LEADERSHIP STYLE AND ENVIRONMENTAL UNCERTAINTY:

MODERATING EFFECT ON THE RELATIONSHIP BETWEEN

BUDGET PARTICIPATION AND BUDGETARY SLACK
AT THE STATE HOSPITAL OF YOGYAKARTA INDONESIA

Christophorus Heni Kurniawan

Augustinus Very Wibawa

Accounting Department of Atma Jaya Yogyakarta University

Jl. Babarsari 43 Yogyakarta, Indonesia 55281
Fax. 062-274-485227
Telp. 062-274-487711 ext. 3122

Abstract

This research was conducted with the aim to test the moderating effect of
leadership style and environmental uncertainty on the relationship between budget
participation and budgetary slack.. The analysis is based on respondents' answers of
68 middle managers at the Rumah Sakit Umum Daerah (Regional State Hospital) in
the Yogyakarta Province of Indonesia.
Using regression analysis, the result provides evidence that budget
participation has a positive significant effect on the budgetary slack. Next result of
moderation regression analysis provides evidence that leadership style has a negative
effect in reducing the positive effect of budget participation on budgetary slack.
Conversely, environmental uncertainty has a positive effect in enhancing the positive
effect of budget participation on budgetary slack.
The results also showed that the leadership style adopted by each institution is
more task oriented. This condition may cause the budgetary slack will be smaller
(down) at the time of the executives (managers) are involved in the preparation of the
budget.

Keywords: budget participation, budgetary slack, leadership style, environmental

uncertainty, and regional state hospital
 I. Introduction

Budgeting is one of the most important thing in corporate strategic planning. Therefore,

middle and lower managers should be included directly in the budgeting process. This process is

called with the budget participation. Budget participation is necessary because the subordinate

more directly determine the budgeting condition of its parts. Budget participation is expected to

be created of the best budget, in accordance with the standards or conditions that are expected in

the foreseeable future (Fitri, 2008). Siegel and Marconi (1989) in Falikhatun (2007) stated that

the participation of subordinates in the preparation of the budget has a positive relationship with

achievement of organizational goals. Subordinates have the opportunity for reporting his

information to the superiors, that can choose the best decisions to achieve organizational goals.

Participation is an effective way to align its units with the goal of throughout the organization.

Problems that often arise from the involvement of lower or middle level managers in the

preparation of the budget is the creation of a budgetary slack. Budgetary slack is usually done by

raising of the cost or lowering of the earnings than they should be, so the budget easily achieved

(Merchant, 1981 in Falikhatun, 2007). Schiff and Lewin (1970) in Falikhatun (2007) stated that

subordinates create budgetary slack because it is influenced by the desires and personal interests

that will facilitate the achievement of budget targets. Especially if performance appraisals are

determined based on the budget achievement.

Initial studies on the relationship between budget participation and budgetary slack shown

not consistent results. Onsi (1973) suggested that the budgetary slack decreased if participation

leads to positive communication, but Collins (1978) states that budget participation has no

significant relationship with the budgetary slack. Govindarajan (1986) suggested that to resolve

the differences in the results of research can be done with the contingency approach.

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Systematically, this approach evaluate a range of conditions or variables that can affect the

relationship between budget participation and budgetary slack. The existence of this approach

leads to the nature of the relationship that exist within the budget participation and budgetary

slack is different for each condition. Contingency framework allows the using of these factors act

as intervening or moderating variables that will affect the relationship between budget

participation and budgetary slack.

Research using the contingency approach in the relationship between budget participation

and the budgetary slack was ever done by Amrul and Nasir (2002). Contingent variables in this

research are leadership style and environmental uncertainty. The results showed that the

relationship between budget participation and budgetary slack is positive in conditions of low

environmental uncertainty. Instead the relationship becomes negative under conditions of high

environmental uncertainty. For the variables of leadership style, the research could not prove the

existence of an influence on the relationship between budget participation and budgetary slack.

The results of researchs that are not consistent and motivated by research Amrul and Nasir

(2002), prompting this study. The study was conducted to reexamine the effect of leadership

style and environmental uncertainty on the relationship between budget participation and

budgetary slack using the different objects. Respondents were used in this study using middle

and lower managers of state hospitals in Yogyakarta Province of Indonesia. The state hospitals

were chosen because of the increasing demands from public community that state hospitals

should be managed more efficient, transparent, and accountable as one manifestation of public

sector institutions.

