Budgeting in Times of Economic Crisis

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Budgeting in Times of Economic Crisis
Article in Contemporary Accounting Research · December 2015

DOI: 10.1111/1911-3846.12222
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Budgeting in Times of Economic Crisis*
SEBASTIAN D. BECKER, HEC Paris
MATTHIAS D. MAHLENDORF, Frankfurt School of Finance and Management
UTZ SCHÄFFER, WHU – Otto Beisheim School of Management
MARIO THATEN, WHU – Otto Beisheim School of Management
Abstract
This paper examines how corporate reliance on budgets is affected by major changes in the economic environment.
We combine survey and archival data from the economic crisis that began in 2008. The results indicate that, as a
result of the economic crisis, budgeting became more important for planning and resource allocation but less
important for performance evaluation. Additional evidence from interviews and data gathered in a focus group
further illustrate these results and show the changes organizations have introduced to respond to the economic
crisis. Taken together, and contrary to more general conclusions from the literature such as an overall increase or
decrease in the importance of budgeting, we find that companies emphasize certain budgeting functions over others
during economic crises.
Keywords
Budgeting, budgeting functions, economic crisis, crisis management
* Accepted by Theresa Libby. This paper has greatly benefitted from the comments of Theresa Libby
(Consulting Editor) and two anonymous reviewers. We would also like to thank Margaret Abernethy, Rolf
Brühl, Fabio Frezatti, Frank Hartmann, Christie Hayne, Lili-Anne Kihn, Teemu Malmi, Michal Matějka,
Carla Mendoza, Steve Salterio, Samuel Sponem, Mike Shields, Wim van der Stede, and Jürgen Weber for
their comments on earlier versions of the manuscript. In addition, we thank the participants at the 33rd
European Accounting Association Annual Conference Meeting in Istanbul (2010) and the 10th Conference
on Interdisciplinary Research in Cost, Profitability and Performance Management in Manufacturing, Logistics
and Service in Ghent (2010) for their helpful comments and suggestions.
Electronic copy available at: http://ssrn.com/abstract=2605359

1. Introduction
Although explicitly called for (Hopwood, 2009; Van der Stede, 2011; Abernethy & Mundy, 2014), management
accounting research has thus far given “little or no guidance on the modes of organizational response to economic
crises” (Hopwood, 2009, 800; cf. also Cameron, Whetten, & Kim, 1987). The magnitude and global dimension of
1
the economic crisis that began in 2008 has provided researchers with a unique and propitious opportunity to
investigate the organizational responses to an economic crisis. This paper draws on data from the 2008 crisis and
investigates the research question: How is the importance of different functions of budgeting affected by an
economic crisis? This question is important, because some research suggests that control systems such as budgets
2
become more important in economic crises (e.g., Czarniawska-Joerges, 1988; Colignon & Covaleski, 1988),
while other evidence claims that budgeting becomes less important (e.g., Collins, Holzmann, & Mendoza, 1997)
or that companies survive crises better without budgeting (e.g., Lindsay & Libby, 2007). We revisit this debate by
analyzing changes in the importance of three different budgeting macro-functions during the 2008 economic crisis:
planning, resource allocation, and performance evaluation. This offers a more differentiated perspective than is
found in extant research, which has tended to make aggregated claims about budgeting in general and about
changes in the importance of budgeting in particular. Our analysis investigates whether particular functions of
budgeting become more important while others become less important as a result of an economic crisis. Data from
three surveys cross-validated with publicly available data from the Amadeus database suggest budgeting became
more important for planning and resource allocation and less important for performance evaluation functions in
companies affected more strongly by the 2008 economic crisis. A focus group and eleven interviews with
respondents from this panel refine these findings by illustrating more specifically the changes made to respond to
the economic crisis.
Our paper contributes to the literature in at least three respects: First, we look at the effects of the 2008
economic crisis on budgeting, a setting with both a significant downward shift and an increased economic
uncertainty compared to a pre-crisis situation. Most literature has focused on idiosyncratic, company-specific
crises or has focused on perceived environmental uncertainty (PEU), covering areas such as competition or
technological change that are not necessarily related to economic crises. Second, we capture budgeting in a
1 We use the term “2008 economic crisis” for the crisis that began in 2008 and impacted the economy over the course of
several years.
2 Our paper investigates the importance of different budgeting functions (similar to Hansen & Van der Stede, 2004). The
previous literature uses different notions that we interpret to be broadly associated with greater importance of budgeting
in economic crises (e.g., the need to tighten control (Czarniawska & Hedberg, 1985) or to centralize decision making).
Contrary tendencies are associated with lower importance.
2

disaggregated way by measuring micro-functions at a fine-grained level which we subsequently aggregate to
macro-functions (i.e., more general rationales for using budgeting). Thereby, we provide a structured catalog of
budgeting micro- and macro-functions that might be fruitful for future research on budgeting. Our findings about
the opposing impact of the economic crisis on these functions provide an argument against treating budgeting as
a unitary concept in management control research. Third, by combining three surveys, archival panel data, and
qualitative data taken from a focus group and interviews, we also provide evidence about the specific changes
made to budgeting practices in organizations as a response to an economic crisis. In contrast, previous studies on
budgeting functions have usually consisted of single case studies or used a cross-sectional survey.
The literature usually defines crises as a substantial threat to an organization (Ury & Smoke, 1991)
characterized by inadequate resources to cope with the threat (Starbuck & Hedberg, 1977; Khandwalla, 1978),
little time for response (Hermann, 1963), a high degree of uncertainty (Rosenthal, Charles, & ‘t Hart, 1989;
3
Rosenthal & ’t Hart, 1991), or an ill-structured situation (Turner, 1976; see also Mishra, 1996; Pearson & Clair,
1998). Economic crises, such as the one studied in this paper, have further characteristics that should be accounted
for. They affect entire economies and are not idiosyncratic to an organization, making them distinct from crises
resulting from either internal problems, such as succession problems, mismanagement, and intra-organizational
4
conflicts, or external problems, such as disasters or accidents (Khandwalla, 1978; Grewal & Tansuhaj, 2001).
Thus, by studying the impact of an economy-wide crisis, our focus is different from that of the majority of studies
in the field of crisis management (e.g., Pearson & Mitroff, 1993; Pearson & Clair, 1998; Boin, 2008) which
5
investigate the impact of internal or external idiosyncratic crises, looking at only one company at a time. This is
crucial, since in the case of a global economic crisis, several environmental characteristics are simultaneously
more hostile for a wider population of companies (Sengupta & Faccio, 2011). Unlike idiosyncratic crises, an
economic crisis has wide-reaching consequences such as a generally reduced availability of capital and an overall
6
reduction in demand.
3 In this paper, we define uncertainty as the inability to predict certain components of an organization’s environment because
of a lack of information (see e.g., Milliken, 1987).
4 The literature often distinguishes crisis by cause, such as by specifying whether it is internal or external (e.g., Khandwalla,
1978; Mitroff, Pauchant, & Shrivastava, 1988); we would make such a distinction for idiosyncratic crises but not for
economic crises, which are always external.
5 While there are clear differences between economic crises and idiosyncratic crises, it is an empirical question whether the
findings of the crisis management literature regarding the responses of organizations to idiosyncratic threats are similar to
those in economic crises.
6 There is also literature that studies the impact of uncertainty on the use of MCS, such as the “reliance on accounting
performance measures” (RAPM) literature, which focuses predominantly on the function of budgets in performance
evaluation (Brownell & Dunk, 1991; Hartmann, 2000). Given that this literature typically studies differences in uncertainty
in the cross-section of companies or departments within companies in non-crisis conditions, it differs conceptually from
3

