integrating ethical dimensions into a model of budgetary slack creation

ABSTRACT. In this study, we develop and test astructural equation model explaining the propensityof individuals acting within organizations to createbudgetary slack. Previous organizational and behav-ioral views of budgetary slack fail to acknowledgethe ethical components of the problem. We surveyedmanagers involved in the budget-setting process toinvestigate the effect of their ethical positions onbudgetary slack creation behavior. The data margin-ally support the overall model, while path coefficientsin the structural equations model confirm hypothe-sized relationships between participation and infor-mation asymmetry in the budgeting process, betweeninformation asymmetry with incentives to create slackand budgetary slack creation, and between measuresof ethical position and slack creation. A discussion ofthe results and their implications is included.

Introduction

The notion of budgetary slack has been discussedin the management accounting literature sincethe early 1950s (Lukka, 1988, p. 281). Agencytheory would argue that slack causes organiza-tional resources to be misallocated and results insuboptimal return on investment; therefore, itshould be eliminated. Despite such arguments,budgetary biasing is an important part oforganizational life. Lukka calls it a “complex andmany-sided phenomenon . . . a result of aninterplay of many different factors” (p. 298).

The difference between planned performancetargets and real performance capabilities is

bud-getary slack. Lower-level employees have oppor-tunities to misrepresent performance capabilitiesin participative budgeting systems. They mayunderstate revenues and/or overstate costs in theplanning process. Such distortion will be to their

advantage if it provides more readily achievableperformance targets and reduces their risk of notsecuring associated monetary (e.g., bonuses) andnon-monetary (e.g., favorable evaluations, praise)rewards.

Budgetary slack has traditionally been viewedas an organizational and behavioral issue.Organizational and individual factors affectingslack identified by previous research includecorporate size, diversity and decentralization(Merchant, 1981), environmental uncertainty(Govindarajan, 1986), task characteristics (Younget al., 1993), information asymmetry (Onsi,1973; Chow et al., 1988; Dunk, 1993), use ofbudget-based incentives and “truth-inducing”versus “slack-inducing” pay schemes ( Jennergren,1980; Chow et al., 1988; Waller, 1988), man-agement attitudes towards achievement of budgetgoals (Onsi, 1973; Merchant, 1985; Dunk, 1993),individual risk aversion (Young, 1985; Kim,1992), and social pressure (Young, 1985).

Budgetary slack can also be viewed as anethical issue. When employees misrepresent theircapabilities, they are using their superior knowl-edge to unfair advantage. “Typically, they fail todisclose to their superiors all their informationand informed insights and, commonly, theyactually present a distorted picture of the poss-bilities. [Slack creation may be inconsistent with]role-related norms and desired virtues of profes-sional managers and accountants” (Merchant,1995, p. 2). Furthermore, the resource mis-allocation that results is detrimental to otherorganizational units and to investors. Thus,creation of budgetary slack is an ethical dilemma:a predicament with a moral component; i.e.,consequences for others and choice or volitionon the part of the decision-maker. As such, one’s

Integrating Ethical Dimensions into a Model of Budgetary Patricia Casey DouglasSlack Creation Benson Wier

Journal of Business Ethics 28: 267–277, 2000.© 2000 Kluwer Academic Publishers. Printed in the Netherlands.

normal position with respect to resolving ethicalquestions would be expected to influence one’sbehavior.

Despite the questionable (or, as Merchantdescribes it, “obvious”) ethics of budgetary slackcreation and other budget gaming practices,surveys (e.g., Onsi, 1973; Umapathy, 1987;Merchant, 1995) and case studies (e.g., Merchantand Manzoni, 1989) indicate that such practicesare the behavioral norm. These observations begthe primary research question addressed in thisstudy: does ethical position help to explainindividuals’ propensity to create budgetary slack?

In this study we developed and tested astructural equation model explaining the propen-sity of individuals acting within organizations tocreate budgetary slack. “Reliance on [suchmodels] is desirable to test measurement andstructure” in studies like ours (Shields andShields, 1998, p. 67). In the remainder of thispaper we present a fuller discussion of theory andresearch supporting the development of ourresearch model and hypotheses, explain ourresults, and discuss our conclusions and possibleimplications.

