Balancing truths and targets: an outline of accountability within the beyond budgeting discourse

An essay for Accounting course (Module A)

By Maxim Peskin MIB, Greenwich cohort

Hult International Business School London, UK

An important subject of academic research and a topic of wide public discussion, accountability still remains a complicated and controversial theme in business studies, and even more so in actual practice. A popular buzzword breaching the gap between theory and real-life applications, it has become a key area of attention for managers globally, especially in large organisations1 dealing with complex hierarchical structures inside them and active and diverse stakeholder groups outside (Kotler, Kartajaya, Setiawan, 2010). The pragmatic side of accountability understanding its value for business, introducing techniques to capture and deliver this value, and most importantly addressing both external and internal aspects of accountability is a relatively recent addition to the management context. Nevertheless, this seeming novelty is grounded in decades of evolution of established managerial paradigms and instruments (Ryan, 2011). This essay investigates the link between the internal aspect of pragmatic accountability, i.e. the accountability of employees, and the evolution of budgeting in modern organisations. The focus is on beyond budgeting debate with its key notions of flexible and decentralised budgets. The essay then examines the ways in which these budgeting innovations can actually enhance overall accountability within the organisation and thus create added value for stakeholders. However, accountability must first be defined in order to provide an outline of crucial issues that businesses might face while trying to make accountability work. Accountability is largely understood as the ability to give account in other words, to provide a consistent narrative describing past actions, explaining them within a certain context (which can be situational, value-defining etc.), justifying them and allowing the person or group which is held accountable to assume responsibility for their decisions (Messner, 2009). The practice of accountability therefore creates two parties: one demanding the account and the other delivering it2. Their interaction forms the mutual strategy (in game theory terms) which, to quote Koestler (1969), decides the course of the game. Implicitly assuming that the demanding party is generally more powerful, Messner (2009) identifies three key potential problems for accountability practice and procedure: limited selfawareness which implies that some actions cannot be sensibly narrated and accounted for; the nature of the accounting process exerting psychological and organisational pressure on the accountable party; the demand for structure and content coherence of the account necessitating a specific regime of truth which might be conflicting with habitual, desired or declared regimes (see Foucault, 1970). __________________________________
1

This essay is focused on accountability in business context, so the terms business and organisation will be used interchangeably throughout the text.
2

This ontology is obviously debatable. For any practical application it may easily be assumed, with equal justification, that accountability practice creates these parties, is generated by them etc.

Brin (1999) suggests that the accountable party, as an equally active participant of the process, might use decoys, distort and conceal the truth, and demand corresponding transparency from the other party particularly if the aims and meaning of the account-giving procedure are not shared. Therefore the fourth risk factor for accountability efficiency is possible destructive action by the accountable party (essentially caused by other partys miscommunication). Some of these accountability issues are addressed directly by concepts developed within beyond budgeting discourse, even though this had not been its initial purpose. In fact, this discourse can be regarded as the next logical step in budgeting evolution, following such innovations as Activity Based Costing and Balanced Scorecard which have been mainstream practice since the 1970s and 1990s respectively. The mission was not to make employees more accountable, but to increase the value of budgeting process itself through administrative cost cutting and improving the core function of budgets: clarifying and operationalising business strategy (see Kaplan, Norton, 1991). This still remains the main purpose of key beyond budgeting ideas flexible and decentralised budgets. However, the changing nature of budgets has also had a profound effect on accountability practices3. For instance, flexible budgets shift managers attention to creating value and innovating beyond incremental product or service modifications thus increasing staff accountability for business performance. Decentralised budgets encourage front-line decision making which not only allows the company to use most recent market information, but also makes employees accountable for their actions and generated results (Fraser, Hope, 2003). It is clear that the notion of accountability is tightly linked to the beyond budgeting discourse. Combined Messner-Brin framework describing potential problems and limitations of pragmatic accountability of employees can now be applied to examine the role and impact of flexible and decentralised budgeting practices in bigger detail. Consider an extreme negative case: rigid, calendar-based budgets. Among other disadvantages, such a system forces employees to comply with the decisions and meet targets which were set in advance and then remain fixed. This inevitably causes budget irrelevance, increasing in time and yet targets still must be met. Since actual performance is benchmarked against outdated measures, deviation is inevitable and the logic of rigid budgets implies that deviation is definitely a problem. Organisational pressure increases, along with psychological discomfort. Therefore, in Messner-Brin terms, the second barrier for efficient accountability is created. __________________________________
3 At the same time, the rise of pragmatic accountability was strongly supported by the social responsibility debate which provided definitive conceptual connection between external corporate accountability and internal accountability, showing that the latter serves as a practical foundation to the former. However, this constitutes a more mechanistic approach to the whole concept of accountability: this line of thought urges businesses to move toward full accountability but views it not so much as a self-sustaining cultural phenomenon but as a set of targets and guidelines imposed by management (see Epstein, Wisner, 2006)

