The Effects of Trust and Budget-Based Controls on Budget Gaming and Budget Value

Proponents of “beyond budgeting” suggest the major control problem in organizations today is the use of budgets for both planning and performance evaluation (Hope and Fraser 2003). Rigidly evaluating and rewarding managers relative to budget targets set at the beginning of the year motivates managers to play budgetary games which taints the budgeting and forecasting process. Contrary to this view, a recent survey of North American budgeting practices by Libby and Lindsay (2010) indicates a large proportion of the organizations sampled continue to use budgets for performance evaluation and control purposes and also offer budget-based bonuses to their managers as an incentive to perform. In addition, a large proportion of these firms appeared to be finding ways to get good value out of the budgeting process even though results indicated a negative correlation between budget value and managers’ perceptions of the degree to which budget gaming occurs in their organizations. The objective of the current study is to provide some insight into what drives higher versus lower budget value from the point of view of the business unit managers. Based on a review of the academic and practitioner literatures, we develop and test a theoretical model of the antecedents of budget gaming and budget value using additional data collected in the Libby and Lindsay (2010) survey. Results indicate good prior period performance is associated with less budget gaming, high budget emphasis is associated with higher budget gaming and increased interpersonal trust between lower and higher levels of management is negatively associated with budget gaming. By splitting the sample into high and low trust groups, we are able to show that lower level manager’s trust in higher level managers is key to explaining perceptions of budget value in our sample.