Background and hypotheses development

Budgetary slack has traditionally been viewed asan organizational and behavioral issue. Agencytheory suggests a conflict of interest (i.e., a“moral hazard”) when individuals contract to actin the interest of the firm but are motivated tofurther their personal (i.e., conflicting) interests.Harrell and Harrison (1994) describe two con-ditions necessary but not on their own sufficientto cause managers to shirk their responsibility tothe firm: (1) the opportunity,1 and (2) the incentiveto do so. Previous theory and research demon-strates that both organizational and individualfactors provide these opportunities and incentivesand affect the formation and magnitude ofbudgetary slack.

Shields and Shields (1998, pp. 58–59) arguethat, on an organizational level, economic, psy-chological and sociological theories support aview of environmental and task uncertainty, taskinterdependence, and superior-subordinate infor-

mation asymmetry as antecedents to participationin budgetary systems.2 (Participation is, of course,essential if one is to create budgetary slack;without participation there can be no oppor-tunity.) Economics theory assumes that thesubordinate knows more than the superior abouthis or her task and task environment and modelsparticipative budgeting as used by a superior togain information and thereby reduce uncertainty(p. 58). Psychological theory considers threecausal mechanisms (i.e., value attainment, moti-vation, cognition) but likewise assumes that “thecause of participative budgeting is either uncer-tainty or a superior-subordinate informationasymmetry” (p. 59). Sociological theory describeshow organizational context (i.e., environmentaluncertainty) and structure affect budgetary par-ticipation. As Shields and Shields explain it, as anorganization’s environment becomes more uncer-tain, it responds with increasing differentiation(i.e., decentralization and functional differentia-tion), requiring more integrating mechanismssuch as participative budgeting to coordinateactivities of subunits (p. 59).

Although not testing the antecedent relation-ship between information asymmetry and par-ticipation which Shields and Shields (1998)suggest operates at the organizational level,several previous studies provide evidence ofassociation among economic, psychological,sociological variables3 at the individual level.Merchant (1981) identifies corporate size, diver-sity and decentralization as factors influencingbudgetary slack. Govindarajan (1986) providesevidence of the effect of environmental uncer-tainty, Young et al. (1993) of task characteristics;and Onsi (1973), Chow et al. (1988), and Dunk(1993) of information asymmetry. Each con-tributes to the opportunity to create budgetaryslack.

Harrell and Harrison (1994) remind us thatopportunity alone is insufficient to causemanagers to shirk their responsibility to the firm.There must also be incentive to do so. Previousresearch also provides evidence consistent withthis theory. Jennergren (1980), Chow et al.(1988), and Waller (1988) find evidence of theinfluence of pay schemes and other budget-basedfinancial incentives on budgetary slack; Onsi

268 Patricia Casey Douglas and Benson Wier

(1973), Merchant (1985), and Dunk (1993),management attitudes toward achievement ofbudget goals. Two studies specifically includeindividual personality attributes and findevidence of the effect of risk aversion (Young,1985; Kim, 1992) and social pressure or thedesire “to avoid being accused of shirking ormisrepresenting productive capability” (Young,1985, p. 832).

These traditional organizational and behavioralviews of budgetary slack fail to acknowledge theethical components of the problem. Forsyth(1992) proposes that individuals judge businesspractices such as the creation of budgetary slackas ethical or unethical and then decide whetheror not to engage in those practices. When viewedas an ethical issue, the propensity to create bud-getary slack may be affected by individual moralphilosophy, one’s ethical ideology or ethical position.

Models of the ethical decision process inorganizations support Forsyth’s view by demon-strating a general consensus that decision makingis a function of individual values as well asorganizational factors. Among the principal con-ceptual models, Trevino (1986) focuses on moraldevelopment in her identification of individualinfluences, while Ferrell and Gresham’s (1985)and Hunt and Vitell’s (1986) models include thepersonal values of the decision maker. Personalvalues are included with knowledge, attitudes andintentions as primary influences on judgment inthe former (p. 89); contained within the dimen-sions of personal experiences in the latter (p. 10).

