Accounting and Budgeting Systems: The Issue of Congruency

Lawrence A. Gordon and Fred E. Sellers

The importance of designing an accounting system that is congruent with an organization's budgeting system has been noted in the literature. Unfortunately, in many government organizations it is common to find incompatible budgeting and accounting systems. The purpose of this study is to investigate whether gearing the accounting information system to a zero-base budgeting system increases the perceived usefulness of the budgeting process. This issue is examined under conditions of both scarce and abundant resources. Based on an empirical study, it is shown that the usefulness of a budgeting system to budget recipients may indeed be dependent on the accounting information system, conditioned on the availability of resources. Given the relationship between budgeting and public policy, implications of the study for the public policy making process are discussed. Introduction Public policy is often discussed in terms of government's actions and the process leading up to those actions (e.g., Dye 1972; Gordon and Schick 1979). Actions on the part of government require a commitment of resources, which is explicitly planned for in a document known as a budget. In fact, Dye (1972, p. 205) argues, "The budget is the single most important policy statement of any government." Wildavsky (1974) and Capron (1970), among others, agree that the budget and the budgeting process are at the core of the public policy-making process. The link between public policy and budgeting has its counterpart in the private sector. Corporate executives have for some time realized that business planning (policy) is inextricably intertwined with budgeting. Budget information is in large part derived from accounting-related information. Hence, a properly designed accounting system would appear to be a necessary, although not sufficient, condition to a finely tuned budgeting system. That is, a prima facie case exists for accounting and budgeting to be compatible. Unfortunately, in many government (public) organizations it is common to find incompatible budgeting and accounting systems. 1 Budgeting personnel in the government often have a political science or economics background with little or no training in accounting. At the state level, a recent study by the National Council on Government Accounting (NCGA) noted, with apparent approval, this separation between accounting and budgeting systems (Pohlman and Van Daniker 1984). The distinction between accounting and budgeting systems also exists at the federal government level. In fact, the U.S. General Accounting Office (GAO) has repeatedly argued that the federal government's accounting and budgeting systems need to become more compatible than is currently the case. The relationship between federal accounting and budgeting systems was a fundamental issue raised by the GAO in its ZBB report (GAO 1979). Among the report's recommendations was one "requiring agencies to promptly design their accounting systems to

provide data necessary to support the adopted zero-base budgeting structure" (GAO 1979, p. 49). The report made many other references to the problem of tailoring information to what was then a newly adopted ZBB process. One of the major problems related to the federal government's experience with ZBB, according to the GAO, was "useless data and duplication of effort due to unresponsive information systems" (GAO 1979, p. 47). Although the importance of designing an accounting system that is congruent with an organization's budgeting system has been noted in the literature, little research has been conducted to examine the need directly. Hence, the primary purpose of this study is to extend the existing literature by filling this research void. Specifically, we investigate whether gearing the accounting information system to a zero-base budgeting system increases the usefulness of the budgeting process. This issue will be examined under conditions of both scarce and abundant resources, since resource availability has been demonstrated to be an important mediating variable in budgeting environments (e.g., Schick 1980; Rubin 1977). The perspective taken will be that of a budget recipient, albeit a recipient who participates in the process. Several factors led us to study the accounting system/budgeting system compatibility issue in the context of ZBB. First, it is well documented that many large and small organizations (both government and nongovernment) adopted a ZBB system in the past two decades (e.g., GAO 1979). Second, several studies have pointed out that the introduction of ZBB places different requirements on the accounting system (e.g. Gordon, Haka, and Schick 1984). Third, the fact that many organizations, and in particular the federal government, did not explicitly adjust their accounting system to be compatible with their newly adopted ZBB system is also well documented, as cited above. The remainder of this article is divided as follows. In the next section, we develop hypotheses concerning the relationship between accounting information requirements and the perceived usefulness of zero-base budgeting, under conditions of both scarce and abundant resources. The methodology used in the empirical study is described in the third section. The results and implications of the study are presented in the fourth section. Concluding comments are given in the final section. Accounting and Budgeting Systems Several authors have differentiated between economic man and admin&trative man (e.g., Simon 1957; March and Simon 1958; and Cyert and March 1963). 2 Economic man makes decisions based on the rational allocation of scarce resources, where the term rational is used to mean optimizing. That is, "the rational man of economics is a maximizer, who will settle for nothing less than the best" (Simon 1978, p. 2). 3 He considers production functions and demand schedules for the organization's products and/or services in order to decide on the optimal level of activity. His knowledge of the relevant parameters is presumably perfect, as are his normative models underlying the decision making process. Administrative man makes decisions in real-world organizations. When he undertakes to analyze alternatives he realizes that there are more potential choices than he has the capacity to discover, much less to analyze. The company's production functions are not clearly specified, nor are the demand functions. Although he is rational in the general

