The Annual Congress of the European Accounting Association
Prague, 1-3 April, 2004
The authors gratefully acknowledge support from
The Research Foundation of the Chartered Institute of Management Accountants
This is a report of work-in-process.
Please do not quote without permission from the authors

1. Introduction
This paper was stimulated by recommendations that have been made over the last ten years or so, that companies should go “beyond budgeting”, although in practice these recommendations often involve virtually abandoning budgeting. The research aim was to discover whether industrial and commercial companies in the South-West of England have changed their budgeting practices in recent years. A major feature of the research was an investigation into the attitudes of both financial and non-financial managers and the extensive budgeting literature provided a basis for questions that probed these attitudes.
Early work such as that by Argyris (1952), Stedry (1960) and Hofstede (1968) concentrated on the interaction between managers and budgeting technologies with particular concern for the impact of budgets on managers and the manner in which budget targets were set. This research tradition led to the suggestion that budgets should be “tight but achievable” because, if too easily achieved, budgets failed to challenge or motivate but, if too difficult, they were de-motivating.
The evidence suggested that there was an optimum level or range at which a budget would facilitate maximum performance.
In the 1970s, Hopwood (1976) and Otley (1978) published their influential studies. Hopwood identified budget constrained, profit conscious and non-accounting styles of managerial evaluation and found that a budget-constrained approach was associated with high job-related tension and budget gaming. Otley failed to replicate Hopwood’s results and concluded that this was probably because, at his case study sites, the emphasis was on profit (rather than cost) centres. This triggered interest in contingency theory and a number of researchers, taking their lead from organisation theorists, tried to demonstrate that management control systems should be matched to the competitive environment, and technology.
The 1980s and 1990s saw a stream of literature that aimed to establish relationships between contingent variables (environment, strategy, organisational size, technology etc.), intervening variables (especially the extent of participation in the budgeting process) and the perceived success of the budgeting system. Otley (1980), Briers and Hirst (1990) and Shields and Shields
(1998) provide overviews of this literature.
Pre-1990 research investigated the characteristics and consequences of “traditional” budgeting systems but the need for a budgeting system of some kind was largely taken for granted. It was implicitly assumed that budgets serve an important managerial need and textbooks such as Drury
(2000: 549-551) rehearse the importance of budgets in: planning, co-ordinating, communicating, motivating, controlling and evaluating operations. Researchers were concerned to establish the conditions in which different forms of budgeting were appropriate, not to challenge the usefulness of budgeting itself. However, this changed in the 1990s as Hope and Fraser (1997,
1998, 1999, 2003) mounted a wide-ranging critique of the manner in which budgeting systems are typically implemented. They observed and described budgeting systems highlighting: the often bureaucratic and expensive nature of the budgeting process, the failure of budgeting to meet the needs of managers in uncertain and competitive environments and the likelihood that budget systems would lead to managerial “gaming” of the numbers.
The research reported here drew on both the traditional budgeting literature and the recent Hope and Fraser critique in the development of a survey questionnaire that was divided into five sections.

Section A dealt with the respondent’s personal background, the perceived competitive environment and use of IT.
Section B explored the nature of the budgeting system, the respective involvement of senior and junior managers and the number of iterations in budget preparation. Section C included questions designed to assess the extent of coupling between budgets and incentive schemes and the importance of financial targets in assessing performance.
Section D explored attitudes to budgets including respondents’ views on the importance of budgets for planning, control etc., their satisfaction with the system and the extent of their agreement with a range of pejorative statements about the impact of budgets. These statements were designed to gauge managers’ reaction to claims that budgets lead to bureaucracy, rigidity, gaming, unfortunate targets etc.
Section E invited respondents to estimate the importance of a range of non-financial indicators and to highlight any important changes in budgeting practice during the past five years.
The survey was mailed to companies in the South-West of England and, by concentrating on companies that had expressed an interest in joining a BRICMAR
1
panel, an overall response of
40.1% was obtained. We requested a completed questionnaire from both a financial and a nonfinancial manager in each company and forty companies from the industrial and service sectors were represented in the survey. A financial manager responded from all these companies
(response rate 53.3%) and a non-financial manager responded from 21 companies (response rate
28%). This paper reports practice in responding companies and responses from both financial and non-financial managers permit investigation of differing attitudes to budgeting across functions.
The following issues will be considered.
In section 2 we compare the responses of financial managers with those of financial managers using both Mann-Whitney and Wilcoxon matched pairs statistical tests. This reveals that, although there are some interesting differences of opinion, generally, financial and non-financial managers have the same attitudes to budgets.
In section 3 we describe the budgeting process in participating companies and the attitudes of financial managers to those processes. The section concludes with an analysis of changes to budgeting processes in recent years based on both managers’ written comments and questionnaire responses.
Section 4 employs factor analysis to explore possible relationships within potential contingent and dependent variables. This provides interesting insights into the uses and consequences of budgeting and into managers’ perceptions of the dimensions of uncertainty.
Section 5 explores the relationships between contingent and dependent variables. This reveals that junior managers are more likely to be involved in setting budgets when firms operate in competitive situations and under conditions of uncertainty. There are more budget iterations when conditions are uncertain and, when there are more budget iterations there is likely to be more managerial gaming. Finally, budgets are perceived to be more important when circumstances are predictable. In predictable circumstances budgets are not likely to be seen as bureaucratic or inhibiting.
1 Bristol Centre for Management Accounting Research

