Developing Business Knowledge Assignment

Literature Review

Topic Choice: Accounting & Finance: Management Control

Participative Budgeting and its Effects on Employee Motivation

by

Jörg Drischel

Introduction

Accounting is an important aspect of management control. Budgets are unarguably the most obvious form of utilising accounting data to monitor and punish or reward strategic business units and consequently employees, regardless of whether they are managers or workers on the shop floor, according to their performance in relation to budgeted targets. "The budget is a financial plan for implementing the various decisions that management has made" (Drury 1997, p. 8). Participation in the formation process of budgets by those ultimately affected is practised in companies with the aim to generate a better-performing workforce. Empirical evidence on the effects of participative budgeting is ambiguous and the literature is fragmented. In this paper, I shall mainly review research on participative budgeting as well as other issues in budgeting and some critical perspectives on budgeting as a means of management control.

Historical evidence of accounting and management control

Chan, Lew and Tong (2001) analysed the accounting and management control practices described in the popular Chinese novel "A Dream of the Red Mansion". They found that big family households of the early Qing Dynasty (18th century) recognised the importance of, and made distinct achievements in, accounting and management controls. "They mastered the segregation of duties, the control of cash, the use of budgets for planning, the containment of costs and the efficiency of operations" (Chan et al 2001). Besides providing evidence of accounting practices and management control systems, their work offers insights into the conditions and requirements for control systems in a specific and social environment. The latter could prove useful for Western corporations acquiring state-owned enterprises in China.

Ezzamel (1997) found evidence of preliminary forms of management accounting, control and accountability in ancient Egypt. He ascertained that accountability was used to legitimise the authority or power of state officials and that it was of ceremonial value in justifying social status.

Behavioural aspects of budgeting

Long before the papers on participative budgeting to be discussed later were written researchers started concentrating on the influence budgetary systems have on behaviour and action. In his book, Hopwood (1974) emphasises the need to see the process of standard setting and budgeting in its entirety and respond to it as a complex human and technical problem rather than one standing in technical isolation. "Budgets are used to motivate members of the organisation by serving as targets and mechanisms for gaining involvement and commitment" (Hopwood 1974, p. 44). Hopwood (1974) realises that budgeting is concerned with human action and the significance of its behavioural, political and social dimensions. He went on to express his amazement at the dominance of a purely technical approach and called for a merger of both technical and behavioural aspects.

In 1955, Argyris looked at the problems organisations faced when introducing participative management by drawing on prior research for a concept of organisation and human personality. In Argyris′ (1955) invented scenario, employees were dependent on a leader. This lead him to question how much participation and democracy this allowed criticising that previous studies had failed to address that question. He concluded that participative management implied a different set of organisational principles and that executive training should thus focus on understanding the effects of basic dependency relationship on employees and how it conflicts with their normal personality needs. This dependency could be reduced by the introduction of participative management.

Participative budgeting and management accounting control systems

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