Accounting Organizations and Society, Vol. 13, No. 3, pp. 281-301, 1988. 0361-3682/88 $3.00+.

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Printed in Great Britain Pergamon Press plc

BUDGETARY BIASING IN ORGANIZATIONS: THEORETICAL FRAMEWORK AND

EMPIRICAL EVIDENCE*

KARI LUKKA
D e p a r t m e n t o f A c c o u n t i n g a n d Finance, Turku School o f E c o n o m i c s a n d
Business Administration, F i n l a n d

Abstract

The purpose of this study is to increase the understanding of budgetary biasing behaviour. The findings are
of both a theoretical and empirical nature. The theoretical results provide a framework containing two
major parts: an explanatory model of budgetary biasing at the individual level, and an organizational model
for budgetary biasing. In the empirical part of the study an attempt is made to test the usability of the frame-
work in a relatively large firm with several profit-centers. Biasingaction is found to be a result of an interplay
of various inter-related factors. Overall, the framework is considered to provide a valid basis for trying to
understand and interpret the budgetary biasing behaviour in the firm studied.

O v e r t h e past f e w d e c a d e s t h e idea o f slack has Kazandjis ( 1 9 8 0 ) , and M e r c h a n t ( 1 9 8 5 a ) are

b e e n w i d e l y d i s c u s s e d in t h e t h e o r y o f t h e firm, also w o r t h m e n t i o n i n g , e s p e c i a l l y b e c a u s e o f
in o r g a n i z a t i o n t h e o r y and in t h e m a n a g e m e n t t h ei r e m p i r i c a l findings. H o w e v e r , in r e c e n t
a c c o u n t i n g literature. T h e c o n c e p t o f organiza- years p e r h a p s t h e m o s t i m p o r t a n t studies that re-
tional slack is o f p r i m a r y i m p o r t a n c e in t h e be- late to b u d g e t a r y slack are t h o s e c a r r i e d o u t by
havioral t h e o r y o f t h e firm ( C y e r t & March, O t l e y ( 1 9 7 8 , 1982, 1985). Ever s i n c e t h e study
1963; s ee also M a r c h & Simon, 1958; William- b y L o w e & Shaw ( 1 9 6 8 ) w as published, t h e
son, 1963, 1964), it has b e e n u s e d in m i c r o - studies h a v e o f t e n dealt w i t h a w i d e r p h e n o m e -
e c o n o m i c s , a l t h o u g h a different t e r m i n o l o g y has n o n than p u r e b u d g e t a r y slack; this w i d e r con-
s o m e t i m e s b e e n used, 1 and t h e c o n c e p t also has c e p t is k n o w n as budgetary bias.
r e c e i v e d s o m e a t t e n t i o n in m o r e g e n e r a l consid- At p r e s e n t t h e f u n d a m e n t a l p r o b l e m s in this
e r a t i o n s o f o r g a n i z a t i o n t h e o r y ( s e e e.g. area o f r e s e a r c h m ay b e d e f i n e d as follows:
T h o m p s o n , 1967; Child, 1972; Galbraith, 1973; ( 1) The development of a direct measure of
Bourgeois, 1981). In t h e m a n a g e m e n t a c c o u n t - b u d g e t a r y bias.
ing l i t e r a t u r e t h e n o t i o n o f slack e m e r g e d in a ( 2 ) A s y s t e m a t i c analysis o f t h e organizational
b u d g e t a r y c o n t e x t in t h e 1950s, p r o b a b l y for th e effects o f b u d g e t a r y biasing.
first t i m e in t h e classic s t u d y b y Argyris in 1952. ( 3 ) T h e d e v e l o p m e n t o f an e x p l a n a t o r y
S u b s e q u e n t m a j o r c o n t r i b u t i o n s to t h e d e v e l o p - m o d e l for b u d g e t a r y biasing.
m e n t o f r e s e a r c h o n b u d g e t a r y slack i n c l u d e t w o T h e d e v e l o p m e n t o f a p r o p e r w a y o f measur-
articles b y Schiff & L e w i n ( 1 9 6 8 , 1 9 7 0 ) and th e ing b u d g e t a r y bias w o u l d naturally f o r m t h e
studies by L o w e & Shaw ( 1 9 6 8 ) and Onsi basis for i m p r o v e d analytical and quantitatively-
( 1 9 7 3 ) . Later studies by O s t m a n ( 1 9 7 7 ) , o r i e n t e d studies. T h e effects o f b u d g e t a r y bias-

* The article is based on a study published by the author at Turku School of Economics and Business Administration in 1985
( Lukka, 1985).
I would like to thank Professors Pekka Pihlanto and Reino Majalafor their instructions and helpful comments. I am indebted
to the anonymous reviewer for helping me to improve both the content and style of the article.
See the concept of X-efficiency in Leibenstein (1966) and (1979).

281
282 KARILUKKA

ing are p e r h a p s its least u n d e r s t o o d aspect. Usu- ance.

ally b u d g e t a r y biasing is r e g a r d e d as dysfunc- H e r e b u d g e t a r y bias is u n d e r s t o o d as an e x
tional ( s e e e.g. Schiff & Lewin 1968, 1970), al- a n t e c o n c e p t - - a c c o r d i n g l y , biasing is a w a y o f
t h o u g h t h e r e is g o o d r e a s o n to claim that its affecting t h e s t a n d a r d s against w h i c h p e r f o r m -
f u n c t i o n a l effects m a y also b e i m p o r t a n t (Cap- a n c e will b e assessed. Essentially it is also a sub-
lan, 1971; Onsi, 1973). H o w e v e r , this article jective phenomenon, because every actor
deals o n l y w i t h t h e last o f t h e s e critical p r o b - ( g r o u p o f a c t o r s o r o r g a n i z a t i o n a l u n i t ) usually
lems. T h e r e s e a r c h focus o f t h e s u b s e q u e n t has his o r h e r o w n u n i q u e p i c t u r e o f t h e pos-
analysis c a n t h e r e f o r e b e e x p r e s s e d as why, in sibilities o f future e c o n o m i c p e r f o r m a n c e s ,
w h a t s i t u a t i o n s a n d h o w is b u d g e t a r y bias w h i c h is always s u b j e c t to u n c e r t a i n t y . In o t h e r
created in o r g a n i z a t i o n s ? T h e s t u d y c o m p r i s e s w o r d s , in a specific b u d g e t figure ( o r b u d g e t
b o t h t h e d e v e l o p m e n t o f a t h e o r e t i c a l frame- p r o p o s a l ) t h e r e m a y s e e m to b e different
w o r k and its p r e l i m i n a r y e m p i r i c a l testing, and is "amounts" o f bias - e v e n bias in different direc-
d e s i g n e d to i n c r e a s e u n d e r s t a n d i n g o f b u d g e t - tions - d e p e n d i n g o n t h e v i e w p o i n t f r o m w h i c h
ary biasing b e h a v i o u r . t h e s i t u a t i o n is a p p r o a c h e d .
O t l e y ( 1 9 8 5 ) has a r g u e d that "the realistic
b u d g e t estimates" ( h e r e c a l l e d t h e f o r e c a s t s ) o f
THE BASIC CONCEPTS p e o p l e m a y b e t h e m o d e s o f t h e i r intuitive p r o b -
In this s t u d y b u d g e t a r y bias is d e f i n e d as a de- ability d i s t r i b u t i o n s , r a t h e r than, for e x a m p l e ,
liberately created difference between the t h e e x p e c t e d values. This is o f i m p o r t a n c e be-
b u d g e t i n g a c t o r ' s forecast a b o u t t h e future c a u s e t h e p r o b a b i l i t y d i s t r i b u t i o n o f c o s t a n d re-
( " h o n e s t b u d g e t estimate"), and his o r h e r sub- v e n u e t e n d to b e s k e w e d a c c o r d i n g to Otley;
m i t t e d b u d g e t figure ( b u d g e t p r o p o s a l ) . H e n c e thus t h e e x p e c t e d v a l u e and t h e m o d e o f t h e dis-
t h e bias m a y arise e v e n b e f o r e a final d e c i s i o n t r i b u t i o n s are different. As a result, t h e r e is a ten-
a b o u t fixing t h e b u d g e t has b e e n made. T h e t e r m d e n c y for b u d g e t forecasts to b e c o m e u n i n t e n -
" b u d g e t " is h e r e u n d e r s t o o d to m e a n a profit tionally biased.
p l a n o r target, i.e. w e are p r i m a r i l y d e a l i n g w i t h It s h o u l d b e e m p h a s i z e d that b u d g e t a r y bias
t h e bias at t h e aggregate level o f profit b u d g e t for was p r e v i o u s l y d e f i n e d as t h e d i f f e r e n c e be-
a r e s p o n s i b i l i t y c e n t r e . 2 In p r i n c i p l e , a situation t w e e n t h e a c t o r ' s b u d g e t a n d his o r h e r h o n e s t
m a y exist w h e r e t h e o v e r a l l b u d g e t is unbiased, s u b j e c t i v e estimate, w h i c h m a y b e an e x p e c t e d
w h i l s t its c o m p o n e n t s ( r e v e n u e s a n d c o s t s ) are value, m o d e , m e d i a n o r s o m e o t h e r p o i n t in t h e
b i a s e d in o p p o s i t e directions. d i s t r i b u t i o n . O n l y w h a t t h e a c t o r h o n e s t l y be-
T h e c o n c e p t o f b u d g e t a r y bias is d e f i n e d lieves to b e his o r h e r realistic estimate, t h e fore-
r a t h e r n a r r o w l y in this analysis. T h e s e n s e o f this cast, is o f i m p o r t a n c e here. 4
n a r r o w n e s s can b e b e t t e r a p p r e c i a t e d if the fol- T h e n a t u r e o f a b u d g e t a r y p l a n n i n g situation
l o w i n g t h r e e basic areas o f b u d g e t a r y b e h a v i o u r usually forces an a c t o r to s e e t h e f u t u r e in t e r m s
are distinguished: 3 o f p o i n t estimates. Yet, b e c a u s e o f t h e e x i s t e n c e
( 1 ) b e h a v i o u r affecting t h e s t a n d a r d s o f u n c e r t a i n t y , o n e can a r g u e that t h e usual
( 2 ) b e h a v i o u r affecting t h e r e p o r t e d results single e s t i m a t e b u d g e t i n g s y s t e m itself p r o d u c e s
( 3 ) o p e r a t i v e a c t i o n affecting actual p e r f o r m - bias in estimates, s In a situation w h e r e forecast-