2. Comparison of Responses from Financial and Non-Financial Managers
2.1 Introduction
Questions 18 – 22 in the questionnaire investigated the attitudes of managers to budgets and the budgeting process. The substantive findings are discussed in the next section but first we report the results of tests designed to discover any differences between the attitudes of financial and non-financial managers. Two sets of tests were undertaken both using non-parametric methods.
The first, Mann-Whitney, test treats the two groups of managers as independent samples while the second, Wilcoxon matched pairs test, is based on matching financial and non-financial managers’ responses by company and analysing differences in response. We begin by reporting the results of the Mann-Whitney test.
2.2 Mann-Whitney test for differences in the responses of independent groups
Question 18 asked the overall question: In your opinion, how important is the budget in the management of your company?
Question 19 asked for an indication of the importance of the uses of budgets for: planning, control, co-ordination, communication, authorisation, motivation and performance evaluation. Both questions requested responses on a 5 point Likert scale from 1, almost irrelevant to 5, extremely important. The Mann-Whitney test results are summarised in
Table 1.
Question
Overall importance
Mean rank:
Finance
Managers
27.8
Mean rank:
Non-finance
Managers
35.6
Significance
(2 tailed test)
0.074
For planning 30.7 31.6 0.844
For control
For co-ordination
30.1
31.1
32.8
30.7
0.533
0.911
For communication
For authorisation
32.2
30.6
28.7
30.2
0.452
0.927
For motivation
For performance evaluation
29.9
31.7
33.0
29.7
0.504
0.658
Table 1: Mann-Whitney test results investigating differences in attitudes to the importance of budgeting
Question 20 asked whether, in the respondent’s opinion, managers were satisfied with the budgeting process on a scale from 1, very dissatisfied to 5, very satisfied. Question 20 asked for an opinion concerning managers in the company while question 21 asked a similar question but for the respondent’s opinion concerning the budgeting system. The results are set out in Table 2.

Question
Managers satisfaction with budgeting in the company
Your satisfaction with budgeting in the company
Mean rank:
Finance
Managers
29.9
29.5
Mean rank:
Non-finance
Managers
31.7
33.8
Significance
(2 tailed test)
0.704
0.346
Table 2: Mann-Whitney test results investigating differences in satisfaction with budgeting
Question 22 investigated a range of possibly unfortunate consequences of budgeting using a
Likert scale from 1, agree strongly to 5, disagree strongly. The results are set out in Table 3.
Question
Process too bureaucratic
Too time consuming for results achieved
Budget process demotivates managers
Budgets set are unrealistic
Mean rank:
Finance
Managers
24.5
26.8
30.1
31.5
Mean rank:
Nonfinance
Managers
27.6
36.3
29.8
27.0
29.8
Significance
(2 tailed test)
0.473
0.037*
0.94
0.322
Too many budget games and padding of budgets
A culture of blame, recrimination, buck passing
Budgets “challenging” but therefore unrealistic
Budgets too rigid and difficult to change
30.9
31.3
30.6
30.9
30.7
28.8
30.3
29.8
28.6
0.811
0.57
0.944
0.819
0.643 Planning in financial years not logical
“Streetwise” managers build empires
Managers stay in budget instead of taking necessary actions
30.0
30.8
31.6
29.9
0.72
0.83
29.9 31.7 0.709 Links to bonus system make this an over-riding concern when budgets are set
Budgets must be realistic so cannot be challenging
Too much emphasis on budget targets, not enough on actions to benefit the business
29.7
32.7
30.6
26.1
0.846
0.155
Battle with HQ too time consuming and unproductive
Budgets focus too much on the past
Budget process inhibits innovations and change
Budgets focus too much on financial performance
Budgets inhibit cross-functional thinking
29.4
30.9
30.9
29.4
30.6
31.3
29.7
29.7
31.2
30.3
0.672
0.786
0.779
0.689
0.935
Too inaccurate, more resources needed 30.8 28.5 0.615
Table 3: Mann-Whitney test results investigating differences in attitudes to the consequences of budgeting
* indicates significant difference at the 5% level (2 tail test)

Virtually all these results reveal no significant differences in the responses of Financial versus
Non-financial managers. The only significant result at the 5% level (two-tailed test) appears in
Table 3 and relates to the time consuming nature of budgets. Financial managers agreed more strongly with the statement that budgets are too time consuming for the results achieved than did non-financial managers. Perhaps this is not surprising because it is financial managers that actually do most of the work in preparing, disseminating and updating budgets. It provides an indication that non-financial managers do not necessarily see budgets as overly time-consuming and counterproductive.
The divergence on only one other question came close to significance. In Table 1, perhaps counter-intuitively, non-financial managers responded more positively than financial managers to the question How important is the budget in the management of you company? The mean rank for non-financial managers was 35.6 compared with 27.8 for financial managers. Although this difference was not significant at the 5% level for a two-tail test, it would be significant for a onetail test. In view of this near significance close attention was given to the results for the importance of particular uses of budgeting: in planning, control, co-ordination, communication, authorisation, motivation, performance evaluation. However, for these questions, there were no significant differences between the two groups of managers and neither was there any consistency in the direction of responses to these questions (see Table 1). We conclude that, in general, there are few differences in attitudes to budgeting between financial and non-financial managers. Those differences that were uncovered by the Mann-Whitney test indicate that nonfinancial managers give budgeting a higher importance than financial managers and are not so concerned about the time-consuming nature of budget procedures.
2.3 Wilcoxon test for differences between matched pairs of responses
A second test was undertaken using the Wilcoxon signed ranks test on matched pairs of financial and non-financial managers. The results are set out in Tables 4, 5 and 6.
Question
Overall importance
Number of negative ranks
(non-financial responses lower than financial responses)
5
Number of positive ranks
(non-financial responses greater than financial responses)
6
Significance
(2 tailed test)
0.448
For planning
For control
4
3
6
6
0.589
0.142
For co-ordination
For communication
For authorisation
For motivation
11
9
7
4
7
6
6
7
0.786
0.977
0.356
0.285
For performance evaluation 6 7 0.475
Table 4: Wilcoxon matched pairs test results investigating differences in attitudes to the importance of budgeting

Question
Number of negative ranks
(non-financial responses lower than financial responses)
Significance
(2 tailed test)
Managers satisfaction with budgeting in the company
Question
Process too bureaucratic
Too time consuming for results achieved
4
Your satisfaction with budgeting in the company 2 6 0.132
Table 5: Wilcoxon matched pairs test results investigating differences in satisfaction with budgeting
Negative ranks (nf lower than f)
3
3
5
Positive ranks (nf greater than f)
3
9
6
0.527
Significance
(2 tailed test)
0.516
0.077
Budget process demotivates managers
Budgets set are unrealistic
Too many budget games and padding of budgets
Number of positive ranks
(non-financial responses greater than financial responses)
6
10
8
3
5
0.854
0.049*
0.396
A culture of blame, recrimination, buck passing
Budgets “challenging” but therefore unrealistic
Budgets too rigid and difficult to change
Planning in financial years not logical
“Streetwise” managers build empires
Managers stay in budget instead of taking necessary actions
6
7
7
8
7
7
4
6
7
9
11
6
0.403
0.856
0.949
0.771
0.786
0.777
Links to bonus system make this an over-riding concern when budgets are set
Budgets must be realistic so cannot be challenging
Too much emphasis on budget targets, not enough on actions to benefit the business
7
6
9
2
6
6
0.130
0.935
0.170
Battle with HQ too time consuming and unproductive
Budgets focus too much on the past
Budget process inhibits innovations and change
Budgets focus too much on financial performance
Budgets inhibit cross-functional thinking
5
8
7
6
6
7
4
7
6
8
0.644
0.400
0.236
0.718
0.823
Too inaccurate, more resources needed 11 4 0.040*
Table 6: Wilcoxon matched pairs test results investigating differences in attitudes to the consequences of budgeting * indicates significant difference at the 5% level (2 tail test)

