Managerial Auditing Journal Volume 17, Number 3, 2002 pdf

110 Access to
Managerial Auditing
Journal
online
111 Abstracts & keywords
113 Accounting and auditing
requirements of the Sudan
Companies Act 1925: time for
change
John A. Brierley, Hussein M. El-Nafabi
and David R. Gwilliam
117 Re-engineering recruitment to the
accounting profession
Malcolm Smith and Christopher Graves
122 A critical evaluation of the effect of
participation in budget target
setting on motivation
Pamela Reid
130 An assessment of the newly defined
internal audit function
Albert L. Nagy and William J. Cenker
138 Auditing the indirect consequences
of rework in construction: a case
based approach
Peter E.D. Love
147 Corporate governance:
communications from internal and
external auditors
Janet L. Colbert
153 Slack in public administration:
conceptual and methodological

issues
Tor Busch
Managerial Auditing Journal
Volume 17, Number 3, 2002
Critical perspectives on accounting and finance
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Managerial Auditing Journal online
An advanced knowledge resource for the entire organization
Access via the Emerald Web site – />[ 110 ]
Accounting and auditing requirements
of the Sudan Companies Act 1925:
time for change
John A. Brierley, Hussein M. El-Nafabi and
David R. Gwilliam
Keywords The Sudan, Legal matters,
Balance sheets, Profit and loss, Accounting
The Sudan Companies Act 1925 is outdated.
There is a need for substantial revision to the
Act either in accordance with, for example,
current UK legislation, or a framework more
directly suited to the economic and legal
environment of the Sudan. At a general level
this should include the preparation of a profit
and loss account, specific formats for the
profit and loss account and balance sheet,
notes to the accounts and an auditor’s report
stating whether or not the accounts give a
true and fair view of the state of a company’s
affairs.
Re-engineering recruitment to the
accounting profession
Malcolm Smith and Christopher Graves
Keywords Recruitment, Biodata, Forecasting,
Performance, Modelling
There can be few personnel techniques so
lowly regarded as the recruitment interview.

Yet we persevere with the use of the
technique despite the overwhelming
evidence of its deficiencies. The accountancy
and auditing professions are as guilty as
most in this regard, and suffer from rates of
attrition and job turnover, which should be
an embarrassment. But there are
alternatives available, and this paper reports
on the development of revolutionary
techniques which might have a significant
impact on recruitment to the accounting and
auditing professions in the UK.
A critical evaluation of the effect of
participation in budget target setting
on motivation
Pamela Reid
Keywords Accounting, Theory, Target setting,
Participation, Performance
This paper critically evaluates the effect of
participation in budget target setting in an
effort to increase the probability of an
organisation’s goals being achieved and, in
so doing, considers some of the numerous
theories of motivation. Such theories include
Maslow through to equity and expectancy
theories. However, given that there are a
multiplicity of variables at work here, the
author concludes that the effect of
participation is situation specific and
dependent upon such variables: there is no

‘‘perfect’’ budgeting system.
An assessment of the newly defined
internal audit function
Albert L. Nagy and William J. Cenker
Keywords Internal audit, Committees,
Risk management, Corporate governance,
Competences
The new definition of internal auditing
defines the function as an independent,
objective assurance and consulting activity
designed to add value and improve an
organization’s operations. The purpose of
this paper is to summarize an assessment of
this new definition obtained through
structured interviews from 11 internal audit
directors of large publicly traded companies.
The responses from the directors indicate
that there are wide differences in viewpoints
and objectives; but a definite shift has
occurred in the overall scope of internal
audit towards operational activities. While
most of the interviewees are in conceptual
agreement with the new internal audit
definition, an underlying warning is
vocalized: ‘‘Don’t throw out the franchise’’.
That is, the traditional role of the internal
auditor should not be completely abandoned.
These, along with other responses pertaining
to related issues and suggestions for future
research, are summarized throughout the

paper.
Auditing the indirect consequences of
rework in construction: a case based
approach
Peter E.D. Love
Keywords Construction industry,
Indirect costs, Contract, Defective premises
There is little known about the indirect
consequences of rework in construction
projects, especially the financial costs.
Therefore, this paper uses examples from a
case study to demonstrate the potential
indirect consequences and costs that are
associated with undertaking rework in
building construction projects. A novel
taxonomy for categorising the indirect
consequences at an individual level,
organisational level and project level is
presented. Based on the findings from
examples derived from the case study, it is
suggested that the incidence of rework can
have a multiplier effect of up to six times the
actual (direct) cost of rectification. To reduce
these costs it is concluded that design and
construction organisations must improve
their quality management systems by
including a quality system for continuously
auditing, analysing and presenting direct as
well as indirect rework costs.
[ 111 ]

Managerial Auditing Journal
17/3 [
2002]
Abstracts & keywords
# MCB UP Limited
[
ISSN 0268-6902]
Abstracts
&
keywords
Corporate governance:
communications from internal and
external auditors
Janet L. Colbert
Keywords Corporate governance, Auditors,
Communication, Finance
International Standards on Auditing (ISAs)
require external auditors to communicate
with the client’s governance body regarding
significant matters which came to the
auditors’ attention during the engagement.
Similarly, the authoritative Practice
Advisories (PAs), issued by the Institute of
Internal Auditors (IIA), mandate that
internal auditors discuss certain items with
the board. Thus, the governance body/board
should be receiving information from two
groups of auditors. Compares and contrasts
the requirements of the ISAs and PAs with
regard to communications with the

governance body/board. The differences in
the communications to the governance body/
board by the external and internal auditors
derive mainly from the focus of each group.
The external auditors serve those users
external to the organization; in contrast,
internal auditors serve the board, which is
responsible for the internal aspects of the
entity. Besides communication on financial
issues, the board also desires information on
operational and compliance matters. The
comparison of the international external
auditing and the internal auditing standards
shows that some information received by the
governance body/board is similar. However,
much is unique. Both groups of auditors aid
the governance body/board in achieving its
objective of guiding the entity to carry out its
mission effectively and efficiently
Slack in public administration:
conceptual and methodological issues
Tor Busch
Keywords Costs, Management, Efficiency,
Public administration
Ever since its introduction, the concept of
organisational slack has constituted the basis
for a considerable body of research within
behavioural science. A great deal of this
research has concentrated on budgetary
slack, and within the field of public

administration the focus has been on the
slack- or budget-maximising bureaucrat. As
the reduction of slack is the purpose of many
of the techniques which are part of the new
public management, there is a need to focus
on how to measure changes in the level of
slack. The objective of this paper is to discuss
the relationship between three central
concepts within the research on slack:
organizational slack, budgetary slack, and
the discretionary budget; to assess whether
these concepts are suitable for public
organizations; and to discuss problems of
measurement.
[ 112 ]
Abstracts & keywords
Managerial Auditing Journal
17/3 [2002] 111–112
Accounting and auditing requirements of the Sudan
Companies Act 1925: time for change
John A. Brierley
Sheffield University Management School, The University of Sheffield,
Sheffield, UK
Hussein M. El-Nafabi
Al-Madina Al-Munawarah College, Al-Madina Al-Munawarah, Saudi Arabia
David R. Gwilliam
School of Management and Business, University of Wales Aberystwyth,
Aberystwyth, UK
Introduction
The Sudan Companies Act 1925 (hereafter the

Act) was modelled on the UK Companies Act
1908. Despite the Sudan gaining
independence from the UK in 1956 it has not
been amended. One of the reasons for this has
been the distraction of the Sudanese civil war
which broke out in 1955 and, except for ten
years of peace following the 1972 Addis Ababa
Agreement, has continued ever since. This
has been exacerbated by seven different
regimes (three civilian and three military)
which have governed the country since
independence. The common features shared
by these regimes have been frequent changes
of government, continuous cabinet reshuffles
and high ministerial turnover. For example
the Ministry of Economic Planning, which
plays a major role in the management of the
economy, has been led by 32 ministers since
independence. The last multiparty
democratic government, which came to office
in 1986, saw four ministerial reshuffles in its
three years in office with some ministerial
offices changing hands on four occasions.
These frequent cabinet reshuffles led to a
lack of continuity in government which has
been exacerbated by the lack of clear
descriptions of ministerial posts, and of
agreed policies or manifestos to be followed
by the appointed ministers. Indeed, the lack of
clear policies and strategies has made it the

general norm in the Sudanese government’s
history that every new minister starts his job
by scrapping the policies adopted by his
predecessor. This government instability
affects the environment in which accounting
and auditing operate and has contributed to
the fact that no amendments have been made
to the Act. Similarly, other acts established
under British colonial rule have not been
subsequently amended, these include the
Bills of Exchange Act 1917 and the Insolvency
Act 1929.
Furthermore, it has been argued that the
establishment of a professional accounting
body in the Sudan was necessary to develop
accounting and auditing practice. To this end
individuals who were members of
professional accounting bodies outside the
Sudan, notably the Institute of Chartered
Accountants in England and Wales and the
Association of Chartered Certified
Accountants in the UK, made several
attempts in the early 1980s with the
government to establish a professional
accounting body in the Sudan. Due to the
rapid changes in the political system during
the 1980s these efforts did not come to
fruition until the Certified Accountants Act
1988, which established the Sudanese
Association of Certified Accountants (SACA).