Extant research shows that budgeting can play an essential role in weathering economic crises, because
“the organization’s accounting control system (including budgeting processes) facilitates adaptation to these
externalities by mediating between external threats and opportunities, and the organizational functioning” (Collins,
et al., 1997, 675; along similar lines, Colignon & Covaleski, 1988, 576). When it comes to the effect of economic
crises on budgeting, the literature presents a limited and contradictory body of research. On the one hand, some
studies state that the higher unpredictability that exists in economic crises (e.g., Plaschke, Roghé, & Günther,
2011) renders budgets inadequate because budgeted numbers are fixed and do not allow organizations to be
responsive (Arwidi & Samuelson, 1993 for the Swedish economic crisis). Also Collins et al. (1997), in their survey
of the relationship between strategy and budgetary usage in political and economic crisis situations in Latin
America, find a reduced importance of budget use, noting that in general a “high crisis reduces the usefulness of
the budgetary system” (682; in a similar vein Kattan, Pike, & Tayles, 2007 for Palestine or Shih & Yong, 2001,
who find that companies facing relatively greater uncertainty during the Asian economic crisis have looser
budgetary control). Taken to the extreme, the views presented by these studies would suggest ignoring budgets in
crisis situations (Hopwood, 2009; Van der Stede, 2011, referring to the 2008 economic crisis) or even abandoning
budgeting entirely, as advocated by proponents of Beyond Budgeting (Hope & Fraser, 2003). One example of this
approach is the Swedish company Ahlsell which is said to have abandoned budgets in the wake of the economic
recession in the 1990s (Groot, 2007). Czarniawska and Hedberg (1985) offer a rationale for making such changes,
arguing that “loosening control [i.e., decreasing the importance of mechanisms such as budgeting] in the face of
decline, may produce more flexibility and therefore constitute a […] functional reaction to decline” (19).
On the other hand, opposing evidence suggests that budgeting might play a more crucial role when an
organization is responding to an economic crisis. Samuelson (1986), also looking at the Swedish economic crisis,
reports that budgeting became more important. Also drawing on Swedish data, Czarniawska-Joerges (1988)
presents the case of a company that had previously only loosely coordinated its different business units but because
of the economic crisis switched to using central guidelines, goals set by headquarters, and formalized planning
procedures. She thereby confirms studies that find theoretical and empirical evidence suggesting that the “almost
reflexive response of management to a decline situation is one of tightening control” (ibid., 417). A longitudinal
study by Colignon and Covaleski (1988) presents findings about a manufacturer during the economic recession in
our focus on the simultaneous and increased uncertainty in dimensions that are specific to economy-wide crises (Skoufias,
2003; for a detailed description of these dimensions, see Section 3). Contrary to the phenomena studied by the two bodies
of literature just mentioned, we define economic crises through a combination of what Vaaler and McNamara (2004),
describe as a “notably unfavorable shift [or shock] in the external environment” (690) together with a greater uncertainty
compared to pre-crisis conditions.
4
the US in the early 1980s. When the crisis struck, the CFO centralized planning and resource allocation using the
budgeting process and made the executive committee responsible for it. The company also introduced budgetary
targets to serve as financial standards of performance and based compensation on their quarterly attainment. This
corresponds with Churchill’s (1984) normative statement that “business unit managers must be given explicit
performance objectives because of economic crises […]. In these situations, the knowledge necessary for good
budget preparation usually resides at a managerial level one or two steps above that of unit managers” (151).
Becker (2014) gives an account of a European bank which, as a result of the 2008 economic crisis, reintroduced
budgetary targets for performance evaluation and resource allocation even though it had abandoned them for these
purposes several years earlier. Organizational participants observed that, because budgets had not been used for
resource allocation, empowered managers “overspen[t] in areas previously controlled by budgets” (40).
We believe that the diversity in findings can potentially be explained by the fact that the multiple functions
of budgeting are only implied and not clearly differentiated in the studies we looked at (cf. Sponem & Lambert,
2010). Therefore, this study begins by disentangling the multidimensional and complex phenomenon of budgeting
(Arwidi & Samuelson, 1993; Otley, 1999). In line with the emerging literature on budgeting functions (e.g.,
Hansen & Van der Stede, 2004; Sivabalan, Booth, Malmi, & Brown, 2009), a central argument of our paper is that
disaggregating budgeting into different functions can highlight mechanisms that are obscured when budgeting is
treated in an aggregate manner.
2. Development of Hypotheses
In the following, we hypothesize the effects of the economic crisis on the importance of three budgeting macro-
7
functions (1) planning, (2) resource allocation, and (3) performance evaluation.
7 This study focuses on these three operational purposes. Note that budgeting can have many other functions such as those
associated with strategy formation (Marginson, 2002), organizational learning (Barrett & Fraser, 1977), legitimization
(Bescos, Cauvin, Langevin, & Mendoza, 2004), and ritual or symbolic value (Hansen & Van der Stede, 2004; Czarniawska-
Joerges, 1988). In general, budgeting can be used for operational (i.e., to implement a given strategy) and strategic functions
(i.e., to collect information necessary for strategy making). While idiosyncratic crises may require strategic change, we
expect that this is not necessarily the case for economic crises according to the above definition, where all companies in an
economy, irrespective of their individual strategy, are affected. Rather, organizations would perceive economic crises as
“transient environmental pressures […] [which] implies that no major strategic reorientations are called for” (Starbuck et
al., 1978, 117). Researchers further claim that this perception leads them to “short-term responses to immediate crises [and
to] supplanting long-term planning” (Cameron, et al., 1987, 127; see also D'Aveni & MacMillan, 1990 and Ocasio, 1995).
Applying these ideas to the discussion of budgeting functions, we assume that it is predominantly operational and not
strategic functions whose importance changes in response to an economic crisis. Therefore, in this study we focus on
operational budgeting functions (Hansen, Otley, & Van der Stede, 2003; Hansen & van der Stede, 2004; Sivabalan et al.,
2009) and adopt a perspective that sees budgeting more as a tool for strategy implementation (e.g., Chenhall & Langfield-
Smith, 1998; Frow, Marginson, & Ogden, 2010; Merchant & Van der Stede, 2012) than for strategy formation (e.g.,
Simons, 1995).
5
We hypothesize that an economic crisis leads to an increase in the importance of the planning function of
budgets. The global reduction in demand generally worsens companies’ prospects and reduces their options for
effecting sales. Given that the risk of failure is higher and companies cannot afford to make mistakes, organizations
try to reduce the impact of an economic crisis and the delay in responding to it. We predict that this results in an
increased need for planning and precision in its execution in order to reduce slack in the organization. The shock
element of economic crises will lead to increased pressure on organizational decision makers to ensure the
organization does not deviate from its goals. We predict that this will lead organizations to reduce uncertainty by
engaging in more planning (Starbuck, Greve, & Hedberg, 1978; Khandwalla, 1978; Harris & Davies, 1981).
In addition, the increased uncertainty over the magnitude of demand reduction, the development of
exchange rates, and the defaulting of customers or suppliers will result in an increased sensitivity to the crisis
environment (Edwards & Harris, 1979) and an increased need for information given the unclear future (Vaaler &
McNamara, 2004; Hopwood, 2009). We predict that as a consequence companies will increase their use of
budgeting for planning in order to investigate and forecast crisis-related environmental uncertainties and discover
their effects on sales, production, stock levels, and the profit and liquidity situation. This investigation will be
carried out with the goal of making a more informed response to the crisis and to communicate and coordinate the
actions that are needed to better achieve their plans (Khandwalla, 1978; Edwards & Harris, 1979; Jauch & Kraft,
1986).
Previous research has shown that when situations are new and organizational decision makers have a
limited understanding of their implications, organizations regard planning as a mechanism for decreasing
uncertainty and are therefore likely to emphasize it (Billings, Milburn, & Schaalman, 1980). We further predict
that, as a result, companies increase the frequency with which they update their plans, more frequently reassess
the assumptions they are based on, or look into different scenarios in order to ex-ante model the outcomes of
different but likely states of the environment for the organization in order to improve reaction times when these
occur (Kami, 1976; Palermo & Van der Stede, 2011).
Our first hypothesis is therefore:
H1: Companies more highly impacted by an economic crisis place increasing importance on the planning
function of budgeting relative to those that are less highly impacted.
We also predict an increase in the importance companies place on the resource allocation function of
budgeting during economic crises. During these periods, the drop in demand leads to reduced revenues for many
6
companies, which results in fewer possibilities for financing operations or investments out of their operating cash
flow. This means that companies have to either tap into their cash savings, sell assets, or borrow money (Campello,
Graham, & Harvey, 2010) to obtain resources to fund their operations. In the 2007-2008 credit and financial crisis
and the ensuing economic crisis, however, several financial institutions declared bankruptcy, and banks in general
reduced the amount of loans they granted, leading to a highly reduced availability of capital for organizations
(Allen & Carletti, 2010). As a consequence, ensuring the productive use of resources and managing liquidity has
become a vital issue for organizations threatened by the crisis (Hopwood, 2009), since it is likely that companies
in an economic crisis will experience severe liquidity problems and risk violating loan covenants (Colignon &
Covaleski, 1988).
In addition, previous research has found that in times of economic downturn pressures toward conserving
resources will lead executives to centralize decision making regarding resource allocation (Starbuck, et al., 1978)
and focus on efficiency to reduce resource misuse (Staw, Sandelands, & Dutton, 1981; Zona, 2012). It thus seems
reasonable for them to respond to the economic crisis by increasing the use of budgeting as a means of rationalizing
and managing resources more strictly, of understanding their cash flow requirements (Epstein & Manzoni, 2002),