It can be seen that, in general, the Wilcoxon tests confirm the results of the Mann-Whitney tests.
Almost all the responses show no significant differences between the two sets of managers. In
Tables 4 and 5 there are no significant responses so the Wilcoxon test fails to confirm the
(almost) significant difference concerning the importance of budgeting unearthed by the Mann-
Whitney test.
There are, however, two significant results in Table 6. The first shows that financial managers are more likely to disagree with the statement budgets are unrealistic than are non-financial managers. The second significant result concerns the statement that budgets are too inaccurate, more resources and technology needs to be devoted to them. Financial managers were less likely than their non-financial counterparts to agree with this statement. The two significant results in
Table 6 are consistent with each other for, if non-financial managers believe that budgets are too unrealistic, it is logical for them also to want more resources devoted to their preparation.
There is one other question in Table 6 where the test result is almost significant (and would be significant if a one-tailed test were employed.) Financial managers were more likely to agree with the statement that the process of setting budgets is too time consuming for the results achieved than their non-financial counterparts. This confirms the result obtained from the Mann-Whitney test.
Overall these groups of financial and non-financial managers have similar views about budgeting, its uses and consequences. However, there are a few interesting differences. Non-financial managers are likely to see the budget as more important in managing the company and less time wasting than their financial colleagues although they are more likely to consider the budget unrealistic. In view of these perceptions, it is not surprising that non-financial managers would like to see more resources and technology devoted to the preparation of the budget than their financial counterparts.
3. The budgeting process
3.1 Introduction
This section is broken into four sub-sections. The first sub-section describes typical budgeting processes in the 40 companies surveyed and the second reviews attitudes to budgets within the 40 companies. The third and fourth sub-sections describe recent changes in budgeting processes.
3.2 Description of the process
Section A of the questionnaire, comprising questions 1-14, dealt with the budgeting process itself and the following description of typical budgeting processes is based on the responses of the 40 financial managers. It has already been demonstrated that the views of financial and non-financial managers are very similar but, in any case, financial managers would be best placed to answer these descriptive questions.
All 40 respondents confirmed that their companies set budgets, typically starting the process 4-6 months before the start of the financial year. 80% agreed that there were frequent revisions to the budget during the budgeting process and 95% confirmed that the budget was calendarised by month throughout the budget year. More than 90% reported both month and year-to-date figures showing budgets, actual results and variances. Fewer reported results for the previous year although 80% showed some past year data for comparison (either actual figures, variances or both). About 75% of the respondents also reported that their companies provide some estimate of

the out-turn for the current financial year. Few companies flex the budget before establishing variances with just 7 (17.5%) respondents claiming to do this. Revisions of the budget during the year are also infrequent with 79.5% of respondents reporting that no changes were made, 12.8% respondents reported a change at the half-year and 7.7% reported quarterly changes. Most respondents (90%) reported that forecasts are prepared separately from the budget, usually every month (over 50% of those preparing forecasts) and usually for the remainder of the financial year
(80% of those preparing forecasts).
34 respondents (85%) agreed or strongly agreed that top managers drove the process. However
23 respondents (57.5%) also thought that junior managers had a major input to the process.
3.2 Attitudes to Budgets
Our sample of financial managers revealed a near universal view that budgets are, indeed, considered to be important, see Table 7. Almost 95% of financial managers thought that budgets are fairly, very or extremely important and only 5.1% thought that they are not very important.
Table 7 relates to financial managers in the 40 survey companies but the same sentiments apply to all the responding managers. The only significant difference between financial and nonfinancial managers was in their views of the importance of budgets and non-financial managers considered the budget to be (even) more important than did financial managers. (Approximately
86% of non-financial managers considered the budget to be very or extremely important compared with approximately 72% of financial managers.)
Overall
Almost irrelevant
(%)
Not very important
(%)
5.1
Fairly important
(%)
23.1
Very important
(%)
53.8
Extremely important
(%)
17.9
Planning
Control
Co-ordination
Communication
Authorisation
Motivation
2.5
5.0
5.0
2.5
10.0
5.0
12.5
12.5
7.5
27.5
25.0
20.0
37.5
35.0
40.0
30.0
55.0
52.5
35.0
40.0
42.5
25.0
17.5
22.5
10.0
7.5
7.5
7.5
Performance evaluation 7.5 5.0 22.5 35.0 30.0
Table 7: Perceptions of the importance of budget uses by 40 financial managers
Performance evaluation, control and planning are the most important uses of budgets in the survey companies and these might be regarded as the “core” uses of budgets. For planning and control almost 75% of respondents think budgets very or extremely important while, for performance evaluation, a smaller percentage (65%) agree with this but a large minority (30.0%) regard budgets as extremely important for this purpose. Budgets are not seen as quite so important for what might be considered the “secondary” purposes of budgeting: co-ordination, communication and authorisation. Slightly less than 50% of respondents saw budgets as very or extremely important for these purposes. Budgets are less important as a means of motivating managers. Only 32.5% saw budgets as very or extremely important for this purpose while a greater percentage (37.5%) considered them almost irrelevant or not very important.

