Budgetary evaluation, environmental uncertainty and performance: Case of Moroccan firms

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1 American Journal of Service Science and Management 2015; 2(1): 1-6 Published online January 30, 2015 ( Budgetary evaluation, environmental uncertainty and performance: Case of Moroccan firms Azzouz Elhamma, Omar Taouab National School of Business and Management, Ibn Tofaïl University Kenitra, Morocco address (A. Elhamma) To cite this article Azzouz Elhamma, Omar Taouab. Budgetary Evaluation, Environmental Uncertainty and Performance: Case of Moroccan Firms. American Journal of Service Science and Management. Vol. 2, No. 1, 2015, pp Abstract Using data from 62 firms based in Morocco, this research reports the findings of a study designed to examine the relationship between budgetary evaluation, environmental uncertainty and firms performance. In this research, we identified three principal styles of budgetary evaluation: strict budgetary evaluation adopted by 21% of the sample; moderate budgetary evaluation adopted by 27.4% of the surveyed enterprises and lower budgetary evaluation adopted by 51.6% of the sample. The environmental uncertainty doesn t have a significant impact on diversity of budgetary evaluation systems. The relationship between budgetary evaluation and firm s performance is significant and positive in enterprises operating in an uncertain environment and in those operating in a certain environment. Keywords Budgetary Evaluation, Contingency Approach, Environmental Uncertainty, Performance 1. Introduction No doubt, the budgetary control is a central tool of management control (Jordan, 1998; Van der Stede, 2003). Recently, several studies consider the budget as a key to the success of the many profitable companies (Burrow, klendl and Everard, 2008; Horngren, Datar and Rajan, 2012). Bruns and Waterhouse (1975) defines budget as financial plans that provide the basis for directing and evaluating the performance of individuals or segments of organizations. Since the seventies of the twentieth century, several studies have been conducted to understand the impact of the budgetary control on the firms performance. However, the explanation of its variety is less studied (Hartmann, 2000). These works were done in the developed countries, especially in the Anglo-Saxon World. However, this type of research is still absent in the Arab countries such as Morocco for example. Morocco that has chosen liberalization and the opening on the international market became pushed to use international accounting (IFRS) and management accounting innovations like the balanced scorecard and the activity based costing (ABC) for example (Elhamma, 2012, 2013; Elhamma A. and Yi Fei Z. 2013). This article aims to present the main results of an empirical study done in Morocco and attempts to highlight: the diversity of budgetary evaluation practices in the surveyed enterprises; the impact of the environmental uncertainty on the budgetary evaluation practices; and the impact of budgetary evaluation on firm s performance according to the environmental uncertainty. A literature review ( 2) and a presentation of our choices of research methodology ( 3) are necessary to conduct the statistical analysis and to present the main results ( 4). 2. Review of Literature and Formulation of Hypotheses In this section, we highlight firstly the diversity of the budgetary evaluation practices. Secondly, we study the impact of the environmental uncertainty on the budgetary evaluation and finally, we present the performance of the budgetary evaluation based on the environmental uncertainty.

