Budget Slack, Earning Management And Budget Shirking

As an important part of management accounting, budget is an effective mean for enterprises to achieve the function of plan, cooperation and control, which is the bridge between different internal units and departments of enterprises. However, the information asymmetry will lead to two kinds of budget opportunism problems:budget slack and budget shirking. Schatzberg and some others point out that there are two kinds of opportunist behaviors during the budget setting process: budget slack and budget shirking. Budget opportunistic behaviors lead to the shirking of agents’ responsibilities of firms.As an incentive mechanism, budget evaluation has been employed by all companies to suppress agents’ opportunistic behaviors. Managers’ remuneration, career progression and some other benefits related are dependent on the completion of budget. Based on the pressure of budget evaluation "selfish" managers have an incentive to seek personal gain by opportunistic behaviors. Jensen(2001) pointed out that when the managers realized that their own performance evaluation linked to the budget, they must be motivated to complete the budget goals through a variety of ways, methods including:manufacturing budgetary slack and earning management.We find that, budget shirking is significantly positive to budget slack, earnings management is significantly positive to budget shirking.Budgetary slack is opportunistic behavior during budget formulation phase, at this stage by influencing budget superiors, agents obtain an easier budget target. At the same time, due to the existence of ratcheting, in order to avoid a higher budget targets caused by the good performance of this period, managers will finish what budget target requires.Earnings management is opportunistic behavior too, by manipulating accounting indexes managers get some private interests. Based on pressure of budget evaluation, managers with higher level of budget shirking are more encouraged to earning management. Managers finished budget target by earning management on the surface. Actually the quality of budget is reduced, and the truth of budget shirking is covered.Conclusions of this paper suggest that budget evaluation which is used to alleviate the conflicts between principals and agents has caused managers’ attention, they have tried new reaction: manufacturing budgetary slack and earning management.