In the light of the Core Value of Integrity, consider management's responsibility when it comes to estimates in the creation of budgets. Describe the incentives management has to misrepresent these estimates. Discuss controls/ procedures that may be put in place to prevent misrepresentation of these estimates.
The problem with budgeting is that certain assumptions have to be made. We don't actually know what the level of sales, expenses, and demand will be, so we need to forecast these items. Management takes several factors into consideration, which include history (how we did in the last quarter), current economic conditions, and industry trends. We then analyze the information to devise projected amounts. There are two unique situations that occur. In some companies, various departments are known to go over in terms of costs. In those same companies, management is often reprimanded in some way for doing so. If I believe I will need $50,000 to cover expenses in my department but if the economy decreases or if industry trends take a sudden ...
This solution explains the incentives that management has in misstating budget amounts. This solution also explains the procedures and controls that senior management can put into place to guard against this unethical type of practice.