

o use the previous two years as a point of reference and to ndicate how often each of the identified gaming behaviors ccurred in their business unit.

In Canada (Fig. 3, Panel A), the most frequently occur- ing games were deferring necessary expenditures to uture periods (80% report that this occurs “occasion- lly” or “frequently”) and negotiating easier targets by sandbagging” (77% indicate that this occurs “occasion- lly” or “frequently”). The other listed games occurred, ut when they did it was more often “occasionally” than frequently” and over 50% of the firms reported that they never occurred.”

In the US (Fig. 3, Panel B), a greater proportion of respon- ents report that gaming behaviors occur and that these

ehaviors occur more often than in the Canadian sample. Mann–Whitney test finds this difference to be statisti-

ally significant (p < .001, n = 211).14 Similar to the Canadian ample, deferring necessary expenditures (91% indicate

14 See Appendix A for how the GAMING score for each company was alculated.

unting Research 21 (2010) 56–75 65

“occasionally” or “frequently”) and sandbagging (86% indi- cate “occasionally” or “frequently”) were the two most prevalent gaming activities. The other three gaming activi- ties all occur (either occasionally or frequently) more often than they do not occur.

These results indicate that budgetary gaming is preva- lent, consistent with the writings of Bart (1988), Jensen (2001) and Hope and Fraser (2003a,b). In fact, only 5 and 1% of the respondents in the Canadian and US samples, respectively, reported no incidences across the five gam- ing activities examined. However, what is not so well known is whether such behaviors actually impair long-run organizational performance. To examine this issue, we cor- related the degree of budget GAMING with its perceived negative effect on long-run performance of the business unit (NEGLRP). The observed correlation is r = .28 (p < .001; n = 133) in Canada and r = .56 (p < .001; n = 78) for the US respondents. These results suggest that increases in gam- ing are perceived to negatively impact long-run business unit performance.

3.3. Factors and outcomes associated with perceptions of budget value

We now undertake some additional analyses to better understand what factors and outcomes might be associ- ated with perceptions of increased budget value. We begin by correlating overall BUDGET VALUE with PERFORMANCE measured as the mean rating over several items on a scale of −2 (considerably below direct competitors) through +2 (considerably above direct competitors). The specific per- formance items are listed in Appendix A. Table 4 indicates that the correlation between BUDGET VALUE and PERFOR- MANCE is positive and significant in both the Canadian (r = 0.16, p < 0.01) and US (r = 0.36, p < 0.001) samples. This result is consistent with the intuitive notion that a good budgeting system can lead to higher levels of firm perfor- mance, but it needs to be recognized that the design of this study does not permit statements of causation to be made.

Following this, we examined the association of several contextual factors (size, strategy, structure and predictabil- ity of the environment) identified by Umapathy (1987) with BUDGET VALUE (see Table 4). We find that neither the SIZE of the business unit (as measured by business unit revenues) nor the divisional STRATEGY (cost leader vs. differentiator [Porter, 1980]) were significantly correlated with BUDGET VALUE in either the Canadian or US samples. In the US (but not the Canadian) sample, the business unit STRUCTURE (stand-alone unit or division of a larger orga- nization) was significantly correlated with BUDGET VALUE (r = −0.16, p < 0.05, two-tailed) indicating that stand-alone business units derived greater value from the budget than did business units that were divisions of larger organi- zations. Finally, the correlation between PREDICTABILITY and BUDGET VALUE was negative in both samples. How- ever, only the US sample result is statistically significant

(r = −0.27, p < 0.05, two-tailed).

We also considered whether differences in perceived BUDGET VALUE might be associated with the way bud- gets are developed and used within firms. The first analysis examined the correlation between TOUCH and BUDGET

66 T. Libby, R.M. Lindsay / Management Accounting Research 21 (2010) 56–75

Fig. 3. Budgetary gaming. Gaming measure: “Using the last two years as a point of reference, how often do you think the, following practices have occurred in your business unit?”

Table 4 Factors associated with budget value.

