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8/17/2019 1 Why Business Unit Controllers Create Budget Slack_involvement in Management _social Pressure_and Machiavel…
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Why Business Unit Controllers Create BudgetSlack: Involvement in Management, Social
Pressure, and Machiavellianism
Frank G. H. Hartmann
Erasmus University
Victor S. Maas
University of Amsterdam
ABSTRACT: This paper investigates business unit BU controllers’ inclination to en-
gage in the creation of budgetary slack. In particular, we explore whether controllers
who are involved in BU decision making are more susceptible to social pressure to
engage in slack creation than controllers who are not. We expect, and find, a crucial
role of the controller’s personality. Results from an experiment among 136 manage-
ment accountants suggest that the personality construct Machiavellianism interacts
with involvement to explain controllers’ responses to social pressure to create budget-
ary slack. Controllers scoring high on Machiavellianism are more likely to give in to
pressure by BU management to create budgetary slack when they have been involved
in decision making. In contrast, controllers scoring low on Machiavellianism are less
likely to give in to pressure to create slack when they have been involved in decision
making.
Keywords: controllers; budget slack; ethics; social pressure; conflict of interest;Machiavellianism.
Data Availability: Data used in this study are not publicly available due to confidenti-
ality agreements with the participants.
INTRODUCTION
The role of business unit BU controllers typically comprises two sets of responsibilities.
On the one hand, BU controllers contribute to corporate control by reporting about the
activities and performance of their unit to higher-level management. On the other hand, BU
controllers contribute to their unit’s performance by supporting BU managers’ strategic and op-
Frank Hartmann is at the Rotterdam School of Management, Erasmus University. This paper has benefited from comments
and suggestions from the two anonymous reviewers and the editor, and from seminar participants at the 5th Conference onNew Directions in Management Accounting, the 2007 AAA MAS Midyear Meeting, the 2007 EAA Annual Conference,the 2009 AAA Annual Symposium on Ethics Research in Accounting, and seminars at the University of Amsterdam andPablo de Olavide University. We also thank Jim Hunton, Michal Matf jka, Ken Merchant, David Naranjo-Gil, PaoloPerego, Marcel van Rinsum, Mike Shields, Roland Speklé, and Marty Stuebs for help and/or comments on earlier drafts of
the paper.
BEHAVIORAL RESEARCH IN ACCOUNTING American Accounting AssociationVol. 22, No. 2 DOI: 10.2308/bria.2010.22.2.272010 pp. 27–49
Published Online: September 2010
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erational decision making Indjejikian and Matf jka 2006; Maas and Matf jka 2009. The literature
suggests a limited compatibility of these two sets of responsibilities, as controllers’ involvement in
their BU’s strategic and operational decision making may reduce their independence from unit
management, which could weaken corporate control e.g., Sathe 1982. Consistent with this view,
Indjejikian and Matf jka 2006 provide survey evidence, which suggests that organizational slack is higher in firms in which BU controllers focus relatively more on providing decision-making
information to BU managers than on providing information for corporate control to higher-level
management.
Despite this potential downside to BU controller involvement in managerial decision making,
there is evidence that such involvement is increasing e.g., Siegel and Sorenson 1999; Järvenpää
2007, which in turn suggests that the downside risk of controller involvement in management
may also be increasing. We perform an experiment among 136 professional management accoun-
tants to explore whether and when BU controllers’ involvement in their unit’s management affects
their inclination to allow slack in BU budgetary reports.
We propose that controllers are faced with a conflict of interest when they see a possibility to
create budgetary slack, as slack creation may be beneficial to their unit but run against the interests
of the organization as a whole. We expect and find that involvement in BU management influences
the extent to which BU controllers perceive this conflict of interest to constitute an ethical di-
lemma, but that involvement does not necessarily increase the likelihood that BU controllers
engage in budgetary slack creation. Instead, our results suggest that involvement in management
influences BU controllers’ reactions to social pressure from other unit managers to create budget
slack in a way that depends on their personality. More specifically, it appears that the personality
construct Machiavellianism, the tendency of an individual “to detach from considerations of ethics
and perform actions that profit the self” Schepers 2003, 341, determines controllers’ reactions to
various combinations of involvement and pressure. Whereas controllers scoring high on Machia-
vellianism are more likely to give in to pressure to create budgetary slack when involved in
decision making, less Machiavellian controllers are less prone to create slack under this condition.
Our findings contribute to the literature in at least three ways. First, we contribute to a recent
stream of studies that examine the design of the controllership function in organizations Indje-
jikian and Matf jka 2006, 2009; Maas and Mat
f jka 2009 by showing that social pressure andpersonality differences interact with functional design in determining controller behavior. Second,
we contribute to the literature on budgetary game playing by extending the findings of Davis et al.
2006 regarding the role of management accountants in budgeting processes and slack creation.
Finally, we contribute to the literature on accounting ethics by examining Machiavellianism as a
predictor of management accountants’ ethical decision making, thus building on earlier work by
Wakefield 2008, Ghosh and Crain 1996, and Ghosh 2000.
The paper proceeds as follows: In the next section, we introduce the constructs, which are
central to our analysis, and we develop our hypotheses. In the third section, we present the design
of the experiment. The results of the study are presented in the fourth section. In the fifth section,
we discuss our findings, their limitations, and their relevance for future research and for business
practice.