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 II. Literature Review and Hypothesis Development

2.1. The Relationship Between Budget Participation and Budgetary Slack

Chow et al (1988) stated that the budgetary slack is defined as the difference between the

expected performance with that reported in the budget. In practice there is confusion between

inaccurate forecasting with the budgetary slack. Furthermore Onsi (1973) explains the difference

between the inaccurate forecasting with the budgetary slack. He stated that the inaccurate

forecasting is unintentional, while the budgetary slack is intentional. Dunk (1993) also states that

budget participation will provide greater opportunities of subordinates to create a budgetay slack.

But participation is also considered to reduce the budgetary slack if the subordinate budget helps

provide personal information about the prospects for the future so the budget is structured to be

more accurate, although it is possible that the greater participation of the budget will be able to

increase the budgetary slack (Venusita, 2006). Lukka (1988) also proved that high participation

in budgeting, providing greater opportunities for subordinates to perform slack.

Based on the above explanation, then the first hypothesis in this study is:

H1: Budget Participation has a positive effect on budgetary slack.

2.2. The Effect of Leadership Style to The Relationship Between Budget Participation and

Budgetary Slack

Leadership is a process by which an individual is affected groups to achieve common goal

(Northouse, 2003). Dubrin (2001) stated that leadership is the ability to instill confidence and

gain support from members of the organization to achieve organizational goals. Each leader has

a leadership style. Sometime leaders do not provide opportunities for subordinates to question or

ask for an explanation (authoritarian style). Sometime a leader gives subordinates the

opportunity to discuss and ask for an explanation (democratic syle), and there are times when

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leaders allow existing conditions up to subordinates (laissez-fair) (Luthans, 2002). The

involvement of groups or individuals in the organization depends on the proper of the leadership

style that leads interaction of manager with his subordinates.

Fiedler (1981) suggests that one's leadership style can be determined whether the task-

oriented or relationships oriented through the instrument of LPC (least preferred coworker).

Leadership styles tend to be oriented in a relationship oriented, increase the opportunity for

subordinates to create the budgetary slacks for their interests. In these conditions the relationship

between budget participation and budgetary slack is positive (high). Budgetary slack will be

reduced in line with the reducing of budget participation on task-oriented leadership style.

Based on the above explanation, then the second hypothesis in this study is:

H2: The leadership style affects to the relationship between budget participation and the

budgetary slack.

2.3. The Effect of Environmental Uncertainty to The Relationship Between Budget

Participation and Budgetary Slack

Budgeting involving many parties, ranging from upper managers to lower levels of

managers. The budget has a direct effect on human behavior, especially for people who are

directly involved in the preparation of the budget (Siegel and Marconi, 1989). To produce an

effective budget, managers need the ability to predict the future by considering various factors

including environmental factors. When subordinates give a biased estimate to the managers, the

budgetary slack arises. According to Govindarajan (1986), the relationship between the budget

participation and budgetary slack is positive in situation of high environment uncertainty. Ikhsan

and Ine (2007) found that an employee who has a high participation in the preparation of budgets

and facing low environmental uncertainty, will be able to create a slack in the budget, because he

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has ability to handle uncertainty and to predict the future. Conversely, in high environmental

uncertainty, it becomes difficult to predict the future and to create a budgetary slack.

Based on the above explanation, the third hypothesis in this study is:

H3: Environmental uncertainty affects to the relationship between budget participation

and budgetary slack.

III. Research Method

3.1. Object of The Research

The objects of this research are the regional state hospital in Yogyakarta Province of

Indonesia. Retrieval of these objects due to the greater demands of the public community that

state hospitals should be managed more efficient, transparent, and accountable as one

manifestation of public sector institutions. There is a difference strategy in the planning and

preparation of public sector budgeting. The funding from central government to local

governments tend to cause the dependence of money (local to central) that create the budgetary

slack and bottom-up approach in budgeting tends to be a mere formality because state hospitals

are not considered for having good strategic planning and priority. This situation raises the

question of whether the budgeting will cause the budgetary slack. The existence of budgetary

slack may caused by the style of leadership and environmental uncertainty.

3.2. Population and Samples

The population in this study were all individuals (executives) on Regional State Hospital in

Yogyakarta that perform the function of budgeting. The technique to determine of the samples

used purposive sampling. Criteria of the sample in this study are:

1. Middle managers at the Regional State Hospital in Yogyakarta.

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2. Have a minimum experience in budgeting at least for one year

3. No objection for filling the questionare

The sample in this research consists of 68 from 74 middle managers (with response rate 91,89%)

on the Regional State Hospital in Yogyakarta that perform the function of bugeting.