2 The level of aggregation may vary from contribution margin to the profit line of the budget.
3Compare Hhgget al. ( 1982 ); see also the "methods of distorting the information system" by Birnberg etal. ( 1983 ) and "bias-
ing of actuals" in Berry et al. ( 1985 ).
4 An actor's forecast is, because of its subjective nature, a rather theoretical concept; its accurate and objective measurement
is therefore problematic.
5 Of course, certain forms of probabilistic budgeting might help in this respect.
 BUDGETARYBIASINGIN ORGANIZATIONS 283

ing is difficult b e c a u s e o f a h i g h d e g r e e o f u n c e r - f o r e c a s t - - t h e r e s u l t t h e n is literally a slack

tainty, it m a y n o t b e p o s s i b l e to d i s t i n g u i s h this b u d g e t . An u p w a r d - b i a s refers to t h e o p p o s i t e
u n i n t e n t i o n a l bias f r o m d e l i b e r a t e bias. k i n d o f biasing, to t h e d e l i b e r a t e o v e r s t a t e m e n t
As a f u r t h e r i l l u s t r a t i o n o f t h e c o n c e p t o f o f e x p e c t e d p e r f o r m a n c e in t h e b u d g e t .
b u d g e t a r y bias, w e r e f e r to t h e analysis b y Dem- S o m e t i m e s it is difficult to d i s t i n g u i s h c o u n -
ski ( 1 9 6 7 ) a n d its d e v e l o p m e n t b y A n d e r s s o n terbiasing f r o m biasing. T h e f o r m e r n o t i o n re-
( 1 9 7 4 ) . T h r e e different e r r o r s are d i s t i n g u i s h e d fers to t h e a t t e m p t b y o t h e r a c t o r s to e l i m i n a t e
e x p o s t in t h e basic d i f f e r e n c e b e t w e e n t h e t h e b u d g e t a r y bias ( L o w e & Shaw, 1968). Ac-
b u d g e t a n d t h e a c t u a l result: c o r d i n g to o n e o p i n i o n t h e w h o l e p r o b l e m o f
( 1 ) T h e e s t i m a t i o n error. b i a s i n g can b e "automatically" s o l v e d b y c o u n -
( 2 ) B u d g e t a r y bias. t e r b i a s i n g ( C y e r t & March, 1963; c o m p a r e Pope,
( 3 ) Real inefficiency a n d ineffectiveness. 6 1984; Buckley, 1983). A n o t h e r , p e r h a p s m o r e
T h e first d i f f e r e n c e i n c l u d e s t h e u n i n t e n t i o n a l w i d e l y h e l d view, is that c o u n t e r b i a s i n g c a n n o t
bias d i s c u s s e d b y O t l e y ( 1 9 8 5 ) . I n t h e real e c o n - usually e l i m i n a t e bias f r o m b u d g e t s b e c a u s e o f a
o m i c t e r m s , t h e t h i r d d i f f e r e n c e m a y b e consi- n u m b e r o f d i s t u r b i n g factors a n d p r o c e s s e s in
d e r e d t h e m o s t significant. H o w e v e r , in o r d e r to o r g a n i z a t i o n s ( s e e Lowe & Shaw, 1968; B e r r y &
gain k n o w l e d g e o f it, w e h a v e to g e t t h e w h o l e Otley, 1975; Kazandjis, 1980).
p i c t u r e clear; o t h e r w i s e b u d g e t a r y bias m a y c o n -
fuse c o n t r o l information. It s h o u l d b e s t r e s s e d
that b u d g e t a r y bias, as it is d e f i n e d h e r e , r e m a i n s THE RESEARCH APPROACH
t h e s a m e e x p o s t as it w a s e x ante; the o t h e r t w o
d i f f e r e n c e s m a y b e c o m e "realized" o n l y e x p o s t . T h e a p p r o a c h o f this a r t i c l e is b o t h c o n c e p t u a l
One more remark concerning the concept of a n d a c t i o n - o r i e n t e d , h e r m e n e u t i c ( s e e e.g.
b u d g e t a r y bias n e e d s to b e m a d e : b u d g e t a r y Lukka et al. 1984). A t h e o r e t i c a l f r a m e w o r k is
b i a s i n g b e h a v i o u r is p o s s i b l e in all t h e f u n c t i o n s c o n s t r u c t e d first, b u i l d i n g o n t h e m a n a g e m e n t
a n d all levels o f an organization. This v i e w is in a c c o u n t i n g literature, o n o r g a n i z a t i o n t h e o r y
c o n t r a s t to t h e usual, s o m e w h a t n a r r o w e r ap- a n d o n r e l a t e d b e h a v i o u r a l r e s e a r c h , in o r d e r to
p r o a c h , w h e r e t h e b i a s i n g b e h a v i o u r is t h o u g h t structure present knowledge about budgetary
to b e f o u n d o n l y at t h e c o n t r o l l e d levels o f t h e biasing b e h a v i o u r . This f r a m e w o r k s e r v e s t h e
organization. 7 This i m p l i e s that t h e b u d g e t a r y r o l e o f p r e u n d e r s t a n d i n g in t h e e m p i r i c a l
p r o c e s s is s e e n as an i n t e r p l a y b e t w e e n d e c i s i o n - r e s e a r c h p r o c e s s . T h e s t u d y also has a
makers, a n d t h e c r e a t i o n o f bias in b u d g e t s is m e t h o d o l o g i c a l flavour, as t h e b a s i c e x p l a n a t o r y
c o n s i d e r e d as o n e o f t h e i m p o r t a n t a s p e c t s o f s c h e m e s t e m s fairly d i r e c t l y f r o m t h e philo-
this interplay. sophical thinking of Georg Henrik von Wright
B u d g e t a r y bias is f u r t h e r d i v i d e d into t w o sub- ( s e e v o n Wright, 1971, 1976).
c o m p o n e n t s : b u d g e t a r y s l a c k ( w h i c h is t h e T h e t h e o r e t i c a l p a r t o f t h e s t u d y focuses o n a
t r a d i t i o n a l e l e m e n t o f b i a s ) and upward-bias. 8 simplified, h y p o t h e t i c a l s t r u c t u r e o f a c t o r s in an
In t h e f o l l o w i n g t h e f o r m e r t e r m is a p p l i e d to t h e organization: t w o n e g o t i a t i n g p a r t i e s are as-
bias w h e r e t h e b u d g e t figure has b e e n i n t e n t i o n - s u m e d , o n e at t h e c o n t r o l l i n g level a n d t h e o t h e r
ally m a d e easier to a c h i e v e in r e l a t i o n to t h e at t h e c o n t r o l l e d level. T h e b u d g e t is i n t e r p r e t e d

6 See Milne's ( 1981 ) discussion on the concepts of efficiency and effectiveness in the context of creating budgetary slack.
7 Throughout the analysis a hypothetical two-level hierarchy including the controlling unit (principal) and the controlled
unit (agent, subordinate, budgetee) is being assumed. Although the terminology used may seem to be rather impersonal - -
for the reason of generality - - it is the actors in organizations we usually refer to.
s Compare positive and negative slack in Otley (1985).
284 KARILUKKA

as a c o n t r a c t b e t w e e n the parties that c o n c e r n s A n e x p l a n a t o r y m o d e l o f budgetary biasing a t

a future p e r i o d w h i c h involves u n c e r t a i n t y .9 The the i n d i v i d u a l level
actors are a s s u m e d to b e b o t h restrictively ra- T h e e x p l a n a t o r y m o d e l of b u d g e t a r y biasing
tional "administrative persons" a n d irrational at the individual level deals w i t h the b u d g e t a r y
"political persons". 1 Hence, p e r f e c t rationality p l a n n i n g process in the p r e p a r a t o r y phase of
of the actors is n o t a s s u m e d from the organiza- b u d g e t proposals, w h i c h p r e c e d e s the b u d g e t
tional p o i n t of view; the actors are, h o w e v e r , as- n e g o t i a t i o n phase. T h e m a i n q u e s t i o n s in this
s u m e d to b e i n t e l l i g e n t from their o w n subjec- phase are:
tive p e r s p e c t i v e ( c o m p a r e C o o p e r et al., 1981 ). ( 1 ) W h a t kind of i n t e n t i o n s are linked to the
This also fits in w i t h o u r organizational assump- c r e a t i o n of b u d g e t a r y bias?
tions w h i c h m a i n l y follow the coalition t h e o r y ( 2 ) Are t h e r e s o m e m o r e specific factors be-
v i e w p o i n t ( C y e r t & March, 1963). h i n d these i n t e n t i o n s ? What are these a n d w h a t
The a c t i o n - o r i e n t e d approach,11 although pre- is their effect o n the a c t i o n of b u d g e t a r y biasing?
sent in the c o n c e p t u a l phase of the study, is em- After p o s i n g these q u e s t i o n s it s e e m e d n a t u r a l
phasized in the empirical phase, w h i c h consists to base the analysis o n a teleological e x p l a n a t i o n
of a case s t u d y c o n d u c t e d in a large o r g a n i z a t i o n scheme. The m o s t famous f o r m u l a t i o n of these
in the retail trade having profit centres. The ob- s c h e m e s is the classical practical syllogism first
jective of the empirical phase is to establish the p r e s e n t e d b y Aristotle, w h i c h links t o g e t h e r the
usefulness of the theoretical f r a m e w o r k in de- actor's i n t e n t i o n s (his or h e r f u n d a m e n t a l aims),
v e l o p i n g an u n d e r s t a n d i n g of the b u d g e t a r y bias- the epistemic assessment of the m e a n s at h a n d
ing b e h a v i o u r in that p a r t i c u l a r organization. for satisfying those i n t e n t i o n s , a n d the resulting
c o n c r e t e action. In this study, h o w e v e r , the orig-
THE EXPLANATORY FRAMEWORK inal s c h e m e of practical syllogism is d e v e l o p e d
f u r t h e r following the ideas of v o n Wright
T h e e x p l a n a t o r y m o d e l of b u d g e t a r y biasing ( 1 9 7 6 ) , as an a t t e m p t is also m a d e to p r o c e e d
utilized in this study c o n t a i n s two i n t e r r e l a t e d b e y o n d the p u r e action i n t e n t i o n s and to con-
s u b m o d e l s : an e x p l a n a t o r y m o d e l for b u d g e t a r y n e c t the organizational and situational issues to
biasing at the individual level, a n d a m o d e l for the explanation. In this way w e arrive at the
b u d g e t a r y biasing at the organizational level. basic e x p l a n a t o r y s t r u c t u r e p r e s e n t e d in Fig. 1.

Personal goals
Organizational INTENTIONS
factors
Information
Power factors
Situational
factors

Fig. 1. The basic explanatory scheme.

9 Compare the basic setting of agency research, e.g. Baiman(1982), Tiessen & Waterhouse (1983), Otley (1984) and Pope
(1984).
~0The concept of a political person followsthe idea of "heroic man" presented by LindstrOm(1979). The actor's assumptions
of a political person are the same as those inherent in the "garbage-can"view of organizationalbehaviour, see March ( 1971,
1978), March & Olsen (1976) and Cooper et aL, ( 1981 ).
11About the essential characteristics of this approach, see e.g. Susman & Evered (1978), Niisi (1979), M~ikinen(1980),
Neilimo & Niisi(1980) and Evered & Louis( 1981 ); compare ColviUe( 1981 ), Tomkins & Groves (1983), Otley (1984) and
Hopper & Powell (1985).
 BUDGETARYBIASINGIN ORGANIZATIONS 285

