Why Do Managers Want to Manipulate Their Budgets - Coursework Example

s s Most companies’ top officials are the one responsible of approving the budget prepared by their juniors. The approved budget then becomes the guide on the use of company in the following financial year. In most cases, the approval process takes a longer time than preparing and this is because the managers have to decide on prioritizing and the involved discussion between the management team. In fact, the process of approving budget involves the following steps: budget consolation, reviewed by financial staff, reviewed by top management, discussion with division manager, and making the tough decision. Question One (a): Why do managers want to manipulate their budgets? After budget approval, the company may use it to carry out budgetary actions. As a result, the managers use it to ensure they carry out the organization objectives and plans and in the end, they have to compare budget plan against the real performance. Once compared, the difference in amount is usually the budget deficient or bias which is cause by manager`s manipulation or distortion on the proposed budget. There are various reasons as to why mangers manipulate budget. Firstly, if the rewards and motivation through performance evaluation help to achieve the budget results, the managers may end up manipulating the budget to include more of rewards in order they can hit the target more easily like league table and bonuses. Besides, managers are highly involved in cases of budget slacks-where organization set their revenue to be too low and a high cost, the organization may end up losing sales since the resources required to raise production with the short time given have been limited. Moreover, the managers who have been promised some rewards on attaining certain goals set their target to be very low such that they easily attain them without caring whether the company looses or gains. Likewise, the senior managers dictate on a budget for performance. As a result, it forces the mangers to keep focus of resources on the performance of their department. Consequently, the mangers end up presenting a budget request biased on his department not for organization as whole. Hence, the direction of bias is downwards. Secondly, the company`s practices and norms is subtle in determining the performance of the company`s budget. Notably, prevailing work conditions help to dictate what is morally right. As a result, the management, which focuses on self-manager performances, will give incentives directed to managers alone. However, the aggregate accounting performance from his action is focusing on organization as whole. On the other hand, the management focusing on others gives a hard determination of degree of performance. As a result, it reduces the aggregate performance although it induces co-operation and collaboration to other firms. Moreover, when there occurs some change in the budgetary system from being top-down or centralized, and an acceptable estimate of growth is set, with the changing budgetary system to may be bottom up, and company`s practices remaining similar, bias of unknown direction happens. Lastly, the mangers may feel insecure in their job and as a result, they are more than ready to use the budgetary trick when a chance arises. By this, it mean, the managers are quick to spend until the entire budgeted amount is consumed when the chance of buying goods occurs at a lower price. In fact, in the managers operating in the declining sales department makes use of entire budgets usage under the assumption that the future is uncertain. As a result, the budget becomes wasteful at the expense of the manager approving his need of upholding the job since the amount needed by the company and the bought one is very varying. Hence, strong upward bias occurs. (b): Why are they able to do? What are the constraints on such behaviour? As a long as the departmental budget exists, some head of the department will always try to game the budget. Additionally, there are numerous reason as to why the mangers are able to accomplish this dishonest measure. First, the mangers at every department can manipulate the budget in order they make the use of their local knowledge maximally. Since the managers in every department are considered to give proposal of their own areas, they can give poor and inadequate information. In fact, the senior managers assume that the managers in the lower levels at department have a knowledge advantage over them. As a result, the new budgetary system was intended to exploit the area manager’s superior insight for conditions in their area. This leads to bias creeping in when the new budgetary system addresses the symmetry in information between the assistant managers and head of organization. Second, the managers may be able to manipulate budget when the field managers of the company are involved in the company`s budget making process. When the field managers are involved, the new budget becomes participative budgetary system. It is notable that in participative budgetary manipulation, it encourages more information to the budget, and rewards or other incentives forms to be involved. Hence, the chance of manipulation is very high unlike it comparative budget, old command and control system, which do not involve field managers. Lastly, the managers manipulate the budget in situations of continued demolition or redevelopment in towns where the company manipulates leading to factors of uncertainty in terms of unpredictable sales. For instance, the case of 1960s, where reconstruction of the damaged city centre of Coventry lead to development of new town, the Milton Keynes, could have affected the sales of organizations operating in this areas. Various factors restrict the manipulation tendency of the organization. These include the act of senior managers’ officers rejecting the forecasted budget. That is, the departmental managers are not sure that their budget will be approved. They are only optimistic the budget will be deemed workable and hence approved. Moreover, senior manager`s view are first sought and discussed before the meeting to ensure sound decision is made. As noted, the budget is a combination of the two management teams. It is a combination of management at department and the senior management officer. In addition, the uncertainty of the future may lead to loses or profits. This means that the new budget is a venture. Moreover, senior managers’ officers may analyze the past records. They may use the past record to predict the future. The past record will be used as a predictor of the future endeavors. Lastly, the determinants of penalties issued in