A Research On Conflict Of Interests In Budgeting System And The Coordination Mechanism

Chinese state-owned enterprises have inherent characteristics such as various internal organizations and frequent transaction of interests. Accordingly conflict of interests happens occasionally within the enterprise. Disagreements between interest subjects inside the enterprise significantly affect the operational efficiency of the enterprise. Conflicts of interests impact on every aspect of enterprise including management systems. Especially budgeting system is influenced badly. Budget planning, actual execution and later stage evaluation involve participation of every interest body. When conflicts of interest happen, supervising and subordinate departments or department at the same level will intervene budget for their own interests. Correspondingly the function of budget will be influenced. This essay will use it as a starting point, combining conflicts of interests and budget system of enterprise. While claiming the conflicts of interests, this essay also presents damage to the enterprise and concrete forms of it. This essay has value in theory and practical significance by proposing improving measures.This paper has made eight surveys in China Erzhong Group (De Yang) Heavy Industries Co. Ltd, systematically collecting large quantity’s text and recording data. Based on these data, the author conducts a research using case study as method. China Erzhong Group (De Yang) Heavy Industries Co. Ltd, as a typical state-owned enterprise, has multiple divisions containing business sectors as well as auxiliary production sectors which are likely to face conflicts of interests. With the relatively sound budget system, the impact of conflicts of interests on budget system can be fully reflected. Therefore, China Erzhong Group (De Yang) Heavy Industries Co. Ltd as a case study object is well representative.The method of content analysis is applied in this paper’s creative process. Using data collected in the research and interview, the author extracts critical points and constructs theories. Before the interview, by looking up previous literatures, expressions in the enterprise’s high level, locations, possible effects on budget system and mitigation measures of effects of conflicts of interests are well sorted out by the author, In the interview, questions are intended to be asked where the conflicts of interests are likely to happen. Combining it with budget system, the author is willing to explore if the effect on budget system is serious, what the functions of budget are influenced; the reasons of the effects and what measures the interviewees will take to improve.The author constructs the theoretical framework which takes objective setting, controlling and performance evaluation of budget as three mainlines before analysis of case study. Manifestations and causes of conflicts of interests in the enterprise mentioned in the previous literatures and presented in the early stage interview will be summarized in this paper. Theoretical framework mainly includes the following three aspects:Firstly, on the issue of objective setting of budget, previous research showed the disagreement between makers and executors of budget on how difficult the target can be achieved. The status of execution of the budget target is directly linked with performance evaluation of divisions. It will affect the payment and promotion of executors. Budget executors are willing to express their interest concerns when setting up the goals of budget.Secondly, on the issue of budget controlling, the author sums up three manifestation of impact of conflicts of interest on budget system from previous research:budget constraint, budget target adjustment and advances in budget improvement measures. The reason of these problems is that the interest of each internal organization within the enterprise is influenced in the process of budget execution. Each budget maker has the motivation not to follow the fixed budget plan for their-own interests which leads to huge impact on budget controlling function.Thirdly, on the issue of performance evaluation, the author extract the fact from previous research that due to the possibility of myopic policy caused by conflicts of interests and high correlation between function of performance evaluation and promotion and payment of executors, budget executors sacrifice long-term interest of the enterprise in order to insure immediate interest which results in impact on function of budget. In the process of case study, based on collected information and theoretical framework from previous research, severe conflicts of interests do exist inside China Erzhong Group (De Yang) Heavy Industries Co. Ltd. Business sectors and auxiliary production sectors have the motivation to intervene budget system for their own interests. The actual situation of China Erzhong Group (De Yang) Heavy Industries Co. Ltd enriches the contents of theoretical framework and makes it more informative.Firstly, on the issue of objective setting of budget, balance of conflicts of interests mentioned in the theoretical framework does occur. And this is expressed in two specific phenomena:index selection of budget target and completeness of budget target. The former indicates which index to be selected as final budget target. The latter indicates how difficult the budget target can be achieved. Besides, another form of conflict of interests exists in decomposition of budget target during case study. The cause of this conflict is profit distribution of internal organizations within the enterprise. The decomposition of budget target brings about target decomposition of cost controlling and total revenue. Budget executors intend to lower standards for self-decomposition in the way of easy-going budget target oriented.Secondly, on the issue of budget controlling, there are mainly two problems in the case study, budget target adjustment and budget improvement measures. The issue of budget constraint is not obvious in China Erzhong Group (De Yang) Heavy Industries Co. Ltd. The reasons of the above two problems are:imperfect mechanism of secondary budget adjustment, insufficient effort of employees and uneven quality of employees. The conflict of interests caused by profit distribution of internal organizations within the enterprise mentioned in the theoretical framework is more likely to happen in the phase of objective setting of budget.Finally, on the issue of performance evaluation, similarly to the theoretical framework, the function of budget system performance evaluation is influenced by conflicts of interests. The main signs are:budget executors may ignore the enterprise long-term planning in order to insure immediate interest which results in impact on function of budget. Although to do so, self-interest will be obtained like improving remuneration and rapid promotion. However, it will damage the long-term development of the enterprise. The high correlation between budget performance evaluation and remuneration leads to contradiction between budget makers and budget executors on short and long-term interests which further has negative impact on function of budget performance evaluation. Even worse, employees may have resistance to it.Based on the above conclusions of case study, the author establish modified theoretical framework, further summarizes the relevant issues enabling the theoretical framework more rational and more coincided with practical case. On this basis, the author puts forward four improved measures in order to contribute to enterprise operation:rational objective setting of budget, establishing effective conduction mechanism of budget controlling, building people-oriented comprehensive evaluation mechanism and constructing efficient information system inside the enterprise.Main contributions of this paper:by giving representative case and combination of intensive interview and content analysis, forms of conflicts of interests in the enterprise operation are well presented. Further, connecting conflicts of interests with budget system which is critical to enterprise operation has great implications for improving budget system and buffering conflicts.In this paper, the inadequacies of the author’s knowledge limit the use of content analysis. It may results differences between conclusions and practical situations. Though there are multiple materials to support the conclusions, it is inevitable to make some mistakes. In later research, questionnaire method can be applied to collect more data and the conclusions can be verified by empirical analysis which makes the paper more credible and reliable. In addition to this, due to limitation of the author’s knowledge on manufacturing, it is unavoidable to making uncompleted and inaccurate suggestion. Future research in this field is expected to make conclusions more accurate and practical in view of these inadequacies.