Moving along the flexibility continuum towards more flexible budgets, the organisation can alleviate this situation. Eliminating fixed calendar-based resource allocation in favour of flexible demand-driven system means that employees can now be held accountable for delivering actual business results through their actions and not just meeting preset goals (Fraser, Hope, 2003). Employees are meaningfully empowered, and the benchmarks and targets remain relevant: both factors demolish this barrier for accountability mentioned earlier. However, if taken to the extreme, flexibility can also be disastrous. If every budget and plan is prone to change, driven by short-term market situations, coherent strategy becomes impossible. Since long-term planning is anyway necessary for the business to survive, unrestrained budget flexibility results in a schizophrenic, discordant multitude of plans, changes in plans, and patches to changes. In Messner-Brin terms, extreme flexibility creates the third barrier for accountability: conflicting regimes of truth, characterised by constant bustle and distrust4. In a mirror-example, centralised budgeting creates conflicting regimes of truth by imposing a top-down plan on local divisions that deal directly with the consumer. The schizophrenic effect is generated by having to be responsible for actual performance and meeting the budget targets at the same time, provided that the latter have never been subject to reality checks or sensible discussion. Decentralisation obviously helps; however, if taken to the extreme, decentralisation can actually increase organisational pressure. Complete decentralisation is tantamount to organisation dissolution, with every local branch or functional department suddenly becoming an independent and separate business. Naturally, this leads (even if temporarily) to what is the second barrier for accountability in Messner-Brin terms. Fraser and Hope (2003) discuss two cases of milder decentralisation and describe numerous and substantial benefits this change in budgeting practice brings. However, they omit the key prerequisite for success: both organisations they examined were essentially retail businesses so in effect operations had been decentralised long before. By contrast, in a productionfocused organisation the same degree of decentralisation could effectively turn the tables of accountability, making the organisational hub accountable to each of the branches and departments that form the organisational rim. The party that demands account would now consist of multiple departments responsible for various geographic locations, products, internal processes or business functions; naturally their demands would be mutually contradictory. In the end, the organisation hub would suffer the same schizophrenic effect that centralised budgeting system previously imposed on the local divisions. __________________________________
4

One of the key findings in Eurel case study (Ryan, 2007) was that too much flexibility inspires general short-termism which consequently destroys performance coherence, trust, accountability and finally business value.

It can be concluded that moderation is crucial for business health and survival. Extreme scenario analysis supports this notion. For more traditional, mainstream organisations a certain degree of budget centralisation and rigidity remains a vital necessity. Modern budgeting evolution and the beyond budgeting discourse in particular is one of the core drivers that have greatly improved practical understanding of accountability in business, making it dramatically more feasible and tangible. However, forcing this evolution to the extreme will only impede pragmatic accountability and destroy stakeholder value. While budget flexibility and decentralisation are conceptually simple tools of increasing accountability, managers must also be able to use other tools. For instance, they can design multi-level budgeting systems with cascading flexibility and centralisation or even redefine the scope and mode of oversight as suggested by the four levers of control approach to further reinforce accountability.

References: Brin, D. (1999) The Transparent Society: Will Technology Force us to Choose Between Privacy and Freedom? Perseus Books Group Epstein, M. & Wisner, P. (2006) Improving Corporate Profitability Through Accountability. QFinance [online], http://www.qfinance.com/business-ethics-best-practice/improving-corporateprofitability-through-accountability?full [accessed 27 November 2011]

Foucault, M. (1970) The Order of Things. Pantheon Fraser, R. & Hope, J. (2003) Who Needs Budgets? Harvard Business Review 81 (1): 108-115 Kaplan, R. & Norton, D. (1992) The Balanced Scorecard Measures that Drive Performance. Harvard Business Review 70 (1): 71-79 Koestler, A. (1969) Some General Properties of Self-Regulating Open Hierarchic Order [online publication], http://www.panarchy.org/koestler/holon.1969.html [accessed 28 November 2011] Kotler, P., Kartajaya, H. &Setiawan, I. (2010) Marketing 3.0: From Products to Customers to the Human Spirit. John Wiley & Sons Messner, M. (2009) The Limits of Accountability. Accounting, Organizations and Society 34 (2009): 918-938 Ryan, B. (2007) Budgeting, the Individual and the Capital Market: A Case of Fiscal Stress. Accounting Forum 31 (2007): 384-397 Ryan, B. (2011) Lecture notes, MIB Accounting class, Hult International Business School. Unpublished