Article 4 of the 1988 Act sets out the functions
of the council of the SACA, which includes
the enhancement of the role of accounts in
the commercial environment. This has not
led, however, to any changes in the Act. Thus
government instability and the lack of
influence of the accounting profession has
meant that the Companies Act 1925 has never
been amended.
The Act was introduced to assist the
formation of private and public limited
liability companies, and provide rules for the
governance of their operations and financial
affairs, but today it is out of date. The
objective of this paper is to illustrate the
outdated nature of the Act’s provisions
relating to accounting and auditing and offer
suggestions for updating the legislation. The
paper is divided into three sections. The first
section discusses the Act’s accounting
provisions, the second section discusses the
Act’s auditing provisions, and the third
section provides a brief discussion of
necessary changes to the Act.
Accounting provisions
Section 123(1) of the Act requires that every
company shall keep proper books of account
The current issue and full text archive of this journal is available
at
/>[ 113 ]

Managerial Auditing Journal
17/3 [
2002] 113–116
# MCB UP Limited
[
ISSN 0268-6902]
[
DOI 10.1108/02686900210419886]
Keywords
The Sudan, Legal matters,
Balance sheets, Profit and loss,
Accounting
Abstract
The Sudan Companies Act 1925 is
outdated. There is a need for
substantial revision to the Act
either in accordance with, for
example, current UK legislation, or
a framework more directly suited
to the economic and legal
environment of the Sudan. At a
general level this should include
the preparation of a profit and loss
account, specific formats for the
profit and loss account and
balance sheet, notes to the
accounts and an auditor’s report
stating whether or not the
accounts give a true and fair view
of the state of a company’s affairs.

in which there shall be full, true and
complete accounts of the transactions and
affairs of the company. Section 124(1) states
that every company has to prepare a balance
sheet at least once a year and at intervals of
not more than 15 months. Further, section
124(2) requires that the balance sheet has to
be audited by the auditor of the company, and
the auditor’s report should be attached to the
balance sheet, or there should be inserted at
the foot of the balance sheet a reference to the
report. The auditor’s report should be read
out at the general meeting and should be
open to inspection by any member of the
company.
Section 125(1) requires that the balance
sheet contains a summary of the property
and assets, and the capital and liabilities of
the company. Although no indication is
provided as to the amount of disclosure,
details should be provided of the ‘‘general
nature’’ of assets and liabilities and ‘‘how the
value of fixed assets has been arrived at’’.
Details about the content of the balance sheet
are stated in the Third Schedule Form C of
the Act (see Appendix). There is no
requirement to disclose comparative figures
on the face of the balance sheet; hence it is
not possible to make comparisons of amounts
disclosed in the balance sheet with the

previous year. The balance sheet does not
require separate disclosure of the accounting
policies used or further disclosure of items in
the form of a note to the balance sheet. The
balance sheet does not provide separate
disclosure of a number of items, such as
investments, like government securities,
shares and debentures. Nor is there a
requirement for a breakdown of stocks and
work-in-progress and debtors (Tyagi, 1982).
There is no detailed breakdown of liabilities,
for example, Tyagi (1982) notes that
disclosure is not required of proposed
dividends and of the security for any loans
received.
There is no requirement to prepare a profit
and loss account. The only requirement is to
disclose the profit for the financial year on
the face of the balance sheet, although this
requirement does not apply if a separate
profit and loss account is prepared. If a profit
and loss account is prepared it does not have
to follow any specific format, which may lead
to difficulties when making comparisons
between companies.
Auditing provisions
Section 138 of the Act specifies the powers
and duties of auditors. Section 138(1) states
that auditors have the right of access at all
times to the books, records and accounts of a

company and are entitled to receive from the
directors and officers of the company such
information and explanations as may be
necessary to carry out their work as auditors.
Auditors are required to report on:
.
whether or not they have obtained all the
information and explanations they
require;
.
whether in their opinion the balance sheet
has been drawn up in conformity with the
law (presumably the Act); and
.
whether or not the balance sheet exhibits
a ‘‘true and correct view of the state of the
company’s affairs according to the best of
their information and explanations given
to them, and as shown by the books of the
company’’ (emphasis added).
The requirement to show a true and correct
view is contrary to the concept of ‘‘true and
fair view’’ in the UK. According to Tyagi
(1982), the auditor is unable to certify
whether the financial statements exhibit a
‘‘correct’’ view because the auditor is not
connected with the management of the
company. He argues that because the balance
sheet is a summary statement of the
activities of the whole company it is more

appropriate for the auditor to assess whether
the balance sheet shows a true and fair view.
The Act does not require the auditor to state
whether or not the profit and loss account, if
prepared, gives a true and fair view of the
profit (or loss) for the period, nor whether or
not the accounts have been prepared properly
in accordance with the provisions of the Act.
Section 137 of the Act specifies the
requirements regarding the qualifications
and appointment of auditors. The Act does
not specify the necessary qualifications of
persons who are eligible to act as company
auditors, although in order to preserve
auditor independence section 137(5) does
prevent certain persons from acting as
auditors. These include:
.
a director or officer of the company;
.
a partner of such a director or officer;
and
.
any person in the employment of a
director or officer.
Section 137(1) requires that an auditor should
hold a certificate issued by the Minister of
Finance and National Economy. Usually the
auditor is appointed at the annual general
meeting until the next such meeting. If for

some reason an auditor is not appointed at
the annual general meeting, section 137(4)
states that the court may, following the
application of any member of the company,
appoint an auditor and fix their
remuneration for the current year.
[ 114 ]
John A. Brierley,
Hussein M. El-Nafabi and
David R. Gwilliam
Accounting and auditing
requirements of the Sudan
Companies Act 1925: time for
change
Managerial Auditing Journal
17/3 [2002] 113–116
Discussion
The 1925 Companies Act is outdated and does
not reflect the changes and the worldwide
developments in the areas of accounting and
auditing practice. There is clearly a need for
substantial revision of the Act either in
accordance with, for example, current UK
legislation or, perhaps more appropriately,
in line with a framework more directly
suited to the economic and legal environment
of the Sudan. At a general level this should
include the preparation of a profit and loss
account, specific formats for the profit and
loss account and balance sheet, notes to the

accounts and an auditor’s report stating
whether or not the accounts give a true and
fair view of the state of a company’s affairs.
Reference
Tyagi, C.L. (1982), ‘‘Balance sheet reform needed’’,
Sudanow, Vol. 7 No. 11, p. 29.
Appendix. Third Schedule Form C of the
Sudan Companies Act 1925
Limited
Balance-sheet
Asat 19
Capital and liabilities
Capital LS. m/ms
Authorized capital . . . . . . shares of LS . . . . . . each . . . . . . . .
Issued capital . . . . . . shares of LS . . . . . . each . . . . . . . .
Subscribed capital . . . . . . shares of LS. each . . . . . . . .
Amount called up at LS. per share . . . . . . . .
Less calls unpaid
Add – forfeited shares (amount paid-up) . . . . . . . .
Reserve fund or development fund . . . . . . . .
Any sinking fund
Any other fund created out of net profits . . . . . . . .
Any pension or insurance fund . . . . . . . .
Provision for bad and doubtful debts . . . . . . . .
Loans on mortgage or mortgage debenture bonds . . . . . . . .
Loans otherwise secured (stating the nature of security) . . . . . . . .
Loans unsecured
Interest
Accrued on mortgages, debentures of other secured loans . . . . . . . .
Unclaimed dividends . . . . . . . .

Liabilities
For goods supplied . . . . . . . .
For expenses
For acceptances
For other finance
Advanced payments and unexpired discounts .
(For the portion of which value has still to be given, e.g. in the case of the
the following classes of companies:
Newspaper, fire insurance, theatre, club, banking, steamship companies, etc.) . . . . . . . .
[ 115 ]
John A. Brierley,
Hussein M. El-Nafabi and
David R. Gwilliam
Accounting and auditing
requirements of the Sudan
Companies Act 1925: time for
change
Managerial Auditing Journal
17/3 [2002] 113–116
Profit and loss LS. m/ms
Balance as per previous balance-sheet . . . . . . . .
Less – appropriation thereof . . . . . . . .
Balance brought forward . . . . . . . .
Profit since last balance-sheet . . . . . . . .
(N.B. – These details need not to be given if the same be contained in
a profit and loss account attached to the balance-sheet.)
Contingent liabilities – claims against the company not acknowledged
as debts
Money for which the company is contingently liable . . . . . . . .
Arrears of cumulative preference dividends . . . . . . . .

Property and assets
Fixed capital expenditure . . . . . . . .
(Distinguishing as far as possible between expenditure upon
goodwill, land, buildings, leaseholds, railway sidings, plant,
machinery, furniture, development of property, patents, trade
marks and designs, interest paid out of capital during construction,
etc., and stating in every case the original cost and the total
depreciation written off under each head).
Preliminary expenses . . . . . . . .
Commission or brokerage . . . . . . . .
(Commission or brokerage paid for underwriting or placing shares
or debentures until written off) . . . . . . . .
Stores and spare gear . . . . . . . .
Loose tools
Live stock
(Stating mode of valuation, e.g. cost or market value.)
Bills of exchange
Book debts
(Distinguishing in the case of a bank between those considered good
and in respect of which the bank holds no security other than the
debtor’s personal security, and distinguishing in all cases between
debts considered goods and debts considered doubtful or bad. Debts
due by directors or other officers of the company or any of them
either severally or jointly with any other persons to be separately
stated in all cases.)
Advances
(Recoverable in cash or in kind or for value to be received,
e.g. rates, taxes, insurance, etc.)
Investments
(Nature of investment and mode of valuation, e.g. cost or market value.)

