The Importance of Procedural Fairness in Budgeting

THE IMPORTANCE OF PROCEDURAL FAIRNESS IN BUDGETING Chong M. Lau and Sharon L. C. Tan ABSTRACT The importance of organizational commitment in enhancing management accounting systems effectiveness has received increased attention in recent years. Surprisingly, no research has investigated whether budgetary participation, by itself, affects organizational commitment, and the process by which this occurs. Procedural justice literature suggests that participation may affect procedural fairness which, in turn, may affect job satisfaction and organizational commitment. This study therefore proposes that budgetary participation affects job satisfaction indirectly through procedural fairness. It also proposes that the effects of participation on organizational commitment are indirect through procedural fairness and job satisfaction. The results provide support for these propositions.

INTRODUCTION Several management accounting studies have underscored the importance of organizational commitment in enhancing the effectiveness of management Advances in Accounting Advances in Accounting, Volume 21, 333–356 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0882-6110/doi:10.1016/S0882-6110(05)21014-3

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accounting systems (e.g. Ferris, 1981; Ferris & Larcker, 1983; Nouri & Parker, 1996, 1998). These studies have found that organizational commitment generally has positive effects on employee attitudes and behaviors. For instance, Nouri’s (1994) results indicate that when managers are highly committed, job involvement is associated with a decreased level of budgetary slack. Nouri and Parker (1996) similarly found that managers who were highly committed did not exploit their high budgetary participation privileges to create budgetary slack. With respect to job performance, Nouri and Parker (1998) found that organizational commitment was positively related to performance. Considering the positive role of organizational commitment in enhancing management accounting systems effectiveness, there is therefore a need for management accounting researchers to pay increased attention on those variables which influence organizational commitment to assist top management to increase their employees’ commitment. The management accounting literature has consistently maintained that budgetary participation may have important attitudinal effects on organizational members (Brownell, 1982a). It is therefore likely that budgetary participation may enhance employee attitudes such as job satisfaction and organizational commitment. A variable of crucial importance to the understanding of the process by which budgetary participation affects job satisfaction and organizational commitment is procedural fairness. Procedural fairness is a part of organizational justice (fairness) theory. This theory suggests that there are two forms of fairness – procedural and distributive. Distributive fairness theory proposes that with respect to decisions involving allocation, people are primarily concerned with and affected by the fairness of the outcomes. As long as the outcome is fair (equitable), people are satisfied. In contrast, procedural fairness theory suggests that people are concerned with the means or processes by which decisions are made and the outcomes determined. As long as the means and processes are considered fair, people are satisfied (Lissak, Mendes, & Lind, 1983; Alexander & Ruderman, 1987). Procedural fairness theory has been relied upon extensively to explain attitudinal and behavioral issues in a variety of disciplines including the legal, psychology, political and organizational behavior. Specifically, it has been used extensively in these disciplines to explain the behavioral consequences of participative decision-making. The research results from these disciplines have consistently shown statistically significant relationships between participation and perceptions of procedural fairness. For instance, based on their review of procedural fairness research, Lind and Tyler (1988, pp. 196–197) concluded that ‘‘procedures that provide for either control or