HYPOTHESIS DEVELOPMENTBU Controllers and the Creation of Budget Slack
Following Webb 2002, 361, we define budget slack as the intentional biasing of perfor-
mance targets below their expected levels. A common concern in budgeting is that BU managers
have incentives to create budget slack to maximize the expected value of the payoffs from budget
target achievement Webb 2002; Nouri and Parker 1996, while it is in corporate managers’ and
owners’ interest that budget proposals reflect the units’ performance potential as accurately as
28 Hartmann and Maas
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possible Fisher et al. 2000; Indjejikian and Matf jka 2006. To mitigate such budget-related
agency problems, organizations typically engage BU controllers to act as independent monitors in
the process. Controllers are made responsible for collecting, organizing, and reporting the data that
are used in budget negotiations and performance evaluations. These tasks require substantial
professional judgment, for example when assumptions are to be made about future developments,
or valuation methods have to be selected to produce budget proposals Maines et al. 2006; Collins
et al. 1987. As a consequence, unit controllers have considerable discretion in representing the
economic reality of their BU. They may use this discretion to represent the economic situation of
the BU to higher-level managers fairly and objectively, but may also abuse this discretion to
provide higher-level managers with biased judgments, which help the local unit and its managers
achieve their budgetary goals.
There is little systematic evidence on the factors that cause unit controllers to engage in the
creation of budget slack. Indjejikian and Matf jka 2006 and Maas and Matf jka 2009 both
suggest that budget slack depends on the position of the unit controller in the organizational
hierarchy. Davis et al. 2006 mention pressure from the superior as a causal antecedent of slack
creation. Although we will argue that both factors play a role, we propose that controllers’ en-
gagement in the creation of budget slack can also be understood as a reaction to an ethicaldilemma. The available discretion, which controllers can—but should not—abuse to the benefit of
their BU, provides such a dilemma, since it forces them to make a trade-off between local and
corporate loyalties. While some studies have looked at the behavior of accountants in ethical
dilemmas Stevens 2002; Shafer et al. 2004, little is known about how BU controllers deal with
such trade-offs. We propose that controllers’ engagement in slack creation is the outcome of a
three-way interaction between involvement in management, pressure from BU managers, and the
personality factor Machiavellianism. Below, we first discuss the relevance of these three factors
for understanding slack creation. Then we demonstrate the importance of considering these factors
simultaneously.
Controller Involvement in Management
Controller involvement in management is the extent to which controllers are active partici-pants in the unit’s operational and strategic decision-making processes and share responsibility for
the outcomes of these processes Sathe 1982; Hopper 1980. The costs and benefits associated
with controller involvement in management have been discussed quite extensively in the literature.
It is generally accepted that the quality of managerial decisions will improve by active engagement
of unit controllers in decision processes Regel 2003; Colton 2001; Sathe 1983. The reason is that
local controllers can bring to bear a unique combination of specialist knowledge in the fields of
finance and accounting, and detailed knowledge of the BU and its activities Chenhall and
Langfield-Smith 1998; Sathe 1982. The literature has also pointed to a downside to involvement,
however, emphasizing that involvement is likely to strengthen the ties between the controller and
the unit and its managers, providing a potential threat to the integrity and objectivity of unit
reporting San Miguel and Govindarajan 1984; Hopper 1980; Simon et al. 1954. This threat can
be explained by social identity theory, which suggests that participation in a group decision-making process increases individuals’ identification with this group and with the group’s outcomes
Tyler and Blader 2003; Tajfel 1969. Involvement in management will make BU membership a
more salient aspect of BU controllers’ identity. This may in turn reduce these controllers’ com-
mitment to their identity as an independent professional Stryker and Burke 2000. As Gunz and
Gunz 2007, 856 argue: “The more involved professionals are in the firm’s strategic decision-
making process, the more salient their organizational identities are likely to be by comparison with
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their professional identities.” Consequently, BU controllers who have contributed to the unit’s
courses of action will more likely feel that building slack into the budget to benefit the unit is an
action that is in their own personal interest as well.
This does not mean, however, that unit controllers will necessarily be more inclined to pro-
duce budget proposals that underestimate their unit’s performance potential when they have beeninvolved in managerial decision making. The reason is that allowing slack in the budget of their
“own” unit may be considered as more unprofessional and unethical than allowing slack in the
budget of a unit at arm’s length. While uninvolved unit controllers might argue that the creation of
budget slack should be considered, at least to some extent, to fall within “the rules of the budget
game” Hofstede 1967, for involved controllers there will be a salient conflict of interest. Con-
sequently, involvement in management may make unit controllers even more reluctant to allow
slack in the unit’s budget. Well aware of the temptation, and the fact that they have been entrusted
to resist it and remain independent, involved controllers may thus prove to be more strict in
observing professional guidelines and codes of conduct than uninvolved controllers Maas and
Matf jka 2009; Shafer et al. 2002. We will argue further below that the overall effect of controller
involvement in management on slack creation depends on social pressure and the degree of
Machiavellianism.
Social Pressure
In their review of social pressure research in accounting, DeZoort and Lord 1997 distinguish
between three forms of social pressure. Compliance pressure is pressure to go along with explicit
requests of individuals at any level. Obedience pressure refers to pressure to submit to the direc-
tions of an authority figure. Conformity pressure refers to pressure in groups of peers on individual
members of these groups. Pressure from BU managers on BU controllers to deliberately bias
performance targets lies at the intersection of these three types of pressure since it is pressure from
both a superior and peers to go along with an explicit request.1
Davis et al. 2006 show that management accountants are more likely to create budget slack
when faced with obedience pressure from an immediate superior the corporate CFO in their
study. This result confirms earlier findings in the social psychology and auditing literatures that
social pressure induces conformance, as individuals want to avoid the negative consequences of appearing deviant in a peer group, or of disloyalty to someone in an authority position Lord and
DeZoort 2001. The social psychology literature, however, also points out an opposite effect of
social pressure. Psychological reactance theory Brehm 1966; Brehm and Brehm 1981 in particu-
lar posits that attempts to persuade individuals to act in a specific manner are often counterpro-
ductive, because they constitute a threat to individuals’ sense of freedom and control. According to
this perspective, individuals who are pressed to act in a certain way perceive their behavioral
freedom to be reduced. This pressure arouses reactance, which is a motivational state aimed at
reestablishing a sense of freedom of choice and personal responsibility for decision outcomes.