3.3. Variables

There are three variables in this research; independent, dependent, and moderating

variables. Independent variable is the budget participation, dependent variable is the budgetary

slack, and moderating variables are leadership style and environmental uncertainty. Linear

regression model will be used for testing the 1st hypothesis. Moderating regression model will be

used for testing the 2nd and 3rd hypothesis. All models in this research can be shown as follow:

• BS = β0 + β1*BP ……………………………………………….. (model 1)

• BS = β0 + β1*BP + β2*LS + β3*BP*LS + e…………………..... (model 2)

• BS = β0 + β1*BP + β2*EU + β3BP*EU + e……………………. (model 3)

Note:

• BS = Budgetary Slack…………………………… (dependent variable)

• BP = Budget Participation……………………… (independent variable)

• LS = Leadership Style………………………….. (moderating variable)

• EU = Environmental Uncertainty……………… (moderating variable)

3.4. Data Collection

Data used in this research were obtained by distributing questionnaires to respondents for

asking about participation in the preparation of the budget, the budgetary slack, leadership style

and the environmental uncertainty that occurs in their organization. The questionnaire that used

in this study consists of five parts:

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1. The first part is an introduction regarding demographic characteristics of respondents:

gender, age, tenure, and participation in budget preparation.

2. The second part is a questionnaire regarding budget participation. Measurement of

engagement and influence of a manager or a subordinate in the budgeting process was

developed by Milani (1975). Each respondent was asked to answer six questions that

measure the level of participation, perceived influence, and contributions of the

respondents in the budgeting process by selecting a value in the scale 1-7. Low scale (value

1) indicates a low level of participation, otherwise the height scale (value 7) showed a high

level of participation.

3. The third part is a questionnaire about the budgetary slack. Measurement of budgetary

slack that created by manager is developed by Dunk (1993) which consists of 6 items

question for measuring the level of budgetary slack by selecting a value in the scale 1-7 .

4. The fourth part is a questionnaire about leadership style. The instruments used in this study

was adopted from Fiedler (1981), known as LPC (Least Preferred Cowoker) scale. Scale is

the opposite word pairs, which includes 17 pairs of words with a score of 1 to 8. If the total

score of 64 or more, meaning high LPC or relationship-oriented and if the LPC score 57 or

less, meaning a low LPC or task-oriented. Answers to questions prepared by using a Likert

scale ranging from 1 to 8. Scale value shows the score of answer for each questions.

5. The fifth part is a questionnaire about environmental uncertainty. Measurement uncertainty

of the environment variable is intended to determine the perceptions of managers on the

perceived environmental uncertainty. Environmental uncertainty was measured with a 11

item question developed by Duncan (1972) with selecting a value in the scale 1-7.

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 IV. Empirical Results

The data that were collected by questionnaire then tabulated and processed using SPSS

version 15. Before being used as a data collection tool, the questionnaire in this study must be

tested by the validity and reliability testing.

4.1. Validity Testing

Validity test that was used in this study is analysis of factors. An instrument is valid if the

value of Kaiser-Meyer-Olkin Measure of Sampling Adequacy (KMSA) ≥ 0.5 (Hair et al., 1997).

Table 4.1. Validity Test

Variabels Value of KMSA Limit KMSA Results

Budget Participation 0,841 0,5 Valid
Budgetary Slack 0,738 0,5 Valid
Leadership style 0,936 0,5 Valid
Environmental uncertainty 0,861 0,5 Valid
Source: Data Process

Test results can be seen that the validity of all variables in this study have a value of KMSA ≥

0.5, then all variables in this study can be declared valid.

4.2. Reliability Testing

Reliability tes that was used in this research is Cronbach’s alpha method. According to

Hair et al., (1998), an instrumen is reliable if the value of a coefficient Croncbac's alpha > 0.60.

Table 4.2. Reliability Test

Koef. Alpha Limit Koef.

Variables Results
Cronbach Alpha Cronbach
Budget Participation 0,888 0,6 Reliable
Budgetary Slack 0,851 0,6 Reliable
Leadership style 0,974 0,6 Reliable
Environmental uncertainty 0,921 0,6 Reliable
Source: Data Process

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Results of reliability test can be seen that all the variables in this study have a value of coefficient

Cronbach’s alpha greater than 0.6, then all the variables in this study can be stated reliable.

4.3. Percentage Analysis

In this section, percentage analysis is done to determine the demographic characteristics of

respondents.