Canadian sample US Sample

Correlation with BUDGET VALUE

p value n Correlation with BUDGET VALUE

p value n

PERFORMANCE 0.16 p < 0.01* 211 0.36 p < .001* 162 SIZE 0.03 ns 205 −0.03 ns 159 STRATEGY −0.08 ns 217 −0.08 ns 158 STRUCTURE −0.06 ns 215 −0.16 p < 0.05** 161 PREDICTABILITY −0.10 ns 104 −0.27 p < 0.05** 78 TOUCH 0.21 p < 0.05** 104 0.20 p < 0.08** 82 Budget linked to strategy implementation 0.43 p < 0.001* 106 0.60 p < 0.001* 83 GAMING −0.22 p < 0.01* 133 −0.33 p < 0.002* 78

Variables were defined as follows (see Appendix A for questions and scales): BUDGET VALUE measured as 0 = disaster through 100 = outstanding value, PERFORMANCE measured as −2 = considerably below most direct competitors through +2 = considerably above most direct competitors, SIZE measured as 1 = Business unit revenues less than $1 million through 8 = Business unit revenues greater than $5 billion, STRATEGY measured as 0 = cost leader and 1 = differentiator, STRUCTURE measured as 0 = stand-alone unit and 1 = division of a larger organization, PREDICTABILITY measured as 1 = easy to predict through 6 = impossible to predict, TOUCH measured as 1 = light through 5 = heavy. Budget linked to strategy implementation measured on a scale of 1 = strongly disagree through 7 = strongly agree (6 point scale used in US sample as neutral point was removed), GAMING measured on a scale of 0 = never to 2 = frequently.

* One-tailed. ** Two-tailed.

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ALUE. A positive, significant correlation was found in oth samples (r = 0.21, p < 0.05, two-tailed in the Canadian ample and r = 0.20, p < .08, two-tailed in the US sample), uggesting that involvement by many levels of managers nd detailed budgeting is perceived to be value-added.

Next, we observed large, positive correlations in both amples between the degree to which budgets are linked o strategy implementation and BUDGET VALUE (r = 0.43, < .001 in the Canadian sample; r = 0.60, p < .001 in the US

ample). These results provide strong support for Kaplan nd Norton’s (2001) recommendation that the budgeting rocess should be linked to strategy implementation.

Finally, budget GAMING was correlated with BUDGET ALUE. The correlation was negative and significant in both

he Canadian (r = −0.22, p < .01) and US (r = −0.33, p < .01) amples. This result suggests that firms need to prevent udgetary gaming in order to reap a higher level of value rom their budgeting system. Combined with the earlier nding of the negative impact of gaming on long-run firm erformance, our analysis suggests that firms need to treat he gaming issue seriously.

. Discussion and conclusion

It is undeniable that Hope and Fraser (2003b) have made valuable contribution to the discipline. They have pro-

ided a cogent and insightful analysis documenting the eaknesses of budgeting and have caused us to think eeply about how to improve the entire management pro- ess. However, our findings suggest that budgeting systems ontinue to play a key role in firms’ control systems and hat most companies have no plans to abandon this prac- ice, although many are planning to take steps to improve heir budgeting systems to overcome some of the common riticisms. Further, given these findings (and in further sup- ort of them), it is not surprising that the average firm in ur sample rates its budgeting system as providing good or etter value. That said, 18 and 13% of Canadian and US firms, espectively, report little or no value or negative value from heir budgeting systems (a score below 60), and approxi-

ately 20% of responding firms in both countries do not use udgets for control. Thus there are some firms that may be eceptive to the Beyond Budgeting message.

Moreover, based on our findings, it would appear that any (but not all) of the assumptions and criticisms under-

ying Hope and Fraser’s argument are over-generalized in erms of their applicability to the average firm. In particular, his study found that:

Use of the fixed performance contract is much less preva- lent than what is suggested by the BBRT or the Reliance on Accounting Performance Measures (RAPM) literature. In fact, our data suggests that it is only used in a very small percentage of firms (5 and 9% of firms in Canada and the US, respectively). Subjective considerations or allowances for non-

controllable events are frequently observed in firms using the budget to evaluate performance. Superiors would appear to be more sophisticated than what is acknowledged in textbooks and some prior academic work.

unting Research 21 (2010) 56–75 67

• Time spent on budgeting in the average sampled North- American firm is considerably less than what critics suggest and does not appear excessive.

• The majority of sample firms do not operate in unpre- dictable environments to the point where budgets become quickly outdated, although a good number of firms do face unpredictable environments. How- ever, many firms utilize adaptive processes to mitigate this concern (e.g., fast track processes to obtain new resources). As well, budgets are revised much more often than expected. This may explain the result that such a small percentage of firms sampled in this study rigidly evaluate a manager’s performance against the fixed bud- get.

• In the majority of firms surveyed, the budget process is explicitly linked to strategy implementation. In fact, budgeting is reported by respondents to be an impor- tant means for implementing strategy and the majority of respondents report that it plays a useful role in doing so.

• Finally, budgetary gaming behaviors are a problem in our sample firms in both countries, although it appears more pronounced in the sampled US firms.

