Research Proposal

s MANCHESTER BUSINESS SCHOOL | Research Proposal | Experiencing financial planning change with old institutional theory: A case study of a Chinese SOE, April 2013-August 2013 | | | | | | | 8357252 | | | 1,850 words, 9 pages | | | 2013/4/25 |

Experiencing financial planning change with old institutional theory: A case study of a Chinese SOE, April 2013-August 2013

1. Introduction and purpose
While the new trend in international academics is passionate about advocating beyond budgeting approach, in one of the most powerful emerging giant, China, predominant corporations are still in the early phase of exploring the thorough implementation of traditional budgets. It is because of this lag perhaps, that little attention has been directed to the development of financial planning system in China from global researchers. What’s more, little credible literature could be found on explaining this progressing process, even from Chinese local researchers.

To fill in the gap, this project tries to present how the practices of and changes in financial planning system adopted by a Chinese SOE reflect those debates over the usefulness of traditional budgets, which ultimately lead to those so-called advanced budgeting approaches. In particular, this dissertation will address following two aspects: 1) How does the company evaluate its own financial planning system? Are benefits and shortcomings identified by the company consistent with relevant literature? 2) What changes have been made or planned to be made towards those shortcomings and other factors? Evaluate the change process using the institutional framework introduced by Burns and Scapens.

2. Literature review 3.1. Development and trend in research of budgets
To understand the financial planning system in the sample company, this dissertation will begin with a review of relevant literature on the development and trend of budget research. This section will start from the emergence and benefits of traditional budgeting, and then move on to the criticism of it, and finally raise alternative ways tackling the critiques.

Being one of the most prevailing instruments of exercising planning and controlling in organisation, budgeting’s origin could be traced back to government financial controls over expenditure, and gradually evolved into a mechanism of planning and controlling when blended with the idea of standard costing (Danture Wickramasinghe, 2007).

Some well recognized classical functions of traditional budgeting system fall within the framework of agency theory. One example would be affirming its key role in resource allocation, authority delegation and performance evaluation (Kilfoyle and Richardson, 2011). Horngren et al. (2010) also notes that the budget facilitates coordination and communication among sub-units across the entity, and ultimately provides incentives to both managers and employees. Moreover, budget plays a crucial role in people’s working experiences, specifically dealing with role ambiguity, even without the existence of formal accountability, financial inducements and involvement in budget preparation (Marginson and Ogden, 2005).

In addition to those functionalist merits within corporate at individual and organizational level, another set of research tries to praise budgets using institutional philosophy. One project claims that in UK devolved bodies, budget is acting more like a representation of political aspirations and objectives, a legitimacy tool of their behaviors, resulting in trust placing into governance by quantification (Lapsley et al., 2007). Although not worked as expected, an Australian university is also observed to introduce a new budget system with the initial intention of gaining legitimacy externally from funding agency as well as internally from its staff (Moll and Hoque, 2011).

Opposite to the literature promoting how corporation would benefit from budgets, some other voices are calling for cooling down from the crush for budgets and questioning the usefulness of budgeting system in organisation. Hansen et al. (2003) summaries those typically criticized drawbacks of budgeting into three categories: budget requires too much time to prepare that counters any benefits it brings, also reducing the usefulness of itself as those assumptions used become outdated; being a top-down approach, budgeting encourages centralization of decision making and cost reduction while discourages innovative and value-adding activities; budgetary controls concentrate on responsibility and follow a command-and-control process are incompatible with new trend in organization structure such as supply chains. What’s more, one famous opponent of traditional budgeting, Jensen (2002) mentions that ‘corporate budgeting is a joke’ which will inevitably lead to managers deflating targets while inflating performance, prospering a culture of cheating and gaming.

Additionally, doubts of effectiveness of budgeting system also involve the discussion of budgetary slack. On the one hand, participative budgeting is supposed to result in better informed budgets and better motivated performance. On the other hand, however, subordinates build slack into the budget by deliberately understate their productive capability through negotiation, causing inefficiency in resource allocation. The amount of slack is tested as positively correlated with the degree of subordinates’ risk-aversion, and the holding of private information from superiors (Young, 1985). While deemed as dysfunctional empirically, theoretical literature reports that the existence of budgetary slack may bring some helpful effects. The negative interaction between budgetary slack creation and short-sighted management behaviour found by Van der Stede (2000) implies that allowing the build-up of slack could leave managers space to focus on relatively long-term strategy such as innovation.