2 2 Azzouz Elhamma and Omar Taouab: Budgetary Evaluation, Environmental Uncertainty and Performance: Case of Moroccan Firms 2.1. Budgetary Evaluation and Its Diversity Budgetary evaluation or reliance on accounting performance measures (RAPM) is an important area of management accounting research, which seeks to investigate the effects of the use of accounting data for evaluating managerial performance. However, several Confusions have arisen in relation to such core concepts as evaluative styles, budget emphasis, budgetary evaluation and RAPM. According to Hopwood (1972), evaluative styles are defined as the extent and manner in which budgetary data are used in performance evaluation. Otley (1978, p.127) describes style of evaluation as the way in which a unit manager perceives the budget to be used in evaluating his performance, in relation to other relevant information. Harrison (1993: 319), considers RAPM to be...the extent to which superiors rely on, and emphasize those performance criteria which are quantified in accounting and financial terms, and which are pre-specified as budget targets. In this research, we consider the budgetary evaluation as the use of the achievement of budgetary targets as an important criterion in evaluating the individual performance of the managers. This budgetary practice was studied by several researchers, especially in the Anglo-Saxon world. Hopwood (1972) developed three styles of evaluation performance which make distinctly different use of the accounting data: Budget Constrained style (BC) in which the manager's performance is evaluated on the basis of his ability to achieve the short-term budget; Profit Conscious style (PC) in which the budgetary and accounting data are used in a careful and flexible manner in the individual performance evaluation, often supplemented with other information; and Non Accounting style (NA) in which the budgetary information play a secondary role in the evaluation of managerial performance Impact of Environment Uncertainty on Budgetary Evaluation To explain the diversity of the budgetary evaluation systems by the environment uncertainty, it seems necessary to use the contingency theory. The basic principle of the contingency theory is clearly mentioned by Scott (1992: 89): "the best way to organize depends on the nature of the environment to which the organization relates". Contingency theory has two basic underlying assumptions: there is no one best way to organize: this approach arose from its opposition to the one best way related of traditional management theories (Scott, 2003) and any way of organizing is not equally effective (Galbraith, 1973). During the last four decades, the management control systems literature has been dominated by the contingency paradigm. Fisher (1995: 32) demonstrates that the contingent control literature is based on the premise that a correct match between contingent factors and a firm s control package will result in desired outcomes. The environmental uncertainty is the earliest variables examined in the contingency research of the 1960s (Burns & Stalker, 1961; Lawrence & Lorsch, 1967; Perrow, 1967; etc.). In management control, this contingency factor is presented as a powerful explanatory variable of its diversity (Chapman, 1997; Hartmann, 2000). The uncertainty is a change of the conditions of the environment which affects the controlled process. It makes the forecasts difficult and the fixing of budgetary targets awkward (Sponem, 2006:5). The effect of this variable on the budgetary evaluation is unclear, empirical RAPM studies generated conflicting results. Hartmann (2000: 472) demonstrates the uncertainty paradox (2000, p. 472). Three categories of results can be found: the first group: several studies have not obtained a significant relationship between the two variables. This result is obtained by Ross (1995); Soobaroyen (2007); etc.; the Second group: Hirst (1981), Merchant (1984) and Govindarajan (1984) highlight that the RAPM is not used in situations of the environmental uncertainty (negative correlation); and the third group: Simons (1987) and Ezzamel (1990) show that RAPM must be used specifically in cases of the environmental uncertainty (positive correlation). In front of these findings on the uncertainty paradox, one is compelled to argue that a high level of environmental uncertainty would not match with a system of evaluation based on accounting or budget performance and this is confirmed by Chenhall (2003). The main argument relates to the inappropriate focus of RAPM on outcomes as opposed to being associated to the level of complexity inherent in high environmental uncertainty situations. Merchant (1990) shows also that RAPM can have negative consequences on the functioning of the organization in an uncertain environment. In this context, the controllability principle is not respected. The following hypothesis is proposed. H1: there is a significant negative relationship between environmental uncertainty and budgetary evaluation Performance of Budgetary Evaluation According to the Environment Uncertainty Research studying the relationship between budgetary evaluation and organizational performance