Research proposal writer
Chapter two
Literature review
2.0 Introduction
2.1 The Theory of Budgeting
Hirst (1987) explains that an effective budgetary control solves an organization’s need to plan and consider how to confront future potential risks and opportunities by establishing an efficient system of control, a detector of variances between organizational objectives and performance (Shields and Young, 1993).Budgets are considered to be the core element of an efficient control process and consequently vital part to the umbrella concept of an effective budgetary control.
Budgets project future financial performance which enables evaluating the financial viability of a chosen strategy. In most organizations this process is formalized by preparing annual budgets and monitoring performance against budgets. Budgets are therefore merely a collection of plans and forecasts (Silva and Jayamaha, 2012
They reflect the financial implication of business plans, identifying the amount, quantity and timing of resource needed (Shields and Young, 1993).The implementation of budgetary procedures. The establishment of short to medium-term objectives serves the purpose of providing estimates of future sales revenues and expenses, to provide short and long-term objectives for a coordinated management policy. Benchmarks for management and task controls are provided by comparing actual results with budgeted plans and to take corrective actions if necessary (Sharma, 2012).Budgets can further influence the behavior and decisions of employees by translating business objectives, and providing a benchmark against which to assess performance. Hancock (2009) even considered such operational planning as the backbone of management.
During budget preparation procedures, consideration of alternative courses of action becomes an integral part and leads to increased rationality. A budget allows a goal, a standard of performance to be established with subsequent comparison of actual results with the created standard. It requires those involved to be forward looking rather than looking back (Scott, 2005). Budgets have therefore been identified as playing a number of roles which include making goals explicit, coding learning, facilitating control, and contracting with external parties (Selznick, 2008). Fisher exemplified this by “linking compensation to performance measures against the budget”, thereby making goals explicit, communicating goals and thereby coding learning and clarifying performance measures for individual employees of an organization (Goldstein, 2005).
2.1 Benefits of budget control.
In reference to Robinson and Last (2009), budgeting system is a tool used by the firm as a framework for their spending and revenue allocation. To ensure the firm’s resources are not wasted, the organization must be able to come out with an effective budgeting system. This is important as it ensure that the outputs produced and services delivered achieve the objectives. According to this theory, a good budgeting system must be able to addresses the efficiency and effectiveness of the organization’s expenditure. A good budget is determined by the level of income of the organization (Robinson, 2009).
The organization has to put proper controls that ensure that the budget is properly maintained and allocated. A firm that is able to run its operations efficiently is able to allocate more revenues for the organization. This is achieved through cutting costs in order to increase the quality and quality of goods and service offered by the firm. However, if an organization has lesser income they might have to find a way to fund their estimated budget by borrowing and tax restructuring (Robinson and Last, 2009). That is why the budget is mostly regarded as the control of expenditure .As the total amount of the annual expenditure; the organization must not exceed the allocation of budget.
Compared to the traditional budgeting system which focuses on the amount of inputs, performance based budgeting system focused more towards the outcome. As the organization spending stretches annually, it is important to understand the nature of spending of the organizations which is always being stated in the budget. It is therefore essential for the organization to understand it s budgeting system and give priority to urgent matters that require attention. In order to find out the relationship between the budgeting system and the organizational performance, it is important for the firm to determine the patterns of the expenditure of the organization and its performance (Phyrr, 1970).
Paper works are involved in manual accounting; all the accounting activities are carried out on paper manually and obviously, it takes much time and resources for the average business organization and most especially, a financial institution that still uses the manual system. Computerized accounting saves a lot of time where in, the employee has to record the transactions and all the other calculations would be carried out by the software either automatically or by a request. Magdalene M, (2010)
I also agree with Magdalene M, (2010) again, that computerized accounting is not only speedy but also accurate. With a computer being used to collect data and change it into meaningful information that is used by management to make timely and effective decisions, the computer carries out the entire data processing through classifying, sorting, calculating, summarizing the data and production of reports, as stated by Birungi (2011). This entire process helps to minimize the risk of miscalculations and other human errors that could have emerged as a result of manual data processing.
With the manual accounting system, every record is on paper and in case of any uncertainties such as heavy floods, landslides and fire outbreaks, the useful data may all be lost, and yet with the computerized accounting system and the introduction of internet and networks in the information technology world, an easy backup and restoration system as well as the use of passwords to avoid unauthorized parties from accessing the data, keeps the information secure.
Some arguments may stress that manual accounting can be handled with cheap work force and resources and that it is reliable as it is done manually with minutes of observations Magdalene M, (2010). However, the level of competition in the business world of today is tight and even growing tighter day by day and if a business with an aim of being successful does not consider the aspect of time especially as far as decision making is concerned, then that business stands to lose. Computerized accounting in this case may be more costly than manual accounting in terms of cheap work force but its output actually overweighs its cost.
Magdalene M, (2010) also argues that computerized accounting can actually handle thousands of calculations simultaneously and accurately as compared to manual accounting where by transactions are handled one at a time and even needs much time to do that as well as being characterized by human errors and mistakes in calculations which may eventually affect the final output of information and hinder effective decision making.