Interest accrued on investments . . . . . . . .
Cash and other balances . . . . . . . .
Amount in hand
Balances with agents and bankers (in detail, showing whether on deposit
or current etc.)
Profit and loss (giving in the case of a debit balance details as far as
possible as in the case of a credit balance) . . . . . . . .
[ 116 ]
John A. Brierley,
Hussein M. El-Nafabi and
David R. Gwilliam
Accounting and auditing
requirements of the Sudan
Companies Act 1925: time for
change
Managerial Auditing Journal
17/3 [2002] 113–116
Re-engineering recruitment to the accounting
profession
Malcolm Smith
School of Accounting and Information Systems, University of South Australia,
Adelaide, Australia
Christopher Graves
School of Accounting and Information Systems, University of South Australia,
Adelaide, Australia
During this decade, dramatic changes have
occurred in the business environment. In
order to remain competitive, accountancy
firms now need to provide a diverse range of
services to their clients, at low cost. To meet

these challenges, it is critical that
accountancy firms select their employees
carefully, as failure to select the right staff
can be costly. Some of the costs associated
with poor recruitment decisions include:
lower productivity and competitiveness,
potential loss of clients, training costs,
advertising costs, recruitment fees and
redundancy packages. The US Department of
Labour estimates that a poor recruitment
decision can cost the employer an amount
equal to 30 percent of the employee’s first
year’s potential earnings (Hacker, 1997).
KPMG state that ‘‘the current estimate of
investment per student is £100,000’’
(KPMG-UK, n.d.).
Recruiters face a difficult task as they need
to make a decision that predicts the
contribution that an individual will make to
the organisation in the future based on the
factual and personal information available
now. As a result, any recruitment selection
procedure adopted by the accounting
profession will be an imprecise selection tool.
Essentially, there is no real substitute for
observing the performance of individuals in
the field, hence the popularity of intern
relationships. However, these may not
always be available. Practical tests
conducted at interview may be a less than

satisfactory alternative, but are still not
universally adopted.
Conventional approaches to
recruitment
Most frequently, recruiters adopt a two-stage
procedure:
1 Select (or not) candidates for interview
based on the contents of their application
form requiring biographical information
(biodata).
2 Make a final employment decision based
on a personal interview; this itself may be
a two-stage procedure if applicants are
first used to draw up a short-list of
potential appointees.
Dipboye et al. (1984) suggest that ‘‘no other
personnel technique is held in such low
esteem in the research literature as the
interview’’, yet despite its demonstrable lack
of reliability and validity, the unstructured
interview remains the prime assessment
mechanism in graduate recruitment. This is
despite the fact that, before the interview,
applicants complete a form containing
historic and verifiable information about the
individual which would permit the
development of scoring systems and the
construction of models with potentially high
predictive ability of eventual success.
In the UK, around 30 percent of graduates

entering the profession ultimately fail to
qualify as accountants, a statistic which
Harvey-Cook and Taffler (1987) attribute to
failures of recruitment procedures.
Harvey-Cook et al. (1998) and Gammie (1999)
demonstrate that selection models using
biographical data have value to recruiters
and outperform conventional approaches;
they suggest that significant benefits can be
accrued by the accountancy profession
through the adoption of formal statistical
procedures at the selection stage.
Emerging recruitment techniques
Harvey-Cook
et al.
(1998)
Holland (1976) finds that people with similar
background characteristics form six
vocational types: realistic, social,
investigative, creative, conventional and
enterprising. Accountants are generally of
the ‘‘conventional’’ type. Biographical data
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Managerial Auditing Journal
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2002] 117–121
# MCB UP Limited
[

ISSN 0268-6902]
[
DOI 10.1108/02686900210419895]
Keywords
Recruitment, Biodata,
Forecasting, Performance,
Modelling
Abstract
There can be few personnel
techniques so lowly regarded as
the recruitment interview. Yet we
persevere with the use of the
technique despite the
overwhelming evidence of its
deficiencies. The accountancy and
auditing professions are as guilty
as most in this regard, and suffer
from rates of attrition and job
turnover, which should be an
embarrassment. But there are
alternatives available, and this
paper reports on the development
of revolutionary techniques which
might have a significant impact on
recruitment to the acc ounting and
auditing professions in the UK.
on personal characteristics and previous
academic performance have been shown to
be the best predictor of employee turnover
(Gable et al., 1989), job performance (Hunter

and Hunter, 1984) and voluntary withdrawal
during training (Drakeley et al., 1988).
In the UK, the most common cause of
withdrawal from the profession during
training is examination failure. As a result,
Harvey-Cook et al. (1998) first developed a
model for success in the professional
examinations (Model 1) and then a model for
‘‘success’’ which incorporated both progress
in examinations and good work performance
(Model 2). Both of these models were
constructed based on applicants to the
profession employed by second-tier
accounting firms (i.e. not the then Big 6).
The models
The two models are described as follows:
1 Model 1: to predict examination success. Six
significant variables were identified in
trainee application forms that contributed
to examination success. In descending
order of importance:
.
number of grade As at ‘‘O’’ level;
.
a good first degree (first or upper
second class);
.
number of arts or language ‘‘A’’ levels
(a negative variable);
.

first degree in science or mathematics;
.
head boy or girl at school;
.
independent school background.
The model’s overall probability of correct
classification is 74 percent, with 78
percent of ‘‘pass’’ predictions correct and
69 percent of ‘‘fail’’ predictions correct in a
sample of 229 applicants taking the
professional examinations (see Table I).
2 Model 2: to predict good work performance.
Again six significant variables were
identified. In descending order of
importance:
.
number of ‘‘A’’ levels in science
subjects;
.
head boy or girl at school;
.
number of teams and societies at
school;
.
exemption from the graduate
conversion course specifically
designed for non-accounting graduates;
.
degree class for first degree;
.

size of social interaction groups at
university (a negative variable).
The model’s overall probability of correct
classification is 75 percent, with 75
percent of the ‘‘successful’’ predictions
correct, and 76 percent of the
‘‘unsuccessful’’ predictions correct (see
Table II).
These two models were confirmed by
applying them to a second group of
applicants three years later.
Relevance to the accounting and auditing
professions
As both models are based on UK data, the
important variables in each of the models
provides a fair reflection of what might be
important characteristics in a UK
environment:
.
‘‘O’’ level (now GCSE) grades are the most
important feature in predicting
examination success. These exams are
undertaken at age 16 and provide the basic
evidence of performance ability for
university selection interviews in the
following year. Although ‘‘A’’ levels are
completed at age 18, in most cases these
will only determine the particular
university destination; with minimal
performance at ‘‘A’’ levels, the ‘‘O’’ level

performance may determine university
entrance.
.
Students who choose electives in
mathematics and science at school are
likely to fare better than those choosing
arts and languages.
.
Students who choose an accounting
degree at university, and who are
therefore not subjected to a graduate
conversion course, or equivalent, should
do better in the profession.
.
Interpersonal skills and social activities
undertaken at school are important and
positive – e.g. school dux, sports colours
and team participation. The opposite
appears to be true at university, where
extra-curricula activities appear to have a
negative effect.
.
The class of first degree awarded is
significant, so the achievement of First
Class Honours or a ranking in the top 5
percent of graduating students would be
positively regarded.
.
This study showed that an independent
school background was a positive factor,

though one less important than the other
factors.
Gammie (1999)
Gammie (1999) constructed similar models
for predicting success in the professional
examinations. However, this study extends
Table I
Model 1: to predict examination success
Predicted
pass
Predicted
fail
Correct
(%) Total
Actual pass 102 29 78 131
Actual fail 30 68 69 98
Overall 132 97 74 229
[ 118 ]
Malcolm Smith and
Christopher Graves
Re-engineering recruitment to
the accounting profession
Managerial Auditing Journal
17/3 [2002] 117–121
prior research by developing and testing
models within a Scottish environment.
Second, the models are applicable to all
professional training offices (i.e. first and
second tier accountancy firms). Finally, the
models are extended to incorporate honours

graduates who complete an additional year of
study (rather than the Year 3 categorisation
common for honours awards within English
universities).
This study was based upon the biodata
collected from recently qualified
accountants, who trained within the whole
spectrum of ICAS training offices. In
Scotland, students can choose either to
complete an ordinary degree (three years
duration) or decide to complete a fourth year
to obtain an honours degree. As a result,
Gammie (1999) developed separate models for
ordinary and honours graduates of fully
accredited degrees.
The models
The two models are described as follows:
1 Model 1: to predict examination success of
fully-accredited honours graduates. Three
significant variables were identified as
indicators of examination success. In
descending order of importance:
.
honours award;
.
number of jobs related to chartered
accountancy whilst at school and
university;
.
whether progressed directly from

university to ICAS training.
The model’s overall probability of correct
classification is 69 percent, with 69
percent of ‘‘pass’’ predictions correct and
69 percent of ‘‘fail’’ predictions correct in a
sample of 149 respondents taking the
professional examinations (see Table III).
2 Model 2: to predict examination success of
fully-accredited ordinary graduates. Two
significant variables were identified as
indicators of examination success. In
descending order of importance:
.
number of jobs related to chartered
accountancy whilst at school and
university;
.
number of resits in second and third
year at university.
The model’s overall probability of correct
classification is 61 percent, with 77
percent of ‘‘pass’’ predictions correct and
43 percent of ‘‘fail’’ predictions correct in a
sample of 225 respondents taking the
professional examinations (see Table IV).
These two models were confirmed by
applying them to a second group of trainees
one year later.
Prior research in recruitment to the
accountancy profession has usually defined