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expression (participation) are seen as fairer yThe effects are so robust and so straightforward y’’ Perception of procedural fairness may therefore help to explain the process by which budgetary participation influences job satisfaction and organizational commitment. Several prior management accounting studies have investigated the importance of budgetary participation in fairness-related issues. However, these studies have generally considered only the interaction (joint) effects of budgetary participation (Magner, Welker, & Campbell, 1995; Lindquist, 1995; Libby, 1999; Lau & Lim, 2002). They have therefore assumed that the effects of procedural fairness are conditional upon other variables. With Wentzel (2002), organizational commitment and job satisfaction were not studied. With Magner and Welker (1994) and Libby (2001), budgetary participation was not investigated. This means that no prior management accounting studies have investigated the likelihood that budgetary participation, through procedural fairness, may affect two important employee attitudes, namely, job satisfaction and organizational commitment. Hence, the fundamental question of whether budgetary participation, by itself, has any effect on organizational commitment has remained unanswered. More importantly, the process by which budgetary participation influences job satisfaction and organizational commitment has also remained unexplained. Pedhazur (1982, p. 174) noted that ‘‘explanation is probably the ultimate goal of scientific inquiryyit is the key for creating the requisite conditions for the achievement of specific objectives. Only by identifying the variables and understanding the processes by which they lead to the (achievement of the dependent variable) is there promises of creating the conditions most conducive toythe achievement of the goals deemed desirable and beneficialy’’ (Parentheses and italics added). A study to address the aforementioned unexplained issues is therefore needed. An understanding of whether, and the process by which budgetary participation influences job satisfaction and organizational commitment would assist management accounting researchers to develop richer theoretical models, and enable practising managers to focus on areas which have the greatest impact on job satisfaction and organizational commitment. Our study is therefore designed to investigate the process by which budgetary participation, through procedural fairness, influences job satisfaction and ultimately, organizational commitment. Specifically, it proposes that the effect of budgetary participation on employee job satisfaction is indirect through procedural fairness. It also proposes that the effect of budgetary participation on employee organizational commitment is indirect through (1) procedural fairness and (2) job satisfaction. Fig. 1 presents the model which

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Procedural fairness

A

B

C Budgetary participation

Fig. 1.

Job satisfaction

E

D Organizational commitment

Theoretical Model: Intervening Effects of Procedural Fairness on Participation and Organizational Commitment.

incorporates these propositions. Job satisfaction is included in the model because there is strong theoretical support that procedural fairness is likely to have a strong impact, not only on organizational commitment, but also on satisfaction, which in turn, is likely to affect organizational commitment. According to Lind and Tyler (1988, p. 191), the most important role of procedural fairness is to enhance both employee satisfaction and organizational commitment. They concluded that ‘‘notwithstanding the importance of performance in organizational settings, the great practical value of procedural justice lies in its capacity to enhance the quality of work life and in its value as a source of both satisfaction and positive evaluations of organizationy’’ (emphasis added). The next section of the paper examines the relevant literature to develop the theoretical justification for the hypotheses to be tested. Subsequent sections, respectively, describe the method, results and the theoretical and practical implications of the study.

HYPOTHESES DEVELOPMENT Participation and Organizational Commitment (see Fig. 1) Mowday, Steers, and Porter (1979, p. 226) defined organizational commitment as ‘‘the relative strength of an individual’s identification with and involvement in a particular organization.’’ They suggested that organizationally committed individual may exhibit certain behavior including ‘‘(1) a

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strong belief in and acceptance of the organizational goals and values; (2) a willingness to exert considerable effort on behalf of the organization; and (3) a strong desire to maintain membership in the organization.’’ Prior research has suggested a positive association between participation and organizational commitment (e.g. March & Simon, 1985; Lincoln & Kalleberg, 1985; Boshoff & Mels, 1995). For instance, March and Simon (1985, p. 74) suggested that ‘‘the more participation of subordinates in making policy decisions, the stronger the tendency of subordinates to identify with the organization.’’ Lincoln and Kalleberg (1985, p. 754) similarly suggested that participation is related to organizational commitment because it ‘‘serves to integrate workers in the organization and commit them to organizational decisions.’’ However, although budgetary participation may be related to organizational commitment, the process through which participation affects organizational commitment is not well understood. This study proposes that the relationship between budgetary participation and organizational commitment may be indirect through (1) perception of procedural fairness and (2) job satisfaction. The following sections provide the theoretical justification for these propositions.

