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Dysfuntional Behavior to Budgetary Process

Definition, Evidences and Measurement Issues

Dysfunctional behavior has its origins traced back to Argyris (1952) seminal case study-

oriented paper. This term describes the ..organizational and behavioral effects seen in

supervisors induced by the use of budgeting (Hartmann, 2000) and refers to the violation of

control system rules and procedures (Jaworski and Young, 1992). Hartmann (2000) contends

that dysfunctional behavior is not just an irrational human tendency, but rather reactions that

can be rationally expected in response to controls and processes. The extent to which such

controls are perceived to impact on performance, evaluation, and ultimately rewards, is also

viewed as having an impact on managerial stress and tension, thus leading to potential acts of

dysfunctional behavior. Hence, Jaworski & Young (1992) expect dysfunctional behavior to be

translated by ..actions in which a subordinate [purposefully] attempts to manipulate elements

of an established control system for his own purposes.

On the other hand, Robbins (1994) uses the term strange behavior and illustrates it

with the common example of managers embarking on a spending frenzy to exhaust their

budget before a given date, in order to avoid cutbacks in the next periods allocation. This case

in point, however, merely gives credit to Jaworski & Youngs (1992) comments on the use of

anecdotes when referring to dysfunctional behavior:

..while behavioural theories such as dissonance, goal setting and power theories have been

used to explain dysfunctional behaviour, it has been difficult to draw clear conclusions

regarding why such behaviour occurs as many of the findings are taken from anecdotes or

small sample studies.. (1992)

Ashton (1976) also examined the issue of dysfunctional behaviors as the opposite and

unintended consequences of the traditional deviation-counteracting feedback control

mechanism. Indeed, a control mechanism can be viewed as a target -monitor-report-reaction

to achieve target loop, which obviously aims at eliminating variances and ensuring

achievement of targets.

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However, Ashton (1976) believed that a parallel loop is also at work within

organizations and contended that the unintended and dysfunctional consequences generated by

the control system may be perpetuated and amplified, hence resulting into a deviation-

amplifying feedback. Within the context of a budgetary control system and consistent with

Argyris (1953) comments, Ashton (1976) provides some examples of deviation amplifying

feedback instances such as sub-units (departments) being self-centered rather organization

goals-focused and difficulties in gathering truthful information to assign responsibilities for

unfavorable variances.

There are various forms of dysfunctional behaviors that can occur in an organization but

with one common and underlying objective: to use the rules and procedures to ones

advantage. Hirst (1983) considers dysfunctional behavior to be translated in rigid bureaucratic

behavior, strategic behavior, resistance and invalid data reporting. But, a more thorough

description of the forms of dysfunctional behavior, as reviewed by Birnberg(1983), can be listed

as follows:

Smoothing The subordinate utilizes the information system to his/her benefit by altering the

pre-planned free flow of data without altering the actual activities of the organization. The most

common example would be the booking of sales/expenses achieved/incurred in the current

period to subsequent periods.

Biasing & Focusing The manager has flexibility over the various indicators or types of

information he/she can report. Biasing would imply selecting the one(s) suiting best the

circumstances and more favorable to the manager. Such situations usually exist when managers

are being required to provide estimates of future events12 (Birnberg 1983). This is very much

related to the idea of focusing, since the attention of superiors is being diverted to specific, and

more positive, elements of a system.

Filtering - According to Birnberg filtering occurs when information is withheld because the

subordinate thinks that this could be used by his/her superior to hinder the subordinates

personal goals (e.g. career progression). This was later confirmed by OReilly & Roberts (1974)

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study. Birnberg (1983) also classify the delaying of reports, over-presentation (to cause

information overload) or over-aggregation as a form of filtering.

Illegal Acts or Falsification Such dysfunctional behaviors may include forgery of

documents and reports i.e. existing information is intentionally altered to satisfy required norms

and variances. Examples of studies that have documented such practices are Mars.

As we know the budgeting process is an essential component of management control

systems and has been an effective system by which management can successfully plan,

coordinate, and control. The process involves the creation and implementation of the broad

objectives of an organization, the detailed objectives, and a short-term and long-term financial

plan. The philosophy and procedures used to implement zero-base budgeting in industry and

government settings are quite similar, only slightly differing with the mechanics to fit the

specific needs of each organization.

Budgeting is the cornerstone of the management control process in nearly all

organizations, but despite its widespread use, it is far from perfect. Practitioners express

concerns about using budgets for planning and performance evaluation. The practitioners argue

that budgets impede the allocation of organizational resources to their best uses and encourage

myopic decision making and other dysfunctional budget games. They attribute these problems,

in part, to traditional budgeting's financial, top-down, command-and-control orientation as

embedded in annual budget planning and performance evaluation processes.

