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Chapter Two: Literature Review

2.0 Introduction

This chapter reviews existing literature on budgeting, budgetary control, and fraud, focusing on their theoretical foundations, benefits, causes, and interrelationships.

2.1 The Theory of Budgeting

Budgeting serves as a crucial mechanism for organizational planning and risk management. According to Hirst (1987), effective budgetary control enables organizations to anticipate future risks and opportunities by establishing a structured monitoring system. Shields and Young (1993) further elaborate that budgets act as a variance detector, identifying discrepancies between organizational objectives and actual performance.

Budgets form the backbone of financial control, projecting future financial performance and assessing the viability of strategic decisions. Silva and Jayamaha (2012) describe budgets as consolidated plans and forecasts that translate business strategies into financial terms, detailing the required resources in terms of quantity, timing, and cost.

Additionally, budgets facilitate short- and long-term goal-setting, providing benchmarks for performance evaluation and corrective action (Sharma, 2012). They also influence employee behavior by clarifying objectives and setting performance standards (Hancock, 2009). The budgeting process encourages forward-thinking and rational decision-making by requiring managers to evaluate alternative courses of action (Scott, 2005).

Moreover, budgets serve multiple functions, including goal clarification, performance measurement, and external contracting (Selznick, 2008). Fisher highlights their role in aligning employee compensation with performance metrics, reinforcing accountability and motivation (Goldstein, 2005).

2.2 Benefits of Budget Control

Robinson and Last (2009) define budgeting as a structured framework for allocating revenues and expenditures, ensuring efficient resource utilization. An effective budgeting system enhances organizational efficiency and effectiveness by aligning expenditures with strategic priorities.

Traditional budgeting emphasizes input allocation, whereas performance-based budgeting focuses on outcomes (Phyrr, 1970). Understanding expenditure patterns helps organizations prioritize critical needs and assess the impact of budgeting on performance.

The shift from manual to computerized accounting has significantly improved efficiency. Magdalene (2010) notes that computerized systems reduce processing time, minimize errors, and enhance data security through automated backups and restricted access. While manual accounting may appear cost-effective, its inefficiencies in data handling and vulnerability to disasters make computerized systems more advantageous (Birungi, 2011).

2.3 Causes of Fraud

Fraud in organizations stems from multiple factors:

Conflict of Interest: Employees may favor suppliers with personal ties or accept kickbacks (Hansen et al., 2005).
Job Insecurity: Unstable employment conditions may drive staff to fraud (Daveas, 2006).
Rationalization: Employees justify fraudulent actions with excuses like perceived unfair treatment (Chikanza et al., 2005).
Poor Record-Keeping: Inadequate documentation facilitates procurement fraud (Farrington et al., 2006).
Low Remuneration: Underpaid employees may resort to fraud for financial relief (Rene Hansen et al., 2005).
Political Interference: Influential figures may manipulate procurement processes (Global Integrity Report, 2008).
Corruption and Weak Laws: Lack of stringent regulations enables fraudulent activities (Transparency International, 2006).
Lack of Skilled Personnel: Insufficient procurement expertise increases fraud risks (Lysons, 2006).
Weak Punishments: Lenient penalties fail to deter fraud (Ntayi, 2005).
Motives and Revenge: Financial stress or workplace grievances may trigger fraud (Dervaes, 2006).

2.4 Relationship Between Budget Control and Fraud

Effective budgetary control mitigates fraud through:

Proper Planning: Detailed, coordinated budgets align with organizational strategy (Dunk et al., 2001).
Evaluation: Regular reviews enhance transparency and accountability (Hancock, 2009).
Monitoring and Control: Continuous oversight prevents deviations (Horngren et al., 1997).
Staff Motivation: Clear, achievable targets foster ethical behavior (Hansen et al., 2003).