Individuals experiencing reactance refuse to go along with the requested behavior, and often
decide to act in an exactly opposite way a “boomerang effect” Brehm and Brehm 1981, 38.
Such an effect is particularly likely to occur in reaction to being pushed to violate professional
guidelines or moral principals Brehm and Brehm 1981; Grover 1993.
Existing studies on professionals in organizations indeed indicate that pressure from managersto deviate from professional guidelines sometimes causes individuals to firmly oppose the re-
quested behavior and to place a renewed emphasis on their role as an independent professional
1While conceptually distinct, the three types of pressure are not orthogonal and may coincide and overlap in reality e.g.,Cialdini and Trost 1998.
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could be either in a cold, calculative way, trading off personal costs and benefits, or in a more
intuitive way, responding to social and ethical pressures. We propose that a clear pattern of
expectations regarding BU controllers’ behavior only emerges when the interaction between these
factors is considered.
Interaction between Involvement, Social Pressure, and Machiavellianism
Social pressure by managers to engage in the creation of budget slack constitutes a threat to
controllers’ freedom and professional independence Shafer 2002. Pressure may therefore evoke
either conformance or reactance. We expect the response to depend on controllers’ Machiavellian-
ism and their level of involvement in BU management. First, there is substantial evidence that
individuals differ in their susceptibility to social pressure Brehm and Brehm 1981; DeZoort and
Lord 1997 and that this difference is partly explained by Machiavellianism. Cristie and Geis
1970, 312 argue that “one consequence of the high Machs’ lack of susceptibility to emotional
involvements in general is a lack of susceptibility to sheer social pressure urging compliance,
cooperation, or attitude change.” Empirical studies in social psychology indeed support that low
Machs are more sensitive to social pressure than high Machs Lamm and Myers 1976; Blumstein
1973. This seems to suggest that pressure by unit managers to engage controllers in the creationof budget slack will be more effective for low Mach controllers. However, this reasoning ignores
that deliberately biasing performance estimates might be considered unethical or unprofessional
by the controller. While it may be true that low Machs find it harder to resist social pressure than
high Machs, they will also be more concerned about the violation of professional and moral norms
implied by the requested act Kleinman et al. 2003; Schepers 2003; Reiss and Mitra 1998. To
understand the effect of pressure on low and high Mach controllers, we therefore have to look at
the relationship that the controllers have with the BU they are working for.
For low Mach controllers, we expect that involvement in management will have the primary
effect of increasing the salience of conflicting interests and amplifying the extent to which slack
creation feels like a violation of trust and professional guidelines. Ceteris paribus, pressure to
engage an involved low Mach controller in the creation of budget slack is therefore more likely to
arouse reactance than pressure to engage an uninvolved low Mach controller in such acts.
Involvement in management also changes the effects of pressure for high Mach controllers,
but in a fundamentally different way. For high Mach controllers, the primary effect of involvement
is that it makes them perceive the outcome of the budgeting process as something that is in their
own interest. Because of the opportunistic and calculative nature of their decision making, high
Machs will be relatively easily persuaded to act in unprofessional or unethical ways, but only if the
personal benefits of acting in such a manner are clear Sakalaki et al. 2007; Cristie and Geis 1970.
High Mach controllers will thus be more susceptible to pressure if they are active participants in
their unit’s operational and strategic decision making. In absence of involvement, the lack of
apparent personal benefits of filing a biased estimate and their ability to resist social pressure will
make high Mach controllers relatively insensitive to the efforts of line managers to engage them in
the creation of budget slack.
In conclusion, we hypothesize that only relatively Machiavellian BU controllers will be easier
to persuade to create budget slack if they are involved in management. This is reflected in thefollowing hypotheses:
H1: The effect of social pressure on high Mach BU controllers’ engagement in the creation of
budget slack will be more positive for BU controllers who are involved in management.
H2: The effect of social pressure on low Mach BU controllers’ engagement in the creation of
budget slack will be less positive for BU controllers who are involved in management.
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Together, H1 and H2 predict a three-way interaction between social pressure, involvement in
management, and Machiavellianism affecting unit controllers’ engagement in the creation of bud-
get slack. Our expectations are graphically depicted in Figure 1, which focuses on the different
expectations for high Mach and low Mach controllers. In terms of the coding used in Figure 1, the
two hypotheses above predict that the slope of the line C H − D H is more positive than the slope of the line A H − B H and that the slope of the line C L − D L is less positive than the slope of the line
A L − B L.
RESEARCH METHOD
Research Design
To examine the hypotheses we conducted an experiment using a 2 2 between subjects
factorial design. Involvement in management and social pressure to engage in slack creation were
manipulated by varying the experimental case scenarios. Machiavellianism was measured using
the Mach IV scale developed by Cristie and Geis 1970, which was included in an exit question-
naire. This scale contains 20 items and asks participants to what extent they agree with statements
that are indicative of a Machiavellian personality. Examples are: The best way to handle people is
to tell them what they want to hear and It is safest to assume that all people have a vicious streak .
All 20 items of the Mach IV scale can be found in Appendix B. The items were scored on a
five-point Likert scale “Strongly disagree” to “Strongly agree”, in line with recent psychology
research Paulhus and Williams 2002; McHoskey et al. 1998. The validity and reliability of the
Mach IV scale is well established in the extant literature Wakefield 2008; Gunnthorsdottir et al.
2002; Fehr et al. 1992.
Participants
The participants in our study are students enrolled in a two-year part-time executive educa-
tional program in finance and control.3
Students in this program, which is offered at different
universities in The Netherlands, have previously obtained a Master of Science in an accounting- or
finance-related field, and are required to have at least three years of relevant work experience. In
total, 169 students from three different universities participated in the study. Of these 169 students,
25 indicated they were not currently employed in a management accounting position.