Von Wright (1976) distinguished originally slack a n d u p w a r d - b i a s ) m a y b e i n v o l v e d h e r e

f o u r d e t e r m i n a n t s o f intentions: wants, duties, ( s e e Schiff & Lewin, 1968, 1970; c o m p a r e Wil-
abilities a n d o p p o r t u n i t i e s . In this s t u d y t h e i r liamson, 1963, 1964). 13
b u s i n e s s e c o n o m i c i n t e r p r e t a t i o n s are d e f i n e d ( 2 ) Performance evaluation intention,
c o r r e s p o n d i n g l y : p e r s o n a l goals, o r g a n i z a t i o n a l w h i c h refers to t h e r o l e o f b u d g e t s as s h o r t - t e r m
factors, p o w e r factors a n d situational factors targets; h e r e t h e e v a l u a t i o n o f p e r f o r m a n c e is af-
(Fig. 1, left). T h e i n f o r m a t i o n f a c t o r is a d d e d to f e c t e d t h r o u g h biasing, usually e x p o s t b u t s o m e -
t h e s t r u c t u r e in o r d e r to e m p h a s i z e its c e n t r a l t i m e s also e x ante. By c r e a t i n g b u d g e t a r y slack it
r o l e at e v e r y s t e p o f t h e p r a c t i c a l s y l l o g i s m (Fig. is p o s s i b l e to c o n f u s e t h e e x p o s t p e r f o r m a n c e
1, right). I n f o r m a t i o n is t h u s a s s u m e d to b e a e v a l u a t i o n a n d t h e r e w a r d s c o n n e c t e d w i t h per-
critical resource of the three basic components f o r m a n c e ; t h r o u g h u p w a r d - b i a s i n g it is p o s s i b l e
o f t h e p r a c t i c a l s y l l o g i s m ( c o m p a r e Pihlanto, to gain t i m e t h r o u g h m a k i n g d e l i b e r a t e l y over-
1982). o p t i m i s t i c b u d g e t a r y p r o m i s e s ( s e e Lowe &
H u m a n a c t i o n is r e g a r d e d as b e i n g in a con- Shaw, 1968; Schiff & Lewin, 1968, 1970; Onsi,
c e p t u a l r e l a t i o n s h i p to i n t e n t i o n s w h i c h are t h e 1973).
final o b j e c t i v e s o f h u m a n action; this is t h e fun- The most important difference between these
d a m e n t a l m e s s a g e o f t h e p r a c t i c a l syllogism (Fig. t w o i n t e n t i o n s is that biasing a c c o r d i n g to t h e re-
1, c e n t r e ) . B e h i n d t h e s e i n t e n t i o n s - - a n d also s o u r c e i n t e n t i o n is m o r e d a n g e r o u s f r o m an
b e h i n d t h e c o g n i t i v e a s s e s s m e n t o f t h e m e a n s at e c o n o m i c v i e w p o i n t as it will l e a d to t h e u s e o f
h a n d - - t h e r e are t h e five critical d e t e r m i n a n t s . r e s o u r c e s a c q u i r e d t h r o u g h biasing. In contrast,
These determinants deepen the more aggregate b i a s i n g w h i c h is d u e to t h e p e r f o r m a n c e evalua-
e x p l a n a t i o n o f a c t i o n g i v e n b y t h e p r a c t i c a l syl- t i o n i n t e n t i o n m a y l e a d to t h e m o s t efficient be-
logism. Such a s t r u c t u r e is a m i x t u r e o f t e l e o l o g - haviour during the budget period.
ical a n d causal e x p l a n a t i o n s . 12 It c a n b e a r g u e d Approaching budgetary biasing from the point
that it sets t h e s e t w o w a y s o f e x p l a n a t i o n into o f v i e w o f t h e c o n t r o l l i n g level is unusual. There-
c o n t e x t ; i n t e n t i o n a l b e h a v i o u r is m o r e charac- fore t h e i n t e n t i o n s w h i c h a r e r e l e v a n t at that
teristic o f h u m a n a c t i o n w h i l e t h e causal s c h e m e level a r e n o t y e t fully u n d e r s t o o d . H o w e v e r ,
c o m e s into t h e p i c t u r e as s t r u c t u r i n g t h e p o t e n - t h e r e is n o e v i d e n c e t o i n d i c a t e that biasing be-
tial a c t i o n s p a c e o f t h e actor. h a v i o u r is u n c o m m o n at t h e c o n t r o l l i n g level.
W i t h r e g a r d to b u d g e t i n g , t h e m o r e g e n e r a l A n a l o g o u s e v i d e n c e is p r o v i d e d b y t h e t h e o r y o f
a c t i o n bases will b e d e f i n e d first; t h e s e are c a l l e d t h e firm c o n c e r n i n g t h e c r e a t i o n o f organiz-
t h e intentions o f budgetary biasing. At t h e c o n - ational slack at t h e t o p levels o f t h e o r g a n i z a t i o n
t r o l l e d level (i.e. f r o m t h e b u d g e t e e ' s p o i n t o f ( s e e W i l l i a m s o n , 1963, 1964; Bourgeois, 1981;
v i e w ) t w o different i n t e n t i o n s to bias a r e distin- K a m i n & Ronen, 1981 ). T h e c o m p l e x i t i e s o f this
guished: case n e e d to b e r e c o g n i z e d , n o t least b e c a u s e
( 1 ) Resource intention, w h i c h refers to an o f t h e d u a l r o l e o f t h e m i d d l e m a n a g e r s in an or-
a c t o r ' s aim o f o b t a i n i n g c o n t r o l o f e n t i r e l y un- ganization; t h e y m a y at t h e s a m e t i m e b e t h o s e
n e c e s s a r y o r o f an e x c e s s i v e a m o u n t o f re- w h o c o n t r o l and t h o s e w h o are c o n t r o l l e d in a
s o u r c e s t h r o u g h biasing, i.e. r e s o u r c e s that are b u d g e t a r y c o n t e x t . Such issues are n o t d i s c u s s e d
n o t e c o n o m i c a l l y rational, at least w h e n consi- f u r t h e r here.
d e r e d e x ante. A c t u a l i z a t i o n o f r e s o u r c e inten- In this study, bias at t h e c o n t r o l l i n g level is
t i o n results in o v e r e s t i m a t i o n o f t h e c o s t side o f s e e n as i n t e n d e d to affect t h e m o t i v a t i o n o f sub-
t h e b u d g e t . Both t y p e s o f bias (i.e. b u d g e t a r y ordinates. This i n t e n t i o n to c r e a t e b u d g e t a r y

12Compare analogously the idea of a dualistic approach in Roberts & Scapens (1985).
m3The case of upward-bias is realized when, in addition to overestimating the costs because of the resource intention, also
the revenues are overestimated, manipulation of the revenue side being larger than that of the cost side.
286 KARlLUKKA

bias is called m o t i v a t i o n intention. Here w e run the use o f Maslow's t h e o r y o f needs, although
into a c o n t r o v e r s y in the behavioural budgeting the inherent weaknesses o f this t h e o r y are rec-
literature: according to s o m e research results a ognized (see e.g. Miner, 1980).
b u d g e t o u g h t to be set at an optimistic level in Maslow's t h e o r y consists of a five-step
o r d e r to gain the best motivational effect (see hiererachy of needs and p r e s u p p o s e s that the
e.g. Stedry, 1960; Hofstede, 1968). This implies l o w e r level needs must first be satisfied - - at
the creation o f upward-bias from the viewpoint least to a reasonable e x t e n t - - before a p e r s o n is
o f the controlling level. A c o n t r a r y opinion motivated by needs at the next higher level. Ac-
suggests that it is motivationally functional in the cordingly, w h e n a p e r s o n shifts to a higher level
long run to leave s o m e " r o o m for manoeuvre" in of needs, those at the l o w e r level b e c o m e less
budgets (see e.g. Caplan, 1971; c o m p a r e Hop- important (Maslow, 1954; see also Hofstede,
w o o d , 1974); this implies the creation of slack 1968; Caplan, 1971 ).
or, at least, providing the controlled level with With regard to budgetary biasing behaviour, it
an o p p o r t u n i t y for it. There is empirical evi- seems justifiable to argue that the m o s t relevant
d e n c e for b o t h types o f biasing behaviour at the needs of Maslow's hierarchy are safety needs and
controlling level: yet the aim o f the upward-bias- e s t e e m needs. Active safety needs may encour-
ing of the budgets seems to be clearly the m o r e age the p e r f o r m a n c e evaluation intention - - de-
usual (Ostman, 1977; Kazandjis, 1980). p e n d i n g on the situation b o t h the ex a n t e and ex
Having discussed general bases for biasing ac- p o s t alternatives ( c o m p a r e Onsi, 1973; Lowe &
tion, consideration is n o w given to m o r e specific Shaw, 1968). They m a y also lead to reinforce-
factors b e h i n d biasing w h i c h are called, in accor- m e n t of the resQurce intention, especially in
dance with von Wright's ( 1 9 7 6 ) original ter- situations w h e r e budgets are used inflexibly as a
minology, d e t e r m i n a n t s o f budgetary biasing. r e s o u r c e allocation device (Kazandjis, 1980).
O n the o t h e r hand, active esteem needs m a y en-
Personal goals c o u r a g e particularly the r e s o u r c e intention; hav-
Personal goals ("wants" in v o n Wright's ter- ing extra resources u n d e r his or her c o n t r o l may
m i n o l o g y ) are e x t r e m e l y important, because be important to the actor's self-esteem (e.g. the
they relate closely to the intentional nature of desire for p o w e r and a u t o n o m y ) and especially
the action. However, this area is s o m e w h a t to the esteem o f others (e.g. the desire for status,
o b s c u r e and ambiguous, and it can be ap- recognition and p o w e r ) (see Hofstede, 1968;
p r o a c h e d from several perspectives. Already the Williamson, 1964).
mainstream o f organizational p s y c h o l o g y offers
two possible ways to analyse h u m a n motivation: Organizational factors
c o n t e n t theories and process theories. The Organizational factors can be considered as
f o r m e r attempts to explain w h y actors are "duties" that s u r r o u n d the decision-maker ( c o m -
aroused, and has p r o d u c e d either theories of dif- pare v o n Wright, 1976). As budgeting is a form
ferent d o m i n a n t motives (e.g. McLelland, 1961; o f organizational control, 14 a budgeting actor is
White, 1959) or classification systems for the s u r r o u n d e d by m a n y kinds of organizational
separate h u m a n motives (e.g. Maslow, 1954; expectations, n o r m s and o t h e r restrictions. Ac-
Herzberg, 1966). O n the o t h e r hand, the process cordingly, individuals are not able to act accord-
theories focus o n the p r o b l e m of c h o i c e for ac- ing to their o w n motives alone but have to rec-
tion, and have p r o v i d e d insights into different ognize the existence of these organizational re-
forms of r e i n f o r c e m e n t principles. From the pre- strictions. O n the o t h e r hand, the organizational
sent perspective, the m o s t significant process c o n t r o l system usually provides i n d u c e m e n t s
t h e o r y is the e x p e c t a n c y t h e o r y (see especially for organizationally functional behaviour.
Vroom, 1964). The present analysis is limited to Organizational roles refer to the expectations

14About different alternatives of control, see Hopwood (1974) and Merchant (1985b).
 BUDGETARYBIASINGIN ORGANIZATIONS 287

o f b e h a v i o u r in an o r g a n i z a t i o n a l p o s i t i o n ; roles d i v i d e d into t h r e e groups:

are o n e w a y o f c o o r d i n a t i n g b e h a v i o u r in an or- ( 1 ) t h e d e g r e e o f p a r t i c i p a t i o n allowed,
g a n i z a t i o n ( s e e M i n t z b e r g , 1979). B e h a v i o u r ( 2 ) t h e style o f u s e o f b u d g e t a r y c o n t r o l infor-
w h i c h is in a c c o r d a n c e w i t h a p e r s o n ' s r o l e is mation,
u s u a l l y e n c o u r a g e d in m a n y ways, a n d be- ( 3 ) t h e r e w a r d s y s t e m used.
h a v i o u r against t h e r o l e is e i t h e r p u n i s h e d o r ig- T h e effect o f p a r t i c i p a t i o n o n t h e a c t o r s ' per-
n o r e d (Pfeffer, 1982). As r e g a r d s b u d g e t a r y bias- f o r m a n c e has b e e n o n e o f t h e m a i n t h e m e s o f b e -
ing b e h a v i o u r , it c o u l d b e a r g u e d that t h e a c t o r ' s h a v i o u r a l a c c o u n t i n g r e s e a r c h . T h e results have
role imposes some kind of general restrictions b e e n m i x e d , a l t h o u g h t h e m a j o r i t y have sup-
o n t h e a m o u n t a n d n a t u r e o f t h e bias c r e a t e d : it p o r t e d a p o s i t i v e c o r r e l a t i o n b e t w e e n participa-
is n o t usually p o s s i b l e to c r e a t e as m u c h bias as t i o n and p e r f o r m a n c e ( s e e e.g. Milani, 1975;
o n e w o u l d like to. O n t h e o t h e r hand, it is possi- Kenis, 1979; B r o w n e l l & McInnes, 1986). How-
b l e to n o t e links b e t w e e n o r g a n i z a t i o n a l r o l e s ever, t h e c u r r e n t v i e w s e e m s to b e that this rela-
a n d t h e m o t i v a t i o n i n t e n t i o n to c r e a t e b u d g e t - t i o n s h i p is o f a c o n t i n g e n t type: t h e r e are s o m e
ary bias - - t h e task o f a m a n a g e r i n c l u d e s i n t e r v e n i n g variables at different levels (e.g. at
m o t i v a t i n g his o r h e r s u b o r d i n a t e s . 15 t h e cultural, o r g a n i z a t i o n a l and i n d i v i d u a l
O r g a n i z a t i o n a l n o r m s are beliefs a b o u t w h a t l e v e l s ) that c o m e into p l a y a n d affect t h e
b e h a v i o u r is a l l o w e d , p r o h i b i t e d o r c o m p u l s o r y s t r e n g t h o f t h e effect o f p a r t i c i p a t i o n a n d
in an o r g a n i z a t i o n (e.g. Niisi, 1979). In a b u d g e t - p e r h a p s also t h e sign o f t h e c o r r e l a t i o n ( c o m -
ary c o n t e x t , n o r m s m a y a p p e a r in t h e f o r m o f t h e p a r e H o p w o o d , 1974; Brownell, 1979).
b u d g e t i n g a c t o r ' s beliefs a b o u t t h e o t h e r p a r t y ' s O b v i o u s l y t h e d e g r e e o f p a r t i c i p a t i o n has an
e x p e c t a t i o n s ; t h e ability to e s t i m a t e " w h a t will i m p o r t a n t r o l e as far as b u d g e t a r y biasing is con-
go" is o n e o f t h e m o s t c r u c i a l m a t t e r s in b u d g e t - c e r n e d . A high d e g r e e o f p a r t i c i p a t i o n gives t h e
ing ( W i l d a v s k y , 1979). In a d d i t i o n to t h e o t h e r c o n t r o l l e d u n i t an o p p o r t u n i t y to take p a r t
n e g o t i a t i n g p a r t y ' s s i t u a t i o n specific e x p e c t a - d i r e c t l y in t h e c r e a t i o n o f bias, a n d in that w a y di-
tions, t h e i m p l i c a t i o n s o f its g e n e r a l b u d g e t i n g minishes the superior power of the controlling
strategies are also o f t e n t a k e n into c o n s i d e r a t i o n unit ( s e e Schiff & Lewin, 1968; Mintzberg,
( c o m p a r e H o p w o o d , 1980), as w e l l as m o r e gen- 1979). A l o w d e g r e e o f p a r t i c i p a t i o n , o n t h e
eral o r g a n i z a t i o n a l n o r m s . o t h e r hand, restricts t h e p o t e n t i a l for b u d g e t a r y
Essentially, b u d g e t a r y bias is l i n k e d t o organi- b i a s i n g at t h e c o n t r o l l e d level a n d p r o v i d e s op-
zational n o r m s in t w o basic ways; t h e s e h y p o t h - p o r t u n i t i e s for biasing at t h e c o n t r o l l i n g level; in
e s e s a p p l y e s p e c i a l l y to t h e c o n t r o l l e d level: this case t h e r e l e v a n c e o f b u d g e t s - - and also
( 1) The norms may reinforce the creation of that o f b u d g e t a r y bias - - may, h o w e v e r , b e
bias w h e n t h e y are felt to d e m a n d m o r e o r less r a t h e r l o w ( H o f s t e d e , 1968).
t h a n w h a t s e e m s to b e realistic f r o m t h e a c t o r ' s T h e use m o d e o f t h e b u d g e t a r y s y s t e m has
p o i n t o f view. This refers to t h e p r o b l e m o f re- b e e n m u c h s t u d i e d in t h e p a s t f e w years, m o s t o f
c o n c i l i n g t h e realistic a n d t h e e x p e c t e d . T h e t h e s t u d i e s having a n a l y s e d t h e effects o f diffe-
usual c o n c r e t e i m p l i c a t i o n is u p w a r d - b i a s i n g r e n t kinds o f uses o f a c c o u n t i n g i n f o r m a t i o n o n
( s e e Lowe & Shaw, 1968; Ostman, 1977). d e c i s i o n - m a k e r s ' p e r f o r m a n c e a n d o n c e r t a i n or-
(2) The norms may restrict budgetary biasing ganizational a n d p s y c h o l o g i c a l factors ( s e e Hop-
w h e n t h e y are felt to b e t i g h t e r t h a n t h e inten- w o o d 1972; Otley, 1978; Hirst, 1981; Govin-
t i o n s o f t h e actor. darajan, 1984). T h e basis for this g r o u p o f
O r g a n i z a t i o n a l factors also i n c l u d e t h e charac- studies was t h e s t u d y b y H o p w o o d ( 1 9 7 2 ) ,
teristics o f t h e b u d g e t a r y system, w h i c h are h e r e w h i c h d i s t i n g u i s h e d t h r e e basic t y p e s o f uses o f

~5Asa special case, Wildavsky ( 1975, 1979 ) has noted that an implicit divisionof roles may take place in an organization: some
have the role of advocates trying to maximise the resource pool under control, others are guardians, who attempt to restrict
the costs allocated. It can be easily understood that these roles have potential links to budgetary biasing.
288 KARlLUKKA

accounting information: the budget-constrained often stated in the budgeting literature that the
style, the profit-consciousstyle and the non-ac- mere existence of a reward system ( c o n n e c t e d
counting style. He found empirically many prob- to budgetary control) leads to the creation of
lems that were related to the use of the budget budgetary slack in order to gain more favourable
constrained style, e.g. high work related tension evaluations e x p o s t (Lowe & Shaw, 1968). This
and stress, p o o r personnel relations as well as effect is magnified if the reward system is asym-
the manipulation of accounting data and the metric, e.g. it emphasizes negative budget errors
physical process. H o p w o o d did not present any more than positive ones (Schiff & Lewin, 1970).
results concerning the manipulation of the On the other hand, the existence of a reward sys-
standards, but it could be hypothesized that the tem may well restrict upward-biasing as it does
use of a budget-constrained style would also not usually consititute rational action for the
reinforce that kind of action (compare Otley, actor in these circumstances. Generally it as-
1978). sumed that the effects of the reward system have
There are naturally many different pos- the closest links with the ex post alternative of
sibilities within one specific style of using ac- the performance evaluation intention.
counting information and hence also many alter-
natives for using the budget-constrained style. Organizational power
One important aspect is the degree of flexibility The inclusion of power in the frame of refer-
in the use of budgets. Ifa budget really cannot be ence is based on the idea that people do not usu-
reconsidered and changed during the budget ally intend to attempt things that, in their judge-
period, it is quite possible that a need might ment, they will not be able to achieve. Actors
emerge for the creation of some informal pos- make intuitive assessments of their own ability
sibilities to enlarge the "room for manoeuvre" to carry through the action they are considering
and, at the same time, to reduce the uncertainty even before they actually set out to reach their
arising from the prospect of running short of objectives (von Wright, 1976). Von Wright orig-
critical resources (see Kazandjis, 1980). inally applied the term "abilities" to this group of
The general opinion in the budgeting litera- determinants.
ture is that budgets affect the motivation to per- The concept of power is extremely complex
form in two main ways: and many-sided, almost ambiguous. Without a
( 1 ) Budgets always have the role of targets; more thorough discussion of this concept, a rela-
having targets motivates the actors, especially if tively general definition by Pihlanto is presented
the targets are internalised. The use of participa- here: p o w e r means "the capability or ability of
tive budgeting systems is important in achieving a social actor to get another party within an
such internalisation (see Otley, 1977). organizational-social relationship to behave in a
( 2 ) The motivational impact of budgets can be way which the party would not otherwise
reinforced by linking the reward system to behave, and also the possibility of an actor to
budgetary control (e.g. Amey & Eggington, behave as desired regardless of potential resis-
1973; Otley, 1977). Such a motivational impact tence" (Pihlanto, 1985 p.8; compare e.g. Dahl,
of this link needs to be understood in terms of a 1957; Mintzberg, 1983; Cooper, 1986).
larger framework such as the expectancy theory According to Bacharach & Lawler (1980),
of managerial motivation (Vroom, 1964; Ronen two important types of p o w e r may be distin-
& Livingston, 1975). guished, authority and influence. The source of
With regard to budgetary biasing, these diffe- authority is the actor's status in an organization.
rent reward systems and their uses are thought Authority is usually static by nature, hierarchi-
to form the most important group of related fac- cally downward directed and leads to coercive
tors. Principally, an organization's reward sys- actions towards the subordinates. In contrast,
tem has the role of encouraging actors to behave the sources of influence can be manyfold: per-
in accordance with organizational goals. It is sonality, expertise and opportunity. Influence is
 BUDGETARYBIASINGIN ORGANIZATIONS 289

characteristically m o r e informal, m o r e flexible at hand, w h i c h are c o n t i n u o u s l y a p p e a r i n g a n d

a n d does n o t ( i n a strict s e n s e ) lead to c o e r c i o n : d i s a p p e a r i n g b o t h as a result of h u m a n actions
it is essentially b a s e d o n the a c c e p t a n c e of the a n d of c h a n g e s in the e n v i r o n m e n t ( s e e v o n
o b j e c t of power. T h e m o s t i m p o r t a n t basis for Wright, 1976). I n this s t u d y situational factors
p o w e r w i t h regard to i n f l u e n c e is o b v i o u s l y the are i n t e r p r e t e d to m e a n c o n t e x t u a l factors, i.e.
c o n t r o l of critical information; it is the m o s t sig- w e use the ideas of the c o n t i n g e n c y approach,
nificant w a y i n w h i c h the c o n t r o l l e d u n i t gets ac- w h i c h is today o n e of the m o s t p r o m i n e n t ways
cess to the use of p o w e r in a b u d g e t a r y con- of t h i n k i n g in b u s i n e s s e c o n o m i c s ( s e e Burns &
text. 16 T h e t w o types of p o w e r may, of course, Stalker, 1961; W o o d w a r d , 1965; T h o m p s o n ,
also w o r k t o g e t h e r w h e n s o m e o n e w h o has au- 1967; Pugh e t al., 1969; Child, 1972; Bruns &
t h o r i t y also has influence. W a t e r h o u s e , 1975; Hayes, 1978; W a t e r h o u s e &
F r o m the p o i n t of v i e w of b u d g e t a r y biasing at Tiessen, 1978; Wood, 1979; Otley, 1980; Ties-
the i n d i v i d u a l level, p o w e r m e a n s e i t h e r an e x s e n & W a t e r h o u s e , 1983). In this part of the
a n t e r e s t r i c t i o n or a p o t e n t i a l for bias. T h e na- analysis t w o situational factors will b e dealt with:
t u r e of the effect d e p e n d s o n the actor's preas- the financial p o s i t i o n of the firm a n d u n c e r t a i n t y .
s e s m e n t of his or h e r o w n relative p o w e r , b u t I n the b u d g e t i n g literature the financial posi-
also o n the j u d g m e n t of the d e g r e e of the e x a n t e t i o n is usually c o n s i d e r e d to b e o n e of the m o s t
i n c o m p a t i b i l i t y of b u d g e t proposals. By defini- significant e x p l a n a t o r y factors of b u d g e t a r y bias-
tion, the c o n t r o l l i n g u n i t has a u t h o r i t y a n d ing; the d i s c u s s i o n has m a i n l y b e e n focused o n
therefore the ability to c o n t r o l biasing at the the profitability of the firm a n d its s u b u n i t s
c o n t r o l l e d level. It is usually w e l l able to create ( c o m p a r e Cyert & March, 1963; Williamson,
its o w n bias, a n d e v e n m o r e so flit also has influ- 1964). Here w e distinguish t w o situations: p o o r
ence, w h i c h is n o t always the case. I n contrast, a n d g o o d profitability, is T h e analysis is based o n
the c o n t r o l l e d u n i t c a n o n l y have influence. This the h y p o t h e s i s that it is the profitability of the
may, h o w e v e r , b e c o n s i d e r a b l e as the actors at c o n t r o l l e d u n i t that has the d o m i n a n t role as far
the c o n t r o l l e d level often have access to critical as the effects of profitability o n b u d g e t a r y bias-
information, t e c h n i c a l e x p e r t i s e for example. ing b e h a v i o u r are c o n c e r n e d . 19
U n c e r t a i n t y of the f u t u r e is often greater to the ( 1 ) G o o d profitability. It is h y p o t h e s i z e d that
s u p e r i o r t h a n it is to the s u b o r d i n a t e , w h o is t h e r e are o n l y m i n o r r e s t r i c t i o n s o n the c r e a t i o n
m o r e closely i n v o l v e d (e.g. Otley, 1978). Influ- of b u d g e t a r y slack, i.e. that slack m a y b e c r e a t e d
e n c e is o b v i o u s l y a highly c o n v e n i e n t type of t h r o u g h b u d g e t s ( C y e r t & March, 1963; O s t m a n ,
p o w e r as far as b u d g e t a r y biasing is c o n c e r n e d 1977). In this case the r e s o u r c e i n t e n t i o n may
s i n c e the o t h e r n e g o t i a t i n g p a r t y m a y n o t b e at b e c o m e p a r t i c u l a r l y relevant. Upward-biasing
all c o n s c i o u s of b e i n g the o b j e c t of the use of m a y also b e possible, b u t it does n o t appear to b e
p o w e r ! ~7 rational for the actor.
( 2 ) Poor profitability. T h e p o t e n t i a l for the
Situational influences c r e a t i o n of b u d g e t a r y slack is p r o b a b l y re-
Situational factors refer to o p p o r t u n i t i e s , i.e. stricted as c o s t - c u t t i n g policies m a y take place in
to the i n d i v i d u a l characteristics of the situation the o r g a n i z a t i o n (see e.g. Williamson, 1964). O n

