Role Playing to Understand Some
Consequences of Budgeting
Based on a Case by
Norman Sheehan
In Accounting Perspectives, 2008
Scenario I: Will you produce 340 Units
for the Special Customer Order?
 You are a factory worker paid by the hour making paper planes.
 The plant manager approaches you on Friday regarding next
week’s production (you only work Monday to Friday).
 Her records show you have been averaging 300 planes per week,
but a large, important customer needs 340 planes guaranteed by the
end of your shift next Friday.
 The plant manager needs to know if you can make these planes
(with no overtime) so that she can commit to the customer,
ensure that you have the extra supplies you need, and confirm that
the shipping department will be ready to ship the order.
 Read your private information — do you agree to produce 340
units next week?
Anecdote from Oracle CEO*
 Oracle’s dashboard system allows founder and CEO Larry
Ellison and other senior managers to monitor how many sales
leads each salesperson has (or has not) been able to convert
into a sale.
 One continuing frustration is that although all of
Oracle’s 20,000 salespeople use dashboards, some 20 percent
refuse to enter their sales leads into the system
 Why are they reluctant to share their sales leads with senior
management?
 Ellison is frustrated: withholding information “makes it hard
to get a true picture of the demand for Oracle’s products.
*Ante, Spencer E., and Jena. McGregor , “Giving the Boss The Big Picture,” BusinessWeek,
2/13/2006, Issue 3971
Scenario II: How Many Units Will You
Volunteer for Next Year’s Budget?
 You are (still) a factory worker who is paid by the
hour making paper planes.You are the only
worker who does this particular job.
 The week after the special order of 340 planes,
the plant manager approaches you regarding next
year’s budget.
 She needs to know how many units per week she
should budget for the next year — what do you
answer?
Scenario III: What if Senior Management
Unilaterally Adjusts the Budget Upward?
 You are (still) a factory worker who is paid by the
hour making paper planes.
 The week after the special order of 340 units, the
plant manager approaches you regarding next
year’s budget.
 You know from before that senior management
routinely adds 10 percent to your stated total —
what do you answer?
Scenario IV: What if You Anticipate Management
Will Implement a Bonus System?
 You are (still!) a factory worker who is paid by the hour
making paper planes.
 The week after the special order of 340 units, the plant
manager approaches you regarding next year’s budget.
 A reliable source informs you that management will
introduce a bonus system next year that pays $2 for each
plane produced over budget — what do you answer?
Justify your answers
 Who said less than 300?
 What do you anticipate you actually will produce?
 Will producing 40-50 extra units/week have a positive or
negative effect on the company?
Managing the Tension between Using
Budgets for Planning and Control
 “Almost every company uses a budget system that rewards
people for lying and punishes them for telling the truth.
Indeed, in some cases, the more managers lie, the more
money they make. (Michael Jensen, “Manager’s journal: Why
pay people to lie?” Wall Street Journal, January 8, 2001)
 How do we resolve this issue in practice?
Thoughts from Hope & Frazier
 Traditional budgeting is a fixed-performance contract. Once a
year, employees must commit and are held accountable.
 Many undesirable side effects, including enticing employees to pad
their budgets in the face of uncertainty.
 Propose using two separate systems:
 for planning, a 12–18 month rolling forecasts updated every 90 days.
 for control and evaluation purposes, benchmark an employee’s
performance (or a unit’s) against internal or industry standards.
 By separating planning and control,
 senior management receives timely and relevant information for
planning .
 Benchmarks motivate employees to meet/beat performance of their
peers inside or outside the company.
•Hope J., and R. Fraser. 2003a. Who needs budgets? Harvard Business Review 81 (2): 108–14.
•Hope J., and R. Fraser. 2003b. New ways of setting rewards: The Beyond Budgeting model. California Management Review 45 (4): 104–19.
Budgetary Slack and Professional
Ethics
 Is padding one’s budget acceptable ethically?
 If not, who will be hurt?
 “Honest” departments that have not padded their budgets
 The organization due to suboptimal allocation of resources
 You, by going to
Hell!
(kidding!)
 Do professional accountants working in industry have greater
responsibility to truthfully reveal their productive capacities than
factory workers?
Codes of Ethics
 Most professional accounting bodies in the world belong to the
International Federation of Accountants, whose Code of Ethics for
Professional Accountants contains the following:
 110.1 The principle of integrity imposes an obligation on all
professional accountants to be straightforward and honest in
professional and business relationships. Integrity also implies fair
dealing and truthfulness.
 110.2 A professional accountant should not be associated with
reports, returns, communications or other information where
they believe that the information:
 (a) Contains a materially false or misleading statement;
 (b) Contains statements or information furnished recklessly; or
 (c) Omits or obscures information required to be included where
such omission or obscurity would be misleading.
The role of professionals in society.
 Society grants professionals such as accountants, lawyers,
doctors, and engineers the legal right to govern their
practice, restrict entry to the profession, and organize
themselves.
 In return, professionals have a duty to safeguard and advance
society’s best interests
 Abiding by ethical principles