success as ‘‘trainees who pass their
examinations’’. Gammie (1999), however,
adopted a more restrictive definition of
success, being ‘‘trainees who pass their
examination at their first attempt’’. As a
result, the models developed by Gammie
(1999) are not readily comparable with
models developed by other researchers.
Relevance to the accounting and auditing
professions
As both models are based on data collected
from Scotland, the important variables in
each of the models provides a fair reflection
of what might be important characteristics in
the Scottish accountancy profession:
.
With regard to fully-accredited honours
graduates, the most important predictor of
ICAS examination success is the degree
classification. This result suggests that
the achievement of First Class Honours
would be positively regarded. One
practical limitation with using this
variable arises from a timing issue.
Recruitment of trainees often occurs early
on in students’ honours year and
therefore the degree classification is
unknown (i.e. has not been awarded).
Gammie argues that this can be overcome
by using the academic staff’s prediction of

the degree classification.
.
Regardless of the type of fully-accredited
degree taken, a significant factor in
predicting ICAS examination success is
the number of chartered accountancy-
related jobs undertaken whilst at school
and university. Clearly, this suggests that
the more jobs undertaken by students
which relate to the profession, the greater
their chance in passing the ICAS
examinations at their first attempt.
Table II
Model 2: to predict good work performance
Predicted
success
Predicted
leaver
Correct
(%) Total
Actual success 60 20 75 80
Actual leave r 18 56 76 74
Overall 78 76 75 154
Table III
Model 1: to predict examination success of fully-accredited honours
graduates
Predicted pass
first time
Predicted fail
one or more

Correct
(%) Total
Actual pass first time 68 30 69 98
Actual fail one or more 16 35 69 51
Overall 84 65 69 149
[ 119 ]
Malcolm Smith and
Christopher Graves
Re-engineering recruitment to
the accounting profession
Managerial Auditing Journal
17/3 [2002] 117–121
.
Fully-accredited honours graduates are
more likely to pass the ICAS examinations
at their first attempt if they commence the
ICAS examination process straight after
completing their degree.
.
This study suggests that the greater
number of resits encountered by
university students studying fully-
accredited ordinary degrees, the less
likely they are to pass ICAS examinations
in their first attempt.
Applying these models in
practice
Harvey-Cook et al. (1998) used a decision
matrix, based on appropriately weighted
variables from Model 1, to generate a logit

score with the following outcome
probabilities. Table V is potentially
invaluable to accountancy firms in
formulating successful recruitment
strategies.
Based upon this matrix, nearly half of all
applicants with scores < 0.20 fail, and the
chances of individuals in this group passing
are extremely low (5 percent). Conversely,
only 6 percent of those with scores and > 0.80
are likely to fail.
Application of a cut-off score of 0.70 for
recruitment through Model 1 would have
given a 14 percent probability of failure in the
test group (rather than the 25 percent
observed). Application of a cut-off score of
0.80 through Model 2 would have given a 7
percent probability of a ‘‘poor performer’’
(rather than the 24 percent observed).
The models were further applied to a set of
applicants (262 in total) to determine how
closely their predictions conformed to
recruiters’ ‘‘call for interview’’ decisions.
Applicants were assigned to one of three
groups, based upon their combined scores
from both models. Applicants were classified
as ‘‘high’’ (highly desirable) if they scored
above the suggested cut-offs for each
model (0.7 for Model 1, 0.8 for Model 2).
Applicants were classified as ‘‘low’’

(undesirable) if they scored below the cut-offs
for both models.
As Table VI shows, only 50 percent (19) of
the applicants rated ‘‘desirable’’ by the
models were actually called for interview,
while almost a third (41) of those classified
‘‘undesirable’’ were. As a result, of the 38
‘‘desirable’’ candidates, only 18 percent (7)
received offers of employment, while 34
percent (13) of those classified as
‘‘undesirable’’ received employment offers.
Recruiters could provide no adequate
explanation of the differences, suggesting
flaws in the interview process and/or
indeterminate variables possibly associated
with the corporate culture of the accounting
firm.
Gammie’s (1999) study has important
implications for the structure of accounting
degrees in the UK. These models suggest that
incorporating accountancy placements and
formal internships into the degree structure,
as is already commonly the case with
sandwich-type business studies degrees, will
have a significantly positive influence on
student success in professional accountancy
programs. This is consistent with the
findings of Eskew and Faley (1988) which
suggest that previous related experience is
significant for the prediction of student

performance. Second, performance in
undergraduate degrees (i.e. honours
classification or number of resits in second
and third year) continues to be a useful
indicator for recruiters in their task of
selecting the most appropriate graduates.
Finally, honours graduates should be
encouraged to progress directly from
university into the professional accounting
programs as this will maximise their chances
of passing the professional exams at their
first sitting.
Table IV
Model 2: to predict examination success of fully-accredited ordinary
graduates
Predicted pass
first time
Predicted fail
one or more
Correct
(%) Total
Actual pass first time 94 28 77 122
Actual fail one or more 59 44 43 103
Overall 153 72 61 225
Table V
Outcome probabilities
Score
Probability of
failure (%)
Probability of

pass (%)
< 0.20 49 5
0.21 < 0.40 38 20
0.41 < 0.60 30 30
0.61 < 0.80 16 35
0.81 < 1.00 646
Table VI
‘‘Call for interview’’ decisions
Firm decision
Interview Reject Total
Score
n
(%)
n
(%)
n
(%)
High 19 50 19 50 38 100
Intermediate 40 46 47 54 87 100
Low 41 30 96 70 137 100
Total 100 162 262
[ 120 ]
Malcolm Smith and
Christopher Graves
Re-engineering recruitment to
the accounting profession
Managerial Auditing Journal
17/3 [2002] 117–121
Summary
The models developed by Harvey-Cook et al.

(1998) and Gammie (1999) provide a viable
alternative to the conventional ‘‘hit and
miss’’ type approaches to recruitment. The
adoption of these models will not only reduce
the costs associated with poor recruitment, it
may spare the applicant from the stress and
loss of confidence associated with a
mismatched career choice.
Biodata techniques do not suffer from
inherent interview bias, are arguably fairer
to all candidates and are robust in their
application. They do, however, need to be
updated regularly to accommodate
demographic changes, grade inflation in
school and university examination results,
and new sources of applicants, to ensure
their continuing effectiveness over time.
The nature of the models means that they
are designed to exclude those candidates
likely to fail examinations, leave the
organisation during training, or
underperform in practice (i.e. to identify
‘‘failures’’ in some sense). However, in order
to do so they overcompensate and will
exclude some candidates who may have made
a positive contribution to the profession, on
the basis that this is the least expensive error
for recruiters to make.
References
Dipboye, R.L., Stramler, G.A. and Fontenelle, V.

(1984), ‘‘The effects of application recall of
information from the interview’’, Academy of
Management Journal, Vol. 27 No. 3,
pp. 561-75.
Drakeley, R.J., Herriot, P. and Jones, A.P. (1988),
‘‘Biographical data, training success and
turnover’’, Journal of Occupational
Psychology, Vol. 61 No. 2, pp. 145-52.
Eskew, R.K. and Faley, R.H. (1988), ‘‘Some
determinants of performance in the first
college level financial accounting course’’,
Accounting Review, Vol. 63 No. 1, pp. 137-47.
Gable, M., Hollon, C. and Dangello, F. (1989), ‘‘The
relationship of application form information
and performance to managerial trainee
turnover’’, International Journal of
Management, Vol. 6 No. 3, pp. 289-95.
Gammie, E. (1999), ‘‘The use of biodata in the
pre-selection of graduates for chartered
accountancy training places: an evaluation’’,
British Accounting Association Conference,
Glasgow, April.
Hacker, C. (1997), ‘‘The cost of poor hiring
decisions and how to avoid them’’, HR
Focus, Vol. 74 No. 10, pp. S13(1).
Harvey-Cook, J.E. and Taffler, R.J. (1987),
‘‘Graduate recruitment procedures in the UK
accounting profession: a preliminary study’’,
Accounting and Business Research, Vol. 17
No. 66, pp. 99-108.