4
Since ourhypotheses are about the decision processes of management accountants, these participants were
excluded from the analyses. Furthermore, as is discussed below, eight of the remaining partici-
pants failed to provide a correct answer to one of the manipulation checks and their scores were
excluded as well. The final sample therefore consists of 136 students. Demographics of the par-
ticipants in the final sample are in Table 1. This table shows that the mean age of the participants
is 31.5 years old. The majority is male 86.0 percent. The average participant has 4.4 years of
experience in management accounting/control functions, has worked 3.5 years for their present
employer, and has been in their present position for 2.2 years.
Research Instrument and Procedures
The students participated in the experiment during class hours. In total we organized seven
sessions across the three different universities. All sessions proceeded according to the same
schedule. One of the authors entered the classroom at an agreed upon point of time and introducedhimself and the research project without specifying the exact purpose of the study. The students
3The program awards the title of “Register Controller” “Certified Controller”, which may be considered as the Dutchequivalent of the U.S. CMA. Students tend to be full time employees of medium and large firms. Their employersgenerally pay the program fee.
4Most of these 25 students were working as internal auditors, consultants, or general managers.
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FIGURE 1
Hypothesized Relationships
Slack
creation
BH
DH
AH
CH
High Machs
Slack creation
DL
BL
CL
AL
LowMachs
Involvement high
Involvement low
Involvement low
Involvement high
Point A: Pressure = low, Involvement = low
Point B: Pressure = high, Involvement = low
Point C: Pressure = low, Involvement = high
Point D: Pressure = high, Involvement = highL subscript denotes low Machiavellianism, H subscript denotes high Machiavellianism.
H1 predicts that BH − AHDH − CH (i.e., that the slope of the line AHBH is less positive than the slope of the
line CHDH).
H2 predicts that BL − AL DL − CL (i.e., that the slope of the line ALBL is more positive than the slope of the
line CLDL).
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were then asked to participate in the study by filling in two questionnaires. It was emphasized that
participation was voluntary. Only one student chose not to participate and left the classroom. Theparticipating students were asked not to communicate with each other while they were filling in
the questionnaires. Subsequently they were provided with the research instrument and an exit
questionnaire, which they filled in successively. Participants were randomly assigned to treatment
conditions, as different versions of the experimental materials were randomly distributed. In this
process, care was taken to allocate treatment conditions equally over sessions.
The research instrument contained a case scenario that was specially developed for this study.
The scenario describes a situation in which a BU controller needs to decide whether to deliberately
underestimate the unit’s expected performance in a budget proposal to increase the expected
payoff from reaching the budget target. The BU in the case scenario is a division of a large firm.
The unit’s management team receives a bonus based on the extent to which BU Return on
Investment ROI exceeds a target level. The BU controller, although a member of the manage-
ment team, is excluded from this incentive system. The ROI target is established on an annual
basis through a process of participative budgeting. The case describes how the BU has changed its
strategy recently and continues to remark that the results of this change are disappointing and that
it is highly unlikely that the unit will meet its ROI target this year. In October of the present year,
the management team of the BU has a meeting about the budget proposal for the next year. At this
meeting the BU general manager suggests proposing a budget that shows an unrealistically low
ROI prediction of 11 percent for the next year, because he does not want the unit to miss its target,
and the BU managers to miss their bonus, two times in a row. The controller needs to decide
whether he will accept this and will produce a report that contains unrealistically low estimates of
revenues and unrealistically high estimates of costs. The full research instrument can be found in
Appendix A.5
The manipulations of involvement in management and social pressure were embedded in the
scenarios. In the scenarios, “Splash” was the name of the BU, “Wouter Simons” was the name of
5A number of potentially relevant factors were controlled by making them explicit in the case scenario. First, the casementioned that the controller reported to both the BU general manager and a corporate controller and that the BUmanager was not in a position to officially file sanctions on the controller in case he would choose not to produce theslack inducing report. Second, it was mentioned that BU controller Wouter Simons “was aware that the chance thatcorporate headquarters will find out that the ROI proposal of 11 percent is founded on unrealistically low estimates isnegligible.” Finally, the case specified that the company and business unit were Dutch and were active in the food andbeverage industry and that the company was not listed on a stock exchange.
TABLE 1
Participant Demographic Data
Gender: Male: 117 (86.0%), Female: 19 (14.0%)
Mean SD Min. Max.
Age 31.46 4.92 25.00 51.00
Years in current position 2.23 1.59 0.20 10.00
Years worked for currentemployer
3.51 2.66 0.20 18.00
Years of experience inmanagement accountingfunctions
4.42 3.05 0.50 19.00
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the BU controller, and “Gerard van Dinkel” was the name of the BU’s general manager. In
addition to the common part of the case, participants in the high involvement conditions read the
following statement:
BU controller Wouter Simons has always been very actively involved in the BU’s strategic and
operational management. He has also contributed substantially to the initiation, development and
implementation of Splash’s new strategy.
Participants in the low involvement conditions instead read:
BU controller Wouter Simons has never been actively involved in the BU’s strategic and opera-
tional management. Neither has he contributed in any way to the initiation, development or imple-
mentation of Splash’s new strategy.
Similarly, participants in the high social pressure conditions read:
Gerard van Dinkel and the other two members of the BU management team put severe pressure on
BU controller Wouter Simons to agree to a ROI proposal of 11%.
Participants in the low social pressure conditions instead read:
Gerard van Dinkel and the other two members of the business unit’s management team do not push
BU controller Wouter Simons in any way to agree to a ROI proposal of 11% but instead leave the
decision for him to make all by himself.
The dependent variable was measured by asking participants to indicate the likelihood that
Wouter Simons, the BU controller in the case, would go ahead and produce a report that would
provide the foundation for an unrealistically low ROI estimate of 11 percent. The participants
indicate their assessment of the lik elihood in percentages between 0 percent certain not to do it
and 100 percent certain to do it.6 In the last of the seven sessions, the students, after having
indicated their likelihood scores, were also asked to describe in their own words the way they
chose the likelihood score for Wouter Simons.