Budgetary Participation and Procedural Fairness (see ‘A’ in Fig. 1) Procedural fairness is concerned with the fairness of the process by which these outcomes are determined. Lind and Tyler (1988, p. 3) described procedural fairness and its behavioral implications as follows: Procedural justice begins with the hypothesis that there is a class of psychological reactions to adherence to or violation of norms that prescribe certain patterns of treatment or certain patterns of allocation. Such reactions have long been known to exert a powerful influence on human cognitions and behaviory The norms that form the basis of the justice response can be divided into two categories, those dealing with social outcomes (distributive justice) and those dealing with social process, that is, the proper behavior and treatment of people (procedural justice). (Emphasis and parentheses added).

Early procedural fairness studies originated mainly in the legal discipline and focused primarily on the importance of participation in enhancing procedural fairness so that fair outcomes are achieved. For instance, much of the seminal work of Thibaut and Walker (1975) was on the impact of participation on procedural justice judgments. They argued that for disputes involving conflict of interest, procedures which allow those affected by the decision/outcome to control or participate in the process would be perceived

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as fair. For outcomes to be equitable, all relevant information should be given due consideration. Since those affected may have individualized information which are not known to others, giving these people process control (participation) would enable them to disclose their individualized information so that the most equitable outcomes are achieved. Hence, procedures which place control of the process in the hand of those affected are likely to be perceived as high in procedural fairness because they promote fair outcomes. In other words, procedures involving participation are perceived as fair because they are instrumental in achieving the most equitable outcomes. Subsequent studies suggested and found that participation enhanced perception of high procedural fairness regardless of whether the final outcomes were equitable or not. This means that the act of allowing those who are affected by the decision to participate in the decision process, in itself, is sufficient to induce perception of high procedural fairness (Tyler, Rasinski, & Spodick, 1985; Lind & Tyler, 1988). These are regarded as the non-instrumental effects of procedural fairness. Lind and Tyler (1988, p. 193) suggested that the non-instrumental effects of procedural fairness occur because allowing one to participate ‘‘fulfills a desire to be heard and to have one’s views considered, regardless of whether the expression influences the decision maker.’’ In their Group Value Model on procedural fairness, they explained the non-instrumental effects of participation as follows: ythere are some values so basic to life in groups that they will occur in all group settingsy in general people value participation in the life of their group and that they value their status as group members. Procedures that allow voice are seen as fair because they provide opportunities for participation in group process and because the opportunity to exercise voice constitutes a visible marker of group membership. In contrast, mute procedures are seen as improper and therefore unjust because they frustrate the desire to participate in group process and because they appear to deny full membership rights to those denied voicey.If it is group participation and status affirmation that are important, these are obtained as soon as it is obvious that one’s views are expressed and considered; there is no need for a positive outcome to confirm these values.

Empirically, there is considerable support for the positive association between participation and procedural fairness (Lind, Erickson, Friedland, & Dickenberger, 1978; Tyler et al., 1985; Kanfer et al., 1987). The robustness of such findings has led Lind and Tyler (1988, p. 9) to conclude that ‘‘one of the most reliable findings in research on procedural justice (is) that people react more favorably to procedures that give them considerable freedom in communicating their views and arguments.’’ (Parenthesis added).