Various forms of dysfunctional behaviors have been identified and management control

systems (MCS) research has focused on some key terms and concepts such budgetary slack.

Budgetary slack may be defined as the deliberate manipulation of budgets/targets by thesubordinate manager, in a bid to ensure easy attainment of the budget/targets.

Notwithstanding some of the points put forward by Marginson and Ogden (2005), it is

important to note that Management Control System (MCS) research has been generally biased

towards the positive consequences of MCS, such as performance, satisfaction, attitude or

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motivation. Negative consequences have been, in comparison, less considered empirically. For

example, empirical studies have focused on the budgetary slack phenomenon, and even in this

specific case, there have been arguments for the beneficial aspects of budgetary slack. The

reason for such bias may be the intrinsic and subjective notion that accountants have for MCS.

Wilken (1989, cited in Jaworski and Young, 1992) rightly stated that accountants tend to see

control as a solution; sociologists as a problem. Thus, dysfunctional behavior, i.e. the

intentional violation of control system rules and procedures (Jaworski and Young, 1992) does

not have appear to have a fundamental appeal within the management accounting and

control literature. Consequently, dysfunctional behavior appears to have been conceptualized in

a very restricted way and has principally been associated to budgetary slack or to psychology-

based concepts such as Job-Related Tension.

The use of formal control systems (existing and established by the organization) rather

than informal ones (relationships developed by individuals or groups within an organization) is

precisely to limit or restrict abuses or dysfunctional actions adopted by managers. However, the

question remains as to how far MCS have achieved this. In view of the accounting background

of most MCS researchers, it is also without surprise that management accounting researchers

have focused on the usefulness of financial-based management control systems, the most

visible part being the budgetary process.

According to Fisher (1995), the general control mechanisms are not formal control

systems per se, but they do impact on the operation and effectiveness of formal control

systems. While general control mechanisms, such as firm culture and firm structure, can indeed

be viewed as being auxiliary or indirectly related to an organizations control system, it is

difficult to consider standard operating procedures (SOP) as being potentially less important

than formal control systems (such as a budgetary control system).

Macintosh and Daft (1987) define Standard Operating Procedure as the set of written

rules, procedures, policies and operating manuals used to guide managers as they administer

their departments. They also include general policy guidelines, job descriptions and

prescriptions for how managers should handle operational situations that might arise. The

auditing literature generally refers to the term internal controls to describe some of the

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standard operating procedures. SOP do form an important part of any public or private sectors

organizational control system. It could also be interpreted as having cybernetic characteristics,

but with a selective feedback mechanism i.e. arising only when departures from the standard

rules are noted.

Therefore, in a context where a manager (sub-unit, divisional or otherwise) has a

relatively high level of flexibility in an organization compared to other staff, the SOP aims at

limiting this flexibility and a possibility of abuse. Apart from the above, Fisher (1995)

commented that most MCS research has focused on budgeting systems and incentive

compensation schemes. The particular examples have been the subordinates participation in

budget/target Setting (BP Budgetary Participation) and Reliance on Accounting Performance

Measures (RAPM) for the subordinates performance evaluation.

The impact of budgeting on organizations was probably first studied by Argyris in the

1950s. These studies show some of the behavioral effects resulting from the way budgets are

used in organizations. The results of his research showed that the particular process used could

cause dysfunctional behavior in subordinates, regardless of the degree of technical refinement

of the budgetary system. In the 1970s, Hopwood's studies inquired into the effects of budgets

on human behavior.

These studies showed that the use by a superior of a budget-constrained style of

evaluation gave rise to significant levels of job-related tension; had adverse effects on peer and

subordinate-superior relationships, and was implicated in manipulative behavior on

subordinates. A long line of studies have been performed since then to uncover an array of

variables that govern the effects of reliance on budgets on behavioral outcomes, including

managerial performance. Examples of these variables include budgetary participation, task

uncertainty, environmental uncertainty, strategy, and culture.

In effect, organizational commitment creates a countervailing force to dysfunctional

tendencies. As commitment increases, the organization is viewed as less hostile and

manipulation is not necessary to obtain the reinforcements desired. Individuals who possess a

strong belief in the organization and who are willing to work hard to achieve organizational

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objectives should be less likely to resort to unethical and/or dysfunctional tactics to achieve

personal goals.