Harvey-Cook, J.E., Taffler, R.J. and Williams,
A.P.O. (1998), ‘‘Improving graduate
recruitment methods in the accounting
profession’’, AAANZ Annual Conference,
Adelaide, July.
Holland, J.L. (1976), ‘‘Vocational preferences’’, in
Dunette, M. (Ed.), Handbook of Industrial and
Organizational Psychology, Rand McNally,
Chicago, IL.
Hunter, J.E. and Hunter, R. (1984), ‘‘Validity and
utility of alternative predictors of job
performance’’, Psychological Bulletin, Vol. 96,
pp. 72-98.
KPMG-UK (n.d.), ‘‘Graduate recruitment
brochure’’, Online, URL: http://
jobs.kpmgcareers.co.uk/career/training.htm,
accessed 1 June 1999.
[ 121 ]
Malcolm Smith and
Christopher Graves
Re-engineering recruitment to
the accounting profession
Managerial Auditing Journal
17/3 [2002] 117–121
A critical evaluation of the effect of participation in
budget target setting on motivation
Pamela Reid
Seaford, UK
Introduction
The highly competitive global economy of

today means that many, if not most,
organisations’ productivity is constrained by
cost pressures. Accordingly, as Drury (1999)
has pointed out, standard costing systems
and budgetary control endeavour to ensure
that the overall aims and objectives of the
organisation are efficiently and effectively
achieved. Such planning and control
measures focus on encouraging individuals
within the organisation to tailor their
behaviour towards the effective and efficient
meeting of those goals.
Budget use
Willsmore (1973, p. 11) noted that ‘‘ budgets
have a very wide potential use’’. Areas in
which budgets can be used to assist in
management planning and control, including
problem identification, co-ordination of the
various parts of the whole, delegated
authority to spend, controlling and
measuring performance, and motivation
have been identified by Atrill and McLaney
(1999), to which Berry and Jarvis (1999) have
added communication and providing a basis
for responsibility accounting. Tensions,
however, between these uses of budgets may
exist, for example, in using a budget as a
means of control and also as a means of
authorisation. Authorised managers may be
motivated to spend their entire allocated

budget if, for example, they believe that the
following year’s budget will be reduced if
‘‘under spending’’ occurs in the current year.
Such behaviour, at least in the short term, is
unlikely to be congruent with the
organisation’s overall concerns with
efficiency (both ‘‘pure efficiency’’[1] and
‘‘mixed efficiency’’[2] as described by
Wildavsky, 1975) and effectiveness, i.e.
control.
In view of such inherent tensions, Stedry
(1960) has proposed that separate, different
budgets be used for differing purposes for he
believes that no one budget can meet the
differing requirements. Thus one could be
utilised for planning purposes and another
for motivational purposes. Given that this
was proposed in 1960, before the advent of
notions of government transparency,
accountability, and community
participation, which are some of the
objectives introduced in pluralistic best
value (Burton, 1997), it would be difficult to
see how this proposal could now gain
credence in the public sector. Within the
private sector too, it also easy to see that the
existence of two (or more) budgets may have
a negative impact on motivation and would
militate against effective, open and honest
participative management.

To paraphrase Theodore Levitt, the well-
known American management guru, ‘‘if you
don’t know where you are going, any road
will take you there’’ (Johnson, 1998). Drucker
(1954), likewise, advocated the use of setting
clear, tangible, verifiable, measurable goals
in order to motivate, rather than to ‘‘control’’,
people. Evidence abounds to show that
without such quantitative goals,
performance suffers (see, for example,
French et al., 1965).
Theories of motivation
The maximisation of individuals’ motivation
to achieve the organisation’s objectives can
only really be obtained through a thorough
understanding of theories of motivation.
Such theories grew from a realisation that
the principles of ‘‘scientific management’’ as
advocated by Taylor (1911), involving the
radical division of labour (Smith, 1904) by
managers (the antithesis, one might argue, of
participation), relied too much upon an
assumption that economic reward motivates.
The current issue and full text archive of this journal is available
at
/>[ 122 ]
Managerial Auditing Journal
17/3 [
2002] 122–129
# MCB UP Limited

[
ISSN 0268-6902]
[
DOI 10.1108/02686900210419903]
Keywords
Accounting, Theory,
Target setting, Participation,
Performance
Abstract
This paper critically evaluates the
effect of participation in budget
target setting in an effort to
increase the probability of an
organisation’s goals being
achieved and, in so doing,
considers some of the numerous
theories of motivation. Such
theories include Maslow through
to equity and expectancy theories.
However, given that there are a
multiplicity of variables at work
here, the author concludes that
the effect of participation is
situation specific and dependent
upon such variables: there is no
‘‘perfect’’ budgeting system.
This realisation, combined with an emerging
consciousness regarding the conditions of
the working classes in the industrialised
West (Mayo, 1933, 1945; Braverman, 1974),

saw the birth of a new school of thought – the
human relations movement – marked by the
Hawthorne Study (Roethlisberger and
Dickson, 1939). From this ‘‘industrial
psychology’’ school developed two streams of
work motivation theory generically known
as ‘‘content’’ theories[3] and ‘‘process’’
theories[4] (Rollinson et al., 1998).
Probably the most obvious starting point
for a consideration of concepts of work
motivation commences with Maslow’s (1954)
‘‘hierarchy of needs’’. However, it is
somewhat unfortunate that such a widely
promulgated hypothesis regarding factors
that motivate people, thus far, appears to lack
empirical backing (see, for example, Hall and
Nougaim, 1968; Wahba and Bridwell, 1976)
and appears to be peppered with untested
assumptions. Nevertheless, it formed the
basis of a revised hierarchy produced by
Alderfer (1969) identifying the core needs of
existence, relatedness and growth. Core
learned and culturally sensitive needs of
achievement, power and affiliation were
proposed by McClelland (1967, 1975) as
explaining motivation. However, it is fair to
say that such needs, and hence their effect on
motivation, are different for different people
and, indeed, can vary over situations
and time.

Herzberg et al. (1959) moved on from
hierarchical needs to examine what they
termed ‘‘motivators’’ and ‘‘hygiene factors’’ in
the workplace, postulating that where job
satisfaction was high there would be
correspondingly high motivation. Although
one can argue that this work constituted an
examination of job satisfaction rather than
motivation, Robbins (1998, p. 173) believes
that the recent growth of worker
participation in planning and controlling
their work is due to Herzberg et al.’s (1959)
recommendation that those factors which
they find intrinsically rewarding
(achievement, recognition, the work itself,
responsibility and growth) should be
emphasised. Nevertheless, if one follows
Herzberg et al.’s thinking to its logical
conclusion, no matter how much emphasis is
placed upon factors that staff find
intrinsically rewarding, such as worker
empowerment, supportive management,
team work, delegated authority and
responsibility, if hygiene factors, such as low
pay, are not addressed their full effect will
not be felt.
The interdependence of intrinsic rewards
with extrinsic rewards with consequences
for motivation has also been postulated (de
Charms, 1968). However, it would appear that

there is limited applicability of this cognitive
evaluation theory in the world of work and
that further research is required.
Emphasis upon the manager’s essentially
negative or essentially positive view of
human nature comprises McGregor’s (1960)
Theory X and Theory Y. McGregor himself
subscribed to the more positive view of his
fellow man as being creative; able to exercise
self control and self direction; and likely to
seek responsibility and to enjoy work. He
recommended such behaviours as
participative decision making in
organisations. Theory X, though, would
suggest that a more authoritarian style of
management is required in order to push
workers towards meeting organisational
needs and meeting targets. Nevertheless, in
the absence of rigorous empirical evidence to
support his views, they must remain, surely,
merely assumption X and assumption Y,
dependent upon situational, and other,
variables.
One of the most popular theories of
motivation is that of expectancy theory,
whereby an individual’s motivation to work
is affected by a wide range of both
independent and interdependent variables
(satisfaction associated with the work itself;
satisfaction associated with the achievement

of objectives; satisfaction with extrinsic
rewards associated with the meeting of
targets; and the individual’s perceived
expectancy of linked reward). The most
notable of these theories is Vroom’s (1964)
model and the, perhaps, lesser known outside
of academia, Porter and Lawler (1968) model
which builds upon the previous model. The
latter, one can argue, fits into current
thinking regarding best practice
surrounding the valuing of diversity, and
open and honest communication in the
workplace. However, Landy and Becker
(1987) take the perhaps more cynical view
that real choice does not exist in the
workplace as factors such as coercion and
insecurity ensure that workers’ performance
is maintained. One variable that
organisations are not able to affect directly is
that which is intrinsic to the individual: the
person’s ‘‘locus of control’’[5] and, obviously,
any other personality traits. Interestingly,
personality traits, it can be argued, may play
a significant part in people’s career/
employer choice. Organisations need to
understand that different variables, in
different people, in different jobs, in different
departments, at different levels in the
hierarchy affect motivation and that
[ 123 ]

Pamela Reid
A critical evaluation of the
effect of participation in
budget target setting on
motivation
Managerial Auditing Journal
17/3 [2002] 122–129
measures to influence performance of those
different individuals must reflect that.
Another important factor in employee
motivation can be seen in equity theory
(Adams, 1965) with its notions of procedural
and distributive justice in absolute and, in
particular, relative rewards. If employees
perceive that their inputs, in terms of their
effort or performance, do not receive
adequate reward, either on their own merit
or in comparison with others, a perception of
inequity will result. Attendant negative
feelings of dissatisfaction will result in the
individual being motivated to redress the
inequity. Generally speaking, this is likely to
affect their future performance in that
organisation in an adverse manner. It is, of
course, possible for the reverse situation to
occur whereby the reward is overly generous
in relation to the input (the ‘‘fat cat’’
scenario) and it is believed that guilt feelings
may be felt. Interestingly, little is written on
the effect upon motivation in the ‘‘fat cat’’

scenario! And finally, as far as this brief
consideration of some of the large numbers of
varying motivation theories are concerned,
there is goal setting theory[6] (Locke, 1968),
although this time focussing on the
individual rather than the organisation.
Targets
As Lyne (1995) has stated, accounting
measures and the use of budgets as targets is
an obvious way in which individuals can be
given clearly stated, measurable, specific
goals. This, assuming that rewards are based
on performance, the meeting of targets,
rather than issues such as seniority for
example, fits with expectancy theory. The
question that then can be posed is at what
level of difficulty should the budget target be
set in order to maximise motivation?
Expectancy theory dictates that there will be
little motivating effect if the budget target is
set so high that it is perceived to be
unattainable, irrespective of the certainty of
expected performance associated rewards on
offer.
Lyne (1995) has related equity theory to
perceptions of the target set, either initially
or upon revision if activity based budgeting
is in operation. If the target is seen as
irrelevant or unfair in some way then the
likely effect is to de-motivate.