sense of being prudent or sensible, and he knows about economic man and his normative decision models, administrative man has no illusions of finding an optimal solution (e.g., profit maximization). Instead, he operates under conditions of bounded rationality, avoiding uncertainty wherever possible, and engaging in search and satisficing (Simon 1979). Once an alternative is found that meets the decision maker's aspiration level, it is selected. Organizational procedures, channels of communication, coalitions, and bargaining will help determine the way decisions are made (Cyert and March 1963). Procedural rationality (i.e., rationality in terms of the process used to select actions) is at least as important as substantive rationality (i.e., rationality in terms of the results of actions) for this type of decision maker (Simon 1978). The budgeting process can be expected to be a mixture of economic and administrative man's approach to decision making. Further, the political processes underlying the organization, including the multiplicity of goals and interests, will be part of the budgeting process. 4 Emphasizing the pluralistic nature of decision making, participants will use political power and influence in pursuing their goals. What kinds of budgeting decisions can be expected to be made under these conditions? A likely answer to that question lies in the concept of incrementalism. According to Schultze (1968, p. 52), incrementalism stresses process rather than substantive criteria. This stress on process is the result of a need to avoid specification of goals, objectives, or programs, since to attempt such specifications exposes the organization to greatly increased conflict among interest groups and the possibility of decision-making paralysis. Under incrementalism, organizations avoid the difficult, if not impossible, task of attempting to aggregate individual preferences into group preferences (Arrow 1963). Year-to year budgetary changes in government organizations have been described as incremental (e.g., Smithies 1955; Fenno 1966; Crecine 1967; Sharkansky 1970; Wanat 1974; Wildavsky 1974). Incremental budgeting consists of starting off with a base portion (usually derived from the previous period's core programs) and adding an increment or subtracting a decrement. In essence, existing programs are assumed to have a special claim on future funding when compared to proposed new programs. Hence, an incremental budgeting process is a piecemeal approach to resource allocations. In analyzing the process of incremental budgeting in the federal government, Wanat (1974, p. 1225) classified budget increases as being either mandatory or programmatic. Mandatory increases were defined as those necessary to keep services at previous levels, that is, they are the increases caused by inflation and other changes in unit costs. Programmatic increases were defined as those necessary to inaugurate new programs. Wanat found that mandatory increases were usually granted. Therefore, he concluded that mandatory budget increases are the explanation for incrementalism in federal budgeting. Further research, he argued, must focus on the programmatic part of the budget. In recent years, the technique of zero-base budgeting (ZBB) has been advanced as an alternative to the incremental budgeting process. Rather than basing this year's budget on last year's, ZBB calls for every project to be examined as though it were being proposed for the first time. Project managers theoretically are required to justify every dollar being requested from the ground up, with last year's spending not acceptable as a

justification for next year's allocation. Objective analysis of potential output levels, methods of achieving them, and estimation of the cost of those methods are required. The ZBB method received much attention after Pyhrr (1970) wrote of its success at Texas Instruments, although its roots go back to at least 1924 (Wildavsky and Hamman 1965). One interested party was then-Governor Jimmy Carter of Georgia, who hired Pyhrr to set up a ZBB system for the state government. Later, Pyhrr was hired to help oversee the task of putting the federal government on a zero-base budgeting system during President Carter's Administration. Further, several state governments, hundreds of private companies, and uncounted municipalities and other levels of governmental units have used ZBB in one form or another. Several universities, hospitals, and libraries also have used ZBB. Many organizations in the United States, as well as in other countries, are still using some variation of ZBB. In theory, the ZBB process consists of five basic steps (Gordon, Haka, and Schick 1984). The first is the determination of decision units for which a separate budget is prepared. Next, a set of decision packages is prepared for each discrete activity within a decision unit. Based on a cost-benefit type analysis, decision packages are ranked at each organizational level and forwarded to the next higher level. A consolidation of the rankings of decision packages occurs at each higher organizational level until final priorities are set at the top level. The ranking and consolidation processes represent the third and fourth steps, followed by the fifth step, which is the budget allocations. Of course, in the federal government, the president's budget must then go to Congress for approval. Although the theory underlying ZBB is essentially founded on a rational economic model of decision making, in practice ZBB is applied in a world dominated by administrative/political decision makers for the reasons noted earlier. Not surprisingly, therefore, assessments of zero-base budgeting systems in various organizations have ranged from highly favorable to highly unfavorable. For example, commentary on the federal government experience with ZBB ranges from lukewarm to pessimistic. Sherlekar and Dean (1980) perceived it as effective in the ranking of priorities, inducing participation in management decision making and in conducting tradeoffs among programs. However, they argued that it consumed excessive time and effort. Herzlinger was much more critical in her analysis. One of the problems with the federal government's use of ZBB, she claimed, was that "decision unit selection was handled as an accounting problem rather than as a budgeting exercise...The problem could have been overcome by assigning the task of decision unit selection to the manager and budgeteers who could be using the data" (Herzlinger 1980, p. 206). Whether we agree with Herzlinger's analysis or not, it is interesting to note her separation of the accounting issues from the budgeting exercise. The GAO (1979) conducted the most comprehensive study of the federal government's experience with ZBB. The GAO's (1979) conclusions, based on an empirical study that included federal government agencies, private corpora- tions, state governments, and local governments, are captured in the following:
We believe that ZBB can work and should be integrated into the Federal budget process. This conclusion reflects our belief that ZBB concepts are valid but that they have been overshadowed by the mechanical process. These concepts-- alternative funding levels,

evaluating program effectiveness, and determining managers' program priorities--were successfully incorporated into some organizations' budget systems. They did not make the mistake of considering ZBB little more than a process. They looked at themselves and they looked at the concepts,