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Abstract: Practitioners in Europe and the U.S. recently have proposed two distinct approaches to address what they believe are shortcomings of traditional budgeting practices. One approach advocates improving the budgeting process and primarily focuses on the planning problems with budgeting. The other advocates abandoning the budget and primarily focuses on the performance evaluation problems with budgeting. This paper provides an overview and research perspective on these two recent developments. We discuss why practitioners have become dissatisfied with budgets, describe the two distinct approaches, place them in a research context, suggest insights that may aid the practitioners, and use the practitioner perspectives to identiiy fruitful areas for research.
INTRODUCTION
Budgeting is the cornerstone of the management control process in nearly all organizations, but despite its widespread use, it is far from perfect.1 Practitioners express concerns about using budgets for planning and performance evaluation. The practitioners argue that budgets impede the allocation of organizational resources to their best uses and encourage myopic decision making and other dysfunctional budget games. They attribute these problems, in part, to traditional budgeting's financial, top-down, commandand-control orientation as embedded in annual budget planning and performance evaluation processes (e.g., Schmidt 1992; Bunce et al. 1995; Hope and Fraser 1997, 2000, 2003; Wallander 1999; Ekholm and Wallin 2000; Marcino 2000; Jensen 2001).
We demonstrate practitioners' concerns with budgets by describing two practice-led developments: one advocating improving the budgeting process, the other abandoning it. These developments illustrate two points. First, they show practitioners' concerns with budgeting problems that the scholarly literature has largely ignored while focusing instead on more traditional issues like participative budgeting.2 Second, the two conflicting developments illustrate that firms face a critical decision regarding budgeting: maintain it, improve it, or abandon it?
Our discussion has two objectives. First, we demonstrate the level of concern with budgeting in practice, suggesting its potential for continued scholarly research. Second, we wish to raise academics' awareness of apparent disconnects between budgeting practice and research. We identify areas where prior research may aid the practitioners and, conversely, use the practitioners' insights to suggest areas for research.
In the second section, we review some of the most common criticisms of budgets in practice. The third section describes and analyzes the main thrust of two recent practiceled...