has reported inconsistent findings. For example, Hopwood (1972) and Kenis (1979) found a negative relationship between budgetary evaluation and performance. But, Stedry (1960) and Simons (1988) found that performance is greatest when budgetary evaluation system based on the achievement of the budget targets. These results are confirmed by Otley (1978). This researcher found a positive relationship between supervisory style and budgetary performance. According to Otley and Pollanen (2000, p. 483), these conflicting results require researchers to introduce a series of contingency variables such as environmental uncertainty for example. In literature, several researchers demonstrated that strict budgetary evaluation was less effective in high environmental uncertainty situations. Based on a survey of 58 business unit managers, Govindarajan (1984) found a negative correlation between environmental uncertainty and budgetary evaluation,

3 American Journal of Service Science and Management 2015; 2(1): with higher negative correlations for more effective business units. Also, Brownell (1985 and 1987) found that a lower budget emphasis would be beneficial on performance in high environmental uncertainty situations. The following hypothesis is proposed. H2: There is a significant negative relationship between strict budgetary evaluation and organizational performance for firms operating in an uncertain environment. There is a significant positive relationship between strict budgetary evaluation and organizational performance for firms operating in a certain environment. 3. Methodology In this second section, we highlight the characteristics of the sample and variables of this research Sample The study was based on data collected using questionnaires sent to enterprises based in morocco. Of 412 questionnaires sent out, a total of 76 questionnaires were returned. However, 14 of these were returned either completely unanswered or partly answered, making a response rate of 15%. The questionnaires were completed by 18 CFOs (29%), 23 management controllers (37%), 17 accountants (27%) and 4 other managers (6%). The sample consists of 48 industrial enterprises (77%), 6 firms of building and public works (10%), 6 enterprises of services (10%) and 2 commercial enterprises (3%). Regarding the firms size, 48% of this sample consists of SMEs and 52% of large firms Measurement of Variables Three variables were measured in the questionnaire: budgetary evaluation, environmental uncertainty and firm s performance. To operationnalize the budgetary evaluation in this research, we selected four items. A scale with five points (ranging for 1: not agree at all to 5: totally agree ) allows respondents to indicate their agreement with each of these situations: the evaluation of the manager is based on its ability to realize the budget targets ; you grant bonuses for responsible coming to realize the budget targets ; you decide promotions for responsible coming to realize the budget targets and you punish responsible not coming to realize the budget targets. A high total score means a strict budgetary evaluation (budgetary evaluation system based especially on the achievement of the budget targets) and vice versa. To measure the environmental uncertainty of the firms surveyed, we selected five items. These items are developed by Gordon and Narayan (1984): dynamism of the economic environment ; dynamism of the technological environment ; predictability of the competitor s activity in the market ; predictability of tastes and preferences of customers and review of marketing policies. For the first two items, the respondent had a choice of five responses (from 1 very stable to 5 very dynamic. For items 3 and 4, there were 5 responses (ranging from 1: completely predictable to 5: completely unpredictable ). Finally, for the last item, the respondent also had 5 possible answers (ranging from 1: very rarely to 5: very often ). A high score means that the environment is uncertain and dynamic and vice versa. To collect information on firm s performance, this question was posed: what do you think about the contribution of your budgetary evaluation system in improvement of these dimensions of performance? We had chosen three dimensions of performance: "profitability", "competitiveness" and "productivity". For each dimension, the respondent had five choices (ranging from 1: very low contribution to 5: very high contribution ). A high score means high performance and vice versa. 4. Results and Discussion In this third section, we present firstly the results about the diversity of the budgetary evaluation practices. Secondly, we test the impact of the environmental uncertainty on the budgetary evaluation and finally, we present the performance of the budgetary evaluation based on the environmental uncertainty Diversity of the Budgetary Evaluation To show the diversity of the budgetary evaluation practices in the companies surveyed, we used a classificatory analysis. It allows to grouping a similar practices. To do it, we used the hierarchical classification by a Ward algorithm that aims to minimize the internal variance of each class and maximize the variance between classes. The results of our analysis are shown in Table 1. Table 1. The main categories of budgetary evaluation practices Group % GROUP 1 Strict budgetary evaluation 21% GROUP 2 Moderate budgetary evaluation 27.4% GROUP 3 Lower budgetary evaluation 51.6% Total 100% Graph 1. The main categories of budgetary evaluation practices We identified three main groups: Group 1: 21% of enterprises surveyed adopted a system for evaluating the performance of individual managers