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Based on the above discussion, it is reasonable to conclude that budgetary participation is likely to be positively associated with procedural fairness (see ‘A’ in Fig. 1). The following hypothesis is therefore tested: H1. Budgetary participation is positively related to perception of procedural fairness. Procedural Fairness and Job Satisfaction (see ‘B’ in Fig. 1) Perception of procedural fairness is likely to be associated with the subordinates’ job satisfaction. Organizational justice theory suggests that fairness is a major social concern and that people’s satisfaction is likely to be affected by their perceptions of procedural fairness. Lind and Tyler (1988, p. 191) suggested that ‘‘procedural justice judgments affect a variety of very important beliefs and attitudes in organizations. In organizations, as in other settings, procedural justice appears to be a major concern, and the experience of procedural justice or injustice is a critical element in the organizational psychology of decision making.’’ Based on their review of the procedural fairness literature, they concluded that ‘‘the researchyhas shown that satisfaction is one of the principal consequences of procedural fairness.’’ McFarlin and Sweeney (1992) similarly suggested that because superiors have some control over their subordinates’ perception of procedural fairness, they might be able to affect their subordinates’ satisfaction. They can achieve this by developing and employing procedures which are perceived as fair by their subordinates. Procedural fairness is likely to be associated with job satisfaction because it may ameliorate discontent among organization members (Lau & Lim, 2002). Subordinates may also experience higher job satisfaction with fair procedures because such procedures may (1) lead to more equitable outcomes, a process known as the ‘‘fair process’’ effect (Folger, 1977; Folger et al., 1979; Greenberg & Folger, 1983; Lindquist, 1995), and (2) satisfy people’s need to be treated in an appropriate and polite manner (Lind & Tyler, 1988). There is also considerable empirical evidence to support the proposition that procedural fairness is positively associated with satisfaction. Early procedural fairness research in the legal arena found that procedural fairness was associated with satisfaction (Thibaut & Walker, 1975). Similar results were found in other disciplines and other settings (e.g. Lissak et al., 1983; Alexander & Ruderman, 1987). More importantly, studies by

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Lissak et al. (1983) and Alexander and Ruderman (1987) both indicated that not only was procedural fairness significantly related to job satisfaction, but the effect was stronger than that of distributive fairness. Based on the above discussion, it is reasonable to conclude that procedural fairness is likely to be associated with job satisfaction (see B in Fig. 1). The following hypothesis is therefore tested: H2. Perception of procedural fairness is positively related to job satisfaction. Budgetary Participation and Job Satisfaction (see ‘C’ in Fig. 1) Early research in budgeting had suggested that budgetary participation is likely to be associated with favorable behavioral outcomes because of the greater subordinates’ acceptance of budget targets which they help to set (Becker & Green, 1962; Vroom, 1964). For instance, Vroom (1964) suggested that budgetary participation is likely to be associated with increased subordinates job satisfaction because participation enables the subordinates to be more involved with their organizational activities and more independent and less dominated by their superiors. Cherrington and Cherrington (1973) relied on the principles of operant conditioning to provide the theoretical support for the positive behavioral effects of budgetary participation. According to them, appropriate reinforcement is provided when subordinates whose rewards are contingent on their budgets also participate in the setting of their budgets. Budgetary participation may affect job satisfaction in several ways. It may improve morale and group cohesiveness (Becker & Green, 1962). It may also provide opportunities for the subordinates to exchange or gain information from their superiors. This may help to clarify the task objectives and the means to achieve these task objectives (Kenis, 1979; Kren, 1992). This may lead to increased goal commitment. It may also motivate the subordinates to disclose their private information to their superiors. This may lead to more difficult goals and hence better performance (Kren & Liao, 1988). All these functional effects associated with budgetary participation are likely to lead to increased job satisfaction for the subordinates. French, Israel, and As (1960) provided early empirical evidence that participation was associated with increased job satisfaction among Norwegian workers because it satisfied important needs such as the need to be valued and appreciated. Several subsequent studies found similar positive association between participation and job satisfaction (e.g. Cherrington &