The research instrument was pre-tested in a separate group of 20 part-time students enrolled
in a Master of Science in Accounting and Control program, most of who were working in a
management accounting position. This pilot test confirmed that there was substantial variance in
the dependent variable and that a significant amount of this variance could be explained by the
study’s independent variables. Moreover, the pilot test showed that participants found the caserealistic and interesting.
RESULTS
Manipulation Checks and Descriptive Statistics
The manipulation of social pressure was checked with the following post-experimental ques-
tionnaire item scored on a five-point Likert scale 1 “Strongly disagree” and 5 “Strongly
agree”: “Business unit controller Wouter Simons was under strong pressure from the other mem-
bers of the business unit management team to build slack in the unit’s ROI budget target.” The
mean score in the high-pressure conditions was 4.26, while the mean score in the low-pressure
conditions was 1.92. The difference between the scores is significant t 15.58, p 0.000. The
6The dependent variable was framed in terms of the likelihood of someone else’s behavior to control for the effects of social desirability. Asking questions in terms of likelihood of behavior is a common practice in experimental account-ing ethical dilemma studies e.g., DeZoort and Lord 1994; Jones and Kavanagh 1996; Tsui and Gul 1996, as is framingquestions in the third person to prevent social desirability bias Ponemon and Gabhart 1990. To see if framing thedependent variable in the third person affects the results we also asked participants to indicate the likelihood that theythemselves would produce the report if they were in the position of the business unit controller. The results with regardto this version of the dependent variable are qualitatively similar to the ones in the third person version and are notreported here.
36 Hartmann and Maas
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manipulation of involvement in management was checked with the following item scored on a
five-point Likert scale 1 “Strongly disagree” and 5 “Strongly agree”: “Business unit con-
troller Wouter Simons was actively involved in strategic and operational decision making at the
business unit.” The mean score in the high-involvement conditions was 4.24, while the mean score
in the low-involvement conditions was 1.65. This difference is also significant t 22.20, p
0.000
Descriptive statistics regarding the dependent variable in our experiment are in Table 2. This
table contains the number of participants and dependent variable mean scores and standard devia-
tions for all four treatment conditions in the experiment. In addition, it shows cell sizes, means,
and standard deviations for the eight cells that result when Machiavellianism is split at the median
value of 2.75 to produce a high Mach and a low Mach subgroup.
We calculate individuals’ Machiavellianism scores as their average scores on the 20 items in
the Mach IV scale ten negatively worded items were reverse coded. The Machiavellianism
scores in our sample range from 1.75 to 3.55 with a mean of 2.76 SD 0.36 and a median of
2.75. The mean score of 2.76 is slightly below the scale mean of 3, which indicates that on average
the management accountants in our sample tended to somewhat disagree with the statements
TABLE 2
Descriptive Statistics Dependent Variable
Full Sample
Involvement
High Low Overall
n Mean SD n Mean SD n Mean SD
Pressure
High 36 54.44 26.207 36 52.22 27.109 72 53.33 26.497Low 31 40.00 23.381 33 42.45 29.539 64 41.27 26.553
Overall 67 47.76 25.795 69 47.55 28.514 136 47.65 27.108
High Mach Subgroup
Involvement
High Low Overall
n Mean SD n Mean SD n Mean SD
High 16 68.44 22.783 15 54.00 26.873 31 61.45 25.501
Low 16 35.31 19.619 19 52.16 27.144 35 44.46 25.147
Overall 32 51.88 26.843 43 52.97 26.629 66 52.44 26.532
Low Mach Subgroup
Involvement
High Low Overall
n Mean SD n Mean SD n Mean SD
High 20 43.25 23.635 21 50.95 27.866 41 47.20 25.861
Low 15 45.00 26.592 14 29.29 28.342 29 37.41 28.113
Overall 35 44.00 24.579 35 42.29 29.663 70 43.14 27.056
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indicative of a Machiavellian personality.7
The reliability of the Mach IV scale was assessed using
Cronbach’s alpha. Cronbach alpha is 0.69, which indicates acceptable scale reliability. A one-way
ANOVA with Bonferroni corrected post hoc tests confirmed that Machiavellianism did not differ
significantly between experimental conditions.
Dependent variable scores range from 0 percent to 100 percent and there is considerablevariance in all four experimental conditions and all eight cells in a model with Machiavellianism
split at the median. The overall mean score is 47.65 SD 27.11. The highest mean score is
found in the cell with both experimental manipulations high and participants with above median
Machiavellianism scores mean 68.44, SD 22.78 while the lowest mean score is for low
Machiavellian participants in the condition with both manipulations at the low level mean
29.29, SD 28.34. The only other cell, besides these two, in which the value of the dependent
variable is significantly different from the scale midpoint of 50 percent, is the high involvement,
low-pressure situation for high Mach controllers mean 35.31, SD 19.62.
Hypothesis Tests
We test our hypotheses using moderated regression analysis. We use regression analysis
because it allows us to examine the interaction between the experimental manipulations and acontinuous variable Machiavellianism without the loss of information that would result if we
dichotomized the Machiavellianism scores Cohen et al. 2003; Hartmann and Moers 1999. Before
calculating the interaction terms, we standardized the Machiavellianism scores to facilitate inter-
pretation of the results. A hierarchical regression procedure was run with SOCIAL PRESSURE ,
INVOLVEMENT , and MACHIAVELLIANISM , the two way-interactions and the three-way inter-
action as predictors of engagement in slack creation. Using a hierarchical regression allows us to
separately evaluate the significance of the two-way and three-way interaction effects and the
contribution of including the interaction coefficients in the regression model to the explanatory
power of the model. The results are in Table 3.