4 4 Azzouz Elhamma and Omar Taouab: Budgetary Evaluation, Environmental Uncertainty and Performance: Case of Moroccan Firms based specifically on the achievement of budget targets (strict budgetary evaluation); Group 2: over 27% of the sample are using moderately the evaluation systems based on achievement of budget targets (moderate budgetary evaluation); and Group 3: over 51% of the sample firms don't use the achievement of budgetary targets as a criterion to evaluate the individual performance of managers (lower budgetary evaluation) Impact of the Environment Uncertainty on the Budgetary Evaluation The results relating to the adoption of different styles of budgetary evaluation according to the environmental uncertainty are shown in table 2. Table 2. Budgetary evaluation styles depending on the environmental uncertainty Environment uncertainty (a) Enterprises operating in an uncertain environment Enterprises operating in a certain environment Strict budgetary evaluation Moderate budgetary evaluation Lower budgetary evaluation 46.2% 58.8% 46.9% 53.8% 41.2% 53.1% Total 100% 100% 100% (a) Distinction between uncertain environment / certain environment was done by using the median value 53.8% of enterprises adopting a strict budgetary evaluation operate in a certain environment, and 53.1% of companies adopting a lower budgetary evaluation operate also in a certain environment. These rates that are very similar don t give us a clear idea on the validation of the hypothesis H1. A linear regression must be used. The main results of linear regression between budgetary evaluation and environmental uncertainty are shown in table 3. Table 3. Regression analysis between budgetary evaluation and environmental uncertainty Independent Variable (environmental uncertainty) β t-statistic Dependent Variable (budgetary evaluation) ns R F-value ns No Significant ns The correlation between the two variables is not significant (r=0.024; p>10%). when budgetary evaluation as the dependent variable, overall model is not significant (F=0.033; p>10%) and explains only 0.1% of the variance. The hypothesis H1 is rejected by our analysis Impact of Budgetary Evaluation on Firm s Performance According to the Environmental Uncertainty To test statistically the hypothesis H2, we use the linear regression between budgetary evaluation and firm s performance in enterprises operating in an uncertain environment and in firms operating in a certain environment. Table 4 summarizes the results of this linear regression. Table 4. Linear regression between budgetary evaluation and performance according to the environment uncertainty Independent Variable (Budgetary evaluation) β t-statistic Dependent Variable (performance) Enterprises Enterprises operating in an operating in a uncertain certain environment environment * ** R F-value 4.422* 2.893** * Significant at 5% level ** Significant at 10% level For the two groups of enterprises, the budgetary evaluation has a significant and positive impact on the firm s performance. In enterprises operating in an uncertain environment, the performance is positively and significantly correlated with the budgetary evaluation (β=0.364; p<5%). This correlation is also positive and significant at 10% level (β=0.301; p<10%) in enterprises operating in a certain environment. The hypothesis H2 is partly validated by the results of our analysis. 5. Conclusion The aim of this article was the identification of possible differences between firms who adopted the budgetary evaluation system based on the achievement of the budget targets and others. In this research, we identifies three principal styles of budgetary evaluation: strict budgetary evaluation adopted by 21% of the sample; moderate budgetary evaluation adopted by 27.4% of enterprises surveyed and lower budgetary evaluation adopted by 51.6% of the sample. The first style is adopted especially by large firms. These results are confirming those of other studies (Merchant, 1981). Two major methodological limits should be highlighted: the modest size of the sample (only 62 firms) and the use of a perceptual approach to collect data. In this regard, we can have a difference between the responses collected and the real practices. In front of these limits, the results obtained in this research must be used with great caution. We used in this research two organizational variables to explain the diversity of the budgetary evaluation. In this context, many avenues of research are considered. First is the utilisation of non organizational determinants (behavioral), for example: leadership styles, the culture of leadership, legal ownership (independent or subsidiary of a Moroccan or

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