16Compare the agency theoretic interpretation of asymmetric information of the negotiating parties, e.g. Baiman( 1981 ) and
Pope (1984).
17About the notion of unconscious power, see Pihlanto (1985).
is The meanings of these notions are not discussed in depth here. We refer to the generally subjectivistic approach of this
study; what is essential is that the relevant actors consider the profitability to be good or poor.
19Of course a more distinctive theoretical analysismight also have been made, for example those situations discussed where
the firm's overall profitability is different from some subunit'sprofitability.
290 KARILUKKA

t h e o t h e r hand, u p w a r d - b i a s i n g m a y s e e m ra- c r e a t i o n o f b u d g e t a r y slack ( t h e e x p o s t alterna-

tional f r o m t h e c o n t r o l l e d unit's p o i n t o f v i e w tive). O f c o u r s e t h e e x a n t e alternative o f t h e
( L o w e & Shaw; 1968: Ostman, 1977); t h e r e m a y p e r f o r m a n c e e v a l u a t i o n i n t e n t i o n also m a y b e
even be pressure towards upward-biasing from a c t i v a t e d e.g. if t h e r e is a high d e g r e e o f u n c e r -
t h e p a r t o f t h e c o n t r o l l i n g unit. tainty, a n d at t h e s a m e t i m e t h e p r o f i t a b i l i t y o f
Kazandjis ( 1 9 8 0 ) has n o t e d , h o w e v e r , that t h e u n i t in q u e s t i o n is n o t satisfactory; in this
e x t r a r e s o u r c e s are s o m e t i m e s a l l o c a t e d in b o t h case u n c e r t a i n t y p r o v i d e s an o p p o r t u n i t y for
"bad" and "good" years. In t h e f o r m e r case this this m a n i p u l a t i o n .
may be possible by means of manipulating both ( 3 ) M o t i v a t i o n intention: a high d e g r e e o f un-
t h e r e v e n u e s and t h e costs u p w a r d s , e.g. in s u c h c e r t a i n t y p r o v i d e s an o p p o r t u n i t y e.g. o f t r y i n g
a w a y that t h e b u d g e t e d profit d o e s n o t c h a n g e to m o t i v a t e s u b o r d i n a t e s b y a t t e m p t i n g to a g r e e
to any significant extent. o n o p t i m i s t i c b u d g e t s . Because it is n o t c e r t a i n
U n c e r t a i n t y is h e r e u n d e r s t o o d to refer to t h e that t h e b u d g e t p r o p o s a l o f t h e c o n t r o l l e d level
epistemological problem of knowing something is realistic t h e r e m a y also e m e r g e a n e e d to c o u n -
a b o u t t h e future; strictly s p e a k i n g it is, o f course, terbias t h e b u d g e t p r o p o s a l s (i.e. c u t t h e sus-
i m p o s s i b l e to k n o w a n y t h i n g a b o u t it ( s e e Keto- p e c t e d slack o r u p w a r d - b i a s ) .
nen, 1981). H o w e v e r , p r o b a b i l i s t i c e s t i m a t e s Overall, a h i g h d e g r e e o f u n c e r t a i n t y p r o b a b l y
c a n b e m a d e a b o u t t h e future values o f t h e has a t w o - f o l d r o l e in t h e b u d g e t a r y biasing con-
p a r a m e t e r s and variables that are o f interest. In text: o n t h e o n e h a n d it m a y r e i n f o r c e t h e diffe-
fact b u d g e t a r y biasing is a p h e n o m e n o n that is r e n t i n t e n t i o n s o f biasing o r c o u n t e r b i a s i n g ac-
b a s e d o n t h e u n a v o i d a b l e u n c e r t a i n t y l i n k e d to tion, o n t h e o t h e r h a n d it also p r o v i d e s an o p p o r -
b u d g e t i n g . It is e x p r e s s l y this u n c e r t a i n t y that t u n i t y for biasing.
p r o v i d e s t h e " r o o m for m a n o e u v r e " for b o t h t h e
n e g o t i a t i n g parties. A s y m m e t r i e s in t h e c o n t r o l The role o f i n f o r m a t i o n
o f u n c e r t a i n t y are essential strategic e l e m e n t s o f B u d g e t i n g can b e i n t e r p r e t e d as a p r o c e s s o f
biasing b e h a v i o u r . 2 e l a b o r a t i n g information. It m a y also b e v i e w e d as
In t h e b u d g e t i n g l i t e r a t u r e u n c e r t a i n t y is usu- an organizational m a r k e t for i n f o r m a t i o n as t h e
ally r e g a r d e d as o n e o f t h e m a i n c o n t r i b u t o r s to n e g o t i a t i n g p a r t i e s are offering and d e m a n d i n g
biasing b e h a v i o u r ( s e e Schiff & Lewin, 1970; i n f o r m a t i o n in a c c o r d a n c e w i t h t h e i r i n d i v i d u a l
Onsi, 1973; Kazandjis, 1980). G e n e r a l l y speak- preferences.
ing, u n c e r t a i n t y m a y easily l e a d to a n e e d to pre- W e are c o n c e r n e d h e r e w i t h t w o t y p e s o f in-
p a r e o n e s e l f for it, just to b e o n the safe side, a n d formation: h i s t o r i c a l i n f o r m a t i o n and informa-
m a y q u i t e naturally i m p l y t h e activation o f all t h e tion a b o u t t h e future. Historical i n f o r m a t i o n
p o s s i b l e intentions: consists o f b o t h t h e formal r e c o r d s o f t h e organi-
( 1 ) T h e r e s o u r c e intention, b e c a u s e the zation ( b u d g e t s , b u d g e t a r y c o n t r o l r e p o r t s ,
a m o u n t o f n e e d e d r e s o u r c e s is n o t c l e a r e x ante. o t h e r a c c o u n t i n g i n f o r m a t i o n e t c . ) and t h e in-
This effect will b e m a g n i f i e d if t h e r e is b o t h a formal " m e m o r y " o f t h e a c t o r s in t h e organiza-
high level o f u n c e r t a i n t y a n d an inflexible use o f tion (e.g. o p i n i o n s a b o u t n o r m s and p o w e r rela-
b u d g e t allocations. In c o n c r e t e terms, this m a y tions). T h e m o s t i m p o r t a n t r o l e o f this t y p e o f in-
m e a n t h e c r e a t i o n o f b o t h b u d g e t a r y slack a n d f o r m a t i o n is to s h a p e a n d d e f i n e t h e original situ-
upward-bias. ation. Historical information, at least t h e formal
( 2 ) T h e p e r f o r m a n c e e v a l u a t i o n intention; be- p a r t o f it, is usually i n t e r p r e t e d as t h e h a r d c o r e
c a u s e a c h i e v i n g t h e b u d g e t is n o t g u a r a n t e e d ex o f b u d g e t a r y planning.21
ante, an a t t e m p t is m a d e to e n s u r e it t h r o u g h t h e An e m p h a s i s o n h i s t o r i c a l i n f o r m a t i o n is

2oSee discussion of power, above, especially the sources of influence.

21Compare the notion of incrementalism in budgeting, e.g. Wildavsky (1975) and Hopwood ( 1980 ).
 BUDGETARYBIASINGIN ORGANIZATIONS 291

b o u n d to cause static b u d g e t i n g a n d it s e e m s to tions c a n c o m e i n t o play in such c i r c u m s t a n c e s

affect b u d g e t a r y biasing i n t w o ways. O n the o n e ( H o p w o o d , 1980).
hand, a s s u m i n g that the e n v i r o n m e n t is fairly sta- Figure 2, w h i c h is based o n the basic explanat-
ble, it makes it easy to m a i n t a i n existing bias in ory s t r u c t u r e p r e s e n t e d above, portrays a sum-
b u d g e t s and, o n the o t h e r hand, it restricts the m a r y of the m o s t i m p o r t a n t results of o u r analy-
c r e a t i o n of any n e w bias. E n v i r o n m e n t a l pos- sis of b u d g e t a r y biasing at the i n d i v i d u a l level. It
sibilities, of course, m a y c h a n g e - - an emphasis reflects an a t t e m p t to gather t o g e t h e r the
o n historical i n f o r m a t i o n m a y t h e n also cause h y p o t h e t i c a l l y r e l e v a n t factors, to s t r u c t u r e
u n i n t e n t i o n a l bias i n budgets. t h e m hierarchically ( i n t e n t i o n s a n d d e t e r m i n -
An analysis of the past is usually n o t e n o u g h , a n t s ) a n d to analyse their e x p e c t e d effects o n
h o w e v e r . Even the m o s t careful analysis c a n n o t b u d g e t a r y biasing b e h a v i o u r at the individual
solve the p r i n c i p a l p r o b l e m of b u d g e t i n g b e i n g level. As w i t h m a n y o t h e r i m p o r t a n t organiza-
d i r e c t e d to the u n c e r t a i n future. I n f o r m a t i o n tional p h e n o m e n a , b u d g e t a r y biasing is s h o w n
a b o u t the future is l i n k e d to i n d i v i d u a l a n d or- to b e at the c e n t r e of m a n y i n t e r r e l a t e d a n d
ganizational e x p e c t a t i o n s a n d it is especially this s o m e t i m e s e v e n c o n t r a d i c t o r y factors. An
that brings an e l e m e n t of g a m i n g to b u d g e t i n g . actor's i n t e n t i o n s are i n t e r p r e t e d as the synthe-
An emphasis o n estimates a b o u t the future im- tic core of his or h e r behaviour. 22
plies that r o o m is g i v e n for the active c r e a t i o n of
bias in budgets, e v e n t h o u g h it o f t e n is a rational
strategy for the o r g a n i z a t i o n to follow b e c a u s e of AN ORGANIZATIONAL MODEL
the e n v i r o n m e n t a l c h a n g e s that are expected. FOR BUDGETARY BIASING
T h e r e is n o positive w a y to d e m o n s t r a t e that any In the p r e v i o u s section, the individual aspect
e v i d e n c e is a b s o l u t e l y unrealistic, too pessimis- of biasing b e h a v i o u r has b e e n discussed. I n this
tic o r too optimistic; e v e r y t h i n g is m o r e or less part of the analysis, the organizational aspect will
subjective. Many kinds of b a r g a i n i n g a n d b e considered. 23 I n c o n c r e t e t e r m s an organiza-
simplification strategies, as well as p o w e r rela- tional analysis of biasing b e h a v i o u r m e a n s un-

PERSONALGOALS
Esteem needs
Safety needs
Norms
ORGANIZATIONAL
FACTORS
Roles ~" INTENTIONS4
Resourceintention
Characteristics </ Performance
of the budgetary evaluation INFORMATION
system tl intention J/ Historical
Participation /7 Motivationintention J / information
Reward system Information
Use of the // ~ ] _IDEA
_ OF MEANS ~ / about the
budgetarycontrol ] ] / future
system J / BUDGETARY r=~/
.,AS.NG ACT, O .
n~tulWheoEnACTORS
Rt~ ~ /

SITUATIONALFACTORS
Profitability
Uncertanty
Fig. 2. Intentions and determinants of budgetary biasing.