The results in column 1 of Table 3 show that the main-effects-only model is significant and
that there exist main average positive effects of SOCIAL PRESSURE and MACHIAVELLIANISM
on SLACK CREATION . As can be seen in column 2 of Table 3, introduction of the two-way
interactions column 2 does not improve the predictive ability of the model. However, the intro-duction of the coefficient for the three-way interaction does result in a higher adjusted R2. An
F-test Cohen et al. 2003 confirms that this increase in R2 is significant F 4.543, p 0.05.
The results for the full model are in column 3 of Table 3. The results for this full model confirm
that there is a significant three-way interaction effect between INVOLVEMENT , SOCIAL PRES-
SURE , and MACHIAVELLIANISM p 0.05, as was predicted by H1 and H2. Also notice that
the main effect of SOCIAL PRESSURE is not significant in the models with interaction terms,
7Following recent literature in personality psychology McHoskey et al. 1998; Paulhus and Williams, 2002 we measuredMachiavellianism on a five-point Likert scale. This provides a deviation from the original instrument of Cristie and Geis1970, which used a seven-point scale. Moreover, Cristie and Geis 1970 calculated an individual’s Machiavellianismscore as the sum of the item scores plus a constant of 20. The idea behind this scoring method is that an individual whois perfectly neutral when it comes to Machiavellianism will have a score of exactly 100 20 times the scale mean of 4
plus the constant of 20. Note that if a respondent’s Machiavellianism score is calculated as the mean item score on afive-point scale as in our study, an individual who is perfectly neutral about the Machiavellianism statements will havea score of 3. Wakefield 2008 used Cristie and Geis’ 1970 original measurement and scoring method. Assuming equaldistributions, the mean Machiavellianism score in the Wakefield sample 80.9 corresponds to a mean score of 2.363 ona five-point scale. To calculate this score we first calculated the mean score of the 20 Mach-IV items on the seven-pointLikert scale 80.9 minus 20, divided by 20 3.045. Then we calculated the corresponding score on a hypotheticalfive-point scale, using a linear transformation 3.045 times 2/3 plus 1/3 2.363. The results indicate that in both herand our study, the average respondent tended to somewhat disagree with the statements indicative of a Machiavellianpersonality i.e., has a score that falls slightly below the theoretical mean of the scale.
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providing an indication that the positive effect of SOCIAL PRESSURE on SLACK CREATION is
not equally strong for all combinations of INVOLVEMENT and MACHIAVELLIANISM .
To shed more light on these results and to add some intuition to this three-way interaction, we
analyze our experimental data separately for subgroups of high and low Machiavellian participants
using factorial ANOVA’s and plot the results. The results show that INVOLVEMENT and SOCIAL
PRESSURE interact differently for high Machs and for low Machs. The findings are illustrated in
Figures 2 and 3.
First, considering the high Mach subgroup, H1 predicts an interaction between SOCIALPRESSURE and INVOLVEMENT . The results indicate that this effect is indeed significant at the
0.05 level F 5.955, p 0.018. Figure 2 shows that the findings for high Mach controllers
follow a pattern that is consistent with our H1. While for involved controllers, pressure strongly
increases engagement in slack creation the likelihood score increases from 35.31 percent to 68.44
percent, the increase is insignificant for uninvolved controllers. As is clear from Figure 3, the
results from a factorial ANOVA for the low Mach group on the contrary show that pressure only
TABLE 3
Hierarchical Regression Coefficients
(p-values between brackets)
(1) (2) (3)
Intercept 35.411* 37.049* 36.240*0.035 0.033 0.036
INVOLVEMENT 1.638 2.577 1.606
0.722 0.702 0.810
SOCIAL PRESSURE 12.380** 11.541 11.2460.008 0.080 0.084
MACHIAVELLIANISM 19.205** 23.945* 35.849**0.005 0.032 0.004
INVOLVEMENT PRESSURE 2.142 1.634
0.818 0.858
INVOLVEMENT MACHIAVELLIANISM 7.393 36.866
0.581 0.057
PRESSURE
MACHIAVELLIANISM
3.083
27.5760.815 0.116
PRESSURE INVOLVEMENT MACHIAVELLIANISM 55.096*0.037
Adjusted R2 0.072 0.053 0.079
F 2.477 1.744 2.037
p 0.020 0.078 0.030
* Coefficient is significant at the 0.05 level two-tailed** Coefficient is significant at the 0.01 level two-tailedDependent Variable SLACK CREATION the indicated likelihood, in a percentage between 0 percent and 100 percent,that the controller in the case will create budget slack. In running the regressions we control for participants’ age, tenurein present position, years of experience as assistant controller and university. None of the control variables has asignificant effect on the results.
Variable Definitions INVOLVEMENT experimental manipulation of whether involvement in management is high or low;
SOCIAL PRESSURE experimental manipulation of whether social pressure to create slack is high or low; and MACHIAVELLIANISM score of participants on Mach IV scale measuring the personality trait Machiavellianism.
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increases slack creation for uninvolved controllers from 29.29 percent to 50.95 percent. Involved
low Mach controllers are not affected by pressure. This interaction effect of pressure and involve-ment is marginally significant in this subsample F 3.518, p 0.066.
Overall, the results suggest that while on average Machiavellianism and social pressure in-
crease BU controllers’ engagement in the creation of budget slack, pressure is not equally effective
in all conditions. Involvement in management increases the effectiveness of pressure on high
Mach controllers; however it decreases the effectiveness of pressure on low Mach controllers. We
argued this is because high Machs and low Machs have different decision-making styles and are
FIGURE 2
Results for High Machs
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
Pressure low Pressure high
Involvement
high
Involvement
low
S ac creat on
AH
CH
DH
BH
Point A: Pressure = low, Involvement = low
Point B: Pressure = high, Involvement = low
Point C: Pressure = low, Involvement = high
Point D: Pressure = high, Involvement = high
H subscript denotes high Machiavellianism.