Revision of budget targets may also be
made following a comparison of the target set
and actual performance. Indeed, Becker and
Green (1962), in order to maximise
continuous levels of motivation, advocated
this. For example, if performance is meeting,
or is even in excess of, expectation then, to
prevent the worker ‘‘coasting’’, budget
targets should be revised upwards. However,
one can, at this point, issue a caveat for there
is possibly a strong argument for a
concurrent review of extrinsic rewards to
prevent the worker with the revised target
experiencing equity theory related tensions.
Becker and Green (1962) also advocated the
revision of budget targets downwards if there
is significant under performance in order to
increase motivation. Likewise, one should,
perhaps, issue a caveat here. Natural justice
dictates that one should recognise when
perceived poor performance is due to factors
beyond the control of the worker (e.g.
unrealistic targets, unexpected changes in
the external environment that could not have
been reasonably foreseen and planned for).
Equally, however, it may not be in the
organisation’s best interests to be seen to be
‘‘carrying’’ under-achievers by the revision of
budgetary targets. Capability proceedings
should be considered in order to assist the

situation.
Participation?
According to Macintosh (1995, p. 211), a
survey of managers and supervisors by the
National Industrial Conference Board (USA)
in the 1930s showed that there was
considerable dissatisfaction with the setting
of ‘‘top-down’’ budgets. This appeared to be
having a negative effect upon motivation.
Thus notions of participation in budget
target setting were first proposed.
A further study in the USA by Argyris
(1952) examined the behavioural dynamics of
budgeting in four firms. The study uncovered
some very unhelpful attitudes and de-
motivating behaviours. For example, budgets
were frequently used as an oppressive tool by
an authoritarian, autocratic management
with a focus on mistakes; an undue attention
on their own departments, rather than on the
whole organisation; the emergence of
‘‘budget slack’’; and a ‘‘blame culture’’.
Supervisors, however, were able to see that
the budgets included unrealistic targets;
were backward looking; rigid and inflexible;
and were used to apply pressure to increase
production. All in all, the focus was upon
outputs, not processes, and the result was
de-motivating. Indeed, the supervisors tried
to redress what they saw as an imbalance by

not referring to budgetary targets and
control. The main recommendations flowing
from this work were those of the supervisors
participating in the setting and revision of
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A critical evaluation of the
effect of participation in
budget target setting on
motivation
Managerial Auditing Journal
17/3 [2002] 122–129
their budget targets and of increased open
communication amongst them.
Other studies, however, lead one to
conclude that, although participative
management is seen as being rather
‘‘politically correct’’ currently, it may be that
its value is situation-specific: there may be
some organisations in which it is not
necessarily a major motivational force. For
example, Cherrington and Cherrington’s
(1973) study found that the ‘‘top down’’
imposition of budget targets led to higher
performance amongst the recipients as
opposed to those managers who, more or less,
set their own targets. Also, contrary to
current popular belief, the setting of budget
targets and budgetary control does not
always lead to autocratic managerial

behaviour (DeCoster and Fertakis, 1968).
Managers can be motivated to respond to
such pressures by exercising their authority
in an inclusive, supportive, democratic,
participatory way.
Performance
Part of that exercising of authority includes
the use of performance evaluation. In today’s
world of Investors in People awards,
performance related pay, and suchlike, the
use of performance appraisals is widespread.
Through marking performance against a set
of measures, it is believed that, especially if
this is linked to relevant rewards, greater
individual and organisational goal
congruence will be achieved and workers
will engage in behaviour likely to result in
greater efficiency and effectiveness in the
meeting of organisational goals. Output,
especially in the private sector, has,
historically, appeared relatively easy to
measure (sales; profit; units produced;
budget targets met) but some outputs,
especially in the public sector, have appeared
to pose more of a challenge to quantify
(Pendlebury, 1996). However, with the ‘‘new
way of thinking about the state’’ (Ridley,
1995), including the introduction of market
forces via a variety of initiatives coming
under the catch-all term of ‘‘privatisation’’

(Ascher, 1993) and the devolvement of
budgets, this challenge is increasingly being
met.
But what of those areas of performance
that are not subjected to measurement and
evaluation? One can argue that worker effort
may be concentrated in those areas that are
subject to scrutiny, possibly to the detriment
of others. Effort may also include the use of
behaviours incompatible with organisational
values. Drury (1999) has also questioned the
lack of evaluation based on longer-term
performance factors than against relatively
short-term budgetary indicators.
Dysfunctional behaviour associated with
performance evaluation against budget
targets includes the oft-reported creation of
‘‘budgetary slack’’ (see, for example, Lowe
and Shawe, 1968; Schiff and Lewin, 1968).
Essentially, this is where workers
endeavour, through the participatory
process, to ensure that the budget target is
relatively easy to achieve. By so doing, the
motivational properties of the budget clearly
are reduced. Lyne (1995) has pointed out that
the likelihood of slack being manipulated is
dependent upon a lack of congruence
between the individual’s and the
organisation’s goals and a lack of open and
honest information sharing and

communication between worker and
manager. Gamesmanship may result,
however, in the setting of budget targets if
the manager holds views compatible with
Theory X! Despite the reduction in the
motivational properties of the budget with
the creation of slack, it should be pointed out
that smoothing properties will be enhanced
and stress experienced by the worker
operating to such budgets reduced which, in
turn, may prove to motivate.
To search for, and identify, management
techniques that lead to budget targets being
achieved with minimal dysfunctional
behaviour has been the quest, therefore, of
some academics. Hofstede (1968) advocated
the creation by managers of ‘‘game spirit’’
and effective upward communication in
order to maximise motivation and
acceptance of the targets set. He argued for
balance. The manager needs to walk a
tightrope in terms of ensuring adequate
emphasis is placed upon the demanding, but
not unachievable, target and sufficient
opportunities for discussion around
budgetary matters to increase motivation,
whilst ensuring that unhelpful feelings of
pressure or negative criticism are not
engendered which prove to be de-motivating.
The latter may sometimes be expressed in

dysfunctional behaviours such as
absenteeism, which militate against
efficiency and effectiveness.
Given managers’ need to evaluate
efficiency and effectiveness, Hopwood (1974)
identified four styles of employing budgetary
and accounting information in the
evaluation process. These were a budget-
constrained style; profit conscious style; and
a non-accounting style. Although Hopwood
(1974) did not explain the origin or
development of these, styles that were linked
to concerns around accountancy issues were
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budget target setting on
motivation
Managerial Auditing Journal
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also linked to a variety of dysfunctional
behaviours and lower reported levels of job
satisfaction. It would appear, however, that
there is a lack of research into possible
effects upon the motivation of workers who
have higher budgetary and accounting
awareness than do their managers, some of
whom may have a non-accounting style in
the Hopwood tradition. Contagion effects

appear only to have been considered as
possibly acting in a ‘‘top-down’’ fashion
(Macintosh, 1995). One may hypothesise that
frustration and consequent adverse effects
upon motivation must surely result?
Variables
Briers and Hirst (1990) have highlighted
some of the wide-ranging variables,
intervening, dependent, moderating and
antecedent, upon performance as regards
budget targets. Hopwood (1974) himself noted
that participation in target setting acted as a
moderating variable upon dysfunctional
behaviours and negative job-related tension
when effected in a situation where the
manager was exhibiting a budget
constrained style.
Participation in the budget target setting
process has traditionally been taken to mean
the active involvement of the budget holders,
at least, which goes beyond simple
consultation. Anything else is, as Argyris
(1952) called it, pseudo participation.
Specifically from an accounting perspective,
participation is seen as a way of increasing
motivation by getting the staff to ‘‘own’’ the
budget and associated targets and see its
relevance to them. Brownell (1982) took the
view that if staff were able to participate in
the setting of their budgetary targets, then

the emphasis given to the measure of this
area of performance should be
correspondingly higher, as opposed to when
such participatory opportunities do not exist
or if they do not represent true participation.
However, if the participation is meaningful,
the improved communication and (hopefully)
control should have a knock-on effect of
improving performance as the quality of life
at work improves. The more cynical, though,
would always, perhaps, question the extent to
which workers in primarily hierarchical
organisations in inequitable power
relationships really have the ability to
influence the setting of their budget targets.
Effective participation itself is dependent
on the structure of the organisation so, for
example, it is likely that those working in
decentralised environments will perceive
themselves to have greater role in
participative budget target setting and such
like (Bruns and Waterhouse, 1975). Lyne
(1995) reports that, by ensuring participation
in the setting of budget targets, motivation of
‘‘low authoritarian persons with high
independence needs’’ is stimulated. Such
stimulation of motivation in participative
situations thus varies according to
personality type. Drury (1999) has pointed to
the positive effects on motivation that

participation produces, but only in those
workers who have confidence in their ability
to perform. This has implications for
training and the onus is upon organisations
to ensure that their selection and
recruitment procedures result in staff being
obtained with, and subsequently trained in,
the skills required to perform effectively. A
further hypothesis proffered by Lyne (1995)
concerned the existence of favourable
organisational attitudes. He expressed the
view that unless there existed positive
attitudes by workers to the organisation as a
whole, management, and the performance
measurement system employed,
participation was unlikely to increase
motivation. Indeed, it may offer an
opportunity for destructive and manipulative
behaviours to show themselves overtly. The
incidence of manipulative behaviours such
as the creation of budgetary slack was found
by Onsi (1973) to reduce when participative
management techniques were used.
The environment in which the
organisation finds itself operating may
militate against the introduction of
participatory practices on the grounds of
overall economic efficiency, however, for it is
a truism that true participation, as opposed
to pseudo participation, involves a heavy