2.3 Causes of fraud
Conflict of interest, Hansen et al, (2005) noted that during Purchasing. An employee might not disclose a conflict of interest concerning a certain service provider. For example, the employee might award a contract to a relative’s company. This hidden interest is not in the interests of the organization. An employee might receive kickbacks from suppliers in exchange for approval to either order from or make a payment to them, when goods have not been fully supplied or are charged at a higher price. They added that Staff from the donor organization can be bribed by an entity manager, so that during the monitoring process some instances of non-compliance are ignored.
Lack of job security, in some countries working for an organization is an admirable and attractive occupation, but in others it is no longer as gratifying as it used to be. There are a number of reasons for this, ranging from restrictive legislation targeted at organization, single party autocratic government, donor fatigue and the presence of civil strife. Most employees working in such environments are tempted to engage in fraudulent activities, as they cannot make personal plans beyond the next two years at most. Most organizations operating in difficult environments have strategic plans ranging from six months to a year, and so the staff contracts may vary with the organization’s planning strategies. Organizations generally employ younger people who may be starting families, or who have young families, and need financial security, (Daveas, 2006).
Rationalization, According to Chikanza et al, (2005) Rationalization also leads to fraud. An employee may commit fraud but still invent a rational explanation as to why the fraud has been committed. This “rationalization factor” encourages the perpetrator to continue committing the fraud. These are some ways in which individuals may rationalize their actions:- “Some people do it, so why should I not do it too.” “I will pay back the organization later or I will stop soon since this is only temporary.” “I get so little, but I work so hard, this organization owes Me.” leading to fraudulent acts in the organization
Poor record keeping, This is to blame for most of procurement fraud in the developing countries, maintaining a proper records of providers is vital and when organizations do not maintain a record of their providers they are prone to fraud (Farrington et al, 2006).Procurement officers should be encouraged to maintain proper record keeping and management to provide bases for tracking fraudulent procurement and procurement entities should provide conducive environment that should be supported by trained skilled and professional experts. The reports add that non-compliant officials should be prosecuted in courts of law. (PAC Reports, 2009-10).
Low staff remuneration, According to, (Rene Hansen et al, 2005), payment can influence fraud in several ways; Staff and external suppliers can be involved in this fraud when obtaining refunds for cancelled workshops, membership and subscriptions, or overpayment for services. Employees can design schemes whereby they duplicate payments to vendors and only deliver one cheque, converting the other to cash. This involves cheque forgery, altering payee amounts or creating duplicate or counterfeit cheques.
Chikanza et al, (2005) asserts that poor payment of employees leads to employee revenge against the organization due to being overlooked for advancement, overworked, in order for them to gain from other sources making them to act in fraudulent manner, leading to fraud.
According to Luway Mongie and Bowman Gilfillan (2009), civil society organizations, believe that they are activists who are not concerned about monetary gain. Employees of organization are engaged with changing the social status of human kind and empowering them with human rights education so that they make informed decisions and choices. With the current change in the economies and political dispensation of many countries, the cost of living is soaring and the risk associated with human rights activism is now too great so that staff feel the need for market related remuneration. Unfortunately most organizations in developing countries are unable to pay attractive salaries, particularly to local staff. Weakens the financial position of organization, as programs are abandoned midway and in some instances staff can go without salaries.
Influence of politicians, in procurement is to blame for procurement fraud in most organization, According to the Global integrity report 2008, it has been noted that although there are penalties, Procurement process especially big procurement contracts tend to involve high profile politicians, who influence the process & therefore usually protect the individuals who may be implicated. The regulations are in place but not effective due to the influence assumed by procurement personnel and how they manipulate the system to attain their own ends (IGG reports, 2010). According to report on the newspaper (Daily Monitor Monday 23 may 2011), Uganda revenue authority (URA) noted that the government is losing revenue as a result of organized crime between staff of the institution and officials of clearing and forwarding firms. Ms Sarah Kasheka.
Corruption, is one of the main proposed causes of procurement fraud, The government of Uganda in its National Strategy to fight corruption and rebuild ethics and integrity in Public Office (2004–2007) launched in July 2004, recognizes that corruption in public procurement and service delivery poses a serious obstacle to economic and social development in Uganda.
Limited procurement skills, amongst the procurement staffs, has led to fraud in most parts of the world , procurement profession is a relatively new profession unlike accountancy , medicine , law and so most parts of the world still lack qualified procurement profession , this limited skill has caused fraud in most institutions around the world, (lysons, 2006).
Ntayi (2005) has noted that procurement operations require experts to carry out public procurement at the private and public sector levels. The PPDA as the regulatory public procurement body should provide enough personnel to carry out the function. Besides, there should be training to provide knowledge and skills of the scope and dynamics of public procurement as required by the (PPDA Act, 2003)
Weak punishment, given to culprits, is normally the reason why most of the culprits continue practicing fraud since the value of fraud is greater than the punishment to be given to the offenders, in Singapore and china the punishment to fraud criminals is normally by death penalty this helped Singapore eliminate corruption completely and china’s score in the scale of 1-10 also improved greatly (transparency international, 2006).