Results are consistent with H1 because BH − AHDH − CH (i.e.,the slope of the line AHBH is less positive than
the slope of the line CHDH).
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influenced by different aspects of the situational circumstances. Finally, an important finding is
that involvement in management does not have a main effect on engagement in the creation of
budget slack. This indicates that it is crucial to consider pressure and the personality of thecontroller to understand whether involvement of controllers in strategic and operational decision
making poses a threat to the objective reporting of performance estimates.
Supplemental Analysis
To supplement our statistical analysis, we asked 27 participants in the final session of our
experiment to explain in their own words how they had chosen their likelihood estimates. This
FIGURE 3
Results for Low Machs
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
Pressure low Pressure high
Slack creation
AL
CL
BL
DL
Involvement
low
Involvement
high
Point A: Pressure = low, Involvement = low
Point B: Pressure = high, Involvement = low
Point C: Pressure = low, Involvement = high
Point D: Pressure = high, Involvement = high
L subscript denotes low Machiavellianism.
Results are consistent with H2 because BL − ALDL − CL (i.e., the slope of the line ALBL is more positive
than the slope of the line CLDL).
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question was asked in the debriefing that was handed out after the experimental scenario had been
finished. Of these 27 participants, 13 48 percent explicitly mentioned the lack of involvement
of the controller in the BU’s strategic and operational management as an important factor that
influenced their estimate of the controller’s subsequent behavior. In particular, in the experimental
conditions in which involvement in management was manipulated as high, many participants 7out of 12 mentioned this as a factor that influenced their judgment. A typical response for
participants in the high involvement, low-pressure condition was: “Normally, I expect controllers
to make estimates objectively. However, because the controller in this case has been so actively
involved in managing the BU he will feel that reaching the target will also be his responsibility…
he will be more inclined to make a very low estimate.”
Pressure from the BU manager was spontaneously mentioned by nine participants 33 per-
cent, often in combination with involvement in management. One participant in the low involve-
ment, high-pressure condition mentioned for example: “The controller … has no direct interest in
the outcome of the budgeting process and does not care if the target is high or low. … On the other
hand, people in general like to conform to the wishes of their colleagues/superiors and therefore
probably tend to do what they are told to do.”
As regards our third antecedent variable, Machiavellianism, many participants mention that
they believe it is ultimately personal ethics, the controller’s professionalism or the person’s “char-
acter” that determines what controllers do in situations like this. An example of a clear formulation
as given by a participant in the high involvement, high-pressure condition is as follows: “For me,
integrity and trustworthiness are paramount. Whatever the situation, I would not allow this to
happen.”
DISCUSSION AND CONCLUSION
This paper set out to examine how BU controllers respond to the ethical dilemma that arises
if they can spur the interests of their own unit by deliberately biasing budget estimates to create
slack. We were particularly interested in increasing our understanding of how, if at all, involve-
ment of controllers in operational and strategic management decisions affects their ability to resist
pressure to engage in slack creation. We expected and found that the three factors, involvement in
management, pressure from BU managers and personality, should be considered together to un-derstand controllers’ engagement in the creation of budget slack. More specifically, we found that
only high Mach unit controllers become more susceptible to pressure if they are involved in
management. Low Mach unit controllers actually became less willing to give in to slack-inducing
pressure if they had been involved in managerial decision making.
The results of our study are important for management accounting research as well as for
business practice. First, our study contributes to the extensive literature on budgetary participation
and the creation of budget slack by focusing on the, until recently, neglected role of the BU
controller in the budgeting process. Most existing studies have treated budgeting and performance
reporting as a process involving only two parties, a higher-level manager and a lower-level man-
ager see Covaleski et al. 2003. Our study complements recent work by Davis et al. 2006,
Indjejikian and Matf jka 2006, and Maas and Matf jka 2009 and shows that a focus on the
personality of the BU controller can enhance our understanding of management accounting and
budgeting practices cf. Naranjo-Gil et al. 2009 and in particular of “the budgeting games peopleplay” Collins et al. 1987.
Our results also provide an explanation for why prior studies e.g., Sathe 1982 have failed to
find a relationship between controllers’ involvement in management and budget gaming. We show
that the relation between involvement in management and the creation of budget slack can be
either positive or negative and that it depends on the personality of the BU controller and the level
of pressure how involvement changes controllers’ gaming behavior. In addition, a focus on indi-
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vidual differences in Machiavellianism might help explain why some management accountants
consider the creation of slack and other forms of budget gaming more unethical, unfair, and
unacceptable than others Elias 2002; Kaplan 2001; Merchant and Rockness 1994. In particular,
it might also provide an explanation for the finding of Davis et al. 2006 that not all their
participants indicated that the situation of being pressured to engage in the creation of slack provided them with an ethical dilemma which would be a typical reaction for a high Mach
participant.
Finally, our study contributes to the literature by experimentally examining a potential trade-
off between the two different basic functions of management accounting: decision facilitation and
decision influencing i.e., control Sprinkle 2003; Demski and Feltham 1976. BU controller
involvement in management is motivated by expected improvements in controllers’ ability to
perform well in their decision-facilitation role Pierce and O’Dea 2003; Granlund and Lukka
1998. It is generally believed to come at the cost of reduced corporate control however, as
involved BU controllers are supposed to be less independent and objective Indjejikian and Matf-
jka 2006; San Miguel and Govindarajan 1984. Our results, however, show that a trade-off be-
tween decision-facilitation and decision-influencing benefits in designing the organizational con-
troller function is not inevitable. What seems crucial instead, is staffing the controller positions
with individuals with the right characteristics. In this sense, our study also has important practical
implications, as our findings suggest that where an involved “strong” controller is needed,
organizations should seek people who score low on Machiavellianism. For unit controllers who
are not going to be active participants in management decisions however, organizations would do
better to attract relatively Machiavellian controllers, as they are less sensitive to social pressure in
situations where the ethicality of slack creation is more ambiguous and budget gaming not in their
self-interest.
