Budgetary Slack in Financial Budgeting: Ethical Issues & Solutions

This report provides an analysis of budgetary slack, defining it as a practice where managers deliberately underestimate revenue or overestimate expenses in a budget. The report discusses the ethical implications of budgetary slack, differentiating between scenarios where it is used to mislead top management for personal gain versus other motivations. It highlights the negative effects of persistent budgetary slack, including hindering business growth, impacting shareholder value, and causing employee attrition. The report suggests several ways to prevent budgetary slack, such as using evaluation tools that reward exceeding targets, implementing a truth-telling pay scheme, adopting participative budgeting, and utilizing zero-based budgeting. It concludes by emphasizing the importance of ethical behavior in budgeting and the need to avoid justifying unethical practices with rationalizations.

INTRODUCTION
Budgetary slack is the way through which the managers of the company deliberately underestimate
the revenue or overestimate the expenses of budget. This helps the managers in a very better way as
they can make their numbers as it is very important for them if the bonus and increment is based on
the basis of the achievement of numbers in budget. (Anon., 2017).It is a very common practice
followed in most of the companies for which the purpose of creating the budget is defeated. A budget
must be true when it is created with the honest intention and which totally rely on the management to
meet the financial goals of the company.
For instance: Budgetary slack can be a ethical and unethical practice too. If the department estimate a
low sales figure purposefully so as to mislead the managers at top level and it is also very easy to
achieve a low sales target which could easily attract bonus and appraisal for mangers but this is very
unethical practice followed in case of budgetary slack by the managers of the company just to
manage their requirement and mislead the top level (MyAccountingCourse.com, 2018).
Whether the budgetary slack was created for ethical or unethical reason, the profitability of the
company is misleaded so it is very important for the management to analyse the previous year budget
and calculate the variances arising between the actual and estimated figures. This can help the top
management of the company to properly forecast the budget and reduce the budgetary slack practice
for unethical reasons. (MyAccountingCourse.com, 2018)
EFFECTS OF BUDGETARY SLACK
Creating budgetary slack year after year can lead to a great problem in business because if the
management of the company purposefully creating very soft targets for the entity it will not make the
business to move forward in this tough competitive market and the shareholders who invested in the
company for as better return will held the management of the company responsible for not adding any
additional value to it and such impact would be seen in the share price of the company and slowly the
company will move out of the competitive market and all the good employees of the company will
jump to a better competitor which is a further drawback for the company and would place the
company at a maximum risk. The best remedy to avoid the budgetary slack is to create a good team
of people with integrity.
WAYS TO PREVENT BUDGETARY SLACK
Evaluation Tool: The Company can reduce budgetary slack if they stop using it as a negative tool.
For example, instead of setting up bonus and appraisal to managers on the basis of budgeted figure
being meet, the subordinates are allowed to exceed the product cost at a possible stages and
appraisal on such basis.

Pay scheme based on Truth: One of the biggest problem that occur in budgetary slack is that when
the employee has the private and confidential information to hide from the top management and they
have an advantage to hide such information so that an easy budget standard can be set and creating
a slack.To reduce this problem a truth paying scheme to motivate all the employees of the company
should be created so that the subordinate can properly communicate all the true information related to
the business and can help in its growth through which profit can be maximised and thereby reducing
budgetary slack . ( WEN Themes, n.d.)
Participative Budget: It is basically an ideal way to prepare the budget. Most companies do not
follow this procedure falls to budgetary slack. The top managers of the company draw the budget
process taking into account all the guidelines and factors of the company .The main issue is that the
standard set by the top managers may be very high or too low .If the standard is too high and the sub
ordinates know that the figure set are unrealistic, motivation will suffer, so to avoid such situation
budget should be participative in nature. ( WEN Themes, n.d.)
Zero based Budgeting: The Prior year budget should be used as a benchmark when creating a new
budget. On seeing the prior budget the new budget should be created and calculation of variances
and size of differences should be analysed from the previous budget and consider whether it is
acceptable within the baseline ( WEN Themes, n.d.).
CONCLUSION
Woody Brooks perception to his friend that he consistently overstate the amount of resources needed
in his budget request for his division is not appropriate as by this, Mr. Woody shall create a budgeting
slack. As a result of the same the company growth prospect in dark and his reply “It’s a dog –eat- -
dog world out there “ is not a proper justification.
References:
WEN Themes, n.d. Budgetary Slack – Definition, Causes and Prevention Methods. [Online]
Available at: https://www.mbaknol.com/financial-management/budgetary-slack-definition-causes-and-
prevention-methods/
[Accessed 25 September 2018].
Anon., 2017. www.accountingtools.com. [Online]
Available at: https://www.accountingtools.com/articles/what-is-budgetary-slack.html
[Accessed 25 September 2018].
MyAccountingCourse.com, 2018. What is Budgetary Slack?. [Online]
Available at: https://www.myaccountingcourse.com/accounting-dictionary/budgetary-slack
[Accessed 25 September 2018].