and of mobilizing financial discipline (Frow, Marginson, & Ogden, 2010). Therefore, we present the following
hypothesis:
H2: Companies more highly impacted by an economic crisis place increasing importance on the resource
allocation function of budgeting relative to those that are less highly impacted.
In contrast to the two above hypotheses, we expect economic crises to negatively affect the importance
of budgeting for performance evaluation. Goal theory suggests that using budgets to evaluate subordinates’
performance based on budget attainment and as targets to motivate them requires a precondition of fairness which
would be satisfied when subordinates perceive targets to be moderately difficult and when the controllability of
potential variances is taken into account (Locke & Latham, 1990; Epstein & Manzoni, 2002). However, the shock
element of an economic crisis may hamper prospects, since in these circumstances budgetary targets often turn out
to be too ambitious compared to the actual figures achieved. In addition, any retrospective adjustment of targets
(to incorporate the shift) would make them a “rubber yardstick that cannot accurately measure performance or
evaluate management” (Churchill, 1984, p. 155; Barrett & Fraser, 1977; Haka & Krishnan, 2005). Indeed,
regarding the uncertainty element of economic crises, research has found that performance evaluation based on
budgets is already inappropriate when the conditions are uncertain in non-crisis situations, as organizations are
often incapable of setting targets at these times (McNally, 1980; Hirst, 1987; Govindarajan, 1984; Hartmann, 2000;
7
Sharma, 2002). Since the uncertainty is likely to be even higher during an economic crisis, meeting budget targets
will depend even more on uncontrollable factors than on managerial effort (Shih & Yong, 2001; Otley, 2014). An
organization that is deciding on the “right” MCS for performance evaluation in an economic crisis may therefore
choose a solution other than budgets; for example, evaluating performance subjectively or by using non-financial
performance measures (Govindarajan, 1984; Chenhall & Chapman, 2006; Abernethy & Mundy, 2014). We
therefore hypothesize that:
H3: Companies more highly impacted by an economic crisis place decreasing importance on the
performance evaluation function of budgeting relative to those that are less highly impacted.
3. Quantitative Data and Results
Survey design and sample description
We conducted our empirical analysis by combining data from three surveys with archival data. We retrieved the
archival data from Amadeus, one of the largest European databases, which contains financial information for
public and private companies across the continent (Amadeus, 2011). We collected the survey data from members
8
of the “WHU Controller Panel,” which consists of German, Austrian, and Swiss companies. The majority of panel
9
members are chief controllers (i.e., heads of corporate or business unit level controller departments), followed by
CFOs/heads of finance, and controllers/management accountants. Descriptive information about the sample is
displayed in Table 1.
-------------------------
INSERT TABLE 1 ABOUT HERE
-------------------------
The sample for this study is comprised of companies of different sizes, ranging from small and medium
sized enterprises to business units of listed companies. The medians lie between 501 and 1,000 with respect to
employees (untabulated) and between 101 and 250 million euros in sales. The sample contains companies from a
8 The initial panel population was selected through a random sampling of organizations from the Hoppenstedt database,
which contains company data for approximately 29,000 medium to large companies in the aforementioned countries. In
addition, all members of the International Controller Association, Germany’s largest management accounting association,
receive invitations to join the panel from time to time (comparable to the respondents of the study by Maas & Matějka,
2009).
9 For an explanation of the German “controlling” business function and its similarities and differences compared to the
organization of Anglo-American management accounting and control see Weber and Schäffer (2008).
8
variety of different industries, which increases the variance of the economic crisis impact. For additional
information about the crisis impact on the companies in our sample, see Table A online*.
The majority of the survey data analyzed in this paper was collected in fall 2009. In addition, we matched
crisis-related items from two earlier surveys (fall 2008 and spring 2009) to the fall 2009 data. Hence, our study
draws on three surveys that were conducted over a period of 12 months and covers the core phase of the economic
crisis that followed the credit and financial crisis of 2007–2008 (Filardo, George, Loretan, Ma, Munro, Shim,
Wooldridge, Yetman, & Haibin Zhu, 2010; Guillén & Suárez, 2010; Bezemer, 2010; Van der Stede, 2011).
Studying this time period allows us to test our hypotheses not only cross-sectionally but also with time-lags, which
10
reduces common method bias. For the first study (fall 2008), 434 of the 711 people that were on the panel at that
time participated, equaling a response rate of 61 percent. The second survey (spring 2009) yielded 361 responses
from 724 members (a 50 percent response rate), and the third survey (fall 2009) yielded 315 responses from 851
members (a 37 percent response rate). Due to missing values (Hair, Black, Babin, Anderson, & Tatham, 2006) for
the dependent variables, our sample for the main analyses is reduced to 290 observations.
We designed all three surveys to be administered online and took into account the recommendations of
Dillman (2007) to compose response-friendly questionnaires and to ensure sufficient personalization of
correspondence. We wrote the items in German and used a translation and back-translation procedure for those
items adapted from English scales to establish inter-language validity (Daniel & Reitsperger, 1991; Hartmann,
2005). We pre-tested all questionnaires on a group of academics and practitioners.
We test the non-response bias by comparing the sample against the panel population using an independent
samples t-test, which we based on control variables such as company size, industry, strategy, along with gender
and organizational position of the respondent (to the extent available). We find no significant differences between
the companies in the sample and the original population at the 5 percent level. We conduct additional tests for non-
response bias by dividing the sample into three equal groups of early, intermediate, and late respondents
(Oppenheim, 1966; Armstrong & Overton, 1977). Again, the results show no statistically significant differences
at the 5 percent level.
* Please see Table A in the supporting information section of the online article.
10 The seven Crisis items displayed in Table B in the supporting information section of the online article were also part of the
surveys conducted in fall 2008 and spring 2009. Using this data as independent variables reduces common method variance
(Podsakoff, MacKenzie, Lee, & Podsakoff, 2003) because the dependent variables (importance of budgeting) were
collected in a separate survey (fall 2009). We also calculated three additional models (untabulated) using the crisis items
collected in fall 2008 and spring 2009 separately as well as an average value over all three surveys. The results are robust
in terms of sign of the effects, the magnitude, and significance, with the exception of the relation between crisis and resource
allocation which remains positive but does not reach conventional significance levels.
9
Measure for economic crisis
Crisis: We use a self-developed 7-item construct to broadly capture economic crisis. As we outlined above, the
key features of an economic crisis are a shock element, along with uncertainty regarding different factors such as
market demand, availability of capital, and currency fluctuations. For the subsequent analysis, the mean score was
11
calculated from these 7 items. Cronbach’s alpha of this scale is 0.83, indicating good reliability (Hair, Black,
Babin, & Anderson, 2009). Table 2 shows the descriptive statistics of the 7 crisis-related items. The economic
crisis impacted the companies in our sample most severely in terms of declining orders and sales and an increase
12
in payment defaults.
-------------------------
-------------------------
We conducted two analyses to evaluate the convergent validity of our Crisis measure (see the supporting
information section of the online article). The results indicate that our survey measure is significantly correlated
with the crisis proxies from the archival data which supports the convergent validity of our perceived crisis
measure.
Measures for budgeting functions
In order to avoid under-specifying the large construct of budgeting and to understand the various functions
13
budgets can have within organizations, we conducted an extensive literature review on budgeting functions. An
emerging set of studies in this literature assumes macro-functions of budgeting, i.e., more general rationales for
11 We modeled our dependent variables as change variables. For the independent variable Crisis, the available survey data
contains items where the change is built into the question, for example: “Have orders declined…?” “Have sales
declined…?” and so forth.
12 As a robustness check, we also estimated our main model using the mean score of only the first four items which according
to the means displayed in Table 3 seem to be most relevant for capturing crisis and have been used by Janke, Mahlendorf,
and Weber (2014) to measure crisis perception. The results are substantially similar.
13 To identify the relevant sources, descriptions and definitions of budgeting functions were derived from English and German
textbooks. In addition, a full text search for the terms “budget” in combination with “function”, “use”, “role”, and “reason”
was conducted in eight major accounting journals (Accounting, Organizations and Society, Contemporary Accounting
Research, European Accounting Review, Journal of Accounting and Economics, Journal of Accounting Research, Journal
of Management Accounting Research, Management Accounting Research and The Accounting Review). Furthermore, due
to the recent growth in interest in the subject, a full text search was extended to working papers from peer-reviewed
conferences, which were retrieved through the Social Science Research Network (SSRN) and Google Scholar, and a general
internet search for practitioner publications on the subject was conducted. Finally, the “ancestry approach” was used to
derive additional sources from the references of the identified studies (Cooper, 1982). Following this approach, 70 sources
were finally used to derive the list of budgeting functions, which are composed of 41 published research studies (59
percent), 17 textbooks (24 percent), 7 peer-reviewed working papers (10 percent), and 5 practitioner publications (7
percent).
10
using budgeting, are composed of an aggregation of micro-functions from a more fine-grained level (Barrett &
Fraser, 1977; Churchill, 1984; Samuelson, 1986; Sivabalan, et al., 2009). Hence, instead of imposing macro-
functions (e.g., Lyne, 1992; Hansen & Van der Stede, 2004) or suggesting that certain micro-functions are part of
macro-functions without explicitly testing this (e.g., Samuelson, 1986; Sivabalan, et al., 2009), we developed our
study on the more detailed level of micro-functions.