Of course budgets can be important but still have unfortunate consequences and, in view of the bad press that budgeting has received in recent years, it might be expected that, while appreciating their importance, managers would be unhappy with their budgeting systems on a number of counts. However, Table 8 provides only very limited evidence of this.
In Table 8 the highlighted figures relate to responses from more than 50% of the sample of financial managers. Most of the highlighted figures show disagreement with the pejorative statements made. Generally, financial managers do not think there are particular conflicts between the need for realism in budgeting and the setting of challenging targets and they do not accept that budgets are unrealistic. Neither do most accept that budgets inhibit innovation and change, de-motivate managers or lead to a culture of blame and recrimination.
A majority of financial managers agreed or strongly agreed with only two of the pejorative statements. There were majorities agreeing that managers might not take necessary actions because of the need to meet budget targets and that the budget process was too time consuming for the results achieved. Remember though, that, on this last point, non-financial managers were not so scathing and only 33.3% of them agreed or strongly agreed with the statement that budgets are too time consuming for the results achieved.
Question
% agreeing or strongly agreeing
% neither agreeing nor disagreeing
% disagreeing or strongly disagreeing
Process too bureaucratic
Too time consuming for results achieved *
Budget process demotivates managers
Budgets set are unrealistic *
Too many budget games and padding of budgets
A culture of blame, recrimination, buck passing
Budgets “challenging” but therefore unrealistic
Budgets too rigid and difficult to change
35.3
56.4
23.1
25.6
40.0
12.5
22.5
40.0
32.4
17.9
17.9
17.9
25.0
22.5
12.5
22.5
32.3
25.6
59.0
56.4
35.0
65.0
65.0
Planning in financial years not logical
“Streetwise” managers build empires
Managers stay in budget instead of taking necessary actions
35.9
27.5
52.5
20.5
32.5
20.0
37.5
43.6
40.0
27.5
30.0 32.5 32.5 Links to bonus system make this an over-riding concern when budgets are set
Budgets must be realistic so cannot be challenging
Too much emphasis on budget targets, not enough on actions to benefit the business
Battle with HQ too time consuming and unproductive
Budgets focus too much on the past
Budget process inhibits innovations and change
17.5
20.0
41.0
45.0
17.5
22.5
35.0
30.8
37.5
30.0
60.0
45.0
28.2
17.5
52.5
Budgets focus too much on financial performance
Budgets inhibit cross-functional thinking
Too inaccurate, more resources needed *
35.9
30.0
28.3
25.6
35.0
28.2
38.5
35.0
43.5
Table 8: Attitudes to the consequences of budgeting from 40 financial managers (responses exceeding 50% highlighted in bold) * For these questions there were significant or almost significant differences between the attitudes of financial and non-financial managers

Overall, these results do not indicate widespread dissatisfaction with budgets and budgeting processes in the survey companies. Nonetheless, it is possible for budgets to have negative consequences in some companies. In particular there is some evidence that budgets can be timeconsuming for the results achieved and managers might fail to take necessary action because of perceived budget consequences. There was also some indication that budgets may lead to
“gaming”, can be rigid and difficult to change and may focus too much on the past. However, these possible consequences must be kept in perspective; overall, the responses summarised in
Table 8 do not indicate widespread dissatisfaction with budgeting processes. There is general agreement that budgets are important in managing businesses and views on the potential drawbacks are very equivocal.
3.3 Changes in the budgeting process
This section is based on written comments in response to a general question asking for changes in the budgeting process during the last five years. All the responses (from both financial and nonfinancial managers) were analysed and rather more than half (55%) of the respondents reported some form of change in the past 5 years.
In 3 companies change was driven by changes in ownership and two companies, now part of a major aerospace manufacturer, had adopted a common, centralised format. However, in a third company, relatively little change had been occasioned by the merger of two major manufacturers.
Structural issues were the cause of change in 4 companies. There were varied references to changes because of mergers and acquisitions, the inclusion of revenue in the budget because the organisation had become a free standing unit, more cost and revenue centres and a general statement that content, format and assumptions changed each year.
Two general themes emerged: greater involvement of junior management in budgeting processes and more detailed analysis. Respondents in 7 companies referred to more input from junior managers, typically linking this to a desire for more delegation and greater ownership and commitment. Respondents in 10 companies referred to more analysis with more detail in number of cost centres, level of planning or scrutiny of actual versus budget figures.
Some intensification of the use of budgets was evident in 8 companies with more emphasis on cash flow planning in two companies, quarterly profit targets and increased scrutiny of costs
(including a reference to overheads being reduced or “slashed”). In four companies, there were references to: increased focus on business/management needs; financial performance; “good” growth; and balance sheet controls (the latter in a company that had suffered five profit warnings).
In three companies there were changes in emphasis of a more technical nature, from net profit to gross profit, to more concern with cost behaviour (fixed versus variable costs) and the use of
“stretch” targets.

In only one company did there seem to be a less intensive approach to budgeting with monthly sales targets abandoned in favour of a six monthly target. This was intended to encourage managers to concentrate on maximising monthly sales (presumably instead of satisficing).
Respondents in 8 companies mentioned specific issues: more analysis of investment plans, zerobased budgeting, activity-based costing, beyond budgeting, linking budgets to performance and bonuses, more key performance indicators (two responses, one emphasising financial metrics) and one company introduced a range of techniques including overhead recovery, departmental recharges and MBO.
3.4 Changes in the importance attached to specific practices and techniques
Less important
(%)
No change
(%)
More important
(%)
Traditional budgeting
Standard costing and variance analysis
Budgets as basis for bonuses
7.7
48.8
5.4
48.7
35.9
48.6
41.0
15.4
43.2
Use of non-financial performance indicators
Activity-based costing and budgeting
Economic value added
Balanced scorecard
0
10.5
2.8
0
20.5
52.6
58.3
44.4
76.9
31.5
36.1
50.0
Table 9 Changes in the importance attached to specific techniques (39 financial managers)
Note: %s do not all total to 100% because some respondents did not answer all the questions.
Table 9 suggests that, in general, a number of techniques and practices have become more important. Most obviously the use of traditional budgeting methods is not diminishing in importance. The responses concerning budgets per se and their use in setting bonuses indicate their increasing importance.
The increased emphasis on traditional budgeting has taken place in parallel with increased emphasis on non-financial performance indicators with a massive majority of respondents their increased importance. Increasing emphasis on the Balanced Scorecard supports the finding that more companies are using non-financial performance indicators more intensively.
The results in relation to activity-based costing and economic value added are more equivocal with about one third of respondents reporting that these techniques are now more important, and, in the case of activity-based techniques about 11% reporting that they had become less important.
In relation to standard costing and variance analysis this survey provides evidence that these techniques are declining in importance. Some 50% of respondents indicated a decline and only
16% reported that these methods had increased in importance.
Over half the respondents felt here had been changes in the past five years but, generally these were not driven by the “beyond budgeting” movement. Changes usually related to revised organisation structure, greater involvement of junior managers, more sophisticated techniques or