As Forsyth describes it, an individual’s ethicalideology may be described most parsimoniouslyby his position with respect to two basic factors.The first factor is the extent to which herejects universal moral rules in favor of a more“relativist” approach to moral decisions.Relativists believe that there are many ways tolook at moral issues and are skeptical of specificethical principles (p. 175). The second factor isthe extent to which an individual assumes thatgood consequences always can be obtained (an“idealist” approach) rather than admitting thatconsequences are often a mix or good and bad(p. 176). In general, the stance an individual takeswith respect to these two factors will influencethe ethical judgments reached (p. 183).

Forsyth’s taxonomy does not disagree withmoral pluralists who would assert that manyfactors play a role in the formation of one’sethical position, or with stakeholder theoristswho would suggest that responsibilities to amultiplicity of business stakeholders influencethat position. Unlike structural models of ethicaldecision-making (i.e., moral developmentmodels) which may explain why individualsbelieve as they do, Forsyth describes what indi-viduals believe. Forsyth’s taxonomy has provenuseful in explaining differences in moral judg-ments (Forsyth, 1980, 1992; Arrington andReckers, 1985) and sensitivity to ethical issues(Shaub et al., 1993), and is more specific toethical values than Rokeach’s (1972) perhapsbetter-known values survey.

Previously discussed theory and researchprovides the basis for the research model used inthis study. (See Figure 1.) In a particular budget-setting environment, information asymmetry isa necessary but not sufficient condition for slackcreation behavior. Only in the presence of anincentive to create slack will that private infor-mation result in budgetary slack. The currentstudy asks: do individual moral values (i.e., ethicalposition) contribute to the likelihood of slackcreation behavior? The research model thereforedescribes budgetary slack creation as a function ofparticipation in the budgeting process, informationasymmetry, incentives to misrepresent a bestestimate of future performance and ethical position,and provides our primary research question: Arethe determinants of budgetary slack consistentwith the model?

The direction of effects for some of themodel’s variables are not predicted by the previ-ously discussed theory and research. Shields andShields (1998) argue that, at an organizationallevel, economic, psychological and sociologicaltheories support a view of information asym-metry as an antecedent to participation in bud-geting systems. They also imply that this“important relationship” will be most observ-able in organizations with high environmentaluncertainty, task uncertainty, or task interdepen-dence (p. 65). In other words, participation is anorganizational solution to the information asym-metry problem that results from environmental

Integrating Ethical Dimensions into a Model of Budgetary Slack Creation 269

factors. Others (i.e., Onsi, 1973; Merchant, 1981;Chow et al., 1988; Govindarajan, 1986; Dunk,1993; Young et al., 1993) provide empiricalevidence of the relationship between participa-tion and information asymmetry at both indi-vidual and organizational levels, either withoutaddressing the issue of antecedence or implyingthe opposite path.

At the level addressed in the current study(that is, at the level of the individual acting withinan organizational setting that prescribes partici-pation in the budgeting process), theory andevidence support the expectation of a positiverelationship (however characterized) betweenparticipation in the budgeting process and infor-mation asymmetry. This is not inconsistent withthe view expressed in Shields and Shields (1998):in organizations that allow participation in thebudgeting process because they expect informa-

tion asymmetry, individual participation mayactually reinforce (i.e., precede) informationasymmetry. H1 suggests this relationship.

H1: There will be a significant positiverelationship between budgetary partici-pation and information asymmetry.

Participation, in conjunction with informationasymmetry, provides the opportunity to createbudgetary slack; however, opportunity is a nec-essary, but not sufficient condition for managersto shirk their responsibility to the firm, to createbudgetary slack (Harrell and Harrison, 1994).Slack is expected to increase as both opportu-nity and incentives increase. That is, participa-tion in the budgetary process and informationasymmetry will not lead to slack creationbehavior without the necessary organizational


BudgetaryParticipation

InformationAsymmetry

Incentive toCreate Slack

Slack Creation

Ethical Position

H2: None

H3: (+)

Relativism Idealism

H4a: (+) H4b: (-)

H5: Sample specific(+ or -)

H1: (+)

Figure 1. Model of slack creation and research hypotheses.

and other incentives encouraging such behavior.Hypotheses 2 and 3 propose these relationships.

H2: In the absence of incentives to createslack, there will be no significant rela-tionship between information asym-metry and budgetary slack creationbehavior.

H3: In the presence of information asym-metry, there will be a positive signifi-cant relationship between incentives tocreate slack and budgetary slack creationbehavior.