14
In this study we use eight items covering different micro-budgeting functions. Table 3 provides an
overview of the three budgeting macro-functions (see column 1), the related micro-functions, and references to
representative literature.
-------------------------
-------------------------
We included these items in the last of the three panel surveys we conducted for this study (fall 2009). To
reduce ambiguity in the interpretation of the functions, we supplied short definitions which we took from the
literature and which we adjusted as a result of the pre-test. We asked respondents to rate their perception of the
importance of each budgeting function (see Table C online)* that existed at the time of the survey (fall 2009) and
15
before the economic crisis (early 2007).
We performed an exploratory factor analysis (EFA) on the two sets of eight micro-budgeting function
items (during the crisis and before the crisis) using Stata software, version 13, from which we empirically derived
16 17
budgeting macro-functions. We used a principal component analysis with orthogonal rotation (Varimax). The
first three factors explain 47 percent, 13 percent, and 12 percent of the variance of the items referring to the
14 We started with a longer list of micro-functions but dropped those that loaded on multiple factors with similar strength or
loaded on different factors for different years.
* Please see Table C in the supporting information section of the online article.
15 It would have been preferable to have measured the importance of the budgeting functions before the crisis unfolded.
Unfortunately, such data were not available in the panel. Therefore, we used the second-best approach of gathering
retrospective information (for a similar approach, see Abernethy & Brownell, 1999; Baines & Langfield-Smith, 2003;
Naranjo-Gil & Hartmann, 2007).
16 Our study is one of the first to collect data on micro-functions and empirically investigates how they group into macro-
functions (see also Sponem & Lambert, 2010).
17 We also calculated factors using the Oblimin oblique rotation technique to address potential correlations between factors.
The results were very similar and indicated the same three factors as the Varimax rotation did.
11
importance before the crisis and 39 percent, 16 percent, and 13 percent for the importance during the crisis. The
item loadings are presented in see Table D online*.
The EFA yields three stable factors (macro-functions) for the importance of budgeting functions before
and during the crisis. The first can be interpreted as the macro-function Planning. It combines the four budgeting
18
micro-functions of operational planning, forecasting, coordination, and variance analysis. These micro-functions
are all associated with budgets being “a concerted plan of action”, integrating all actors in the organization, and
may serve to give a realistic “picture of a likely and desired future” to internal and/or external stakeholders (Parker,
2002, 309; see also Epstein & Manzoni, 2002).
The second factor is Resource allocation. It combines the two budgeting micro-functions of resource
allocation itself and the authorization of spending. These micro-functions emphasize the need for an a priori
identification of resources to achieve operational goals, analyzing different suggestions regarding resource
consumption, and the authorization of spending based upon criteria such as suitability and feasibility (for similar
arguments, see Parker, 2002 and Drury, 2009).
The third factor is Performance evaluation, which combines the two budgeting micro-functions of
performance evaluation and rewards. These micro-functions aim to evaluate performance based on the attainment
of budget targets and to motivate managers through budgeting, respectively (Samuelson, 1986; Gignon-
Marconnet, 2003).
For each budgeting macro-function, we calculated the change in the importance of the budgeting macro-
functions as the difference in the mean score of the respective items from during the crisis (i.e., fall 2009) and
before the crisis (Abernethy & Brownell, 1999; Baines & Langfield-Smith, 2003; Naranjo-Gil, Maas, & Hartmann,
2009). Higher positive values indicate that the macro-function became more important.
* Please see Table D in the supporting information section of the online article.
18 The literature often describes control as a main component of budgeting that allows monitoring and comparison of planned
and actual outcomes. This is done to assess whether the organization is moving toward its objective and to implement
corrective action through variance analysis (e.g., Giglioni & Bedeian, 1974; Green & Welsh, 1988; Parker, 2002; Sivabalan,
et al., 2009). However, control is also often understood as a component of performance evaluation through inclusion of an
incentive compensation system (e.g., Fisher, 1998; Parker, 2002). To avoid this confusion, and in line with the fact that it
loads onto the planning macro-function, we use “variance analysis” to denote the former. Given that there is ambiguity
regarding the meaning and roles of some of the functions of budgeting (Samuelson, 1986; Hansen & Van der Stede, 2004),
as this example shows, we relied on the factor-analytic approach to support a qualitative categorization. In accordance with
the former explanation, we therefore interpret “variance analysis” as a component of planning.
12
Control variables
19
To capture the effect of “normal” uncertainty (i.e., uncertainty not clearly linked to the economy-wide crisis),
we selected four items from the measures of PEU and used their mean score for further analyses (see Table E
online)*. We took these from the construct developed by Gordon and Narayanan (1984b), originating from the
study by Khandwalla (1977). PEU is deemed the most relevant factor for MCS design and use (Milliken, 1987;
Chapman, 1997; Tymon, Stout, & Shaw, 1998; Hartmann, 2000; Chenhall & Chapman, 2006).
Competitive strategy is one of the most relevant factors for MCS design and use (e.g., Chapman, 2005;
Langfield-Smith, 2007). Govindarajan (1988), for example, finds evidence suggesting that the effectiveness of
using budgets for performance evaluation depends on company strategy. We measured the variable Strategy
according to Porter’s classification scheme (Porter, 1980), as this scheme “provid[es] a kind of shorthand that
encapsulates complex, holistic gestalts in a simple language” (Miller & Dess, 1993, p. 556). The measure used a
single-item, seven-point Likert scale, similar to that used by Govindarajan (1988), ranging from “cost-leadership”
(=1) to “differentiation” (=7) (see Table F online)*.
MCS design and use change over the lifecycle of companies (Davila, 2005; Davila & Foster, 2007;
Moores & Yuen, 2001). Thus, we included the company lifecycle as a control variable. This variable also controls
for idiosyncratic crisis to the extent that companies that have reached realignment or decline stages of their
lifecycle may face idiosyncratic crises. We asked respondents to indicate their company’s stage of maturity (e.g.,
foundation/birth, growth, maturity, realignment/revival, and decline). We included indicator variables in the model
that take a value of one for a specific stage (see Table G online)* and zero otherwise.
We also control for the effect of company size. As shown by previous research, larger companies are more
likely to adopt formalized and impersonal controls such as budgets, rather than personal ones (Bruns &
Waterhouse, 1975; Merchant, 1981). Thus, company size might be reflected in the change of the importance of
budgeting functions.
19 We also conducted an exploratory factor analysis (not tabulated) of our crisis-impact items and the PEU items of Gordon
and Narayanan (1984). The results suggest that some of Gordon and Narayanan’s PEU items do not load onto the same
factor as the crisis items. This is not surprising. The economic crisis effect was predominantly caused by the shock (e.g.,
the sales reduction) and uncertainty in economic-crisis specific dimensions. In contrast, some PEU items ask for uncertainty
related to new technologies, new products, new scientific discoveries, and so forth. These items are not related to the core
characteristics of economic crises. Thus, we use those items (PEU) to control for the “normal” uncertainty.
* Please see Table E in the supporting information section of the online article.
* Please see Table F in the supporting information section of the online article.
* Please see Table G in the supporting information section of the online article.
13
Empirical models for tests of hypotheses
As previously described, our exploratory factor analysis of budgeting micro-functions produced three factors,
representing the macro-functions planning, resource allocation, and performance evaluation. To test our
hypotheses, we simultaneously estimated the following equations and allowed co-variances between the residuals.
∙ ∙
∙ ∙
Table 4 contains the descriptive statistics for each of the variables.
-------------------------
-------------------------
Table 5 shows the correlations between the variables used in this study.
-------------------------
-------------------------
14
20
Using Stata software, version 13, we applied multivariate regression analyses with robust standard
21
errors to assess the relationships in question. Table 6 shows the results. Columns (1), (2), and (3) show the results
for a model containing all control variables but not the main variable of interest, Crisis. The R2 of this model is
22
0.07. Columns (4), (5), and (6) show the estimates for the main model, yielding an R2 of 0.15. Thus, the semi-
partial R2 (i.e., the incremental variance explained by the independent variable of interest after controlling for all
other independent variables; Acock, 2008, 225; Lindsay, 1993) is 0.08, which indicates a substantial explanatory
power of Crisis above and beyond the control variables.
-------------------------
-------------------------
Results for the planning macro-function
H1 states that the importance of budgeting for planning increases the more a company is impacted by an
economic crisis. As can be seen in Table 6, column (4), the results support H1. Crisis is significantly associated
with the change of importance of the planning macro-function (p < 0.01). Returning to the competing views
outlined in the introduction, regarding whether the importance of budgeting increases or decreases in times of
economic crisis, our study suggests that with respect to planning-related functions, budgeting becomes more
important, not less.
Results for the resource allocation macro-function
As shown in Table 6, column (5), Crisis has a significant positive effect on the change of importance of
resource allocation (p < 0.05). Thus, the results support H2, which states that economic crises have a positive
impact on the change of importance of budgeting for resource allocation.
20 In addition to the regression analyses, we also calculated simple tests of mean differences for the budgeting functions before
and during the crisis. The results (not tabulated) suggest that all means are significantly higher during the crisis with the
exception of performance evaluation. Hence, this simple test supports H1 and H2. H3 is not supported, although the non-
significant result for performance evaluation suggests that this aspect is different from the others, which is in line with our
arguments.
21 We used the full information maximum likelihood method, which preserves cases with missing values and is considered
superior to list-wise deletion (Bernaards & Sijtsma, 1999; Schafer & Graham, 2002; Raykov, 2005).
22 As described in the measurement section, our dependent variables represent the change from before the crisis (i.e., early
2007) to the importance during the crisis (measured in fall 2009) and are calculated by subtracting the before crisis values
from the 2009 values. Such model specification implicitly assumes that the autoregressive effect of the variable at time t-1
on the same variable at time t is one (Davidson & MacKinnon, 2004). To relax this assumption, we calculated additional
models (untabulated) where we additionally included the importance of each budgeting function at t-1 (i.e., before the
crisis) as an independent variable. The results were qualitatively similar.
15
Results for the performance evaluation macro-function
H3 states that the importance of budgeting for performance evaluation decreases the more a company is
impacted by an economic crisis. As can be seen in Table 6, column (6), the effect of Crisis on the change of
importance of budgeting for performance evaluation is negative and significant (p < 0.05). Hence, the results
support H3.
4. Qualitative Data and Results
Research methods
To triangulate and refine our quantitative results with more elaborate insights from practitioners’
experience, we employed two methods to gather additional qualitative data (Ahrens & Chapman, 2006; Brannen,