Tabel 4.3. Demographic Characteristics of Respondents

Characteristics Information Number Percentage

Male 39 57.4
Gender Female 29 42.6
Total 68 100
< 25 years old 0 0,0
26 - 34 years old 6 8.8
Age 35 - 49 years oldn 48 70.6
> 49 years old 14 20.6
Total 68 100
< 5 years 2 2.9
Year of service 6 – 10 years 56 82.4
> 10 years 10 14.7
Total 68 100
Yes 68 100,0
Participation in
No 0 0,0
budgeting process
Total 68 100
Source: Data Process

The results of the percentage analysis can be seen that the majority of respondents in this study

(57.4%) were male, with ages between 35 to 49 years (70.6%). The majority of respondents

(82.4%) have a service life of 6-10 years and 100% of respondents said that they included in the

budgeting process.

4.4. Descriptive Analysis

This analysis is used to determine the category of respondent's answer. In this analysis will

be discussed about mean, standar deviation, minimum - maximum response, and respondents'

answers range.

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 Tabel 4.4. Descriptive Statistic

Std.
Variables N Range Minimum Maximum Mean
Deviation
Budget Participation 68 3.67 3.00 6.67 4.4265 .87738
Budgetary Slack 68 3.50 3.00 6.50 4.3235 .81236
Leadership style 68 5.41 2.35 7.76 4.7396 1.07409
Environmental
uncertainty 68 4.00 2.91 6.91 4.3008 .79784

Valid N (listwise) 68
Source: Data Process

The results of descriptive analysis in each of the variables are grouped into three class intervals

as follows:

Table 4.5. Range of Class Interval

Variables Interval Range Value

1,00 – 3,00 Low
Budget Participation 3,01 – 5,00 High Enough
5,01 – 7,00 High
1,00 – 3,00 Low
Budgetary Slack 3,01 – 5,00 High Enough
5,01 – 7,00 High
1,00 – 3,33 Low
Leadership style 3,34 – 5,66 High Enough
5,67 – 8,00 High
1,00 – 3,00 Low
Environmental uncertainty 3,01 – 5,00 High Enough
5,01 – 7,00 High

The results of descriptive analysis on all variables obtained an average value that were included

in the high enough category. This indicates that respondents declared variables are measured in

the study is stated high enough in the Regional State Hospital in Yogyakarta. Standard deviation

varies in the answers of 68 respondents. The larger standard deviation means the greater

variation in respondents' answers, and vice versa. Standard deviation values of all variables is

less than 2.00. It can be concluded that the respondents' answers relative to cluster on the

arithmetic mean value or in other words have similarities with each other.

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4.5. Hypothesis Testing

1. The Relationship Between Budget Participation and Budgetary Slack

The test results obtained by the F-test is 57.902 with a probability (p) = 0.000. Under the

provisions of the F-test in which the probability (p) ≤ 0.05 can be concluded that budget

participation is able to predict the changes of budgetary slack. Adjusted R Square value of

0.459 indicates that budget participation can influence the budgetary slack by 45.6% while the

remaining amount of 54.4% influenced by other variables not included in this model.

Value obtained by the T test is 7.609 with probability (p) = 0.000 and regression coefficient

(b) of 0.684. Under the provisions of the partial regression analysis in which the probability

(p) ≤ 0.05 then it can be concluded that budget participation has a positive and significant

effect on the budgetary slack. The results of this analysis showed higher levels of employee

participation in the budgeting process within the company actually had a positive influence in

improving the budgetary slack.

2. The Effect of Leadership Style to The Relationship Between Budget Participation and

Budgetary Slack

The test results obtained by the F-test is 45.263 with a probability (p) = 0.000. Under the

provisions of the F-test in which the probability (p) ≤ 0.05 can be concluded that budget

participation, leadership style, and the interaction between budget participation and leadership

style is able to predict the changes of budgetary slack. Adjusted R Square value of 0.665

indicates that budget participation, leadership style and the interaction between budget

participation and the leadership style can influence the budgetary slack by 66.5% while the

remaining amount of 33.5% influenced by other variables not included in this model. T test

results on a variable interaction between budget participation and leadership style count value

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 of -2.193 obtained probability (p) = 0.032 and regression coefficient (b) of -0.561. Under the

provisions of the partial regression analysis in which the probability (p) < 0.05 it can be

concluded that the interaction between budget participation and leadership style has a

negative and significant effect on the budgetary slack. This results showed that budgetary

slack will decrease on a condition of lower budget participation and a good/high of leadership

style. In other words, a good leadership style makes a significant contribution in reducing the

influence of budget participation to the budgetary slack.