Facing concerns and complaints of all those problematic consequences, suggestions of coping with them generally can be divided into two streams – improve budget or desert it. The former proposal makes modifications to traditional budgets, i.e. considers alternative forms of budgeting. And the latter gets rid the whole budgetary system thoroughly and install other tools such as balanced scorecard to regain functions previously supported by budgets (Hansen et al., 2003).

Libby and Lindsay (2010) surveyed senior managers from some North-American medium to large sized organizations and found that, managers continue to trust budgets but with reservation and were prepared to adapt them to perform better overall control, and only limited respondents expressed interests in abandoning the practice.

One representative way of improving classic budgeting is the Activity-Based Budgeting approach (ABB-approach). The core evolution behind amendment can be simply summarized as switching from facilitated by standard costing to activity-based costing. Hansen et al. (2003) generalized some advantages of this alteration. The first and key one is that adopting a more sophisticated managerial system, i.e. Activity-based management system, could present more truthful image of reality, thus resulting in more accurate and efficient resource allocation to support corporate goals. In addition, the new budget is more understandable to lower level managers and employees, especially floor workers, than that contained only financial figures, leading to less reluctant to budgetary controls and better fulfillment of budgeted objectives. Although appeared as a persuasive scientific managerial tool, all limitations and shortcomings of activity-based costing, like the difficulty in identification of appropriate cost driver, would be passed on to it, leaving the usefulness of ABB-approach remains in question (Hansen et al., 2003).

Contrasted to the moderate solution above, Hope and Fraser (2003b) advocates strongly a radical sentiment of abolishing budgeting, claiming that no matter how many cutting-edge techniques a corporate adopts, it could never create the desired self-motivated workforce as long as budget chairs planning process. They perceive beyond budgeting as the ultimately sole answer to those modern companies trying to respond quicker to market shifts, decentralize managerial hierarchy and eliminate gaming behavior and ‘spend it or lose it’ philosophy caused by rigid budgetary control. After documenting a real-world corporation’s attempts to turn beyond budgeting, Østergren and Stensaker (2011) concluded that in a successful implementation of beyond budgeting, more strategic and flexible targets as well values have to emerge.

It is noticeable, however, that the promising outlook of beyond budgeting centers on the effect of boosting performance evaluation(Hope and Fraser, 2003a, Hansen et al., 2003), compared to ABB-approach that reinforces mainly operation planning(Hansen, 2011), at least indicated so in most literature. As researchers are making effort to substantiate their advances relative to traditional budgets with field work(Moll and Hoque, 2011, Hansen, 2011, Østergren and Stensaker, 2011), it is optimal to view them as providing a precious opportunity towards better overall management control in this more competitive and dynamic than ever environment at the moment.(Hope and Fraser, 2003a)

3.2. Management accounting change in the light of old institutional theory (OIT)
To achieve a better understanding of the changes in financial planning system of the sample company as an on-going process rather than a outcome, the author resorts to the mainstream theoretical framework in this area, the old institutionalism.

It is common sense that reality always differs from theory, so it is with management accounting world. On the one hand, companies are observed to follow decision-making models deviating from the one developed from neoclassical economic theories and presented as optimal solution by mainstream textbook. From On the other one hand, conventional wisdom, or functionalism, offers little insight into how particular techniques come to be used or resisted in organizations (Burns and Scapens, 2000). This gap between management accounting theory and practice (Scapens, 1994), is where institutionalism energies.

To conceptualize management accounting change, Burns and Scapens (2000) developed a framework by incorporating two fundamental concepts of old institutional economics, routines and habits, and generalize the change process as: encoding, enacting, reproduction and institutionalization. As demonstrated by Figure 1, institutional principles are first encoded into rules and routines (arrow a), which are then enacted by actors (arrow b). Subsequently, repetitive behavior reproduces those routines (arrow c) and finally gets them institutionalized (arrow d).

