Ethical aspects of Budgeting

> inclusion of slack
> Lack of goal congruence
> Over stating results
> Budget constrained management styles
> Undue pressure on the budget holder
> Pseudo participation
> Budget as a pot of cash

Managers may make the budget easier to achieve in
order to protect financial rewards, improve performance appraisals, reduce
their workload etc. Not only does this unethical practice create
unwarranted rewards for the budget holder it can have knock-on
implications elsewhere in the business. It could mean that resources are
not allocated to other parts of the business that require them (thus
impacting on financial rewards for the business as a whole), it may mean
that production does not meet customer demand (so that sales and market
share are lost) and could have implications for other budget holders (such
as marketing and recruitment) who are aiming to co-ordinate their activities with the activities presented in this budget. The poor ethical
practices of the budget holder, caused by the bottom-up approach to
budgeting, can therefore fail in achieving many of the purposes of
budgeting such as co-ordination, utilisation, motivation and evaluation

This is where the manager puts personal
goals ahead of organisational goals. The manager may be more
concerned with, say, quality of the product or levels of staffing than is
planned for in the overall organisational plan. This lack of goal congruence
can mean that the organisation is likely to fail in meeting its strategic
objectives. For example, in a competitive market an organisation might
choose to pursue a strategy which aims to sell the product at a price which
undercuts the selling price of rivals. This strategy will be difficult to achieve
if a manager pursues a strategy of improving quality (and therefore
increasing costs) which makes it more difficult to achieve a low selling
price. Likewise, in a government funded health service there may be a
goal to reduce repeat treatments for patients. But this would be frustrated
if budget holders create a budget focused on reducing time per patient
appointment in order to achieve reduced waiting times for patients

The manager might produce overly-optimistic
budgets. The manager of a subsidiary, for example, may want potential
performance to look as favourable as possible in order to protect the
subsidiary from sell-off or closure or to improve his/her/their own chances
of promotion. But this can lead to further unethical practices such as over-
stating results or even fraudulently recording non-existing sales in order to
then satisfy the overly-optimistic forecast. This can result in undue rewards
given to the budget holder but also to false information being provided to
other key stakeholders. If these practices come to light there can be a
very negative reaction from wider stakeholders such as the general public.

When the performance of a
manager is assessed by his/her/their ability to meet a budget, then the
manager is likely to adopt a conservative approach to new business
opportunities that appear; turning down opportunities where the benefits
may only be felt in the long term. Managers may also favour projects and
developments that are most amenable to the construction of budgets.
Projects that involve little uncertainty and few unknowns are easy to
incorporate in budgets and hence managers may be more inclined to
adopt such projects rather than the alternatives. The budget holder may
make decisions which focus on short-term performance at the expense of
the long term good health of the business. For example, staff training may
be reduced in order to meet a cost target, thus harming staff development
and career paths in the longer term.

The budget preparer may be
putting undue pressure on the budget holder to achieve a desired result.
Budget preparers often set challenging (or ‘stretch’) goals in order to
motivate the budget holder to achieve improved performance. This can
cause stress for the budget holder as well as inducing the budget holder to
employ unethical practices of his/her/their own in order to achieve the
target. For example, in order to achieve a high sales target in a
competitive market a budget holder might use aggressive sales tactics on
potential customers such as over-representing product features or putting
pressure on customers to buy complementary products that they may not
actually need.

Likewise, budget preparers are often accused of
‘pseudo’ participation in the budget setting process which may in itself be
unethical. Budget holders are allowed to feel that they have some input
and participation in the budget but actual decisions are approved and
controlled centrally. This can ultimately lead to poor motivation and job
satisfaction for the budget holder with typical repercussions such as poor
time keeping, absenteeism and even the loss of the employee altogether

In some environments managers may come to
consider the budget as a sum of money that has to be spent. This arises
particularly in service departments or public sector organisations, the
performance of which is gauged mainly through comparison of actual and
budget spending