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Cherrington, 1973; Milani, 1975; Kenis, 1979). Based on their review of the management accounting literature, Kren and Liao (1988, p. 288) concluded that ‘‘the positive effect of participation on job satisfaction has had consistent support in empirical testing. The results indicate that subordinates like to participate and are more satisfied with their jobs when participation is present.’’ Based on the above discussion, budgetary participation is likely to be positively associated with the subordinates’ job satisfaction. The following hypothesis is therefore tested: H3. Budgetary participation is positively related to job satisfaction. Job Satisfaction and Organizational Commitment (see ‘D’ in Fig. 1) There is considerable empirical support for a significant and positive relationship between job satisfaction and organizational commitment (e.g. Mathieu & Zajac, 1990; Myer, Allen, & Smith, 1993; Ketchand & Strawser, 2001). Ketchand and Strawser (2001) suggested that while the temporal ordering is unclear, the strength of the relationship is generally unequivocal. Among the various dimensions of organizational commitment (affective, continuance and normative), Mathieu and Zajac (1990) found that the positive association between job satisfaction and organizational commitment is strongest for affective commitment. Ketchand and Strawser (2001) suggested that subordinates who are satisfied with their jobs may develop emotional attachments (high affective commitment) to their organizations. Myer, Allen, and Smith (1993) suggested that the development of affective commitment is likely to be preceded by job satisfaction because subordinates who find satisfaction in their jobs are generally those who are allowed the chance to do satisfying work or afforded the opportunity to develop valued skills, for instance, through the opportunities to participate in their organizational affairs. Job satisfaction is therefore likely to be positively associated with affective organizational commitment. The following hypothesis is therefore tested: H4. Job satisfaction is positively related to organizational commitment. Procedural Fairness and Organizational Commitment (see ‘E’ in Fig. 1) Procedures are developed and implemented by organizations. It is therefore likely that the subordinates’ perceptions of fairness in the procedures

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developed and employed by their organizations will affect their attitudes especially their commitment to their organizations. If employees can be guaranteed fair procedural treatment, they are more likely to be loyal and committed to their organizations. McFarlin and Sweeney (1992, p. 634) argued that employee resentment against injustice requires ‘‘the ability to identify other people and the procedures that they use as the source of poor outcomes. Thus, organizational outcomes may represent a clear target to blamey.By definition, organizational outcomes make salient the institutional sources of the procedures that affect employees.’’ Kim and Mauborgne (1993) similarly suggested and found that perception of high procedural fairness in head office procedures was positively associated with branch managers’ organizational commitment. Libby (1999, p. 127) argued that when perception of procedural fairness is low, subordinates may take destructive actions which may lead to ‘‘negative organizational consequences including reduced commitment to the organization.’’ Magner, Welker, and Campbell (1995, p. 613) similarly incorporated organizational commitment as one of the consequences of unfair procedures in their study. They argued that, apart from the employees’ immediate supervisors, employee resentment against unfair procedures may also be manifested in negative attitudes toward ‘‘many of the officials residing above the employee’s immediate supervisor in the organizational hierarchy’’ and that these officials ‘‘are likely to be seen as having a significant role in establishingybudgetary procedures such as participationyand are held culpable forylow level of budgetary participation.’’ Additional theoretical support for the hypothesis that procedural fairness is positively associated with organizational commitment is provided by the Group Value model on procedural justice developed by Lind and Tyer (1988, pp. 231–232). This model suggests that: Humans are by their very nature affiliative creatures, and they devote much of their energy to understanding the functioning of the various groups to which they belong and to participating in social processes within those groupy.Group procedures specify the authority relations and the formal and informal social processes that regulate much of the group’s activitiesy Because procedures are very important aspects of the perception of groups, evaluations of procedures, in the form of procedural justice judgments, would be expected to have strong effects on other group-relevant attitudes. It is hardly surprising, then, that procedural justice judgments affect evaluations of leaders and institutions. Indeed according to the group value model, overall attitudes toward the group itself would be expected to be shaped in substantial part by procedural justice judgments. To the extent to which group procedures are seen as unjust, which is to say that the procedures are contrary to basic group or individual values, evaluation of the group and

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commitment to it will suffer. To the extent that group procedures are fair, evaluation of the group and commitment and loyalty to the group will increase. (Emphasis added).