1992). First, we conducted a focus group with interested survey respondents (similar to Dossi & Patelli, 2008).
We divided the focus group into two consecutive stages: (1) a plenary discussion with 73 participants (all survey
respondents were invited), and (2) a small group workshop to discuss the effect of the economic crisis in more
depth with eight participants. Second, we conducted eleven additional semi-structured interviews with members
of the panel over the telephone. Interviewees were selected who hold positions similar to those held in the overall
sample of survey respondents and representing a balanced set of industries (for an overview, see Table H online)*.
We conducted the interviews with the help of an interview protocol in which we presented our research interest
along with an overview of the budgeting micro-functions. We encouraged the interviewees to describe the effects
the economic crisis had on their companies and its management control processes more generally as well as the
effects on the individual budgeting micro-functions. We encouraged them to give elaborate answers and examples
and to mention any other issues they thought were relevant and which we had not addressed. The interviews lasted
between thirty and sixty minutes. All interviews were recorded and subsequently transcribed. Some interviewees
also showed us documentary evidence from their companies, which we also acknowledged when provided.
Results for the planning macro-function
Before we elaborate on the qualitative results regarding the budgeting functions, it is important to first
mention that companies may have scheduled their budgeting processes or been impacted by the economic crisis at
different times. For some companies, budgeting processes had either recently ended or were still underway when
they were affected by the economic crisis. Other companies, in the first year of the economic crisis or in the
subsequent one, were starting their budgeting process in the face of the economic crisis. Many of the former
* Please see Table H in the supporting information section of the online article.
16
companies reported that they re-budgeted once they discovered that the economic crisis would affect them to the
extent that their original “numbers architecture” (interviewee, truck manufacturer) would be rendered useless. As
an example, an interviewee from an industrial manufacturer explained that having a fixed plan was so important
at his company that the company re-budgeted an already-approved budget despite the fact that this was a time-
consuming, expensive, and thus “historic” event. Similarly, a retailer that had started its budgeting process before
the crisis found that the inherent assumptions proved unrealistic at the beginning of the budgeted year 2009. Thus,
despite the immense work involved, in January 2009 the company prepared a new budget in a faster and leaner
way than it had previously done. In doing so, it applied a more pessimistic sales and margin level to account for
the smaller and less munificent market. This budget was used for the rest of the year as incorporating the
recessionary conditions into the plan was deemed necessary, even though the plan would not necessarily be met
because of the increased uncertainty, as later proved to be the case.
The latter companies, i.e., those that started the budgeting process in the wake of the economic crisis,
increased their planning functions in a different way. Before the crisis, some companies had started the planning
process comparatively early relative to the beginning of the budgeted year and addressed the budgeted year as well
as the several years after it, but once the crisis hit they planned for the budgeted year in a more detailed manner
(e.g., in terms of line items to be planned) and abandoned medium-term planning for subsequent years. Almost all
interviewees described that they tried to prepare their budget faster (e.g., through a stronger top-down orientation)
and started the process later in the year so that the plan would reflect more recent and accurate data (for a similar
discussion, see Plaschke, et al., 2011).
Additionally, members of several companies suggested that planning functions were intensified through
the envisioning of various scenarios (see, e.g., Akten, Giordano, & Scheiffele, 2009; Palermo & Van der Stede,
2011) to account for a frequently asked question: “Is the current sales decrease as bad as things can get? In the
crisis we never knew how far things could fall!” (interviewee, glass manufacturer; similar statements elsewhere).
Interviewees reported that during the budgeted year their companies tried to be more flexible through these
scenarios by being able to react quickly in case planning assumptions proved untrue, something which was
considered much more likely during the crisis (for similar evidence, cf. Roche, 2010). Our interviews also show
that companies generally communicated their plans and objectives (both internal and external, e.g., to banks) more
frequently and that in the crisis, controllers/management accountants were explicitly asked to coordinate and to
make sure that different business units did not have contradicting budgetary plans to eliminate any slack. This
corroborates previous findings, which showed a tighter coupling between organizational subsystems in economic
17
crises (Czarniawska-Joerges, 1988). Almost all respondents mentioned that there was also a deeper analysis of
variances and more operational engagement by top management to enable not only planning but also control: “in
the crisis, variance analysis was emphasized more and often really important people [e.g., executive board
members] called [me] to understand the variance and increase the pressure to plan and forecast accurately”
(interviewee, glass manufacturer) asking “what are the reasons for the variances, how are you going to change and
with which action plans?” (interviewee, retailer).
In addition to this increase in importance for planning-related budgeting functions, almost all companies
we spoke with in the focus group or the interviews reported to have also increased planning by either introducing
a (rolling) forecasting process or by greatly increasing its frequency and detail if it already existed:
“[During the crisis], the forecasting changed from quarterly to monthly! Cash was calculated 50
times a year; on a weekly basis. And we sort of switched to ‘high definition’, so we increased the
resolution by reporting many more indicators. The most painstaking detail! It gets crazy when you
have to specify which week a particular part of the stock will be sold off. No one can know that!”
(interviewee, truck manufacturer)
Later in the budgeted year, and when the initial budget had become less useful for planning and control purposes,
these forecasts also assumed the status of new “roadmaps” (according to one interviewee) for managing some
companies.
Overall, and in response to a question raised in the literature about how companies’ planning approaches
have been affected by the economic crisis and whether they have become more flexible (Van der Stede, 2011), we
find that the crisis seems to have resulted in more continuous planning, either through re-budgeting or through the
preparation of forecasts. Overall, the metaphor “driving by sight”, which interviewees from various companies
repeatedly employed, seems to accurately represent that within-year planning and control became paramount
during the crisis.
Results for the resource allocation macro-function
H2 suggests that the impact of an economic crisis increases the importance of the resource allocation
function of budgeting. The quantitative analysis shown in Table 6 supports H2. The participants in the focus group
and interviews explained that the significant reduction in investment and recruitment budgets (in some companies
by as much as half) during the crisis led to an increased emphasis on resource allocation in the budgeting process
(see also Rhodes & Stelter, 2009). They also suggested that companies expended major efforts in becoming more
flexible to cope with the increased economic uncertainty; they therefore often classified capital expenditures as
18
“musts” or “cans” in the budgeting process, stopped or pushed them into later periods, and attempted to lease
rather than buy assets in order to optimize liquidity. There was also an increased emphasis on quantifying the
expected returns for all kinds of investments or expenses including those that, before the crisis, were simply
justified strategically because they were not deemed to be calculable or could not be assessed adequately in
quantitative terms (e.g., the hiring of a manager in strategic product marketing).
In addition, companies also reported increased return thresholds during the crisis. According to an
interviewee from an industrial manufacturer: “The higher you raise the bar, the more intense the competition
among the projects.” Interviewees also described companies placing much more focus on payback periods,
profitability, and cash flow, with some of them eventually implementing a fully-fledged management accounting
23
system for capital expenditures as an addition to the budgeting processes.
In terms of spending authorization, during the crisis the large majority of companies we spoke to changed
their signature policies by requiring the signature of a person higher up in the hierarchy (as far up as the executive
24
board) and for much smaller amounts. They also reported that, in order to retain flexibility, resource allocation
was decided upon twice, i.e., first during the budgeting process and for a second time when the expense was
actually incurred during the budgeted year. An interviewee from an industrial manufacturer summarized this as:
“In bad times you have to pull the reins, and in good times you can let go again, and this is mirrored
in all essential aspects, also in the budgeting process.”
Overall, these centralization tendencies, along with the increased top-down orientation and operational
involvement by top management reported above for planning, mirror findings arguing that management sometimes
does this to show that it is still in control (Czarniawska & Hedberg, 1985). This could be seen as an example of
the “threat-rigidity effect” (Staw, et al., 1981), which suggests that organizations in crisis tend to concentrate power
and influence higher up the hierarchy (see also Hermann, 1963; Nystorm & Starbuck, 1984 for idiosyncratic
crises).
Results for the performance evaluation macro-function
Consistent with our quantitative results for H3, the focus group participants and interviewees confirmed
the shift in the budget’s role for performance evaluation. They dismissed the usefulness of budgets in providing a
23 As a general finding, we saw that the relevance of different performance indicators used in all three macro-functions
changed in the crisis across all the companies in that “cash [was] the guiding element in the crisis” (interviewee, truck
manufacturer). Also profitability and costs became more important relative to sales.
24 One company, however, saw similar tendencies emerging but ultimately decided against using them because it feared losing
flexibility.
19
valid evaluation of the performance of subordinates during an economic crisis situation, because of the difficulty
in identifying realistic goals or revising them frequently (Barrett & Fraser, 1977; Epstein & Manzoni, 2002). The
head of finance for an automotive supplier suggested that his company, when faced with the shock of reduced
sales in the economic crisis, “decoupled [performance evaluation] from budget results, given that the agreed targets
were not realistic anymore.” Thus, the fact that most companies intensified their budgetary planning functions
during the crisis in order to be “closer to reality” and better prepared seems not to have transferred to performance
evaluation. We attribute this to the fact that planning and performance evaluation functions of budgets are
separated in time (Barrett & Fraser, 1977; Østergren & Stensaker, 2011).
Instead of using budgets to evaluate performance, our focus group participants and interviewees explained
that the most recent forecasts, the actuals from previous years, or indicators of operational efficiency in production
were used. The CFO of one SME added a reason for his company’s use of qualitative targets: “It would have been
difficult to get managers to accept negative targets [i.e., setting a certain loss as a target].” Our participants also
told us that, while some companies continued to adjust for uncontrollable factors such as currency fluctuations to
facilitate clearer performance evaluation if they had previously done this, this was not carried out as a means to
account specifically for effects of the economic crisis.
As well as these effects on the performance evaluation function, several interviewees mentioned that there
was a crisis-driven tendency to suspend rewards at the individual level in favor of company-wide rewards. This