changing emphasis. Generally the change was toward more sophisticated (traditional) budgeting, and, in some companies, financial controls had been tightened. One company had actually adopted “beyond budgeting” but, following several profit warnings, had returned to more traditional methods. Most respondents felt that traditional budgeting methods were more rather than less important. Although there is a danger of bias in respondents’ perceptions of increasing importance over time, the sheer weight of respondents indicating increasing importance for nonfinancial performance indicators seems likely to reflect a real change. Greater importance for the balanced scorecard compared with other techniques such as ABC and EVA confirmed this general impression.
It seems that traditional budgeting is now more likely to be combined with increased use of nonfinancial indicators. However, this does not seem to be signalling the demise of traditional methods or the rise of “beyond budgeting”. 37 of 39 respondents continued to see budgets as fairly, very or extremely important, and for all the usual reasons: but especially performance evaluation, control and planning.
4. Exploration and data reduction by factor analysis
Factor analysis was undertaken to analyse the responses to three questions and the resulting factors were used in further analysis. These analyses were based on 61 responses from both financial and non-financial managers. The factor results for Question 19, asking how important were a range of uses of budgets are presented in Table 10.
Budget Uses
Performance evaluation
Factor 1: implementation, control and evaluation
0.840
Factor 2: planning
Motivation 0.822
Communication
Co-ordination
0.778
0.755
Control
Authorisation
0.583
0.556
Planning 0.943
Table 10: Rotated component matrix for Question 19, ‘how important is the budget for each of the following uses?’
Table 10 reveals that budget uses can be analysed on two dimensions. The first factor has been named “implementation, control and evaluation” because co-ordination, communication and motivation relate to “implementation”; authorisation and control relate to “control”; and performance evaluation clearly relates to “evaluation”. It is interesting that, while all these functions of budgets are grouped together (so that, if one of them is important the others are likely to be important also), the use of budgets for planning is separated into a second factor. It seems that there is empirical support in this survey for the common division of the subject matter of management accounting into techniques for planning and control.
Factor results for Question 22, asking for agreement or disagreement with pejorative statements concerning the consequences of budgeting, are presented in Table 11. It can be seen that six

underlying factors were identified in relation to the possibly unfortunate consequences of budgeting and these were named:
Factor 1: bureaucratic, unrealistic and inhibiting
Factor 2: de-motivation and blame culture
Factor 3: games and empires
Factor 4: rigid and hierarchical
Factor 5: realism versus challenging
Factor 6: historical orientation and constraint
Pejorative statements
Budgets inhibit cross-functional thinking
Fctr
1
0.800
Fctr
2
Fctr
3
Fctr
4
Fctr
5
Budgets focus too much on financial performance
Too time consuming for results achieved
0.780
0.744
Fctr
6
Budget process inhibits innovations and change
Budgets set are unrealistic
Process too bureaucratic
Budgets “challenging” but therefore unrealistic
Links to bonus system make this an over-riding concern when budgets are set
Budget process demotivates managers
A culture of blame, recrimination, buck passing
Too inaccurate, more resources needed
Too many budget games and padding of budgets
“Streetwise” managers build empires
Planning in financial years not logical
Battle with HQ too time consuming and unproductive
Budgets too rigid and difficult to change
0.738
0.660
0.564
0.689
0.674
0.576
0.541
0.513
0.804
0.702
0.813
0.677
0.574
Budgets must be realistic so cannot be challenging
Budgets focus too much on the past
0.816
0.745
Too much emphasis on budget targets, not enough on actions to benefit the business
Managers stay in budget instead of taking necessary actions
Table 11: Rotated component matrix for Question 22, ‘do you agree or disagree with the following statements’?
0.563
0.554

This factor analysis suggests that there might be six dimensions of budget consequences and, not surprisingly, these can be mapped against Hope and Fraser’s (2003) claim that there are three primary factors causing dissatisfaction with budgets. For convenience this comparison is set out in Table 12.
Hope and Fraser’s (2003: 4) primary causes of dissatisfaction with budgets
Budgeting is cumbersome and expensive
Corresponding factors revealed by
Factor (1): bureaucratic, unrealistic, inhibiting analysis of Question 11
Factor (4): rigid and hierarchical
Factor (6): historical orientation and constraint
Budgeting is out of kilter with the competitive environment and no longer meets the needs of either executives or operating managers
The extent of “gaming the numbers” has risen to unacceptable levels.’
Factor (3) games and empires
Table 12: Comparison of Hope and Fraser’s taxonomy of budgeting problems with factors derived in this survey
Hope and Fraser’s reference to the cumbersome nature of budgets is reflected in factors (1) and
(4) concerning the bureaucratic, rigid and time-consuming nature of budgets. The reference to the competitive environment and the needs of managers can be related to factor (6) where the budget process constrains and shapes actions that are not in the best interests of the business. And the reference to “gaming” is obviously matched by factor (3): gaming and empire building.
There is no obvious parallel in Hope and Fraser’s analysis to factor 2: the possibility that budgets can lead to an unfortunate culture of de-motivated managers obsessed with blame, recrimination and buck passing. However this consequence is implicit in earlier literature dating back to
Hopwood’s (1974) reference to a “budget constrained” style of management.
This study together with Hope and Fraser’s analysis and earlier literature suggests that the unfortunate consequences of budgets might be analysed on four major dimensions: bureaucracy; failing to support management; gaming; demotivating/blame culture. The fifth factor that emerged is that of the tension between setting realistic and challenging targets.
However, there is little evidence in this study to suggest that this is a major problem.
Factor analysis was also undertaken on one of the Background questions that aimed to identify the respondent’s perception of uncertainty in the environment. These results are reported in Table
13.