There is also much empirical support for an association between procedural fairness and evaluation of authorities and institutions responsible for decision-making (e.g. Alexander & Ruderman, 1987; Folger & Konovsky, 1989; MacFarlin & Sweeney, 1992; Magner et al., 1994, 1995; Tang & Sarsfield-Baldwin, 1996). Based on their review of the procedural fairness literature, Lind and Tyler (1988, p. 179) concluded as follows: The general finding seen in all of these studies has been that procedural justice is a remarkably potent determinant of affective reactions to decision making and that procedural justice has especially strong effects on attitudes about institutions and authoritiesyThese findings lead us to suspect thatya number of other organizational attitudes are affected by procedural justice judgmentsy..we believe that attitudes toward the organization as a whole, including such things as organizational commitment, loyalty and work group cohesiveness, are strongly affected by procedural justice judgments. (Emphasis added)

Based on the above discussion, it is possible to conclude that perception of procedural fairness is likely to be positively associated with organizational commitment. The following hypothesis is therefore tested: H5. Procedural fairness is positively related to organizational commitment. Mediating Effects of Procedural Fairness and Job Satisfaction Overall, the discussion in the previous few sections and Fig. 1 suggest the following. First, budgetary participation is likely to be related to procedural fairness (see A in Fig. 1), which in turn, is likely to be related to job satisfaction (see B). This means that the effect of budgetary participation on job satisfaction (see C) may be indirect through procedural fairness. Accordingly, the following hypothesis is tested: H6. The effect of budgetary participation on job satisfaction is indirect through procedural fairness. Second, procedural fairness is related to job satisfaction (see B), which in turn, is related to organizational commitment (see D). This means that the effect of procedural fairness on organizational commitment (see E) may be indirect through job satisfaction. Accordingly, the following hypothesis is tested:

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H7. The effect of procedural fairness on organizational commitment is indirect through job satisfaction. Finally, the discussion and Fig. 1 suggest that budgetary participation is related to both procedural fairness (see A) and job satisfaction (see C). Both procedural fairness and job satisfaction, in turn, are related to organizational commitment (see E and D). Taken together, these relationships suggest that the effect of budgetary participation on organizational commitment is indirect through (1) procedural fairness and (2) job satisfaction. Accordingly, the following hypothesis is tested: H8. The effect of budgetary participation on organizational commitment is indirect through (1) procedural fairness and (2) job satisfaction.

METHOD A survey questionnaire was employed with a sample of 100 organizations. The sample was selected randomly from the list of manufacturing organizations in Kompass Singapore 2000. The manufacturing sector was the largest sector listed in the directory. In order to provide some degree of control over the size of the organizations, only organizations with more than 100 employees each were selected. Since surveys involving real managers generally yield relatively low response rates, the approach of addressing these managers by their names and mailing the questionnaire directly to them was adopted to enhance the response rate. Hence, telephone calls were made to the selected organizations to obtain the names of an average of three functional heads (e.g., manufacturing manager, sales manager, marketing manager, personnel manager) from each organization. Functional heads were selected to provide some degree of control over the level of management. A total of 300 functional heads’ names were obtained from those organizations which were willing to supply the researchers with the names of some of their managers. A questionnaire with a covering letter assuring confidentiality in the responses provided was mailed to each of the 300 functional heads. After three week of the initial mailing, follow-up by telephone calls were made to those functional heads who had not responded. A total of 156 responses were received. Four of these responses were not usable as the respondents had failed to complete various parts of the questionnaire. This leaves the study with 152 usable responses and an overall response rate of 50.7%.

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In order to ensure that non-response bias was not present, t-tests on the variables studied were undertaken to ascertain if the early responses were significantly different from the late responses. This approach has been recommended by Oppenheim (1992) as a useful test for non-response bias. Our results indicated that no significant differences were found. Hence, there was no non-response bias in the responses received. The demographic data indicated that mean age of the respondents was 40.6 years. They had held their current positions for an average of 6.4 years, had an average of 10.3 years of experience in their areas of responsibility and were each responsible for an average of 87 employees. Most of them (93%) had either tertiary or professional qualifications. Based on these data, it is reasonable to conclude that the respondents were in general relatively senior, experienced and well qualified managers in their organizations.