investment of time and time is money.
However, equally, an impetus for the
implementation of participation in budgeting
may be the uncertain nature of the
environment. Internal drivers for the
implementation of participation may also
come from uncertainty for, if senior
managers lack knowledge and information
(i.e. there is uncertainty) which is held by
subordinates, then participation is likely to
be pursued.
From this, one can question as to whether
motivation is affected by the participants’
understanding or perception as to why
participation, be it real or pseudo, is pursued
within certain organisations. Given the
complexity of researching such a topic with
all its interdependent variables, it is,
perhaps, unsurprising that attempts to locate
possible answers to this line of enquiry have
drawn a blank thus far.
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motivation
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Carried to its logical conclusion, real

participation would result in the ‘‘bottom-up
employee empowerment’’ envisaged by
Johnson (1992). Here, employees at the base
of the pyramid would not only have access to
detailed accounting information, but they
would be encouraged and facilitated to use
this, together with their knowledge of the
fundamentals of the organisation, to progress
and grow that organisation and ensure
maximum efficiency and effectiveness in the
meeting of its goals. This, it can be argued, is
a somewhat Utopian vision, involving a
strong belief in the efficacy of Barnard’s
(1938) assertion that power in any
organisation is held at its base and also that
all have sufficient competence and
motivation to analyse detailed accounting
information.
Much of the current literature concerning
participation in budget target setting has
tended, it seems, to focus on vertical
participative budgeting. Shields and Young
(1993), accordingly, have called for future
research to examine horizontal participative
budgeting which would, no doubt, stimulate
interest given the flatter organisational
structures of today and the growth of
organisations working in partnership and
utilising pooled budgets.
The role of the supervisor and their style

cannot be underestimated when considering
participation in setting budget targets, and
especially in their evaluation of
performance. Fisher (1989) also highlighted
the provision of accurate speedy feedback by
the supervisor. Briers and Hirst (1990) called
for greater research into various facets of
this area, such as the selection of supervisory
style.
Conclusion
Clearly the strength of setting budget targets
lies in their easily quantifiable, measurable
form which removes some of the inherent
subjectivity in evaluating performance.
However, performance is generally also
expected in areas other than those which can
be measured via the accounting domain.
There are many factors that influence
motivation to perform overall and some of
these have been examined here. The use of
participation in the setting of budget targets
is one such factor. It is hard to see, however,
how participation can be isolated from its
context, for in some circumstances where
participatory practices are utilised
motivation may be increased. There is an
inherent danger, however, that, because of
the politically attractive elements of
participation, it may become some kind of
dogma, to be pursued as some sort of

universal truth irrespective of the context.
Notes
1 ‘‘Pure efficiency’’ being defined as where an
objective is met at the lowest cost or where the
maximum amount of an objective is obtained
for a specified amount of resources.
2 ‘‘Mixed efficiency’’ being defined as where an
objective is changed to suit the available
resources.
3 ‘‘Content’’ theories focus on the needs of
people as the prime impetus for motivated
behaviour.
4 ‘‘Process’’ theories focus on the mental
processes which transform the motive force/
need into particular patterns of behaviour.
5 This being whether a person believes
outcomes and events are under his or her
control, or whether they are determined by
external factors that cannot be controlled by
the individual.
6 In goal setting theory behaviour that is
motivated is considered to be a function of the
individual’s set goals and the likelihood of
achieving these.
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effect of participation in
budget target setting on
motivation
Managerial Auditing Journal
17/3 [2002] 122–129
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[ 129 ]
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effect of participation in
budget target setting on
motivation
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An assessment of the newly defined internal audit
function
Albert L. Nagy
Department of Accountancy, John Carroll University, Cleveland, Ohio, USA
William J. Cenker
Department of Accountancy, John Carroll University, Cleveland, Ohio, USA
Introduction
In June 1999, the Institute of Internal
Auditors (IIA) officially adopted a new
definition of the internal auditing function.
The new definition was developed by the
Guidance Task Force (GTF) and defines the
internal audit function as:
an independent, objective assurance and
consulting activity designed to add value and
improve an organization’s operations. It helps
an organization accomplish its objectives by
bringing a systematic, disciplined approach
to evaluate and improve the effectiveness of
risk management, control, and governance
processes (IIA, 2000).

The new definition shifts the focus of the
internal audit function from one of assurance
to that of value added and attempts to move
the profession toward a standards-driven
approach with a heightened identity
(Bou-Raad, 2000; Krogstad et al., 1999).
The overriding issue addressed in this
paper is whether or not the new definition
actually reflects the day-to-day activities of
internal audit departments. That is, have the
activities of internal auditors really changed?
In addition, the new definition of internal
audit elicits other issues worthy of
examination. For example, do internal audit
departments have sufficient resources and
expertise to fulfill their role as consultants?
Has there been adequate coordination with
the other traditional corporate governance
parties (e.g. audit committees and external
auditors) in regard to the changing focus of
internal audit? Where does the newly defined
internal audit department fit in the
company’s organizational structure? This
article summarizes the responses and
insights to these and other related questions
from internal audit directors of large
publicly traded companies.
With the objective of obtaining meaningful
insight, we conducted structured interviews
with the directors of internal audit of 11 large

publicly traded companies (average revenues
approximately $6.4 billion), most of which
have their main offices located in northeast
Ohio. The directors are perceived as highly
motivated, well-seasoned professionals with
tenures in their current positions ranging
from two to 19 years, and internal audit staffs
ranging from three to 70 individuals. The
directors have an average of 17 years
experience in internal audit, and 19 years
with their present employer. We consider
these individuals to be some of the leading
professionals in the field of internal auditing,
and believe that their opinions and insight
would be valuable to the financial
community.
The structured interviews addressed the
following four areas of interest:
1 Audit scope – what is the overall
orientation of the internal audit
department and has it changed?
2 Organizational structure – how is the
internal audit department perceived and
evaluated?
3 Risk management – how does the director
assess business risk and identify audit
areas to target?
4 Audit committee – what are the audit
committee’s expectations of internal
audit?

The issues discussed with the directors are
couched in terms of discussing the changes
within their respective departments over a
ten-year time frame. Those individuals who
had not been with their respective companies
for ten years represented to have a good
understanding of their companies’
environment in the early 1990s. The remainder
of this paper provides a summary of the
responses p rovided by the directors to selected
questions in the above stated categories, along
with some general comments.
The current issue and full text archive of this journal is available
at
/>[ 130 ]
Managerial Auditing Journal
17/3 [
2002] 130–137
# MCB UP Limited
[
ISSN 0268-6902]
[
DOI 10.1108/02686900210419912]
Keywords
Internal audit, Committees,
Risk management,
Corporate governance,
Competences
Abstract
The new definition of internal

auditing defines the function as an
independent, objective assurance
and consulting activity designed
to add value and improve an
organization’s operations. The
purpose of this paper is to
summarize an assessment of this
new definition obtained through
structured interviews from 11
internal audit directors of large
publicly traded companies. The
responses from the directors
indicate that there are wide
differences in viewpoints and
objectives; but a definite shift has
occurred in the overall scope of
internal audit towards operational
activities. While most of the
interviewees are in conceptual
agreement with the new internal
audit definition, an underlying
warning is vocalized: ‘‘Don’t throw
out the franchise’’. That is, the
traditional role of the internal
auditor should not be completely
abandoned. These, along with
other responses pertaining to
related issues and suggestions for
future research, are summarized
throughout the paper.

The scope and orientation of
internal audit
The questions in this section of the interview
address the overall orientation of the
interviewee’s internal audit department, any
recent shift in this orientation, and several
surrounding issues arising from this shift.
Based on our discussions and consistent with
the new internal audit definition, the
orientation of internal audit has shifted
toward consulting and value added services
and away from the traditional assurance
services. Such a shift raises several
interesting issues including: has the external
auditor compensated for the reduction in
assurance services previously provided by
internal audit, and who determines the scope
of activities for the newly defined internal
audit function? The following is a
summarization of the responses to these and
other selected questions in this section of the
interview.
Question: do you agree with the changing
definition/role of the internal audit
function?
The directors interviewed generally agree
that the changed internal audit definition
focusing on value-added activities is
appropriate. Those directors in support
generally believe that ‘‘there are no cost-

savings for departments focusing on
financials,’’ and that the ‘‘responsibility of
financial reporting ‘watchdog’ falls mainly
on the external auditor.’’ Although these
directors agree with the new definition, the
impact it has on their department’s scope and
activities is minimal. A recurring
observation from the directors was that their
respective internal auditing departments
have been focusing on value-added activities
for years, and that ‘‘the definition has finally
caught up with practice.’’
Interestingly, several directors take
exception to the use of the term ‘‘consultants’’
to describe their internal auditors and are
careful to distinguish between operational
auditing and consulting. For example, one
director defines operational auditing as
‘‘assessing business processes and controls
against established criteria. Value-adding
recommendations may or may not result
from such audits.’’ In other words,
operational auditing involves the assessment
of the effectiveness of internal controls and
systems in place, and is clearly a function of
internal audit. Being a consultant, on the
other hand, was viewed as ‘‘having a level of
knowledge and expertise that most internal
auditors do not possess.’’ Consultants are
hired to solve problems or recommend

solutions, which is a different function than
assessing controls or procedures against
established criteria.
Along with questioning the capabilities
of internal auditors as consultants,
several directors are weary of the longevity
of the consultant’s role. That is, consultants
are ‘‘hired to fix problems and then go away,’’
certainly not a desirable role for most
internal auditors. Thus, despite the fact
that the new internal audit definition
includes consulting as an internal audit
activity, most of the directors refuse to label
the activities of their departments as
‘‘consulting.’’
A cautionary reminder to the internal
audit community consistently given by the
directors was to ‘‘not forget our roots.’’ These
directors note that the traditional attestation
function of internal audit has been useful to
organizations for many years, and it is the
area of expertise of internal auditors.
Therefore, these directors believe that the
traditional role of internal audit should not
be completely abandoned in favor of the new
‘‘consulting’’ directive.
The few directors who disagree with the
new definition believe that any effort exerted
by professional organizations to define
the function of internal audit is fruitless.