Perceptions about uncertainty
Factor 1: certainty as to action
Factor 2: certainty as to outcomes
Factor 3: uncertainty in actions and outcomes
Factor 4: uncertainty in environment and information
Certain about which method is best
Uncertain how to act
Certain about how the job should be done
Can tell if actions were effective
Certain about how to deal with environmental changes
Difficult to determine whether the right decision was taken
0.766
-0.659
0.659
0.802
0.728
0.764
Environmental changes frequently affect decisions
Frequently encounter new problems
0.728
0.819
In doubt as to how to obtain information
0.728
Table 13: Rotated component matrix for the frequency with which the following apply to your job
Table 13 summarises the factors that emerged from a series of questions designed to explore the degree of uncertainty in the manager’s job. Factor 1 (explaining the greatest variation in the variables) relates to certainty about the best method and how it should be implemented. A variable relating to uncertainty about how to act is strongly negatively correlated in this factor. As the variables in this factor imply a clearly perceived course of action supported by conviction that such action is the best that can be taken, this factor is labelled “certainty of action”.
Factor 2 also suggests considerable certainty in management but this factor is subtly different from the first because it relates more to the outcomes of management action. This factor has been labelled
“certainty as to outcomes”. Factor 3 seems largely to be the opposite of factors 1 and 2, grouping together variables relating to difficulty in determining the correct course of action and implicit turbulence in the environment with exogenous changes frequently impacting the company. This factor has been labelled “uncertainty in actions and outcomes”. Finally, factor 4 seems even more extreme than factor 3. Here, new problems are constantly arising and managers do not even know how to gather data in order to begin to analyse them. One could characterise this as “drowning”, but, consistent with the other factors, we label it “uncertainty in environment and information”.
5. Correlation between the uses and consequences of budgets and contingent variables
5.1 Introduction
Three questions were designed to elicit information concerning the nature of the business and its perceived environment. The first enquired as to the sophistication of the company’s IT system

(from simple stand-alone to highly sophisticated). The second asked for a perception of the competitive environment (from very little competition to very strong competition). And the third, comprising nine separate sub-questions sought an indication of the degree of uncertainty perceived by the respondent. The latter were analysed into the four factors described above. Thus in this study we start with six contingent factors: the nature of the IT system, competitive environment and the four certainty/uncertainty factors.
Three questions were intended to elicit information about the nature of the budgeting process, two of which concerned managers’ input. Question 3 asked for agreement/disagreement to the statement: top managers drive the budgeting process to ensure that the final outcome will be acceptable to them. Question 4 similarly asked for agreement/disagreement but to the statement: junior managers have a major input to the budgeting process and can affect the final budget outcome. Question 5 also enquired about the nature of the budget process by asking for agreement/disagreement with the statement: there are usually many revisions before the budget is eventually finalised. These questions concerning the budget process may be consequential to the competitive environment and perceptions of uncertainty in the environment, but they may drive perceptions of the usefulness and consequences of budgeting. We begin our analysis by investigating possible relationships between the contingent variables and the nature of the budgeting process. Kendall’s tau test was employed, a non-parametric test for association between two variables. The results reported here assume that a one-tail test can be employed because the direction of association can be readily hypothesised.
5.2 Influences on the nature of the budgeting process
Table 14 summarises the results of the Kendall’s tau test results for the (assumed exogenous) contingent variables and the nature of the budgeting system. The results are not surprising, and can be summarised as follows.

Junior managers are more involved in budgeting when the environment is competitive and uncertain (note that the contingent variable certainty of outcomes is negatively associated with junior managers having an impact on the budget.)

If there is considerable certainty in the company, then managers tended to disagree with the proposition that there are many iterations before the budget is finalised.

A sophisticated IT system correlates with senior managers driving budget. Too much should not be made of this, however, because sophisticated IT also correlates strongly with junior managers having an impact on the budget - this relationship would be significant at the 10% level.

“Dependent” variable:
Contingent variable
Sophistication of IT
Competitive situation
Senior managers drive the budget
0.208*
-0.004
Junior managers affect final budget
0.167
0.201*
Many iterations of the budget before finalised
0.183
0.091
Certainty of actions
Certainty of outcomes
Uncertainty of outcomes
Uncertainty in environment
0.020
0.064
-0.017
-0.076
0.018
-0.170*
-0.149
0.175*
-0.314**
-0.170*
0.007
0.126
Table 14: Kendall’s tau test statistics for contingent variables and the budgeting process
* indicates significance at the 5% level (one-tail test)
5.3 Influences on the uses and consequences of the budgeting system
Next we consider the degree of association between the contingent variables (now expanded to include characteristics of the budgeting system) and the uses and consequences of budgeting.
There are nine dependent variables in Table 15. The first three relate to Questions 18 and 19: the importance of budgeting in managing the company and the factors established for the importance of budgets in implementation/control and planning. The remaining six variables relate to
Question 22 where six factors were established concerning the possible consequences of budgeting: bureaucracy, poor culture, gaming, rigidity, realism versus challenge and constraining.
Table 15 reveals some straightforward relationships between the contingent variables and the budgeting process.
In competitive situations it seems that realistic budgets can be challenging because there is highly significant negative association between competitive environments and the proposition that budgets have to be realistic and so cannot be challenging.
If managers are certain about their actions then budgets are likely to be important for implementation and control but not for planning (where there is a significant negative relationship). In these circumstances managers are more likely to disagree with propositions affirming the unfortunate consequences of budgets and significantly so in relation to budget bureaucracy and the possibility that managers take unfortunate action because of budget constraint. This result is intuitively sensible and suggests that traditional approaches to budgeting are perfectly acceptable to managers when the environment is stable and predictable. Otley
(2001: 253) noted that “…budgetary control appeared to work reasonably satisfactorily in a