MEASUREMENT INSTRUMENTS Budgetary Participation The Milani (1975) six-item instrument was employed to measure budgetary participation. This is one of the most widely used instruments in management accounting research on budgetary participation. Management accounting studies which have employed this instrument include Brownell (1982b), Chenhall and Brownell (1988); Frucot and Shearon (1991); Harrison (1992), Kren (1992) and Nouri and Parker (1996) and Lau and Buckland (2001). Consistent with several prior studies which had demonstrated the instrument’s high internal consistency as measured in terms of the Cronbach alpha statistic, our studies found a relatively high Cronbach alpha of 0.94 for the six items of the instrument. The factor analysis results indicate that all six items loaded satisfactorily on a single factor (Eigen value ¼ 4.6; variance explained: 76%).

Procedural Fairness The four-item instrument developed by McFarlin and Sweeney (1992) was employed to measure perception of procedural fairness. The four items ask the managers to rate the fairness of the procedures used by their superiors to communicate performance feedback, determine pay increases, evaluate performance and promotability. A Cronbach alpha of 0.90 was obtained for

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the four items. This demonstrates the high internal consistency among the four items of the instrument. The factor analysis results indicate the unidimensional nature of the instrument as all four items loaded satisfactorily on a single factor (Eigenvalue ¼ 3.07; variance explained: 77%).

Job Satisfaction This variable was measured by the 20-item short-form version of the Minnesota Satisfaction Questionnaire (MSQ) developed by Weiss, Dawis, England, and Lofquist (1967). It measures the degree of managers’ satisfaction with 20 different job facets. It has been adopted by several management accounting studies including Brownell (1982b); Frucot and Shearon (1991) and Harrison (1992). Scarpello and Campbell (1983) found that this instrument had more success than other instruments in predicting overall job satisfaction with facets of the job. Weiss et al. (1967) found that it had high levels of reliability when tested with a sample of 27 norm groups and a specific group of managers. Dunham, Smith, and Blackburn (1977) found it provided the highest level of convergent validity and outperformed other measures in tests of discriminant validity. The Cronbach alpha of 0.95 obtained for this instrument in our study indicates high internal consistency. As noted above, this instrument comprises 20 items with each item representing a different job facet. This means that the 20 items constitute 20 different job facets e.g. ability utilization, achievement, activity, advancement (Weiss et al., 1967). Hence, factor analysis, which seeks to reduce the list of items into categories (factors), is inappropriate here because from a theoretical perspective each of these 20 items is already a category by itself. Consequently, factor analysis was not undertaken for this variable.

Organizational Commitment This variable was measured by the nine-item short-form version of Organizational Commitment Questionnaire (OCQ) developed by Mowday et al. (1979). Myer et al. (1993, p. 152) regarded this instrument as the ‘‘most widely used measure of affective commitment to date.’’ Both Mowday et al. (1979) and Angle and Perry (1981) suggested that OCQ has good psychometric properties. High levels of Cronbach alphas were found for this instrument by several prior studies (e.g. Nouri, 1994; Nouri & Parker, 1996, 1998). Consistent with these prior studies, the Cronbach alpha of 0.91

The Importance of Procedural Fairness in Budgeting

Table 1. Variables

Descriptive Statistics and Cronbach Alpha. Mean

Participation Procedural fairness Job satisfaction Organizational commitment

347

26.98 13.64 66.06 45.92

Std Dev

Theoretical Range

8.45 2.98 12.46 9.48

Actual Range

Min

Max

Min

Max

6 4 20 9

42 20 100 63

6 4 36 16

42 20 97 63

Cronbach Alpha

0.94 0.90 0.95 0.91

Pearsons Correlations among Variables.

Table 2.