Theory is less definitive in predicting rela-tionships between and among dimensions ofethical position (i.e., relativism, idealism) andbudgetary slack creation. In the presence ofinformation asymmetry and incentives to createslack, relativists are skeptical of specific ethicalprinciples (Forsyth, 1980, p. 175), leading us tohypothesize that:

H4a: As relativism increases, slack creationbehavior will increase.

Conversely, in the presence of information asym-metry and incentives to create slack, idealistsassume that good consequences are alwayspossible, rather than admitting that consequencesare often a mix of good and bad (p. 176), leadingus to hypothesize that:

H4b: As idealism increases, slack creationbehavior will decrease.

Forsyth (1980, p. 183) argues, however, thatit is an individual’s position with respect to bothof these factors that influences the ethical judg-ments reached. He describes four possible group-ings of respondents, based upon espousedidealistic or non-idealistic views and belief inmoral rules as being universal or relative. Forsyth(1980) does not specify objective criteria forgrouping respondents in this or any subsequentwork, instead defining his high [low] idealism[relativism] classification as above [below] thesample mean. Extending both Forsyth’s and

Harrel and Harrison’s (1994) logic, one’s ethicalposition would either increase or mitigate theeffect of organizational incentives to createbudgetary slack depending upon one’s group.While the interaction of relativism and idealism(i.e., ethical position) is expected to influenceslack creation behavior, the sign of the coefficientshould be sample specific. Therefore, the finalhypothesis is:

H5: Ethical position is significantly relatedto slack creation behavior.

Research methods

We used survey research techniques to solicitmanagers’ perceptions of various factors that theresearch literature indicates has an influence onthe creation of budgetary slack. Survey materialscomprised an anonymous, self-administeredquestionnaire, generally considered to be arelatively unobtrusive approach to gatheringsensitive information. Some measurements ofbudgetary practices and budgetary slack weredeveloped for this study, modeled on those ofUmapathy’s (1987) N.A.A (now I.M.A.) spon-sored survey of budgeting practices in U.S.industry. Others were adapted from prior research(Onsi, 1973; Dermer, 1975; Merchant, 1981,1985; Jawarski and Young, 1992). Demographicvariables included age, gender, education,position, and experience. Next we describe thesample of managers employed in the study, thecontents of the research instrument, and how themeasured variables were used in the study.

Sample surveyed

The Institute of Certified Professional Managersprovided a mailing list of 725 of its members forthe purpose of conducting this research. Theinstitute was formed by members of theInternational Management Council, managementeducators, and the National ManagementAssociation to promote the management profes-sion.4 To receive certification, prospectivemembers must meet experiential and educational


requirements and pass an examination that coverspersonal, interpersonal, and administrative skills.Certification remains current for five years; re-certification requires evidence of continuingprofessional education.

Certified Managers come from multiple dis-ciplines not confined solely to business. Some areengineers, medical doctors, and pilots. In thebusiness field, insurance and finance professionalsas well as accountants are represented in themembership. We anticipated that this populationwould provide the most desirable sample for ourstudy: that is, managers actually engaged in theplanning and budgeting activities of their com-panies, not just accountants overseeing theplanning and budgeting process.

Of the original 725 survey instruments mailedto the sample of managers, thirty-three wereundelivered. Four more had serious omissionsand were excluded from subsequent analysis,resulting in a final response rate of 31.98 percent(220 usable responses/688 total subjects). Theaverage respondent is 49.34 years old (s.d. of 8.6),male (predominates by 75.3%), has 10.3 years(s.d. of 7.99) experience in his position and 20.04years (s.d. of 10.11) experience in his industry.In addition, 77.4% of respondents currentlyparticipate in the budgeting process in their com-panies and 80.2% have participated in that processin the past.

Research instrument

Previously validated questions used to measurevariables shown in the slack creation model arecategorized below by factor of interest. Thequestions were presented in random order on thesurvey instrument. Survey participants respondedto these questions using a five-point scale for allfactors.

Budgetary Participation (BP). We used a three-itemmeasure of BP developed and validated byMerchant (1981), adapted in our study to assesscompany practices rather than personal partici-pation, as well as one measure previously used byOnsi (1973) and one measure developed in thisstudy. As Merchant describes them, these

questions elicit perceptions of the respondent’s“influence on budget plans” (p. 821). Reliabilityfor this measure (Cronbach’s

α = 0.66) is accept-able and similar to that observed in previousaccounting research. The measured variablesform the basis for the latent construct BP usedin testing the slack creation model.