While commending the IIA and other
organizations for offering useful guidance to
the profession, one director notes that it is
‘‘foolish for the profession to stand up and
say, this is what you have to be.’’ Another
echoes this belief by suggesting that ‘‘the
definition of internal audit should not fall
into generalities because every company is
different. Our current chairman does not feel
that operational auditing has significant
value, certainly not as much as traditional
financial statement auditing does.
Management does, and should, dictate what
we do, not the profession.’’
Questions: given the new definition of the
internal audit function, have the objectives
of your department shifted to focus on
value added activities? If so, who initiated
the change?
Most managers opine that the focus had
shifted several years prior to the definitional
change and that the new definition simply
better reflects existing practice. However,
only two managers indicate that the
initiative for the change originated with the
internal audit department. A consistent
theme in the responses is that management,
not the profession, ultimately determines
the orientation of the internal audit
department of a company. One comment

perhaps best illustrates the actual status,
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Albert L. Nagy and
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An assessment of the newly
defined internal audit function
Managerial Auditing Journal
17/3 [2002] 130–137
even though the manager agrees with the
changed definition: ‘‘We [internal auditors]
are trying to dictate what we are; but
actually it is dictated by management
expectations.’’
Question: assuming a shift in your
department’s focus, has there been a
satisfactory coordination with the
activities of the external auditor?
The responses to this question fell on a
spectrum from ‘‘total coordination’’ to
‘‘coordination just not being there.’’ Not
surprisingly, the level of coordination with
the external auditor seems to be dependent
upon the focus of the internal audit
department. That is, directors of departments
with a significant orientation towards
the traditional assurance/compliance
services indicate far more extensive
coordination with the external auditor. The
directors whose departments have an
operational focus generally consider their

role (that of improving operational
efficiency) quite different than that of the
external auditor (assuring the financials),
and thus believe that less coordination is
necessary.
A director from a ‘‘pure operational shop’’
indicates that the communication between
the internal and external auditors is as if ‘‘the
Great Wall of China exists between the two.
We’ve got a long way to go and I am not sure
that we will ever get there [coordination].
External auditors perform, at best, only a
cursory review of the suggested internal
audit plans.’’ On the other end of the
spectrum, a director of a company that
requires extensive compliance audits,
because of many overseas divisions,
indicates that total coordination exists
between external and internal auditors.
For this company, the external auditor
‘‘performs an extensive review of the internal
audit program so that work will not be
duplicated.’’
Several directors of departments focusing
primarily on operational auditing express a
general concern about the level of review
being conducted on the quarterly reports
(10-Qs). These directors note that the shift
in focus toward operations coincides
with a reduction of traditional attestation

testing, and that the external auditors
‘‘had not increased their level of detailed
testing to compensate.’’ When asked if the
quarterly statements are being reviewed at
an adequate level, many of the directors
simply did not know. These responses
raise additional questions that may be
worthy of future empirical research.
For example, has the shift towards
operational auditing by the internal auditors
created a gap in the attestation review
function? Are important accounts receiving
adequate attestation review? Are quarterly
results receiving adequate attestation
review?
Questions: based on your experience, what
is the relative input from the following
sources in determining what subject
matter to audit: line manager, top
management, audit committee, internal
audit director, and other? Has this
changed over the past ten years?
Consistent with internal audit departments
moving toward an operational/consulting
orientation, the directors interviewed
indicate that the relative input from the
department’s ‘‘customers’’ (i.e. line managers
and top management) has increased over the
last ten years. The internal audit directors
still possess significant input in determining

what should be audited, but not nearly as
much as ten years ago. One director, who
labels his department of ten years past as a
‘‘graveyard’’ where ‘‘nothing was being
done,’’ asserts that the department was run
by a director who dictated 100 percent of the
department’s activities without input of any
kind from line managers or top management.
An interesting, and perhaps disturbing,
observation from the responses is that the
audit committee has minimal-to-no input in
determining the audit plan.
Another observation consistent with
internal audit departments moving toward
an operational/consulting orientation is that
directors are allotting significant amounts of
budget time for unanticipated requests from
customers. Arguably, consulting and value-
added activities are more reactionary than
traditional assurance activities and thus are
more difficult to plan. One director from a
‘‘purely operational’’ shop sets aside
approximately one-half of his department’s
time for unanticipated requests, and justifies
this act by stating ‘‘in the 1980s our activities
were driven internally. In the 2000s, I don’t
do it if someone doesn’t want it done.’’
Organizational structure
Some interesting organizational structure
issues arise from the newly defined internal

audit role. One such issue is how does
management evaluate the activities of
internal audit? That is, the traditional
assurance function of internal audit, often
perceived as a ‘‘necessary evil,’’ had a clear
and distinct role within the organization and
the value of these services often went
[ 132 ]
Albert L. Nagy and
William J. Cenker
An assessment of the newly
defined internal audit function
Managerial Auditing Journal
17/3 [2002] 130–137
unquestioned. However, by migrating toward
a consulting role within the organization,
internal audit departments may lose the
safety net of being labeled as a ‘‘necessary
evil’’ and may now have to justify the value of
their activities to top management on a
continuous basis. By reaching an
understanding with management of what
makes internal audit services value-added,
internal audit ensures that their services will
be fully utilized and that their
recommendations will be respected (Flesher
and Zanzig, 2000). The following is a
summarization of the responses to selected
questions in this section of the interview.
Question: do you feel an increased need to

justify the services of internal auditing to
top management?
Surprisingly, only one of the directors
interviewed found it important to justify the
services of internal audit to top management
on a continuous basis. In general, the
directors believe that their services are
perceived within their organization as
important and have never felt the threat of
being outsourced or discontinued. Most
directors cite a strong ‘‘tone at the top’’ in
regard to quality reporting and controls,
and thus feel no need to continuously justify
their existence. The one director who
perceives an ‘‘absolute’’ need to justify the
department is in an organization whose
management is committed to value-based
management (VBM), and thus feels
compelled to present cost savings or value
added amounts from internal audit to top
management and the audit committee. These
responses reflect a potential inconsistency. Is
it hypocritical for internal auditors, who
assess the efficiencies and justification of
organizational units’ services, to avoid the
scrutiny of being evaluated themselves by
others?
Question: do you measure the amount of
value-added by your department?
Consistent with the previous question’s

responses, most of the directors interviewed
do not attempt to quantify or measure the
amount of value that is added from their
department’s activities. These directors do
not feel threatened or pressured to justify
their department’s services, and thus believe
that measuring the amount of value-added
would be a pointless exercise. Additionally,
these directors opined that the inherent
difficulty in measuring value-added amounts
makes quantifying them impossible or at best
problematic. One director went so far as to
indicate that it is ‘‘dysfunctional’’ to report
such an amount because management may
use this number as a benchmark for future
results.
Despite the inherent difficulties in
measuring value-added amounts, a few of the
directors interviewed quantify and report
this amount to top management on an annual
basis. These directors believe that
quantifying and reporting the value-added
amount is a positive process that can be
measured objectively. Annual cost savings
captured by internal audit is the basis for
this measurement. These directors view the
process as ‘‘job security,’’ that helps promote
a company-wide attitude of perceiving
internal audit as a ‘‘resource.’’ Only one of
the directors is required to formally establish

a target goal as part of the operating budget
(the one director subject to VBM). Reviews of
fleet leasing arrangements (number of
vendors, evaluating lease/purchase options),
and healthcare (improved Medicare
integration, use of generic drugs), were given
as examples where ‘‘real dollar’’ savings were
generated by the departments.
Question: do you survey you r customers to
obtain feedback about the performance of
your audit staff?
Two viewpoints emerged from the responses.
One group of directors believes that
surveying their customers is a useful
technique in assessing the amount of value
that their department is providing. These
surveys typically ask for an evaluation of the
individual auditor’s effectiveness and
professionalism. Most of these directors (all
but one) indicate that the survey results are
not directly linked to the auditor’s
compensation, but may be used as criteria
when considering promotions. The one
director whose company formally links the
internal audit department’s annual bonus to
survey results represents a department that
is heavily operational in nature and the
director believes that ‘‘customer satisfaction
should weigh in compensation decisions.’’
The other group of directors believes that

surveying customers is not a justifiable
exercise for internal audit departments to
perform. This group suggests that such
information is ‘‘worthless’’ and could
‘‘potentially undermine the auditor’s
objectivity and independence.’’ One director
summarizes this group’s viewpoint by
stating, ‘‘I want our auditors to do their job
and not worry about ‘finding’ things or
satisfying the customer. An auditor that
does not find anything wrong or discover
cost-savings did not necessarily do a
bad job.’’
[ 133 ]
Albert L. Nagy and
William J. Cenker
An assessment of the newly
defined internal audit function
Managerial Auditing Journal
17/3 [2002] 130–137