Dependent variable:
Contingent variable
Sophistication of IT
Competitive situation
Certainty of actions
Certainty of outcomes
Uncertainty of outcomes
Uncertainty in environment
Senior managers drive the budget
Junior managers affect final budget
Many iterations of the budget before finalised
0.007
-0.015
0.138
0.099
0.196*
0.015
0.104
0.251*
0.110
0.082
0.007
0.056
0.028
0.047
0.076
0.082
-0.136
0.007
-0.132 -0.152* -0.040
0.049
0.084
0.231*
0.044
-0.077
-0.081
0.112
0.127
-0.061
0.107
0.044
-0.039
0.147* -0.161* -0.300** -0.076
0.041
0.118
-0.025
-0.023 0.316** -0.053
-0.130
-0.099
0.096
0.121
-0.161
0.072
0.136
-0.043
-0.162
-0.146
0.252*
0.063
-0.115 -0.354** 0.126
-0.094
0.094
0.034
-0.030
0.170
-0.111
-0.003
0.052
0.045
-0.13
-0.092
0.107
-0.157
-0.016
-0.216*
-0.023
-0.145
0.105
-0.010
0.018
0.163 -0.321** 0.000
Table 15: Kendall’s tau test statistics for contingent variables versus uses and consequences of budgeting relatively stable environment with well codified business plans.” This study provides confirmation of Otley’s experience and assessment of the literature although it suggests that, in stable circumstances, budgets are important for control, not planning. Perhaps when business is predictable the budget is not really necessary as a planning device but given “well codified business plans” the budget becomes valuable as a control device.
Where there is more uncertainty in outcomes managers are more likely to see budgets as counterproductive (more positive associations with propositions concerning the unfortunate consequences of budgets) and there is a significant negative association with the use of budgets

for control and evaluation. This, of course, contrasts with the correlation found when the environment is stable and predictable.
Perhaps surprisingly the second “uncertainty variable” shows a positive association with the importance of budgeting in managing the company. It will be recalled that this factor incorporates the variables: frequently encounter new problems and in doubt as to how to obtain information.
It is possible that, in such a difficult environment, the budget provides an important source of information and a basis for planning (the correlation with budgets being important for planning is at least positive).
In “top down” companies where senior management drive the budget there is a very significant likelihood that the budgeting process will be perceived as more bureaucratic, time consuming and inhibiting than in companies where a less “hands-on” approach by top management is adopted.
If there are, typically, many iterations in the budgeting process then the budget is likely to be perceived as important and particularly for planning. This is hardly surprising but the interpretation of this result requires careful consideration of the direction of causality. It seems likely that, when the environment is uncertain, the budget becomes relatively more important for planning and the number of iterations in the budget setting process increases (an inference from the negative correlation between stable/certain environments and the number of budget iterations in Table 14). With more budget iterations there appears to be more scope for game playing and empire building. Finally, there is a very significant disagreement with the proposition that a realistic budget cannot be challenging and this is consistent with the similarly significant correlation between a competitive environment and disagreement with this statement.
Overall these results make a good deal of sense. Traditional budgeting is most obviously satisfactory when there is clarity as to actions to be taken. In these circumstances the budget is less important for planning (presumably because there is little need for integrative mechanisms in planning) but it is important for implementation and control. Managers tend to disagree with pejorative statements about the consequences of budgeting and significantly so in relation to its potentially bureaucratic and constraining influences.
These findings confirm again understandings that have been current for many years. Otley (2001:
253), referring to assumptions made in the 1960s and 1970s, noted that ‘Although a unidimensional representation of a more complex reality, budgetary control appeared to work reasonably satisfactorily in a relatively stable environment with well-codified business plans.’
Thompson and Tuden (1959) neatly summarised the likely systemic consequences of managerial beliefs about the business environment (note that, as in this survey, Thompson and Tuden analyse the consequences of managerial attitudes and beliefs; they are not concerned with whether those beliefs are correct). See Figure 1.

Preferences about possible outcomes
Certain Uncertain
Beliefs
About
Causation
Certain
1
Decision by computation
2
Decision by compromise
Uncertain
3
Decision by judgement
4
Decision by inspiration
Figure 1 From Thompson-Tuden (1959), based on reproductions in Birnberg et al. (1983:
113) and Drury (2000: 659)
Burchell et al (1980) extended the Thompson-Tuden model arguing that, under cell 1 conditions, decisions might be reached by algorithmic “answer machines” and this study indicates that these are the conditions where managers are most likely to express satisfaction with traditional budgeting procedures. This conclusion should not however be extended to its logical corollary, that managers might express dissatisfaction with budgeting when other conditions apply. We have seen that this study provides only equivocal evidence in support of such a hypothesis.
5.4 Influences on satisfaction with budgeting processes
Finally we consider all the variables so far considered to be contingent, analysing their relationship with satisfaction with the budget process. There are two variables. The first is the respondent’s assessment of managers’ views; the second is the respondent’s personal view of the budgeting system. Because of the number of contingent variables now considered only those variables that have significant associations with the satisfaction variables are listed in Table 15.
Managers’ satisfaction with
Personal satisfaction with budgeting system budgeting system
Contingent variable
Certainty of actions 0.263** 0.268**
Certainty of outcomes
Uncertainty of outcomes
0.226*
-0.280** -0.301**
Importance of budgeting in managing the company
Importance of budgeting for control and evaluation
Bureaucracy, time wasting and inhibition caused by budgeting
De-motivation and culture of blame caused by budgeting
0.259*
0.355**
-0.459**
-0.514**
0.290**
0.375**
-0.514**
Table 15: Significant associations between contingent variables and satisfaction with the budgeting process
* indicates significance at 5% level (one-tail test) and ** indicates significance at 1% level

The following variables have significant positive associations with managers’ satisfaction: perceived importance of budgeting and perceived importance of the use of budgets for implementation and control, certainty in actions and outcomes. The last association is reinforced by a significant negative association between managers’ satisfaction and uncertainty in actions taken. There were also highly significant negative associations between budgets as bureaucratic de-motivators and managers’ satisfaction. Although there were not quite so many significant relationships for personal satisfaction, the significant relationships reflected the same pattern of responses. In general results for the “satisfaction” variables reinforce earlier conclusions. In perceived stable environments managers tend to be satisfied with traditional budgeting systems and there is a tendency for managers to be satisfied when budgets are considered to be important. Not surprisingly, if budgets are perceived to have negative consequences managers tend to be dissatisfied with them.
6. Discussion
The survey reported here explores claims in the recent literature that managers are now generally dissatisfied with budgeting processes and ought to be considering methods that move “beyond budgeting”.
Tests were undertaken to discover whether financial and non-financial managers in the survey companies had different attitudes and very few significant differences between the two groups were found. The significant differences that were unearthed suggest that non-financial managers tend to see the budget as more important and less time wasting than their financial colleagues.
Consistent with these perceptions, they would like to see more resources and technology devoted to the budget process than finance managers. These results are consistent with Lyne (1992) who found that both first-line and senior managers sought increased use of the budget for control purposes, and both managers and accountants desired more decentralisation in budgeting processes.
Having established that there were few differences between the perceptions of financial and nonfinancial managers we next analysed the responses of forty financial managers concerning the budget process and their attitudes to budgeting. Their description of budgeting processes was much as expected and conforms with that of Hope and Fraser (2003):
It typically begins at least four months prior to the year to which it relates… [Budget] packs are returned to the corporate centre (or to intermediary points in the corporate hierarchy) and then subjected to review.
Thereafter multiple iterations take place as each unit negotiates the final outcome. One the budget is agreed upon, regular reports are required by the corporate center to enable senior executives to control performance. (Hope and Fraser. 2003: 5)
However, while there is agreement on the nature of typical budgeting processes, attitudes to this process vary. While Hope and Fraser’s analysis concentrates on the negative aspects of budgeting there was only limited evidence of this in the responses of the financial managers surveyed. Our survey respondents felt that budgeting is important for a multiplicity of purposes and there was only limited support for a set of pejorative statements claiming that budgets have a number of unfortunate consequences. There was a measure of agreement with statements claiming that budgets are time consuming and may prevent managers from some desirable activity. However, there were only bare majorities agreeing with these statements and the majority of survey respondents disagreed that budgets were de-motivating, fostered a culture of blame, were unrealistic or led to conflicts between challenging and realistic targets.