Information Asymmetry (IA). We used a three-item measure of IA previously developed by Onsi(1973; see also Merchant, 1985). These questionswere adapted for use in this study by changingwording specific to manufacturing to moregeneral language. We also used a six-itemmeasure from a larger scale developed by Jawarskiand Young (1992) to measure perceptions of dif-ferences between respondents’ and supervisors’knowledge of task requirements and ability toassess task performance. Reliability for thisnine-item measure used for the latent constructIA in the study model (Cronbach’s α) is 0.64.

Incentive to Create Slack (ICS). We again adapteda four-item measure of ICS previously validatedby Onsi (1973) as well as a two-item measurederived from Dermer (1975; see also Merchant,1981). These assess the use of budget-basedincentives and management attitudes towardsachievement of budget goals in respondents’companies. This measure proved reliable (α =0.68) and formed the basis for the ICS latentconstruct.

Ethical Position (EP). The ethical position latentconstruct contains the two dimensions developedby Forsyth (1980), and his Ethics PositionQuestionnaire (EPQ) was used to measure them.The questionnaire presents a series of twentystatements with which respondents are asked toindicate degree of agreement or disagreement.Individual relativism and idealism scores are themeans of related items. Reliability for each of theten-item idealism and relativism measures is 0.86and 0.84, respectively.

Slack Creation (SC). We adapted a four-itemmeasure of SC developed and administered byUmapathy (1987) and used those measures toform the latent construct SC. The measures elicit


a self-report of willingness to engage in slackcreation and other budget gaming behaviors (e.g.,shifting funds between accounts to avoid budgetlimits and intentionally understating forecastedrevenues or overstating costs). Reliability for thismeasure (α = 0.90) is quite high.

Model and analysis

The Structural Model. Structural equation analysismethods are intended to examine constructs thatare unobservable in themselves (i.e., latent).These latent constructs are indirectly observablethrough other multiple measured indicators(Rodgers, 1991). Such models are appropriate forconstructs such as budgetary participation, infor-mation asymmetry, incentive to create slack,ethical position, and slack creation in our model.This approach typically requires large samples(MacCallum, Browne and Sugawara, 1996), andthe sample used in this study is sufficiently largefor a structural equations approach.

Hypotheses One through Five. We used the pathcoefficient values generated from the structuralequation model to test hypotheses 1, 2, 3, 4a, 4b,and 5. Our initial structural model implementedthe five factors and the six links among factorsin our model (see Figure 1). We included thepreviously described measures as indicators of thelatent constructs budgetary participation, infor-mation asymmetry, incentive to create slack,ethical position, and slack creation. As well, weused the procedure described in Anderson andGerbing (1988) to compare the fit of our modelto six plausible alternative models: (1) a modelspecifying information asymmetry as antecedentto participation (IA → BP), (2) the modelomitting ethical position (EP), (3) the modelomitting incentive to create slack (ICS), (4) themodel omitting information asymmetry (IA), (5)the model adding a direct participation → slackcreation (BP → SC) path, and (6) the modeladding separate ethical position → slack creation(EP → SC) paths for each of Forsyth’s factors(i.e., idealism → slack creation and relativism →slack creation).

We analyzed the point-biserial and product

moment correlation matrices that resulted in astandardized structural equations model solution,and computed model results using maximumlikelihood estimation. We used five measures ofoverall structural equations model fit to evaluatemodel fit: (1) the Average Absolute StandardizedResidual (AASR), (2) the χ2 ratio, (3) the unad-justed χ2 ratio, (4) the Non-Normed Fit Index(NNFI), and (5) the Comparative Fit Index (CFI)(Bentler, 1990).

