8-3 Assignment: Case Study Use it or lose it syndrome

In large corporations, budgeting is a collective process of formulating an organizations plans

and budget are the quantitative expressions of those plans. The most important planning,
evaluation and communication benefits depends on an effective budgeting process (Horngren,
Sundem, Stratton, Schatzberg, 2011). But one of the problems that can limit, in some cases very
severely, the benefits of budgeting is the incentive to lie and cheat or budget gaming and
perverse (dysfunctional) behavior. Usually, many corporations fund their spending out of a fixed
budget that expires at year end, and faced with uncertainty over future spending demands, these
corporations have an incentive to build a buffer stock of fund over the front end of the budget
cycle. And when demand does not materialize, they then rush to spend these funds on lower
quality projects at the end of the year (Liebman & Mahoney, 2010). For these corporations, the
unspent funding may not only be a lost opportunity, but can also signal a lack of needs to budget
planners resulting to decrease funding in future budget cycle.

According to Bankrupting America (2013). The Wall Street Journal summarized the problem
perfectly in 2010: Under current law, agencies are typically forced to return any unspent part of
their budgets, giving them an incentive to use every last dollar even if the money isnt needed.
And this will usually result in a sudden short period of wasteful spending towards the end of the
fiscal year because these agencies worry they will spend too little and as a result will affect their
allocation for the next fiscal year.

According to Liebman, J. & Mahoney, N. (2010). The research by Libby and Lindsay in 2007
explicitly expressed the issue of budget gaming. Majority of those surveyed indicated that the

three gaming phenomena occur at least occasionally: spending money at the year end to avoid
losing it (the old-usage use it or lose it syndrome), deferring necessary expenditures and
negotiating easy targets (the sandbagging syndrome). This is especially the case when
corporations use, meeting budgets is directly linked with rewards and incentives for managers,
this may prompt managers to create a budgetary slack or budget padding, that is a situation
where they may overstate their budgeted costs, understate their budgeted revenue or rush
spending towards the end of fiscal year in order to create a budget target that is easier to achieve
(Horngren et al. 2011). A vast studies have proven that majority of participants seek to maximize
their personal gain during the process of setting budgets. The studies also showed a sharp dropoff in investment quality in the hurried year-end spending. For instance, In the Fiscal Year
1980, The Senate Subcommittee On Oversight of Government Management Held Hearing and
Issued A Report, Hurry-Up Sending, To Address problems With Federal Spending Practices and
The Award of Government Contracts. The Subcommittee found out that the rush to obligate
expiring funds before the end of the fiscal year frequently resulted in lack of competition, poorly
defined statement of work, inadequately negotiated contracts, and the procurement of lowpriority items or services (Year-End Spending: Reform Underway But Better Reporting and
Oversight Needed, GAO, 7/31/98).

The inefficiency from this wasteful year-end spending raised the question for an alternative
solution to reduce the waste and potentially increase efficiency. Such alternative approach would
be to allow corporations to roll over budget authority across the fiscal year. Under this approach
the budgeting would still be on an annual basis, but instead of expiring at year end, the unused
funds would be added to the newly granted budget authority in the next year. For instance, in

response to concerns over wasteful year-end spending, the states of Oklahoma and Washington
allows state agencies to roll over their budget authority to some extent. Also the U.S. federal
government, the Department of Justice has obtained special authority to transfer unused budget
authority to an account which can be used for capital and other similar expenditure in future
years (Liebman & Mahoney, 2010).

Overall, one can say that allowing agencies to roll over unused money into the following fiscal
year should lead to higher spending quality, as we can see that with this alternative approach
organizations are less likely to engage in wasteful year-end spending when the funding could be
used for higher value projects in the next budget period.

References
1. Horngren, C. T., Sundem, G. L., Stratton, W. O., Burgstahler, D., & Schatzberg, J.
(2011). Introduction to management Accounting. (15th Ed.). Upper Saddle River,
NJ: Pearson Education, Inc.

2. ACC-500 Module 8 lecture Note (Overview): The Budgeting Process

3. GAO. (1998). Year-End Spending: Reform Underway But Better Reporting and
Oversight Needed Retrieved November 16, 2013, from
http://www.gao.gov/archive/1998/ai98185.pdf
4. Liebman, J. & Mahoney, N. (2010) Do Expiring Budgets Lead to Wasteful Year-End
Spending? Evidence from Federal Procurement

5. Bankrupting America. (2013). WHAT IS SPEND IT OR LOSE IT? Retrieved

November 16, 2013, from http://www.bankruptingamerica.org/fact-sheet/what-isspend-it-or-lose-it/#.Uohlr2DTnIU