This evidence does not indicate that managers in general are very dissatisfied with their budgeting systems and this was reinforced by responses to questions asking for the nature of any changes in the budgeting process during the past five years. Changes usually related to revised organisation structure, greater involvement of junior managers, more sophisticated techniques or changing emphasis. Change tended toward more sophisticated (traditional) budgeting together with more use of non-financial performance indicators and most respondents felt that traditional budgeting and its link with incentive schemes was more, rather than less, important.
This study assessed whether certain contingent variables affected the budgeting process and managers’ satisfaction with it and, to simplify this analysis, some data was first reduced using factor analysis. Factor analysis suggested that the use of budgets can be analysed on two dimensions, the first dealing with implementation, control and evaluation; the second with planning. Factor analysis also indicated that negative attitudes to the consequences of budgeting can be analysed on 6 dimensions: bureaucracy, poor culture, gaming, rigidity, causing conflict between realistic and challenging targets, and having a historical, constraining orientation. Four of these dimensions can be easily mapped on to Hope and Fraser’s analysis of budgeting problems and a fifth dimension is reminiscent of earlier work dating back to Hopwood’s (1974) pioneering study. Finally, one of the contingent variables aimed to explore respondents’ attitudes to certainty/uncertainty and this analysed into four factors labelled: certainty of actions, certainty of outcomes, uncertainty of outcomes, and uncertainty in the environment.
Analysis of correlation between variables revealed a number of associations. In competitive, uncertain, situations junior managers were more likely to be involved in the budgeting process whereas, in relatively stable, certain environments junior managers were less likely to be involved. Mintzberg (1979: 291-292) hypothesised that “All members of the organization typically seek power… [and] managers of the strategic apex promote centralization…” The evidence supporting this hypothesis is: “anecdotal, but plentiful” and the “…structure can easily become excessively centralized.” This view is supported by the finding that the involvement of junior managers is facilitated by a competitive, uncertain environment that acts as a counter to centralising tendencies. The dangers of excessive centralisation are also flagged in this study by a strong correlation (in Table 15) between top management driving the budget process and perceived bureaucracy and the inhibition of junior managers.
Although there was significant correlation between sophisticated IT and top management driving the budget we note that there was also positive correlation between sophisticated IT and both the involvement of junior managers and multiple budget iterations. We prefer not to draw a strong conclusion from the significant result, instead merely noting that IT can facilitate greater managerial involvement and a more complex process.
Simplistically our results point to two “ideal types” of budget process. On the one hand, in stable circumstances, the budget might be prepared efficiently with few iterations and little junior management involvement. Alternatively, in competitive, uncertain situations, the budgeting process might involve several iterations with greater involvement of junior managers.
There are a number of significant correlations between contingent variables and attitudes to budgets. In relatively predictable environments budgets are likely to be more important for control (not planning) and managers tend to disagree with pejorative statements about budgeting.
When there is more uncertainty budgets become less important for control and, by implication, more important for planning. Extending the idea of the ideal type, in uncertain situations, budgets become more important for planning and less important for control and a realistic budget is sufficiently managerial challenging to managers. There are likely to be more iterations during

preparation of the budget and, perhaps because of this, there is greater scope for managerial gaming.
Finally we identified significant correlation between managers satisfaction and certain contingent variables. Satisfaction was greatest in stable environments where budgets were taken seriously, especially for control and evaluation. Conversely, satisfaction was lower in more uncertain situations and when the budget process was perceived to be bureaucratic or the cause of demotivation and a culture of blame.
7. Conclusions
This survey provides little evidence to support the assumption that there is widespread dissatisfaction with traditional budgeting. Managers generally see budgets as important and especially for planning, control and evaluation. The uses of budgets seem to split on two major dimensions with planning differentiated from the use of budgets for control and evaluation.
Managers tend to disagree with propositions that budgets cause a variety of organisational problems although there is some evidence that budgets can inhibit necessary action and financial managers may consider budgeting to be time-consuming for the results achieved. Non-financial managers are less likely to take this view.
In stable environments managers may identify their perceived best action and anticipate outcomes. Budgeting can then be: efficient with limited junior management input; concentrated on control and evaluation; and managers may express satisfaction with the process. However, the study found highly significant correlation between the perception that budgeting is driven by top managers and the perception that the process is bureaucratic and inhibiting.
In uncertain environments junior managers are more likely to be involved in budget processes with more iterations during budget preparation and there may be more managerial gaming.
Satisfaction with budgets is likely to be lower in these circumstances than in more stable environments.
It seems that traditional budgets still have a major role in many organisations particularly those operating in stable environments. In these circumstances top managers should balance their desire for centralised control with the inclusion of junior staff in managerial processes. Traditional budgets may also be important in providing a means of planning and including junior staff in more uncertain situations. In these circumstances, budget processes may be more complex and there is a greater likelihood of managerial gaming. This study indicates that managers continue to regard budget processes as important. Where companies do go “beyond budgeting” they do so by adding additional techniques or analytical detail rather than reducing traditional budgeting.
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