In attempting to move the budgeting research agenda forward, we believe that one should not take an “either/or” focus (i.e., Beyond Budgeting vs. traditional). There are examples of very successful companies utilizing both approaches. Instead, it would appear to be more fruitful to develop the possibilities for each model by seeking deeper understanding as to the mechanisms and processes which underlie the application of each model in highly success- ful companies. Given this, future research in this area is unlikely to be facilitated by the use of representative sam- ples. Instead, in-depth study of a set of carefully chosen companies focusing on key issues will be required. It will also require examining the total package of controls in use (Fisher, 1995; Otley, 2001; Chenhall, 2003; Merchant and Van der Stede, 2006).

The types of questions to consider are many and var- ied. For example, Hope and Fraser (2003b) outline the principles underlying highly successful Beyond Budgeting companies. A similar activity needs to be performed within highly successful ‘traditional’ budgeting companies in line with respondents’ views in this study that the problem with budgeting lies in how it is used rather than any inher- ent flaws. To delve into this point further, we consider the example of Johnson & Johnson described in Simons’ (1987) Codman & Shurtleff case. J&J makes extensive use of bud- gets (budgets are the heart of their control system) in an extremely unpredictable business environment and places considerable emphasis on meeting or exceeding budget targets. However, their control system utilizes a number of elements that would seem to mitigate the concerns of utilizing a high-budget-emphasis style in an unpredictable environment (see Govindarajan, 1984; Hirst, 1987; Hope

and Fraser, 2003b). In particular, they use:

• A contingency fund to help deal with uncertainty; • Subjective evaluations and a strong HR system;

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• Highly detailed budgets across responsibility centers and the involvement of lower to senior levels of management (our TOUCH variable);

• A strong culture for managing for the long term; • A long-term planning system that is strategically ori-

ented; • Operational (budgetary) plans that are linked to the long-

term (strategic) plan; • Multiple revisions (mainly of tactics); • A budget system that is managed interactively, not diag-

nostically (Simons, 1995); • A culture of information sharing; and • A strongly decentralized management structure.

Other questions include examining whether other high performing ‘traditional’ budgeting firms utilize similar ele- ments as Johnson & Johnson (i.e., determining key elements within the traditional model)? Does an unpredictable envi- ronment impact the use of some of these elements (i.e., contrasting successful companies operating in predictable and unpredictable environments)? What specific practices underlie the ability for successful firms to innovate in highly unpredictable environments? Also, are there any patterns to the kinds of successful firms that adopt the Beyond Budgeting approach? What explanations under- lie such patterns? Lastly, can successful firms mitigate or eliminate the use of budgetary gaming. If so, how is this achieved?

Another suggestion focuses on examining whether there are consistent factors across the two models. For example, Handelsbanken, the exemplar case in Beyond Budgeting (Lindsay and Libby, 2007) shares the follow-

ing characteristics with Johnson & Johnson, a company exhibiting extensive use of budgeting for control: a strongly decentralized management system; a strong cul- ture, including a culture of information sharing, subjective evaluations and the use of interactive control systems.

unting Research 21 (2010) 56–75

In this regard, it is important to recognize that the Han- delsbanken story is much more about promoting and controlling for radically decentralized employees than it is about managing without budgets.

Perhaps most importantly, the finding of the frequent use of subjective considerations and allowances for non- controllable events within a budget paradigm would seem to cast doubt on the validity of the RAPM paradigm that has dominated management accounting research (Hartmann, 2000). At a minimum, there is a need to better understand how subjective considerations and other allowances are used in performance evaluation.

Finally, the results of this study must be interpreted in light of its limitations. The paper’s low response rates and method of company selection makes generalizing these results to all North-American firms problematic. However, some comfort can be taken in the fact that results were remarkably consistent between the two samples, provid- ing a strong indication of their replicability. Nonetheless, a common bias impacting both samples cannot be ruled out. Also, the standard limitation that surveys can be affected by unreliable responses or that the measures utilized may not be a valid surrogate for the constructs of interest needs to be acknowledged. However, the severity of this threat is weakened in the present study because many of the questions are low level constructs (e.g., how long does budgeting take in your firm?). Further, we pre-tested the surveys, performed numerous validity checks, obtained reasonably consistent results across the two samples and within samples, and respondents could not go back and change their answers once a section was completed.

Notwithstanding these limitations, we believe this

study has made an initial contribution towards further developing our understanding of what remains an impor- tant and widespread organizational practice – budgeting – and for setting direction for future research in this area.

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