Discussion and Recommendation

The inefficient use of an organizations resources may result from organizational cultures

that experience unhealthy behavior by management with respect to budgetary planning and

control activities. For an academic institution, the impact on tuition pricing from a culture that

suffers from budget game playing strategies may be material. As previously mentioned, the

study of the satisfaction with organizational rewards in a budget context that explores behavior

unhealthy to budget attainment is very limited.

Satisfaction and the importance of rewards available in a small college, as represented

and measured by need satisfaction, and the respective relationship to an individual's willingness

to report department heads as engaging in budgetary behavior that may be construed as

dysfunctional was investigated using selection techniques and regression analysis. One model

was identified indicating a significant negative relationship between the relative satisfaction and

importance of actualization needs to the individual and the individuals willingness to report

others as engaging in unhealthy budgetary behavior. The significant negative relationship

suggests that the more important actualization needs are to an individual and the greater an

individuals dissatisfaction with actualization needs, the more likely the individual will report

others as engaging in unhealthy budgetary behavior.

Of the sixteen items from Porters (1961) instrument used to measure the salience of

perceived rewards, three were classifiable and as such gathered to represent self-actualization

needs. The three items included an individuals perception as to the opportunities for personal

growth, the feelings of self fulfillment and the feelings of worthwhile accomplishment provided

by their management position in the business. Behavior incongruent with the budget process,

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and perceived dysfunctional, included behavior, for example, monetary department were

perceived to obtain approval for budget requests by using friendships with manager and

allowing their manager to think their department had a crisis. As such, the results suggest that

the greater the overall dissatisfaction with the individuals perception as to the opportunities for

personal growth, the feelings of self-fulfillment and the feelings of worthwhile accomplishment

provided by the business culture with respect to their management position, then the more

likely the individual will report that department heads rely on such tactics as friendships and

contrived crises to obtain budget funds for their respective departments.

Beside that, The U.S.-based CAM-I Activity-Based Budgeting (ABB) group advocates

improving the budgeting system by marrying a more complete, activity-based operational model

with a detailed financial model. Its focus is on improving budgeting's support of operational

planning. The European-based CAM-I Beyond Budgeting (BB) group takes a more radical view

and recommends a two-stage approach? The first stage addresses the problems with budgeting

when they are used for performance evaluation. It suggests that traditional budgetary controls

that combine planning and performance evaluation lead to both poor planning and

dysfunctional behavior.

Therefore, the BB-group recommends either radically changing traditional budget-based

performance evaluations or completely eliminating the budget process. The second stage of the

BB-approach is to radically decentralize the organization and empower lower-level managers

and employees. Although the ABB-group has more of a planning focus and the BB-group more

of a performance evaluation focus, they share a common belief that traditional budgeting is

fundamentally mismatched to today's rapidly changing and uncertain environments.

Beside that there is evidence to suggest senior management and MCS consultants would

need to pay attention to the dysfunctional implications when setting up the various control

mechanisms in their organizations.

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References

Argyris, C., 1952. The Impact of Budgets on People. Ithaca: School of Business and PublicAdministration, Cornell University

Hartmann, F.G.H. 2000. The Appropriateness of RAPM: Toward the Future Development ofTheory. Accounting, Organizations and Society 25: 451-482.

Jaworski, B.J., and S.M. Young. 1992. Dysfunctional Behavior and Management Control: AnEmpirical Study of Marketing Managers. Accounting, Organizations and Society 17(1): 17-35.

Robbins, S.P. 1994. The Decision Making Process. NJ: Prentice-Hall.

Ashton, R.H. 1976. Deviation-Amplifying and Unintended Consequences of ManagementAccounting Systems. Accounting, Organizations and Society 1(4): 289-300

Hirst, M.K., 1981. Accounting Information and the Evaluation of Subordinate Performance: ASituational Approach. The Accounting Review 56(4): 771-784.

Birnberg J.G., L. Turopolec, and S.M. Young. 1983. The Organizational Context of Accounting.

Accounting, Organizations and Society 8 (2): 111-129.

OReilly III, C.A., and K.H. Roberts. 1974. Information Filtration in Organizations: ThreeExperiments. Organizational Behavior and Human Performance. 253-265

Marginson, D. and S. Ogden. 2005. Coping with Ambiguity through the Budget: The PositiveEffects of Budgetary Targets on Managers' Budgeting Behaviors. Accounting, Organizations andSociety 30(5): 435-456.

Fisher, J., 1995. Contingency-Based Research on Management Control Systems: Categorizationby Levels of Complexity. Journal of Accounting Literature 14: 24-53.

Macintosh, N.B., and R.L Daft. 1987. Management Control Systems and DepartmentalInterdependencies: An Empirical Study. Accounting, Organizations and Society 10: 49-61.