Repeated actions construct institutions through cumulative impacts over time, whereas institutions shape action as soon as established, but the crucial point is that they are continuously changing and changing each other. This dynamic pattern of interaction between the institutional realm and the realm of action, provide the framework for the case study followed.
Figure 1 The process of institutionalization Source:Burns and Scapens (2000) 3. Methods and methodology of research
This paper is substantiated with a field-based case study. The sample company is selected because of two reasons: first of all, the access to the company was granted due to personal relationship; then the company is considered to be an appropriate study object as SOE is the typical type of company in Chinese stock market, so that this company could be regarded as representative to some extent.

To get full understanding of the company’s financial planning system, both techniques of documentary analysis and interviews are adopted. The interviewees are to be recruited using snowball method starting from the Chief Financial Officer, involving mainly those professionals participated in the change of financial planning system. And doubts arise in later stage of analysis will be communicated and hopefully answered via telephone and e-mail.

4. Ethical issues
The main ethical issue in this project is the confidentiality of data collected from within the company. Procedures would differ due to different sources of information, namely documents and interviews. For the former type, any documents and files accessed that are not publicly available will be disclosed only with permission from the company. For the latter, all interviewees will be anonymous to protect their personal information.

5. Project plan
Affected by the approaching final exams, most of the field work has to wait until June. So the timetable for this project is illustrated by the following Gantt chart:

Reference
Bruns, J. , Scapens, R. W. 2000, Conceptualizing management accounting change: an institutional framework, Management Accounting Research, 11, 3-25.
Danture Wickramasinghe, C. A. 2007, Management Accounting Change.
Hansen, S. C. 2011, A theoretical analysis of the impact of adopting rolling budgets, activity-based budgeting and beyond budgeting, European Accounting Review, 20, 289-319.
Hansen, S. C., Otley, D. T. & Van der Stede, W. A. 2003, Practice developments in budgeting: an overview and research perspective, Journal of management accounting research, 15, 95-116.
Hope, J. & Fraser, R. 2003a, Beyond budgeting: how managers can break free from the annual performance trap, Harvard Business School Press.
Hope, J. & Fraser, R. 2003b, Who needs budgets?, Harvard business review, 81, 108.
Horngren, C. T., Foster, G., Datar, S. M., Rajan, M., Ittner, C. & Baldwin, A. A. 2010, Cost accounting: a managerial emphasis, Issues in Accounting Education, 25, 789-790.
Jensen, M. 2002, Corporate budgeting is broken, let's fix it.
Kilfoyle, E. & Richardson, A. J. 2011, Agency and structure in budgeting: Thesis, antithesis and synthesis, Critical Perspectives on Accounting, 22, 183-199.
Lapsley, I., Ezzamel, M., Hyndman, N., Johnsen, A., Pallot, J., Lapsley, I., Ezzamel, M., Hyndman, N., Johnsen, A. & Pallot, J. 2007, Experiencing Institutionalization: The Development of New Budgets in the UK Devolved Bodies, Accounting, Auditing and Accountability, 20, 11-40.
Libby, T. & Lindsay, R. M. 2010, Beyond budgeting or budgeting reconsidered? A survey of North-American budgeting practice, Management Accounting Research, 21, 56-75.
Marginson, D. & Ogden, S. 2005, Coping with ambiguity through the budget: the positive effects of budgetary targets on managers' budgeting behaviours, Accounting, Organizations and Society, 30, 435-456.
Moll, J. & Hoque, Z. 2011, Budgeting for legitimacy: The case of an Australian university, Accounting, Organizations and Society, 36, 86-101.
Østergren, K. & Stensaker, I. 2011, Management control without budgets: a field study of ‘beyond budgeting’in practice, European Accounting Review, 20, 149-181.
Scapens, R. W. 1994, Never mind the gap: towards an institutional perspective on management accounting practice, Management Accounting Research, 5, 301-321.
Van der Stede, W. A. 2000, The relationship between two consequences of budgetary controls: budgetary slack creation and managerial short-term orientation, Accounting, Organizations and Society, 25, 609-622.
Young, S. M. 1985, Participative Budgeting: The Effects of Risk Aversion and Asymmetric Information on Budgetary Slack, Journal of Accounting Research, 23, 829-842.

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[ 1 ]. Chinese companies and researchers are commonly discussing the implementation of ‘comprehensive budget’ or ‘master budget’, which in essence means traditional budgeting. To differentiate this Chinese path of moving from no formal, all-round budget system towards establishing one, this paper uses ‘financial planning system’ referring to budget system in Chinese corporations.