case of lose or unattained budget forecasts. That is, the budget result may lead to rewarding or punishing the manager. Hence, the above constraints checks on the manipulation extent of the budget. Question 2 (a): To what extent is it possible for Senior Managers to counter-bias the budget of the junior managers? The process of counter biasing occurs when the budget has already been passed. It happens when the senior management officer failed to recognize the given problem and act accordingly. This would have acted in favor of department managers and it consequence will be downward the management hierarchy. Mostly, this arises due to failed connection between the performances of the budget and biases. Moreover, it may have arisen by the fact that the problem may have been arisen by the detection and correction where accuracy was needed. To indentify detection became difficult because errors occurred in both direction causing changes that are unexpected at external circumstances, through poor forecasting or actions that are deliberate. In addition, when the bias has been detected, it may turn unwise to change it because it would cause advance effects on motivations, to the subordinates although some private adjustment can be made. Likewise, the senior manager may step in when there is undoubted evidence of manipulation. For instance, under-biased may be portrayed through declining sales remaining consistent. Moreover, as L&S suggest personal and behavioral concerns as to the consequences of counter-biasing managers’ forecasts may determine the possibility of a “vote of no-confidence”. These arise when undoubted evidence indicates there was indeed substantial problem when aggregating subordinates estimates to arrive the forecasted values. Hence, the managers at department levels will be influenced highly and hence it would work upwards the hierarchy level of management. Besides, the knowledge of senior managers plays major role in countering the bias created by the juniors. Mostly, the senior managers are well in knowledge on the fields below them in hierarchy of management especially because they passed these ranks before being promoted. The more the experience, the higher the chances of countering the bias created. Contrary, the departmental managers may have more information than the senior management officers who rose into higher rank through other favors. As a result, the knowledge may in favor of senior mangers that are in well knowledge. However, it may act downward when the departmental managers have more knowledge than the senior mangers. In addition, the senior managers can use the difference observed between the forecasted budget sales and the subsequent sales. Any difference is an indication of bias occurring or poor planning. In fact, poor planning causes variance, which is interpreted as the inaccurate forecast of event in the budget. Similarly, environmental shock could result from poor planning. That is unexpected or unforeseen changes happen. As a result, the process may work toward the top management officers when it is well undertaken. However, if it involves bias, it will work towards the junior managers. As a result, the above process approve the central to the paper’s motivation L&S are disagreeing with Cyert and March about the ‘success’ of counter-biasing. (b): How would you attempt to restrict the biasing of managers? What consequences are likely to result from your scheme? Given the managerial role of senior managers, there are various restriction I would impose and this would cause various consequences. Firstly, it would involve altering the budget objective. In this category, the boundaries of the new budget will be set clear especially on how different they are from the former budgets. In fact, it would involve stating that the budget it is all about planning. As a result, the consequences delivered from this would involve removal of stress from the given budget since the manager will be directed on what to do. Moreover, it would lower interest rates since the motivation will not be included in a budget set to be planning one. Secondly, it would involve breaking the link established between rewards and budgets. This would ensure the linkage does not occur since the plan of rewarding would be set a part from the process of budgeting. In the real sense, there exist no linkage of reward and performance; it is made so by assumptions. Likewise, through the Michael Jensen Agency Theory recommendations, the relationship between rewards and budget is explained to be linear. Moreover, would ensure there is accuracy in rewarding. That is, rewarding is only done to deserving entity. Hence, the above would lead to downward bias. Thirdly, it would involve bolstering the department of senior management officer with some data from the offices of department management officer. The data would be related to how the management at department had analyzed market trends to make a forecast. Additionally, it would be data from consultants made, and that data obtained through use of technology to make intelligent forecasts. The effect of this would be high cost of implementation. This would raise the budget and hence voted vote of no confidence. Moreover, the information acquired is external of which is different in terms of accuracy when compared to internally generated information. Fourthly, it would involve making multiple budgets as alternative plans or for different departments for senior budget. The made budgets should involve different purposes. However, the senior management officer will be issued with the budget for panning and the being used to evaluate other budgets in terms of their settings. Consequently, the budgets cost would increase tremendously. Moreover, the managers in departments would become confused on which budget is appropriate to use. This would lead to mixed implementations of the budget. Hence, more budget bias. Fifthly, it would involve establishing a bottom drawer budget. A bottom drawer budget is issued in two terms. That is, one considering the public and the other private. The public is issued the budget that makes them happy and the real management is allowed to follow a private budget that is friendlier to the firm. However, there is risk of being discovered. Once discovered, there would be public outcry on incredibility of the managers. Lastly, it would involve establish nuclear options. These are method of setting costs and figures to be far above the acting budget. It means it would involve establishing the budget at the maximum value of the expected budget. Contrary, there is a risk of being noticed. Moreover, the firm`s legitimacy would be lost (Mayer). Read More