The Effect of Honesty and Superior Authority on Budget Proposals

Abstract

Research in budgeting suggests that subordinates may exhibit economically significant degrees of honesty, in spite of pecuniary incentives to do otherwise. This study continues the exploration of honesty in budgeting along two dimensions. First, unlike prior experiments, we measure the incremental effect of honesty by manipulating whether budget requests are made in the form of a factual assertion. Second, prior designs may have emphasized the ethical dimension of budgeting by granting the subordinate wide discretion over setting the budget, whereas we manipulate whether the subordinate or the superior has final authority over setting the budget. We find that less slack is created when budget communication requires a factual assertion in the subordinate authority treatment, but not when the superior has final authority. Hence, we find an incremental effect of honesty only when the subordinate has final authority. We conjecture, and provide some evidence, that this is due to subordinates framing the superior authority situation as one of negotiation where each party acts in his or her self-interest, rather than as an ethical dilemma. This view, that budgeting is essentially devoid of ethical considerations, is consistent with some recent characterizations of budget practices.

The Robustness of Honesty Effects on Budget Proposals when the Superior has Rejection Authority

“…Organizational slack can be viewed positively as a response to uncertainty that provides a stabilizing influence in down times due to the availability of margin (Cyert and March 1963;Merchant 1985). 2 Prior experimental studies use the honesty construct to explain the tendency of a person to make true statements despite incentives to make false statements (Evans et al 2001;Rankin et al 2008). Consistent with economic models that incorporate honesty in a capital budgeting setting, we define honesty as a preference that causes disutility from making false statements (Mittendorf 2006).…”

“…Recent experimental evidence in Rankin, Schwartz, and Young (2008; hereafter, RSY) calls into question the role of honesty in participative budgeting settings. RSY note that previous experimental studies finding evidence for honesty use budgetary slack as a direct measure of honesty and grant the subordinate unilateral budget authority.…”

“…Rankin et al (2008;RSY) examine the effect of honesty on budget proposals in a participative budgeting setting by manipulating the mode of communication of the budget proposal, such that subordinates either provide a factual assertion of actual project cost or propose a division of the project profit without a factual assertion. They find no effect of honesty on budgetary slack when the superior can reject the subordinate's budget proposal.…”

Public and Private Forms of Opportunism within the Organization: A Joint Examination of Budget and Effort Behavior

“…In a related study, Rankin et al (2006) find that giving the superior final budget authority diminishes the effect of honesty preferences on budgetary slack. They conclude that when superiors have final budget authority, subordinates are motivated more by strategic concerns than ethical concerns.…”

Psychology Models of Management Accounting

“…For example, the most effective MA control system for an organization in which some individuals value honest communication or social identity will be different from the most effective system for an organization in which no individuals have such preferences (Evans et al, 2001;Towry, 2003). Conversely, characteristics of an MA control system such as budgeting procedures and compensation can influence the extent to which individuals put high values on honesty and/or fairness (Rankin et al, 2008;Zhang, 2008).…”