22It would also be possible to go further and present the expected directions of influence of these factors (either reinforcing,
restricting or potential creating) and at the same time to take into consideration the two concrete types of biasing.
23This aspect has recently become dominantin the U.K.behavioural accounting research in contrast to the more micro orien-
tation adopted in the U.S.A.,see Hopwood (1978) and Ofley (1984).
 292 KARILUKKA

derstanding the actual b u d g e t negotiation phase. the role of budgetary biasing in the b u d g e t
The aim is to obtain s o m e preliminary insights negotiations? As far as organizational analysis is
into the role of biasing as a means and a result of c o n c e r n e d , two points are stressed: conflicts in
b u d g e t negotiations. The limitations of any such the negotiations, and p o w e r factors. The effects
analysis must be recognized, however. Such in- o f p o w e r are realized in the b u d g e t negotiations
teresting and important aspects o f the process as - - the real negotiating p o w e r is revealed and
dynamics and learning are still e x c l u d e d be- possible i n c o r r e c t preassessments emerge, z4
cause the emphasis in the original study (Lukka, The result o f these negotiations is usually a
1985) was primarily o n the individual aspect. b u d g e t at the controlled level, w h i c h may, of
Figure 3 shows the general framework for the course, still include biases (biases 3 and 4).
w h o l e study as well as portraying an outline of H e n c e there are four principal kinds o f budget-
the links b e t w e e n the t w o submodels of biasing ary biases in the process, the different interpreta-
behaviour. tions emerging because the forecasts made by
Budgetary biases 1 and 2 are the potential the different actors are subjective b y nature.
biases created in the parties' b u d g e t p r o p o s a l s - - In trying to reveal the principal features o f the
bias 1 at the controlling level and bias 2 at the conflicts in b u d g e t a r y negotiations and the role
controlled level. O n the o t h e r hand, biases 3 and of bias in relation to them, the situation is some-
4 are the potential biases of the final b u d g e t - - w h a t simplified. The elements o f the analysis are
bias 3 evaluated by the controlling unit and bias two organization levels, the controlling ( N + 1 )
4 evaluated by the controlled unit. and the controlled ( N ) - - or strictly speaking
The fundamental idea b e h i n d Fig. 3 is to p o i n t two actors at these two levels - - their forecasts

CONTROLLING UNIT
Budget
Personal goals proposal
Organizational
factors I Budgetary

r Power factors bias (1)

Situational
factors
Budgetary
Estimates BUDGETARY bias(3)
for the NEGOTIATIONS
future Potential THE BUDGET
conflicts
Historical Power
information factors Budgetary
CONTROLLED UNIT bias (4)
Personal goals
Organizational
factors I Budgetary
Power factors Budget bias (2)
Situational proposal
factors

Fig. 3. Budgetary process from the biasing viewpoint.

o u t that the bias contained in a final b u d g e t is not ("honest b u d g e t estimates") and their b u d g e t
the result o f only o n e actor's intentional be- proposals. There are three principal alternatives:
haviour, but rather the result o f the dialectics of ( 1 ) the forecasts m a d e b y the parties are the
the negotiations. The right hand side of the fig- same25;
ure refers to the organizational analysis: w h a t is ( 2 ) the forecast at level ( N + 1 ) is higher than

z4Otherwise we refer to our analogous discussion on power above.

2s The meaning of"the same" should not be interpreted here quite literally.
 BUDGETARYBIASINGIN ORGANIZATIONS 293

that at level N; In this case t h e p a r t i e s ' forecasts differ, a n d t h e

( 3 ) t h e f o r e c a s t at level ( N + 1 ) is l o w e r t h a n p r o b a b i l i t y o f conflicts is t h e r e f o r e g r e a t e r t h a n
t h a t at level N. in t h e first alternative. T h e r e is n o c o m m o n
T h e first o f t h e s e a l t e r n a t i v e s is i l l u s t r a t e d in g r o u n d for t h e n e g o t i a t i o n s a n d t h u s t h e r e is
Fig. 4. r o o m for m i s i n t e r p r e t a t i o n . F o r e x a m p l e , t h e un-
. . . . .
b i a s e d b u d g e t p r o p o s a l o f t h e c o n t r o l l i n g unit
s e e m s to h a v e an u p w a r d - b i a s f r o m t h e p o i n t o f
F(N+I)~ F B s - - - - _ - B F s ~ F(N) v i e w o f t h e c o n t r o l l e d level. T h e e q u i l i b r i u m
p o i n t s in this s i t u a t i o n are, t h e b u d g e t p r o p o s a l
o f t h e c o n t r o l l i n g level m e n t i o n e d first, F/UB a n d
The symbols used are: F IN + 1) = forecast at level N + 1 BS/F, w h i c h a r e b o t h alternatives w h e r e o n e o f
F IN) = forecast at level N t h e p r o p o s a l s is biased! T h e s i t u a t i o n UB/BS
F = unbiasedbudgetproposal
UB = an upward-biased budget proposal naturally gives rise to t h e m o s t conflict.
BS = budget proposal containing slack
W i t h r e g a r d to a l t e r n a t i v e two, it is also possi-
b l e for t h e "union" o f t h e b u d g e t p r o p o s a l s to b e
Fig. 4. A negotiation situation of minor conflict.
zero, as is i l l u s t r a t e d in Fig. 6. H e n c e , w h e n t h e
d i f f e r e n c e b e t w e e n t h e p a r t i e s ' e s t i m a t e s is suffi-
Two p o i n t s s h o u l d b e m a d e a b o u t t h e illustra- c i e n t l y large, t h e original s i t u a t i o n leads to con-
tion used here: flict in e a c h c a s e - - o n l y t h e i n t e n s i t y o f t h e con-
( 1 ) T h e b u d g e t p r o p o s a l a l t e r n a t i v e s (UB, F, flict differs d e p e n d i n g o n w h i c h d i r e c t i o n a n d
BS) o f b o t h p a r t i e s a r e l y i n g o n an "invisible" ver- h o w m u c h t h e p r o p o s a l s are biased.
tical axis r e p r e s e n t i n g t h e level o f t h e b u d g e t
p r o p o s a l ( t h e h i g h e r t h e p r o p o s a l t h e m o r e dif-
ficult it is).
( 2 ) T h e fact that t h e b u d g e t p r o p o s a l alterna- . . . . . . . .

tives o f t h e p a r t i e s are r e p r e s e n t e d as b e i n g ........ u~___=

e x a c t l y at t h e s a m e level s h o u l d n o t b e inter-
BSY FIN)
p r e t e d q u i t e literally. M o r e i m p o r t a n t t h a n t h e
e x a c t a m o u n t o f bias is t h e d i r e c t i o n o f t h e biases
in t h e diagram. Fig. 6. A situation without overlapping negotiation area.
In t h e first case s k e t c h e d in Fig. 4, t h e p a r t i e s
h a v e a c o m m o n v i e w o f t h e f u t u r e as t h e i r fore-
T h e t h i r d a l t e r n a t i v e is i l l u s t r a t e d in Fig. 7.
casts are t h e s a m e - - t h e r e f o r e t h e i r p o s s i b l e
T h e e q u i l i b r i u m p o i n t in this e x a m p l e is UB/BS,
b i a s e s a r e also i n t e r p r e t e d in t h e s a m e way. As a
again a s i t u a t i o n w h e r e t h e p r o p o s a l s o f b o t h
r e s u l t this s i t u a t i o n m a y b e r e g a r d e d as i m p l y i n g
p a r t i e s a r e biased. T h e g r e a t e s t conflict will arise
n o m a j o r conflicts. Naturally, conflicts are possi-
in s i t u a t i o n BS/UB. It is naturally also p o s s i b l e
b l e in this s i t u a t i o n if t h e p a r t i e s i n t e n d to c r e a t e
that in t h e t h i r d a l t e r n a t i v e t h e r e is o r g i n a l l y n o
bias in different d i r e c t i o n s , o r if t h e i r biases are
e q u i l i b r i u m area.
not of the same magnitude.
T h e s e c o n d a l t e r n a t i v e is i l l u s t r a t e d in Fig. 5.

F(N+I) ~ BS . . . . .
. . . . . F,,, F(N+I)

BS~r~

Fig. 5. Principal's forecast higher than that of subordinate's. Fig. 7. Principal's forecast lower than that of subordinate's.
294 KARILUKKA

B u d g e t a r y bias m a y thus e i t h e r intensify o r t h e h o u s e h o l d s u p p l i e s retail trade, b u t has also

