Flattening the Organization: The Effect of Organizational Reporting Structure on Budgeting Effectiveness

Flattening the Organization: The Effect of Organizational Reporting Structure on Budgeting Effectiveness
Author(s): Towry, Kristy L. and Hannan, R. Lynn and Rankin, Frederick W.
Year: 2005
Paper Number: GBS-ACC-2005-005
Goizueta Department: Accounting

Abstract

This study investigates whether increasing a superior's span of control reduces the level of slack in a participatory budgeting setting. We develop our theory by incorporating into Antle and Eppen's (1985) budgeting model the recent empirical evidence that individuals are willing to incur a monetary cost in order to punish someone who violates a social norm. Specifically, we assume the superior is willing to incur a cost in order to punish a subordinate who she believes is violating a social norm by incorporating excessive slack in his budget. This theoretical refinement leads to the prediction that as the span of control increases, superiors will be more willing to reject project proposals with high budgeted costs. We further predict that subordinates under an expanded span of control will anticipate the superiors' increased "toughness," and will respond by reducing their budgetary slack. We conduct an experiment to test these predictions. The experimental results are consistent with our theory. That is, as the span of control is increased, superiors show a greater willingness to reject projects for which they believe slack is excessive, and subordinates respond by reducing slack. Our study suggests that increasing the span of control can improve the effectiveness of the budgeting process, which is an important component of most firms' control environments. Although prior research has generally assumed that increasing the span of control weakens the control environment, our study demonstrates that increasing the span of control can actually strengthen it.