was done as a reflection of a concern to survive the crisis together:
“As an effect of the [economic] crisis, it became impossible to give good estimates of
revenues and costs on a business-unit basis. Our credo being ‘We’re in this together’, we
linked a share of the bonus payments for everyone in the company—if there was room for
bonuses at all.” (CFO of a SME in the focus group)
At the companies we interviewed, this also meant that managers accepted that there was no individual
variable compensation during the economic crisis, out of an expression that such elements are a reflection not only
of an individual’s performance but also of overall company health:
“Paying out no bonus is then the intended consequence.” (interviewee, industrial
manufacturer)
In conclusion, performance evaluation with budgetary targets became less important and gave way to
other indicators. The practice of rewarding employees only when previously committed targets were achieved
20
seems to have been maintained during the economic crisis. However, reaching such targets diminished in relevance
because employees accepted that it was impossible to get a bonus when the company was struggling to survive the
economic crisis. Hence, we can state that, in terms of the performance evaluation macro-function, the importance
of budgeting decreases in times of economic crisis.
5. Concluding Discussion
A major motivation for this study was that the limited existing literature covering changes to organizations’ MCSs
in response to economic crises makes conflicting predictions and does so only at a very general level. Studying
the 2008 economic crisis, this study disentangles these opposing ideas by using a model that draws on the multiple
functions of budgeting.
Our study offers three contributions: First, this study is among the few to research the relation between
macroeconomic activity and organizational-level responses. Importantly, we investigate a setting with both a
significant downward shift and increased economic uncertainty compared to a pre-crisis situation. Previous
research has often measured crisis with perceived environmental uncertainty in very general terms and thus with
items not necessarily related to economic crises. We further find that the contradictory evidence in previous studies
regarding the changing importance of budgeting as a response to economic crises may be due to a lack of detail in
the conceptual specification of budgeting. By gathering more detailed information using a functional perspective,
our findings suggest opposing effects, in that the importance of budgeting for planning and resource allocation
increases in times of crisis, while the importance for performance evaluation decreases. Thus, in economic crisis
situations managers place increased importance on some functions of budgeting while they decrease the
importance of others. This finding is important for management control research, since it allows us to caution
against making aggregate statements about changes to budgeting, especially because there may be opposing
underlying effects, as is the case for economic crisis. Beyond our interest in describing the changes in the
importance of budgeting functions, we also believe that gaining a more profound view of the changes resulting
from a crisis—whether idiosyncratic or economy-wide—will be insightful for other organizational practices.
Following this line of thought, our study contributes to the literature by showing ways to improve understanding
of the longstanding debate over whether crises are likely to result in greater or lesser control and rigidity (e.g.,
Staw, et al., 1981).
Second, we reviewed the literature on the functions of budgeting and conducted an exploratory factor
analysis that yielded three stable macro-functions that can be interpreted as budgeting for (1) planning, (2) resource
allocation, and (3) performance evaluation. We have thereby provided a thorough and structured catalogue of
21
budgeting functions that contributes to an emerging stream of literature in this field (e.g., Hansen & Van der Stede,
2004; Sivabalan, et al., 2009). The use of micro- and macro-functions is further helpful because it can be replicated
across studies (Van der Stede, 2001). More generally, our research provides an alternative to treating budgeting as
a unified concept in management control research. Most previous research has been rather reductionist and almost
exclusively focused on the performance evaluation function of budgets, rarely accounting for other functions
budgeting plays in organizations. The approach taken in this paper opens up a fruitful avenue for future research,
investigating in greater detail other conditions under which particular functions of budgeting are more or less
emphasized. Empirically, this could show itself in different patterns. For example, a particular macro-function
could be emphasized to different extents through the varying degrees to which micro-functions are emphasized.
Separately, and to the extent that some functions of budgeting are conflicting (Barrett & Fraser, 1977),
organizations face trade-offs and have to choose to emphasize one budgeting function at the expense of another.
An interesting approach in this respect could then be to not only find out under which conditions other than an
economic crisis this may occur, but also to highlight which other mechanisms are then put in place to fulfill the
function formerly fulfilled by budgeting. For example, if budget targets become less important for performance
evaluation, which other items play a role in complementing or replacing them? Are there instances in which
budgetary performance can still be used for performance evaluation but not for rewarding functions? Alternatively,
what is the role of forecasts or re-budgeting for the planning function? Future research may also seek to understand
further how different uses of one function (e.g., budget emphasis, budget participation, or budget use as studied
by the RAPM literature, see e.g., Sivabalan, et al., 2009; Libby & Lindsay, 2010) are related to changes in the
overall functional emphasis placed on different budgeting functions. In a similar vein, it would be interesting to
understand the links between the functional emphases on budgeting and their diagnostic or interactive use (Simons,
1995).
Our third contribution stems from the data we gathered in the focus group and the interviews with panel
members. Based on respondents’ descriptions of the specific changes their companies made to budgeting practices
during the economic crisis, we respond to calls in the literature and provide insights which have so far been missing
(Van der Stede, 2011). Our exchanges with practitioners indicate a high practical relevance of a functional view
of budgeting. The results of our exploratory factor analysis coincide with the current practitioner discourse set
forth around the concept of Beyond Budgeting which also proposes a functional view of budgeting and which
closely corresponds to the functions found in this study (see e.g., Bogsnes, 2009). We also find that such a
functional approach may serve as a general repository for the practitioner discourse on budgeting and control,
22
since it helps to untangle and better understand this management control practice. It can facilitate a discussion on
changes to budgeting practices, free from “methodological capture by practice norms” (Hopwood, 2009, 798), one
that is more abstract and less concept-laden as compared to the discourse around practice-defined concepts such
as Better Budgeting, Advanced Budgeting, Beyond Budgeting, or even “traditional budgeting”. For some, the term
“budget” is loaded with many meanings and connotations (e.g., a connection to performance evaluation with the
question of “How much bonus will I get?”, or to resource allocation with the question of “Do we have budget for
that?”). These may stand in the way of improved conceptual specification (Colignon & Covaleski, 1988) and
objective debates on the changes to complex organizational phenomena such as budgeting.
When interpreting this study’s findings, its limitations should also be considered: First, even though the
results of the analyses describe the managerial decisions made during the crisis, we would like to emphasize that
this does not address their effectiveness as a crisis response as compared to other potential responses. Studies
taking an effectiveness perspective could help derive more specific recommendations for managers. Second, our
focus is limited to economic crises that simultaneously hit a large number of companies. Future research might
look at changes in the control systems of companies that are experiencing idiosyncratic crises (e.g., product recalls,
high-impact lawsuits, strategic mistakes). This might, for example, provide important insights into the impact of
strategic challenges on control systems and thus eventually their more strategic uses. A third and related limitation
lies in the scope of the control system examined. This study analyzed the effect of an economic crisis on the
functions of budgeting since this allowed us to take a very holistic view of organizational responses to economic
crises. Future research might build on our insights and take an even broader view of MCSs or the integration of
budgeting with other parts of an organization’s control system or package (Flamholtz, Das, & Tsui, 1985;
Abernethy & Chua, 1996; Malmi & Brown, 2008; Grabner & Moers, 2013). While our illustration of changes in
the functions of budgeting represents areas where organizations can make comparatively quick alterations as a
timely response to crises, organizations may equally prefer to adopt organizational or informal controls (Chapman,
1998) as additions or replacements. Combining a functional view with a control systems or package approach can
show how a function dealt with by one control technique can be similarly fulfilled by another technique. We
therefore encourage more research into the functions of control techniques in general for explaining management
control practice.
23
TABLE 1. Characteristics of the final sample
Cumulated
N % %
Panel A: Respondent profile
Position
CEO/Head of Operations 20 6.90 6.90
CFO/Head of Finance 77 26.55 33.45
Chief controller 99 34.14 67.59
Controller/Management Accountant 64 22.07 89.66
n/a 30 10.34 100.00
Panel B: Company size
Sales in Million Euros
0 – 10 14 4.83 4.83
11 – 25 16 5.52 10.34
26 – 50 33 11.38 21.72
51 – 100 39 13.45 35.17
101 – 250 46 15.86 51.03
251 – 500 37 12.76 63.79
501 – 1,000 28 9.66 73.45
1,001 – 2,500 22 7.59 81.03
2,501 – 5,000 10 3.45 84.48
5,001 – 10,000 5 1.72 86.21
More than 10,000 11 3.79 90.00
n/a 29 10.00 100.00
Panel C: Industry
Other business services 49 16.90 16.90
Metal production and fabricated metal products 24 8.28 25.17
Consumer goods 22 7.59 32.76
Chemicals and allied products 22 7.59 40.34
Credit business and insurance 22 7.59 47.93
Public administration/health and social services/educational
services 21 7.24 55.17
Electrical engineering/precision engineering/optics/fabrication
of office machines 20 6.90 62.07
Machinery and plant engineering 18 6.21 68.28
Media/information technology 17 5.86 74.14
Automotive manufacturing 16 5.52 79.66
Transportation and communications services 15 5.17 84.83
Other manufacturing industries 13 4.48 89.31
Other 12 4.14 93.45
Trade, maintenance, and repair of automotive and durable
goods 10 3.45 96.90
Construction 9 3.10 100.00
Total 290 100
24
TABLE 2. Descriptive statistics of items underlying the Crisis measure
Standard
Mean Minimum Maximum
deviation
1. To what extent is your company impacted by the current 4.50 1.60 1 7
economic crisis?
Please indicate to what extent your company faces the
following types of impact of the current financial and
economic crisis:
2. Have orders declined? 4.30 2.00 1 7
3. Have sales declined? 4.30 2.00 1 7
4. Have customers increasingly failed to pay? 3.80 1.60 1 7
5. Has there been a reduction in capital availability? 3.00 1.70 1 7
6. Have suppliers increasingly been unable to provide goods 2.70 1.40 1 6
or services?
7. Is your company affected by crisis-induced currency 2.60 1.70 1 7
fluctuation?
Note. For all items, the answers were collected using a scale ranging from “1 = Not at all” to “7 = To a great extent”.
25
TABLE 3. Overview of budgeting functions
Budgeting Budgeting micro-function Selected references
macro-function (as suggested (as described in the literature)
by exploratory factor
analysis)
Planning Operational planning Berland, 1999
Forecasting Barrett & Fraser, 1977
Coordination Epstein & Manzoni, 2002
Variance analysis Lyne, 1992
Resource allocation Resource allocation Anthony & Govindarajan, 2007
Authorization of spending Epstein & Manzoni, 2002
Hilton, Maher, & Selto, 2003
Otley, 1978
Performance evaluation Performance evaluation Ekholm & Wallin, 2000
Rewarding Berland, 1999
Epstein & Manzoni, 2002
Hofstede, 1967
Hopwood, 1974
26
TABLE 4. Descriptive statistics
Mean Standard Minimum Maximum