We used these measures because statisticians donot agree on a single overall fit measure(Breckler, 1990). The average absolute standard-ized residual denotes the unexplained variance inthe model. AASR values less than 0.05 indicatesufficient explained variability by the model(Bentler, 1990). The χ2 ratio of smaller valuesrepresent good fitting models ( Joreskog andSorbom, 1989). Values over five indicate poorfitting models while values near one indicateadequate model fit. This measure of model fit issensitive to sample size. The unadjusted χ2 ratiois less sensitive to sample size, and model fitvalues of five and above indicate a poor fit (Wold1985). NNFI is also less sensitive to sample sizebut is more sensitive to sampling error. Valueshigher than 0.90 indicate good fit (Bentler andBonett 1980). Finally, the CFI was used as it isless sensitive to either sample size or samplingerror. CFI values of 0.90 and above indicate goodfit while those between 0.80 and less than 0.90indicate a marginal fit (Bentler, 1990).

Results

This study posed the primary research question:Are the determinants of budgetary slack consis-tent with the hypothesized model? We answeredthis question by evaluating overall goodness of fitindices for the current study’s data. For the struc-tural equation model, two of the five overallgoodness of fit indices indicate less than marginalmodel fit: NNFI (0.78) and AASR (0.054). TheCFI (0.81) and unadjusted χ2 ratio (4.1) indicatea marginal model fit, while the χ2 ratio (1.7)represents a good fitting model. The model’s fitstatistics exceed those of all the alternative modelswe tested.


Tests of Hypotheses 1, 2, 3, 4a, 4b, and 5

We tested hypotheses 1, 2, 3, 4a, 4b, and 5 usingthe coefficient values of paths in the best fittingstructural model. Table I summarizes coefficientvalues, t-statistics, p-values, hypothesized andobserved coefficient signs for all paths.

Hypothesis 1 predicts a significant positiverelationship between participation and informa-tion asymmetry. The 0.43 BP → IA path coef-ficient (t = 3.36, p ≤ 0.001) finding is consistentwith most of the previously-discussed researchat the individual level but, as might be expected,fails to support Shields and Shields (1998)organizational-level argument that informationasymmetry is antecedent to participation inbudget systems.

Hypothesis 2 predicts no effect of informationasymmetry on slack creation in the absence ofincentives. Each is a necessary but, without theother, not sufficient condition (Harrell andHarrison, 1994). These data do not demonstratea significant IA → SC path, supporting thehypothesis. The coefficient for this path indicatedby the data is –0.18 with a related t-statistic (p-value) of –0.84 (0.20). Hypothesis 3 predicts apositive ICS → SC path in the model: that is,in the presence of information asymmetry, asincentives to create slack increase budgetary slackcreation will increase. The data support thishypothesis, indicated by the 0.53 path coefficientand related t-statistic (p-value) of 1.88 (0.03).

Hypotheses 4a and 4b predict a positiverelativism and a negative idealism latent path,

respectively, in the model. Relativism has asignificant positive latent coefficient of 0.24(t = 2.21, p-value = 0.09), supporting hypoth-esis 4a. As well, the data indicate that idealismhas a significant negative latent coefficient of–0.50 (t = 2.36, p-value = 0.009), supportinghypothesis 4b.

Hypothesis 5 predicts a significant ethicalposition → slack creation (EP → SC) pathcoefficient in the model, but does not hypothe-size the coefficient sign. Although ethicalposition is expected to influence slack creationbehavior, the direction (i.e., sign) of effects onan individual’s behavior would depend upon thatindividual’s specific beliefs (Forsyth, 1980).Therefore, the coefficient sign is likely to besample-specific. For these data, the significantEP → SC path (coefficient = 0.67, t = 2.34,p-value = 0.01) supports hypothesis 5.

Conclusion

This study extends our understanding of bud-getary slack by investigating ethical dimensionsof this important issue. The results provideevidence that ethical position, given opportu-nity and other incentives to create budgetaryslack helps to explain individual slack creationbehavior. These findings have potentially broadpolicy implications for businesses, as they maypoint to ways to discourage budget gamingbehaviors.

Onsi (1973) and Umapathy (1987) indicate


TABLE I Test results of hypothesized paths

Hypothesized Path t-statistic p-value Hypothesized Observedpath coefficient sign sign

H1: BP → IA –0.43 –3.36 < 0.001 + +H2: IA → SC –0.18 –0.84 < 0.20 None N/A

*H3: ICS → SC –0.53 –1.88 < 0.03 + +H4a: Relativism → SC –0.24 –1.22 < 0.09 + +H4b: Idealism → SC –0.50 –2.36 < 0.009 – –H5: EP → SC –0.67 –2.34 < 0.01 Sample specific +

* Observed sign for H2 was negative through not significant.

that budget games are the behavioral norm,despite being apparently unethical. Merchant(1995, p. 11) raises the question as to why theseactions, “most of which are at best ethicallyquestionable, are so common.” He asks, “Docorporate managers fail to understand the ethicalissues? Do they lack the will . . . or ability tocontrol the actions?” Jones’ (1991) moral inten-sity theory provides one possible explanation forthis troubling observation: budgetary slack maynot be a sufficient compelling issue to arousestrong ideological reactions.