3. The Effect of Environmental Uncertainty to the Relationship Between Budget

Participation and Budgetary Slack

The test results obtained by the F-test is 26.025 with a probability (p) = 0.000. Under the

provisions of the F-test in which the probability (p) ≤ 0.05 can be concluded that budget

participation, environmental uncertainty and the interaction between budget participation and

environmental uncertainty is able to predict the changes of budgetary slack. Adjusted R

Square value of 0.528 indicates that budget participation, environmental uncertainty and the

interaction between budget participation and environmental uncertainty could affect the

budgetary slack by 52.8% while the remaining amount of 47.2% influenced by other variables

not included in this model. T-test results on a variable interaction between budget

participation and environmental uncertainty count values obtained for 2.378 probability (p) =

0.020 and regression coefficient (b) of 1.044. Under the provisions of the partial regression

analysis in which the probability (p) ≤ 0.05 then it can be concluded that the interaction

between budget participation and environmental uncertainty has a positive and significant

effect on the budgetary slack. Analysis showed that budgetary slack will be higher in

conditions of high budget participation and high environmental uncertainty. In other words,

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 high environmental uncertainty contribute significantly in enhancing the effect of budget

participation to the budgetary slack.

4.6. Discussion

There are several effects that may occurs when subordinates involved in the preparation of

the budget. Siegel and Marconi (1989) in Falikhatun (2007) stated that the participation of

subordinates in the preparation of the budget has a positive relationship with the achievement of

organizational goals. However, problems that often arise from the involvement of lower or

middle level managers in the preparation of the budget is creation of budgetary slack. Schiff and

Lewin (1970) in Falikhatun (2007) states that a subordinate creates budgetary slack because of

influenced by the desires and personal interests that will facilitate the achievement of budget

targets. Especially if performance appraisals are determined based on the achievement budget

manager. The result of this research are consistent with the research conducted by Schiff and

Lewin (1970). Participation in the budgeting process undertaken by individuals (middle manager

at Regional State Hospita in Yogyakarta) has a positive effect on the budgetary slack. This

condition indicates that higher levels of budget participation of managers have a tendency to

increase the budgetary slack.

Budgetary slack can be derived by considering aspects of leadership. Leadership is a

process by which an individual affected groups to achieve common goal (Northouse, 2003 in

Thoyib, 2005). Durbin (2001) in Thoyib (2005) states that leadership is the ability to instill

confidence and gain support from members of the organization to achieve organizational goals.

The effectiveness of groups or individuals involvement in the organization depends on the

interaction style of manager to his subordinates and the degree to which the situation gives

control and influence to the leader. Fiedler (1981) in Ikhsan and Ine (2007) suggested that the

13
budgetary slack will be reduced in line with the reduction of budget participation on task-

oriented leadership style. Based on Table 4.4, the answer of respondents for leadership style is

obtained mean value by 4,7396. For 17 pairs of words with a mean score of 4,7396, it’s mean

that total score is 80,5732. Because of total score more than 64, this research provide evidence

that the leadership style adopted by each Regional State Hospital in Yogyakarta is more oriented

to the task (task oriented). This condition may cause the budgetary slack will be smaller (down)

at the time of the executives with task-oriented style are determining in the preparation of the

budget and not too involved the subordinates.

Other results of this research note that, the effect of budget participation on the budgetary

slack will be higher in times of high environmental uncertainty. This indicates that the high

environmental uncertainty lead managers who work at Regional General Hospital in Yogyakarta

to minimize the posibility of not achieving the target by reducing the budget. It’s mean that high

environmental uncertainty in budget participation will increase the budgetary slack.

V. Conclusion

This research shows that budget participation is able to predict the changes of a budgetary

slack by 45.9%. Budget participation has a positive and significant effect on the budgetary slack.

Budget participation, leadership styles and interaction between budget participation and

leadership style is able to predict the changes of budgetary slack by 66.5%. Interaction between

budget participation and leadership style has a negative and significant effect on the budgetary

slack. The results showed that budgetary slack will decrease on a low of budget participation and

a good/high of leadership (task-oriented) style. Budget participation, environmental uncertainty

and the interaction between budget participation and environmental uncertainty is able to predict

the changes of budgetary slack by 52.8%. The interaction between budget participation and

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environmental uncertainty has a positive and significant effect on the budgetary slack. The

results showed that budgetary slack will be higher in conditions of high budget participation and

high environmental uncertainty.

This research has a limitation on the toll of data collecting. The questionnaire used in this

study using budget participatory model developed from manufacturing companies and not from

the public sector. This condition may cause the obtained results reflect the lack of budget

participation, budgetary slacks, leadership style and environmental uncertainty in the public

sector especially on the state hospital. Based on this limitations, suggestion for the further studies

are expected to use a questionnaire that was developed from the public sector in order to obtain

better results.

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