Weak laws by the government, is to blame for the rampant fraud , most government across African continent have weak laws governing procurement , since procurement department in most countries is seen as a new field so the government have not taken much responsibility in developing it. (Transparency international, 2006).
Lack of role models, Most of African leaders are corrupt and they have amassed a lot of wealth from corruption, therefore this has made even the organizational workers to be corrupt themselves. According to (national fraud authority, 2004) billions of taxpayers’ money in African continent is lost in corruption.
Motives, According to Thembile et al, (2005), an employee may come under extreme financial stress, if she or he has health problems or family members are chronically ill. An employee may desire to solve a need or seek to attain a certain lifestyle. Possibly there may be gambling or alcohol-related problems. Unfortunately the manager cannot do much about such motives, but it is important that they are identified. Internal motives emanate from the workplace if an employee feels they are being underpaid, are unfairly treated in an appraisal interview, are given high volumes of work, leading to stress, and an employee perceiving that promotions are based on work politics and not performance, this may lead to fraudulent act.
According to Joseph R. Dervaes (2006), internal motives emanate from the workplace if an employee feels they are being underpaid, are unfairly treated in an appraisal interview, are given high volumes of work, leading to stress, and an employee perceiving that promotions are based on work politics and not performance, this may lead to fraudulent act.
Motivation and revenge, Motivation is another critical element. It includes financial need, challenge, and revenge. When the trusted employee has a financial need in their life, the motivation factor kicks in to permit the individual to perform an illegal act (Joseph R. Dervaes 2006). Joseph R. Dervaes (2006) asserts that, the financial need can be either real or perceived (i.e.; greed). They become desperate and see no other alternative to solve their financial crisis. Sometimes this is the most visible element of change in a person’s life actually observed by fellow employees in the office. But, sometimes the individual commits fraud by exploiting the organization’s computers, accounting systems, and internal controls as a challenge. Breaking the organization’s codes and passwords is perceived as a game. The most dangerous person is one who seeks revenge against the organization. This wayward employee seeks to financially destroy the organization in retaliation for the poor treatment they’ve received in the past. Employees who have lost their jobs, been passed-over for promotions, or who did not receive a raise fall into this category.
2.3 Relationship between budget control and fraud
Proper Planning
In order to carry out budgetary control, it is necessary to formulate a fully co-ordinated detailed plan in both financial and quantitative terms for a forthcoming period. The duration of the period is usually one year. The plan needs to be in line with the long term development strategy of the organization, although in the shorter term of a budget year, conditions may prevail which could dilute this aim. For example a depressed economy could lead to a temporary departure from the long term plans. Therefore, before formulating the budgets, the policy to be pursued during the forthcoming trading period needs to be established (Dunk, et al, 2001).
Once budgets are operating throughout an organization, it is important that feedback is made available to the managers responsible for its operation. This is often done by means of monthly budget reports. These reports contain comparisons between the budget and the actual position and throw up differences which are known technically as variances. The budget plans must be properly co-ordinated in order to eliminate bottlenecks. Individual budgets should be co-ordinated with one another to ensure that the implementation process is conducted effectively in order to save time and costs (Horngren, Forster and Dater, 1997).
Evaluation
Evaluation is a key determinant for effectiveness, through an evaluation plan, the firm can clarify what direction the evaluation should take based on priorities, resources, time, and skills needed to accomplish the evaluation. To enhance effectiveness and transparency the management team should be actively involved in the process of monitoring and evaluation of budgetary control processes and procedures (Hancock, 2009).
The process of developing an evaluation plan in cooperation with an evaluation workgroup of stakeholders will foster collaboration and a sense of shared purpose this highly contributes towards achieving an effective budgetary control (Simiyu, 2002).
Monitoring and Control of Budget Process
Monitoring and control of budget process is a determinant of effectiveness, once the budgets have been implemented they need to be monitored and controlled to ensure effectiveness in aligning budgets over a defined period of time (Horngren et al., 1997).
A professional and transparent approach to budget planning will help convince investors, development banks and national or international donors to make financial resources available if the organisation implements proper monitoring and control of budget process. This is achieved through ensuring that the estimated budget does not deviate from the actual outcome in order to take appropriate actions where necessary (Otley and Van der Stede, 2003).
Staff Motivation
By setting challenging but realistic targets well designed budgets can play a significant part in motivating managers. The targets must be clear and achievable, and the manager should participate in setting his or her own budget (Hansen et al., 2003).The budget gives senior management a means of judging the performance of their teams. It must be remembered; however, that adherence to the budget alone cannot measure all aspects of a manager’s performance.
For an effective budget implementation, the budget plan should be more clear and accurate, the financial resources should be readily available and enough, both the staff and interested stakeholders should be involved in the budget process, the staff actively involved in the budget should be motivated to facilitate successful implementation of the budget process (Hansen et al., 2003).