deviation
Planning a 0.48 0.84 -2.25 3.00
Resource allocation a 0.43 0.99 -2.50 5.00
Performance evaluation a 0.09 0.76 -4.00 3.00
Crisis (EBIT) 0.10 1.47 -3.71 2.95
Crisis (perceived) b 3.58 1.21 1.00 6.29
Crisis (industries) 0.38 0.49 0.00 1.00
PEU b 4.28 1.16 1.25 7.00
Size 5.20 1.47 1.00 7.00
Strategy 5.31 2.44 1.00 11.00
Lifecycle 3.06 0.89 2.00 5.00
Note.
a Variable values are calculated as the difference between the mean scores of the underlying
variables of budgeting function importance during the crisis (i.e., fall 2009) and before the crisis.
b Variable values are calculated as mean scores.
27
TABLE 5. Correlation matrix
(1) (2) (3) (4) (5) (6) (7) (8)
(1) Planning a 1.00
(2) Resource allocation a 0.24*** 1.00
(3) Performance evaluation a 0.25*** 0.24*** 1.00
(4) Crisis b 0.19*** 0.12** -0.14** 1.00
(5) EBIT decrease 0.20** 0.19** -0.07 0.33*** 1.00
(6) Crisis industries 0.21*** 0.08 -0.04 0.40*** 0.35*** 1.00
(7) PEU b 0.05 0.06 0.01 0.12** 0.19* 0.05 1.00
(8) Strategy 0.02 -0.01 -0.02 0.20*** 0.14 0.09 0.16** 1.00
(9) Size -0.08 -0.08 -0.07 0.12** -0.08 -0.03 0.08 -0.01
Note. The variable Lifecycle that was used to create indicator variables for the main analysis is omitted from this table.
a Variable values are calculated as the difference between the mean scores of the underlying variables for budgeting function importance during the crisis (i.e., fall 2009) and before the
crisis.
b Variable values are calculated as mean scores.
Significance (two-tailed t-test): *p < 0.1; **p < 0.05; ***p < 0.01.
28
TABLE 6. Regression analysis of the effects of the economic crisis on the importance of budgeting functions
Model 1 Model 2
Resource Performance Resource Performance
Planning
allocation evaluation Planning allocation evaluation
(1) (2) (3) Prediction (4) Prediction (5) Prediction (6)
Crisis + 0.140*** + 0.095** - -0.079**
(0.04) (0.05) (0.04)
PEU 0.048 0.092* 0.007 0.032 0.082 0.018

