The other side of budgeting

The other side of budgeting Hendi Yogi Prabowo ;  The Director of the Center for Forensic Accounting Studies on the Accounting Program at the Islamic University of Indonesia, Yogyakarta, PhD in Forensic Accounting from the University of Wollongong, Australia

JAKARTA POST, 17 Januari 2013

Recently, the former member of the House of Representatives and former beauty queen, Angelina Sondakh, was sentenced to four-and-a-half years in prison for her involvement in the Hambalang scandal. Many have said the sentence was too light for an offense of that severity.  Before the case was uncovered, Angie was a member of the House budget committee, whose responsibilities include deciding where taxpayers’ money is to be spent in the state budget.  The case of Angelina is just one of a number of scandals to have hit the Democratic Party as a number of its high-ranking politicians have been named corruption suspects or have been sentenced by the corruption court. Consequently, the Democratic Party needs to work really hard to restore its reputation for next year’s election. Over the past few months, especially after Angelina’s arrest, the word “budget” became popular among mass media. Last December, for example, the public criticized how some ministers’ offices were deemed “lazy” by the Indonesian Forum for Budget Transparency (FITRA).  This was mainly due to the fact that at the end of the year, they had not yet spent all their annual state budget allocations, which was seen by the public as an indication that not all of their planned programs for the year had been implemented. Theoretically, a budget is essentially a financial plan which depicts, among other things, the planned revenue and/or expenses depending on the type of the entity (e.g. profit oriented or non-profit oriented). Setting a budget also means setting targets for an organization, for which at the end of every budget period the target achievement will be assessed.  From such assessments, favorable and unfavorable variances will be identified and corrective action will be taken. As a form of a plan, a budget is important for organizations of various shapes and sizes to continuously align themselves with their objectives.  In practice, however, formulating a budget can be a difficult task. For example, different people with different interests may interpret achievable targets differently. Therefore, despite the numerous studies on the issue, there is still no universally accepted budget formulation method.  Budget systems such as line item budgeting, performance budgeting, program budgeting and zero-based budgeting are examples of budgeting systems that may work well in one environment but may fail in another. In addition to its benefits to an organization or even a country, studies also recognize a number of behavioral problems pertaining to budgeting activities. First, deciding what components should be included within a budget will likely depend on the interests of the formulators. In a state budget formulation, for example, although the main goal should be maximizing the limited public resources, many believe that in practice it is often politically (i.e. serving political party interests) rather than rationally (i.e. focusing on effectiveness and efficiency) constructed.  Second, since a budget is essentially a target, budget formulators may set it low so that they can easily achieve it and be credited for it. Company executives, for example, may receive financial incentives for meeting the sales budget. In the case of the state budget, a government office may spend its remaining budget funds on unplanned activities regardless of whether or not they will be beneficial to the public just to meet the spending target.  In some cases, pressure to meet the revenue and/or expenditure budget may also become a pressure to commit fraud as in the cases of financial statement fraud. In such cases, instead of evaluating their failures and making the necessary corrections to their operations, some companies that fail to meet their expected revenue simply resort to financial statement manipulation by deceptively overstating their revenue without proper accounting justifications.  Evidence suggests that the pressure to manipulate financial statements is even higher for companies that rely too much on the stock market as they need to impress current and potential investors with positive financial figures in their reports. Finally, we need to realize that there are both good and bad in budgeting. A good budget will assist an organization to achieve its targets in the future. In a state, a good budget essentially serves as the lifeblood for a government to carry out its duties.  Experts believe that ideally in a budgeting process, budget formulators need to address both the “how” and “why” questions.  That is to say that they need to be able to answer questions not only on how public resources must be spent but also why they have to be spent on a given set of programs and activities. At the end of the day, budget executors need to accept whatever results they have achieved and make the necessary evaluation and corrections for future improvements. ●