d a m p e n t h e conflicts in b u d g e t negotiations. s o m e activities in t h e h o t e l business. It is a
H o w w i d e a gap t h e r e is b e t w e e n t h e p a r t i e s ' c o o p e r a t i v e s o c i e t y a n d has c l o s e links w i t h o n e
b u d g e t p r o p o s a l s d e p e n d s u p o n t h e i r forecasts o f t h e m a j o r g r o u p i n g s in the w h o l e s a l e t r a d e in
a n d t h e i r p o s s i b l e biases ( d i r e c t i o n , a m o u n t ) . If Finland. F o u n d e d in 1916, t h e firm has e x p e r i -
t h e p a r t i e s ' forecasts are at different levels, e n c e d m a n y ups and d o w n s d u r i n g its history.
r e a c h i n g e q u i l i b r i u m p r e s u p p o s e s bias in at least T h e 1970s w e r e a p a r t i c u l a r l y difficult p e r i o d
o n e p a r t y ' s budget. T h e d i r e c t i o n o f t h e biases a n d for several years it m a d e no p r o f i t at all. T h e
c r e a t e d b y t h e p a r t i e s is also o f i m p o r t a n c e : t h e m a j o r causes o f its difficulties w e r e its s l o w n e s s
c o n t r a d i c t i o n will b e intensified if t h o s e biases to change, its r a t h e r small and p o o r l y j u d g e d in-
are d i r e c t e d o u t w a r d f r o m "the area o f c o m - v e s t m e n t p r o g r a m m e a n d t h e intensifying c o m -
p r o m i s e " , i.e. t h e area w h i c h lies b e t w e e n t h e p e t i t i o n in the retail b u s i n e s s in Finland. In 1981
p a r t i e s ' forecasts. and 1982, t h e p e r i o d o f t h e e m p i r i c a l study, t h e
T h e a b o v e d i s c u s s i o n refers to t h e starting firm was i n t e n s i v e l y trying to r e c o v e r its profits,
p o s i t i o n in b u d g e t negotiations. D u r i n g t h e set- b u t w i t h o n l y m i n o r success.
t l e m e n t o f a b u d g e t this p o s i t i o n m a y c h a n g e T h e s t u d y was c o n c e n t r a t e d o n t h e m o s t criti-
c o n s i d e r a b l y : t h e r e will usually b e a g r e a t d e a l o f cal p a r t o f t h e firm n a m e l y its daily g o o d s line,
a r g u m e n t a t i o n and e x c h a n g e o f information, w h i c h is o n e o f t h e t h r e e a l m o s t i n d e p e n d e n t
and p o w e r factors really c o m e into t h e p i c t u r e . b u s i n e s s lines o f t h e firm. In 1982 it a c c o u n t e d
This p r o b a b l y leads to t h e parties' forecasts get- for 57% o f t h e sales o f t h e firm, b u t its profitabil-
ting c l o s e r to e a c h other. F u r t h e r m o r e , it also ity h a d n o t b e e n satisfactory for t h e p a s t c o u p l e
i m p l i e s that t h e biases that m a y have b e e n o f years. T h e daily g o o d s line m a n a g e r h a d u n d e r
c r e a t e d are d i m i n i s h e d or, at least, given a n e w his d i r e c t i o n t w o h i e r a r c h i c a l l y s u b o r d i n a t e
i n t e r p r e t a t i o n . It is, o f course, p o s s i b l e that o r g a n i z a t i o n levels; d i r e c t l y b e l o w h i m t h e r e
e q u i l i b r i u m ( t h e b u d g e t ) is r e a c h e d w i t h o u t any w e r e four g r o u p managers, w h o , in turn, h a d al-
bias at all. It is m o r e likely, h o w e v e r , that al- t o g e t h e r 56 retail u n i t m a n a g e r s r e p o r t i n g to
t h o u g h s o m e c o n v e r g e n c e m a y take place, s o m e them. 26 T h e s e units - - m a i n l y small retail shops,
bias is still n e e d e d to r e a c h a solution, if t h e start- b u t also various d e p a r t m e n t s in t h e firm's de-
ing p o i n t w a s e i t h e r t h e s e c o n d o r t h e third alter- p a r t m e n t s t o r e - - w e r e d i r e c t l y in c o n t a c t w i t h
native illustrated in Figs 5 to 7 above. t h e market. Hence, t h e p a r t o f t h e firm that was
o f special i n t e r e s t to this s t u d y c o m p r i s e d t h r e e
levels o f h i e r a r c h y : t h e line manager, four g r o u p
THE EMPIRICAL STUDY
m a n a g e r s and 56 retail unit managers. All t h e s e
T h e e m p i r i c a l p a r t o f this s t u d y p r o c e e d s to- levels w e r e in fact a c c o u n t a b l e for t h e i r profits,
w a r d s a g e n e r a l p i c t u r e o f b u d g e t a r y biasing be- a l t h o u g h this r e s p o n s i b i l i t y was o f o n l y an unof-
h a v i o u r b y m e a n s o f testing t h e usefulness o f t h e ficial n a t u r e at t h e g r o u p m a n a g e r level.
f r a m e w o r k p r e v i o u s l y d e v e l o p e d in a r e l a t i v e l y T h e p r i m a r y f u n c t i o n o f t h e m a n a g e m e n t ac-
large firm w i t h s e v e r a l profit-centres. T h e cho- c o u n t i n g s y s t e m o f t h e firm w a s to p r o v i d e con-
sen m e t h o d w a s to p e r f o r m i n t e n s i v e a c t i o n re- trol i n f o r m a t i o n a b o u t t h e profit-centres; t h e
s e a r c h in just o n e firm b e c a u s e t h e p h e n o m e n o n control was based on budgets which were
o f biasing is o f a r a t h e r sensitive nature. n e g o t i a t e d o n a y e a r l y basis. T h e b u d g e t c o n t r o l
p e r i o d s w e r e o n e m o n t h and o n e year. T h e m o s t
The fir m studied i m p o r t a n t figures to b e c o n s i d e r e d w e r e t h e p r o -
fit ( u s i n g a residual i n c o m e m e a s u r e ) , t h e con-
T h e firm s e l e c t e d for s t u d y o p e r a t e s m a i n l y in t r i b u t i o n m a r g i n ( u s i n g a marginal c o s t i n g sys-

26The four groups of the daily goods line were distinguished according to the different nature and size of the retail units they
consisted of.
 BUDGETARYBIASINGIN ORGANIZATIONS 295

t e m ) a n d sales. T h e b u d g e t i n g p r o c e s s i n v o l v e d discussions. T h e m a i n m e t h o d o f c o n t r o l l i n g t h e
a g r e a t d e a l o f p a r t i c i p a t i o n ; t h e p r o c e s s b e g a n at statements of the actors interviewed was the use
t h e l o w e s t level o f t h e h i e r a r c h y ( t h e retail unit o f b u d g e t a r y p l a n n i n g a n d c o n t r o l material,
managers) and included numerous meetings, w h i c h w a s available in a l m o s t u n l i m i t e d quan-
n e g o t i a t i o n s a n d d i s c u s s i o n s at different organi- tities.
zational levels. O n t h e w h o l e , t h e r e l e v a n c e o f T h e m o s t difficult p r o b l e m in t h e e m p i r i c a l
b u d g e t s a p p e a r e d r a t h e r high in t h e firm. This p a r t o f t h e s t u d y was h o w to m e a s u r e t h e vari-
m a y b e a t t r i b u t e d to t h e r e l a t i v e l y s t r o n g em- ables - - e s p e c i a l l y b u d g e t a r y bias, w h i c h is n o t
phasis o n t h e c o n t r o l p h a s e o f t h e b u d g e t i n g p r o - easily o p e r a t i o n a l i z e d . As t h e a p p r o a c h w a s basi-
cess: b u d g e t v a r i a n c e s w e r e c o m p u t e d a n d cally qualitative, t h e m e t h o d u s e d w a s to mea-
a n a l y s e d a c t i v e l y o n t h e basis o f c o n t i n u o u s a n d s u r e bias indirectly. I n f o r m a t i o n a b o u t biasing
r e g u l a r r e p o r t i n g . Also, b u d g e t s w e r e u s e d as w a s a c q u i r e d b y m e a n s of:
m a j o r r e f e r e n c e p o i n t s in t h e e v a l u a t i o n o f t h e ( 1 ) clarifying t h e g e n e r a l a t t i t u d e s o f t h e in-
actors' performance. t e r v i e w e e s to biasing;
( 2 ) g e t t i n g t h e i n t e r v i e w e e s to m a k e state-
m e n t s a b o u t t h e i r actual b i a s i n g b e h a v i o u r ;
METHOD ( 3 ) finding o u t w h a t t h e i n t e r v i e w e e s k n e w o r
w h a t t h e y t h o u g h t a b o u t t h e i r c o l l e a g u e s ' bias-
As t h e a c t i o n - o r i e n t e d r e s e a r c h a p p r o a c h w a s ing b e h a v i o u r ( a t t h e i r o w n o r g a n i z a t i o n a l level
u s e d in this study, t h e e m p h a s i s in t h e e m p i r i c a l a n d at o t h e r levels).
p a r t w a s o n qualitative information. T h e re- Surprisingly t h e i n t e r v i e w e e s t e n d e d to dis-
s e a r c h m a t e r i a l w a s c o l l e c t e d m a i n l y in t h e f o r m cuss t h e biasing b e h a v i o u r in t h e firm, as w e l l as
o f s e m i - s t r u c t u r e d ( " t h e m e " ) i n t e r v i e w s at diffe- t h e i r o w n biasing p a t t e r n s a n d t h e i r r e l a t e d in-
r e n t levels o f m a n a g e m e n t . A d d i t i o n a l r e s e a r c h t e n t i o n s o r reasons, r a t h e r o p e n l y . H o w e v e r , it
m a t e r i a l was g a t h e r e d b y d i r e c t o b s e r v a t i o n s h o u l d b e b o r n e in m i n d that a g r e a t d e a l w a s no
(mainly by attending budget meetings) and d o u b t left unsaid.
t h r o u g h analysis o f b u d g e t a r y p l a n n i n g a n d con-
t r o l materials. 27 T h e focus in this p a r t o f t h e
s t u d y w a s o n t h e t w o l o w e s t m a n a g e m e n t levels RESULTS
o f t h e daily g o o d s line: all f o u r g r o u p m a n a g e r s
w e r e i n t e r v i e w e d ; at t h e unit level t w o retail Firstly, b o t h f o r m s o f b u d g e t a r y bias w e r e ob-
u n i t m a n a g e r s f r o m e a c h g r o u p w e r e inter- s e r v e d in t h e firm. T h e t r a d i t i o n a l t y p e o f bias
v i e w e d . T h e m a n a g e r o f t h e daily g o o d s line, t h e ( b u d g e t a r y s l a c k ) still s e e m e d to b e m o r e c o m -
company controller and the managing director m o n t h a n u p w a r d - b i a s . At t h e first sight this m a y
o f t h e firm w e r e also i n t e r v i e w e d - - t h e l a t t e r s e e m s o m e w h a t s u r p r i s i n g as t h e p r o f i t a b i l i t y o f
t w o m o r e t h a n o n c e . T h e i n t e r v i e w s l a s t e d for t h e w h o l e firm w a s unsatisfactory. H o w e v e r , as
1 - 3 hours. A t a p e - r e c o r d e r w a s n o t u s e d d u r i n g far as b u d g e t a r y bias is c o n c e r n e d , t h e profitabil-
t h e i n t e r v i e w s in o r d e r t o c r e a t e a c o n f i d e n t i a l ity o f t h e g r o u p s a n d t h e retail units s e e m e d t o
atmosphere. be more important than the profitability of the
T h e m o s t i m p o r t a n t p r i n c i p l e in i n t e r v i e w i n g w h o l e firm. T h e r e f o r e t h e o t h e r p o s s i b l e
w a s o n e o f flexibility. Usually t h e t h e m e s discus- e x p l a n a t o r y factors o f t h e t h e o r e t i c a l f r a m e w o r k
s e d w e n t f r o m t h e g e n e r a l to t h e p a r t i c u l a r , b u t were taken under consideration.
t h e o r d e r was c h a n g e d as n e c e s s a r y a c c o r d i n g to At t h e g r o u p level in t h e h i e r a r c h y different
the interests of the persons being interviewed. biasing "profiles" c o u l d b e d i s t i n g u i s h e d a m o n g
In this r e s p e c t t h e i n t e r v i e w s r e s e m b l e d n o r m a l t h e four g r o u p s studied. In t w o o f t h e m , t h e cre-