(0.04) (0.05) (0.04) (0.04) (0.05) (0.04)
Strategy 0.010 -0.013 -0.016 -0.011 -0.024 -0.005

(0.03) (0.04) (0.03) (0.03) (0.04) (0.03)
Size -0.033 -0.040 -0.026 -0.042** -0.046* -0.021

(0.02) (0.03) (0.02) (0.02) (0.03) (0.02)
Lifecycle fixed effects Yes Yes Yes Yes Yes Yes
Constant 0.305 0.074 0.312 0.033 -0.127 0.459*

(0.26) (0.28) (0.26) (0.26) (0.29) (0.27)
N 290 290
R2 0.07 0.15
Note. Standard errors in parentheses; *p < 0.1, **p < 0.05, ***p < 0.01 (significance levels are one-tailed for variables with a directional prediction and two-tailed otherwise). Columns
(1), (2), and (3) were estimated simultaneously, thus the R2 refers to the system of all three equations. Similarly, columns (4), (5), and (6) were estimated simultaneously. Planning,
Resource allocation, and Performance evaluation are the difference of the respective mean scores during the crisis (i.e., fall 2009) and before the crisis. Crisis is the mean score of the
survey items that capture crisis impact. PEU is the mean score of “normal” perceived environmental uncertainty (i.e., uncertainty unrelated to the economic crisis). Strategy refers to
competitive strategy, with low values indicating cost-leadership strategy and high values indicating differentiation strategy. Lifecycle is captured in the form of indicator variables for
the different stages of company life cycle.
29
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Budgeting in Times of Economic Crisis

Article in Contemporary Accounting Research · December 2015

Sebastian Becker Utz Schäffer

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SEBASTIAN D. BECKER, HEC Paris

MATTHIAS D. MAHLENDORF, Frankfurt School of Finance and Management

UTZ SCHÄFFER, WHU – Otto Beisheim School of Management

MARIO THATEN, WHU – Otto Beisheim School of Management

during economic crises.

Budgeting, budgeting functions, economic crisis, crisis management

Electronic copy available at: http://ssrn.com/abstract=2605359

the economic crisis.

Electronic copy available at: http://ssrn.com/abstract=2605359

Electronic copy available at: http://ssrn.com/abstract=2605359

treated in an aggregate manner.

occur (Kami, 1976; Palermo & Van der Stede, 2011).

Our first hypothesis is therefore:

function of budgeting relative to those that are less highly impacted.

therefore hypothesize that:

3. Quantitative Data and Results

Survey design and sample description

INSERT TABLE 1 ABOUT HERE

Dillman (2007) to compose response-friendly questionnaires and to ensure sufficient personalization of

2005). We pre-tested all questionnaires on a group of academics and practitioners.

at the 5 percent level.

INSERT TABLE 2 ABOUT HERE

Measures for budgeting functions

study on the more detailed level of micro-functions.

INSERT TABLE 3 ABOUT HERE

item loadings are presented in see Table D online*.

2002, 309; see also Epstein & Manzoni, 2002).

arguments, see Parker, 2002 and Drury, 2009).

(=1) to “differentiation” (=7) (see Table F online)*.

Table 4 contains the descriptive statistics for each of the variables.

INSERT TABLE 4 ABOUT HERE

INSERT TABLE 5 ABOUT HERE

power of Crisis above and beyond the control variables.

INSERT TABLE 6 ABOUT HERE

Results for the planning macro-function

important, not less.

Results for the resource allocation macro-function

impact on the change of importance of budgeting for resource allocation.

4. Qualitative Data and Results

Results for the planning macro-function

because of the increased uncertainty, as later proved to be the case.

discussion, see Plaschke, et al., 2011).

with which action plans?” (interviewee, retailer).

(interviewee, truck manufacturer)

during the crisis.

Results for the resource allocation macro-function

quantitative terms (e.g., the hiring of a manager in strategic product marketing).

in all essential aspects, also in the budgeting process.”

Results for the performance evaluation macro-function

account specifically for effects of the economic crisis.

was done as a reflection of a concern to survive the crisis together:

bonuses at all.” (CFO of a SME in the focus group)

of an individual’s performance but also of overall company health:

“Paying out no bonus is then the intended consequence.” (interviewee, industrial

of budgeting decreases in times of economic crisis.

from a crisis—whether idiosyncratic or economy-wide—will be insightful for other organizational practices.

Staw, et al., 1981).

(3) Performance evaluation a 0.25* 0.24* 1.00

(4) Crisis b 0.19* 0.12 -0.14** 1.00

(5) EBIT decrease 0.20 0.19 -0.07 0.33*** 1.00

(6) Crisis industries 0.21* 0.08 -0.04 0.40* 0.35*** 1.00