Is Budget Slack Immoral?

Abstract

Is budget slack immoral? This is still a subject of debate. But it is very clear that budget slack is somewhat a behavior of biased information delivered from budget owners to their superior management. Some of the budget slack may be caused by the uncertainty of future business environment, while others may be caused intentionally for the private benefits of budget owners. This text believes that the budget slack caused by business uncertainty is not immoral and somewhat reasonable. But the question is, how to measure the part of the budget slack caused by business uncertainty? This article develops a comprehensive approach on evaluating the budget slack of company’s business units caused by business uncertainty leveraging their operation efficiency and transfer value under the internal transfer system. This result greatly assists in evaluating the rationale of the budget slack of company’s business units from the impact of business uncertainty. If the budget slack of a company’s business unit is far beyond the reasonable range from the empirical perspective, it could be considered as suspicious for further investigation.

Keywords: budget slack, operation efficiency, transfer value, utilization, billability

JEL Classification: M41, G30, J30