In interpreting this study’s results, some limitations should be considered. First, it should be
recognized that while we find support for our hypotheses, our model only explains a relatively
limited amount of variance in controllers’ engagement in slack creation and other factors likely
play an important role as well. Next, the data for this study were acquired through an experimental
survey in a classroom setting. Although the controlled setting contributes to the internal validity of
the study, it may have come at some costs to external validity. Furthermore, the fact that the studyfollowed the existing literature on accounting ethics and used a case-based experiment with the
manipulations embedded in the case scenario provides typical concerns with respect to construct
validity. For example, it has been argued that cognitive limitations sometimes make it difficult for
participants to determine what their behavior would be in situations described in case scenarios
Grover 1993.
Although much effort was made to ensure a realistic scenario, participants’ answers might still
have been influenced by the artificial setting imposed on them. However, we believe that the fact
that actual management accountants were involved, who also judged the task as realistic, adds to
both the internal and external validity of the study. Moreover, the responses that participants gave
when asked to explain their likelihood estimates do not suggest that the results are driven by the
typical limitations associated with our method.
Finally, considering our participants, it should be noted that although our participants were
employed in a management accounting function, they were also still studying. The findings of ourexperiment might therefore be biased toward relatively inexperienced controllers and moreover,
because all participants were working in The Netherlands, toward the Dutch cultural and institu-
tional setting. Also, the generalizability of our findings is limited by the fact that our participants
were relatively young and predominantly male. This is especially important because some studies
have found that males score higher on Machiavellianism than females and that Machiavellianism
decreases with age e.g., Mudrack 1993; Wilson et al. 1996. Despite these limitations, we believe
Why Business Unit Controllers Create Budget Slack 43
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Table A1Splash ROI Target and Realization over the Years 2000–2004
Year ROI Target ROI Realization
2000 10% 9%
2001 12% 12.2%2002 12.5% 13%
2003 13% 13.6%
2004 14% 13.3% expected
In October 2004, the Splash management team has a meeting to decide about the 2005 budget
proposal. Gerard van Dinkel, Splash’s general manager, suggests basing the proposal on
conservative estimates. Both he and BU controller Wouter Simons believe Splash should be able
to make a ROI of 13.5% in 2005. However, Gerard van Dinkel asks Wouter Simons if he can come
up with a proposal of a ROI target of 11%, because he feels it would be bad for the business unit
to miss its targets two times in a row and he therefore does not want to take any risks. He also
mentions that it would be undeserved if Splash’s managers miss their bonus again next year.
BU controller Wouter Simons realizes that the only way to come up with a ROI proposal for
2005 of 11% is by making unrealistically low sales estimates and unrealistically high cost esti-mates. He also knows that Gerard van Dinkel does not have the formal authority to order his
participation in making such estimates. He therefore needs to decide for himself whether or not he
wants to go ahead with it.
We would like to know how likely you think it is that Wouter Simons proceeds to develop a budget
proposal that contains the unrealistically low ROI target of 11%.
In making your assessment of this likelihood please also note the following:
BU controller Wouter Simons is aware that the chance that corporate headquarters will find
out that the ROI proposal of 11% is founded on unrealistically low estimates is negligible.
Conditions with Involvement in Management High
BU controller Wouter Simons has always been very actively involved in the BU’s strategic
and operational management. He has contributed substantially to the initiation, development, andimplementation of Splash’s new strategy.
Conditions with Involvement in Management Low
BU controller Wouter Simons has never been actively involved in the BU’s strategic and
operational management. Neither has he contributed in any way to the initiation, development, and
implementation of Splash’s new strategy.
Conditions with Social Pressure High
Gerard van Dinkel and the other two members of the BU management team put severe
pressure on BU controller Wouter Simons to agree to a ROI proposal of 11%.
Conditions with Social Pressure Low
Gerard van Dinkel and the other two members of the BU management team do not push BU
controller Wouter Simons in any way to agree to a ROI proposal of 11% but instead leave the
decision for him to make by himself.
Please answer the following questions:
1. How likely do you think it is that Wouter Simons chooses to proceed with developing a
budget proposal that is based on a ROI estimate of 11%? (Please indicate a chance
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between 0% and 100%.)
____ %
2. Imagine that you would be in the same situation as Wouter Simons. How likely would it
be that you proceeded with developing a budget proposal that is based on a ROI estimate
of 11%? (Please indicate a chance between 0% and 100%.)
____ %
APPENDIX B
Mach IV Scale Developed by Cristie and Gies (1970)
1. Never tell anyone the real reason you did something unless it is useful to do so.
2. The best way to handle to people is to tell them what they want to hear.
3.* One should take action only when sure it is morally right.4.* Most people are basically good and kind.5. It is safest to assume that all people have a vicious streak.
6.* Honesty is the best policy in all cases.7.* There is no excuse for lying to someone else.
8. Generally speaking, men won’t work hard unless they are forced to do so.9.* All in all, it is better to be humble and honest than to be important and dishonest.10.* When you ask someone to do something for you, it is best to give the real reasons for
wanting it rather than reasons that carry more weight.
11.* Most people who get ahead in the world lead clean, moral lives.12. Anyone who completely trusts anyone else is asking for trouble.
13. The biggest difference between most criminals and other people is that the criminals arestupid enough to get caught.
14.* Most men are brave.15. It is wise to flatter important people.
16.* It is possible to be good in all respects.17.* Barnum was wrong when he said that there’s a sucker born every minute.18. It is hard to get ahead without cutting corners here and there.
19. People suffering from incurable diseases should have the choice of being put painlessly
to death.20. Most men forget more easily the death of their father than the loss of their property.
* Reverse-scored item.
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