As Jones (1991) describes it, moral intensityrefers to characteristics of the ethical issue itself,and explains why people decide and behavedifferently when the issue is the theft of a fewsupplies from the organization as opposed to therelease of a dangerous product to the market (p.373). Moral intensity includes perceptions of themagnitude, concentration, probability, and timingof consequences of the action, proximity of effect,as well as social consensus (i.e., social agreementthat the act is good or bad). Young (1985)confirms that social pressure (i.e., the desire toavoid negative social sanctions associated withshirking) affects the occurrence and magnitudeof budgetary slack. To answer Merchant’s (1995)questions: corporate managers may understandthe ethical issues and have the ability, but not thewill, to control the actions. Merchant andManzoni (1989) provide evidence in support ofthis explanation when they report that managersnot only admit to planning slack in settingbudget targets, but argue that they are justifiedin doing so. An organizational culture that failsto discourage an activity, serves to encourage it.

Models of the ethical decision process gener-ally agree that two influences predominate inethical decisions; they “share the viewpoint thatethical decision making in organizations is afunction of individual as well as organizationalfactors” (Akaah and Riordan, 1989, p. 113).Organizational ethical culture reflects threebroad-based perceptions: (1) the extent to whichemployees perceive that managers act ethically;(2) the extent to which employees perceive thatmanagers are concerned about ethics in theorganization; and (3) the extent to whichemployees perceive that management will reward

or punish ethical or unethical behavior (Beardenet al., 1993, p. 253). Brief et al. (1996, p. 193)call it organizational climate – “the ‘feel’ of anorganization; [that is,] . . . the perceptions oforganizational members about how organizationsfunction and/or what is important in theirorganizations.” Perceptions of organizationalculture are “based upon the conditions peopleexperience in their organizations – the events,practices, procedures, and rewarded, supported,and expected behaviors that characterize theorganization” (p. 194).

Brief et al. (1991, p. 393) observe that personalvalues are related to ethical decisions only underconditions of low accountability (i.e., when theviews of those to whom they are accountable arenot known). Left to their own devices, individ-uals have no choice but to consider otheroptions, tolerate inconsistency, or rely on learnedresponses. Extending this logic, the organizationaleffect on individuals’ propensity to createbudgetary slack will be more pronounced if theculture explicitly supports a distinct position. Tocontrol budgetary slack, Jones (1991) implies thatthe issue must be made more morally intense;there must be social consensus that slack isdetrimental to company goals. A strong ethicalculture, a moral environment within the firmcreated through management practices as well asespoused values, may be the most effective –indeed the only – deterrent to budgetary slack.

Notes

1 In the form of privately-held information in theHarrell and Harrison study.2 Shields and Shields (1998) identified by “exten-sive literature search” (p. 52) 47 studies publishedbefore 1996. Of these, only four included anyantecedents to participative budgeting and only twoof those four included either task interdependenceor uncertainty (i.e., the factors their study theorizes)as antecedents.3 Participation is modeled in most of these studiesas an independent or moderator variable withoutantecedents. Merchant (1981) models an antecedentdifferent from those theorized by Shields and Shields(1998).4 The Institute’s stated goals are: (1) to elevate


management as a profession, (2) to provide directionfor study in the management area, (3) to provide anobjective evaluation of managerial competence, and(4) to recognize demonstrated competence in themanagement profession.

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Patricia Casey DouglasCollege of Business Administration,

Loyola Marymount University,7900 Loyola Blvd.,

Los Angeles, CA 90045-8385,U.S.A.

E-mail: [email protected]

Benson WierSchool of Business,

Virginia Commonwealth University, Richmond, VA 23284-4000,

U.S.A.


integrating ethical dimensions into a model of budgetary slack creation

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