27 The primary basis for the methodological choices are Hiigg & Hedlund (1979), Neergaard ( 1981 ) and - - with regard to
making theme interviews - - Hirsjiirvi & Hurme (1982).
 296 KARILUKKA

a t i o n o f b u d g e t a r y slack was t h e d o m i n a n t be- e v i d e n c e o f t h e m o t i v a t i o n intention: o n e g r o u p

haviour pattern; these were the relatively more m a n a g e r s t a t e d that h e e n c o u r a g e d his s u b o r d i -
p r o f i t a b l e g r o u p s a n d financially less i m p o r t a n t nates to c r e a t e slack in t h e i r b u d g e t s in o r d e r to
to t h e e c o n o m y o f t h e daily g o o d s line, t h e r e f o r e i m p r o v e t h e i r w o r k motivation. His aim was a
t h e s e t w o g r o u p s w e r e also s u b j e c t to less pres- s i t u a t i o n w h e r e his s u b o r d i n a t e s w o u l d c o m -
s u r e b y t h e u p p e r m a n a g e m e n t . In o n e o f t h e s e p e t e w i t h e a c h o t h e r in s h o w i n g p o s i t i v e b u d g e t
t w o groups, p a t t e r n s o f slack c r e a t i o n s e e m e d to errors. H o w e v e r , e v e n in t h e case o f this particu-
b e h i g h l y institutionalized: t h e g r o u p m a n a g e r lar g r o u p manager, it w a s difficult to distinguish
a n d at least s o m e o f his s u b o r d i n a t e retail unit b e t w e e n the "pure" m o t i v a t i o n i n t e n t i o n a n d
m a n a g e r s h a d an informal a g r e e m e n t to c r e a t e t h e g r o u p m a n a g e r ' s o w n a m b i t i o n s and u n c e r -
s o m e slack in budgets. This w a s l i n k e d w i t h t h e t a i n t y w i t h r e g a r d to his c o n t r o l l i n g level, t h e
p r e s s u r e s t h e g r o u p m a n a g e r felt in r e l a t i o n to daily g o o d s manager, i.e. f r o m t h e g r o u p man-
his o w n b u d g e t attainment. W i t h r e g a r d to this ager's performance evaluation intention.
g r o u p , t h e r e was also a p o t e n t i a l h i s t o r i c a l expla- P e r h a p s t h e s e t w o things are in actual fact in-
n a t i o n for this b e h a v i o u r p a t t e r n : t h e g r o u p man- separable.
ager's e a r l i e r c h i e f h a d b e e n an e x t r a o r d i n a r i l y It w a s also p o s s i b l e to i n d i c a t e s o m e o f t h e de-
a u t h o r i t a r i a n p e r s o n , w h o h a d n o t w a n t e d to lis- t e r m i n a n t s o f t h e f r a m e w o r k d e v e l o p e d as po-
t e n to any e x p l a n a t i o n s if t h e b u d g e t s w e r e n o t tentially m o r e i m p o r t a n t e x p l a n a t o r y factors in
a c h i e v e d ; so t h e g r o u p m a n a g e r h a d o b v i o u s l y b u d g e t a r y biasing t h a n others. T h e s e i n c l u d e d
a d o p t e d the aim o f always t r y i n g to b e o n t h e safe b o t h t y p e s o f p e r s o n a l goals, o r g a n i z a t i o n a l
side. norms, the degree of participation, the reward
O n t h e o t h e r hand, in t h e o t h e r two, less p r o - system, b o t h t y p e s o f p o w e r factors, t h e profita-
fitable b u t e c o n o m i c a l l y m o r e i m p o r t a n t , bility situation as w e l l as u n c e r t a i n t y . E v i d e n c e
g r o u p s in t h e daily g o o d s line, b o t h t h e c r e a t i o n o f t h e o t h e r factors i n c l u d e d in t h e t h e o r e t i c a l
o f b u d g e t a r y slack a n d u p w a r d - b i a s i n g o c c u r r e d . f r a m e w o r k was e i t h e r n o t c l e a r o r t h e r e was n o
O n e case o f u p w a r d - b i a s i n g was a c l e a r e x a m p l e such evidence. Of course the role of information
o f an a t t e m p t to s h o w r e c o v e r y o f t h e unit and w a s i m b e d d e d in t h e p r o c e s s o f b u d g e t i n g a n d
satisfactory p r o f i t a b i l i t y at least e x a n t e . T h e unit b u d g e t a r y biasing, b u t d i s t i n g u i s h i n g it e m p i r i -
in q u e s t i o n was o n e o f t h e p o o r e s t in t h e w h o l e cally f r o m o t h e r r e l a t e d factors p r o v e d difficult.
firm, a n d was c o n s t a n t l y u n d e r t h e t h r e a t o f clo- T h e b u d g e t n e g o t i a t i o n p r o c e s s in t h e firm
sure. T h e unit m a n a g e r h a d b e e n n e w l y ap- also offered s o m e i n t e r e s t i n g insights into t h e
p o i n t e d to his j o b a n d felt that h e really h a d no- r o l e o f bias a n d b i a s i n g b e h a v i o u r in p r a c t i c e . In
t h i n g to lose. P r e s s u r e f r o m t h e u p p e r levels o f s o m e cases t h e r e was e v i d e n c e o f "battles"
t h e o r g a n i z a t i o n and his o w n a m b i t i o n s m a d e where the authority (and influence) of the
h i m b u d g e t optimistically. g r o u p m a n a g e r and t h e i n f l u e n c e o f t h e retail
O n t h e w h o l e t h e t h e o r e t i c a l f r a m e w o r k de- unit m a n a g e r clashed, e.g. o n the q u e s t i o n o f
v e l o p e d in the s t u d y w a s felt to c o n s t i t u t e a valid w h a t w a s a "sufficient" b u d g e t level in t h e l o n g e r
basis for an e m p i r i c a l analysis o f this firm: t h e term. It a p p e a r e d that t h e a s y m m e t r y o f informa-
b u d g e t a r y biasing b e h a v i o u r c o u l d b e u n d e r - tion, w h i c h w a s usually in favour o f t h e unit man-
s t o o d t h r o u g h t h e factors i n c l u d e d in the frame- agers, at least gave t h e m e q u a l status w i t h t h e
work. A l t h o u g h t h e biasing i n t e n t i o n s w e r e g r o u p m a n a g e r s in negotiations. T h e r e was also
o f t e n s o m e w h a t unclear, t h e m o s t i m p o r t a n t o f s o m e e v i d e n c e that, in this firm, satisfactory p r o -
t h e t h r e e biasing i n t e n t i o n s d e f i n e d a b o v e fitability in t h e p a s t has a g r e a t d e a l o f influence
s e e m e d to be, in this firm, t h e p e r f o r m a n c e o n t h e s e t t i n g o f b u d g e t levels.
e v a l u a t i o n intention. It s e e m e d to e x p l a i n t h e In o n e o f t h e g r o u p s a l m o s t n o conflicts a r o s e
m a j o r p a r t o f b o t h t h e c r e a t i o n o f b u d g e t r y slack d u r i n g negotiations: t h e d e g r e e o f p a r t i c i p a t i o n
( t h e e x p o s t a l t e r n a t i v e ) and u p w a r d - b i a s i n g w a s high a n d t h e n o r m s o f t h e c o n t r o l l i n g level
( t h e e x a n t e alternative). T h e r e was also s o m e h a d p r o b a b l y a l r e a d y b e e n c o n s i d e r e d p r i o r to
 BUDGETARYBIASINGIN ORGANIZATIONS 297

the negotiations. Another group gave the im- compensation method". Basically this strategy
pression that possible conflicts between the takes advantage of the limited monitoring
group manager and his superior were solved abilities of the controlling unit - - it is usually
through the creation of slack in the budgets of only interested in some key figures in both plan-
the retail units in the group; this case resembled ning and control. The compensation strategy in-
a situation where the forecast of the controlling cludes the allocation of bias into costs which fall
unit is originally lower than that of the control- outside the routine monitoring of budget fig-
led unit. 28 ures. In this way any slack that the controlled
Something similar happened in another group unit may have lost in the key figure areas can be
where the budget of one of the retail units was compensated for elsewhere. The result may be a
considerably reduced when the group manager profit line which is unbiased when considered as
learned the budget claim for the group (a target a whole, but biased when its components are
level presented in the whole firm's plans). The examined separately.
"budget adjustment", as the group manager cal- ( 4 ) One method of biasing was to make inten-
led it, was done by reducing the percentage of tional mistakes or deliberately avoid correcting
the budgeted contribution margin of one of the mistakes noticed during the preparation of
units in the group from 12.8% to 12.3%. The budgets. This occured twice in the empirical
unit manager in question was not very pleased study. One retail unit manager had "forgotten" to
about this deterioration in his budget. During budget one group of his income (rents), thereby
the interview he stated that in his unit the inter- creating slack in his budget. Another retail unit
nal target level of the contribution margin would manager said that his heating costs were
still be 12.8%. budgeted to follow the upward trend of those
To conclude this short presentation of the em- costs, while he actually knew that a technical im-
pirical results obtained, some additional points provement was probably going to reduce them
can be made: by about 30%. Since n o b o d y noticed the mis-
(1) The managers seemed to make a rather take, he did not correct the figure, obviously in-
clear distinction between their behaviour in tending to have a slack budget.
principle, and their real actions. At least one unit To sum up, the empirical part of this study
manager stated that he was against all kinds of showed, in essence, that it is possible to ap-
budget manipulations, while at the same time his proach budgetary biasing from an action-
budgetary actions clearly also included the crea- oriented viewpoint, applying the framework de-
tion of bias. One possible explanation for this is veloped in this study. In addition, the details in
that the managers felt some biasing to be a legiti- the empirical part deepened and sharpened the
mate part of the game of budget control. picture of budgetry biasing which had been
( 2 ) Optimistic budgeting of revenues, which created by the prior theoretical analysis.
usually implies increases in the budgeted costs,
was something of which the group managers
were particularly wary. This reflected their ex- SUMMARY AND CONCLUSIONS
perience that if the budgeted revenues were not
realized, a disproportionately large negative The objective of this study was to increase the
budget error on the b o t t o m line could easily understanding of budgetary biasing behaviour.
materialise, because the budgeted costs tend to Essentially it attempts to construct an explanat-
occur independently of the level of the realized ory model of budgetary biasing and to test its
revenues. adequacy in understanding the biasing actions in
( 3 ) There emerged evidence of an interesting one particular case. An action-oriented (her-
budgeting strategy that might be called "the meneutic) research strategy and a descriptive

28As an example of this situation, see Fig. 7.

 298 KARILUKKA

(non-normative) approach were used. does not usually represent either of the parties
The findings of the study may be grouped into directly.
theoretical and empirical results. The theoreti- In the empirical part of the study an attempt
cal results constitute a framework which was was made to proceed towards a general picture
based on an analysis of the basic concepts (the of budgetary biasing behaviour by means of test-
concept of budgetary bias, its subcomponents ing the usability of the developed framework in
and nature), and the further development of two a relatively large firm with several profit-centres.
interrelated submodels: an explanatory model The research material was collected mainly in
for budgetary biasing at the individual level, and the form of semi-structured ("theme") inter-
a model for budgetary biasing at the organiza- views at different levels of management. Addi-
tional level. tional research material was gathered by direct
The explanatory model of budgetary biasing observation and through analysis of budgetary
at the individual level dealt with budgetary plan- planning and control materials.
ning during the preparatory phase of budget Both forms of budgetary biasing were ob-
proposals, which precedes the budget negotia- served in the firm; in this case the creation of
tion phase of the process. This analysis used budgetary slack still seemed to be more general
practical syllogism as the basic explanatory than upward-biasing. The theoretical framework
scheme, which was further amended with re- developed was generally considered to provide
gard to the specification of the determinants of a valid basis for understanding and interpreting
the intentions. The theoretical analysis based on the budgetary biasing behaviour in this firm. It
this structure contained an examination of three was also possible to indicate some determinants
different intentions to create budgetary bias: re- within the framework as potentially more im-
source intention, performance evaluation inten- portant explanatory factors than others. The
tion (these two at the controlled level in the or- empirical part showed that it is possible to ap-
ganization) and motivation intention (at the proach budgetary biasing from the chosen ac-
controlling level); these were used as the more tion-oriented viewpoint, and to apply to it the
general explanatory factors of the model. The framework developed in the study. In addition,
five groups of the more specific explanatory fac- the details that had emerged from the empirical
tors were thoroughly analysed and subsequently part deepened and helped to clarify the picture
divided into several subfactors. of budgetary biasing that was created in the
The organizational model for budgetary bias- theoretical part of the study.
ing examined the actual budget negotiation What has been learned then is, in essence, that
phase from the viewpoint of budgetary biasing. budgetary biasing is an important part of organi-
In this context it was established that, depending zational life. This complex and many-sided
on the forecasts and the directions of the biases p h e n o m e n o n is a result of an interplay of many
of the negotiating actors, budgetary bias may different factors on the basis of which the author
have (in principle) either an intensifying or a has tried to construct a theoretical framework. It
dampening influence on conflicts in negotia- seems that this way of structuring the context of
tions. It was also noted that the budgetary bias budgetary biasing and the relationship of the re-
contained in the final budget is of a different levant factors is useful; the empirical part of the
character to the biases included in the budget study offered some preliminary evidence on this
proposals which precede it: if there is bias in the adequacy. How useful the framework really is
final budget, it is a result of the dialogue between must be a question of continuing research en-
the negotiating actors (assuming of course that deavour.
there is at least some participation) and hence
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