Procedural fairness Job satisfaction Organizational commitment

Participation

Procedural Fairness

Job Satisfaction

0.404 0.465 0.338

0.519 0.480

0.647

 po0.01 (2-tailed).

obtained in our study indicates the high internal consistency of the nine items in the instrument. A factor analysis was undertaken for the nine items. All items loaded satisfactorily on a single factor (Eigenvalue ¼ 5.43; variance explained ¼ 60%). Descriptive statistics of the above variables are presented in Table 1. Table 2 presents the Pearsons correlation matrix among these variables.

RESULTS Hypotheses H1, H2, H3, H4, H5 The first five hypotheses predict positive relationships among budgetary participation, procedural fairness, job satisfaction and organizational commitment. The univariate results of the Pearsons correlation matrix as presented in Table 2 are used to ascertain if these hypotheses are supported. The results indicate the following. For Hypothesis H1, the relationship between budgetary participation and procedural fairness is positive and significant (0.404; po0.01). For Hypothesis H2, the relationship between procedural fairness and job satisfaction is positive and significant (0.519; po0.01). For Hypothesis H3, the relationship between budgetary

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participation and job satisfaction is positive and significant (0.465; po0.01). For Hypothesis H4, the relationship between job satisfaction and organizational commitment is positive and significant (0.647; po0.01). Finally, for Hypothesis H5, the relationship between procedural fairness and organizational commitment is positive and significant (0.480; po0.01). Hence, Hypotheses H1, H2, H3, H4 and H5 are all supported.

Hypotheses H6, H7 and H8 Hypotheses H6, H7 and H8 all involve intervening relationships. In order to ascertain if these hypotheses are supported, it was necessary to decompose the total effects of these relationships into direct and indirect effects. Structural equation modeling is an appropriate technique for these tests. Hence, the EQS computer software program (Bentler, 1995) was employed. Tests of the structural model as depicted in Fig. 1 were first undertaken. The results indicate that the w2 of the model is 0.014 (1df; po0.90). Hence, the w2 p-value (0.90) is substantially higher than the recommended value of 40.05 (Bentler, 1995). The fit indices are: normed fix index ¼ 1; nonnormed fit index ¼ 1.034; comparative fit index ¼ 1. These fit indices are all higher than the recommended value of 40.90 (Bentler, 1995). Based on these results, it is possible to conclude that the structural model is a very good fit. Table 3 presents the results from the structural equation models showing the total effects, direct effects and indirect effects for the various relationships. These results indicate the following. First, the relationship between budgetary participation and job satisfaction has a total effect of 0.465. This can be decomposed into a direct effect of 0.305 and an indirect effect of 0.160. The indirect effect can be computed from the path coefficients (see Fig. 2 or Table 4) as follows: BP-PF-JS ¼ 0.404
0.396 ¼ 0.160. As this value is in excess of 0.05 (Bartol, 1983; Pedhazur, 1982), the indirect effect is meaningful. Hence, Hypothesis H6, which states that the effect of budgetary participation on job satisfaction is indirect through procedural fairness, is supported. The results in Table 3 also indicate that the relationship between procedural fairness and organizational commitment has a total effect of 0.412. This can be decomposed into a direct effect of 0.197 and an indirect effect of 0.215. The indirect effect can be computed from the path coefficients (see Fig. 2 or Table 4) as follows: PF-JS-OC ¼ 0.396
0.545 ¼ 0.215. As this value is in excess of 0.05 (Bartol, 1983), the indirect effect is meaningful. Hence, Hypothesis H7, which states that the effect of procedural fairness on organizational commitment is indirect through job satisfaction, is supported.

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Table 3. Total Effects, Direct Effects and Indirect Effects. Dependent Variables

Independent Variables

Total Effects

Direct Effects

Indirect Effects

BP PF BP PF JS BP

0.404 0.396 0.465 0.412 0.545 0.333

0.404 0.396 0.305 0.197 0.545 0.000

— — 0.160 0.215 — 0.333

PF JS JS OC OC OC

BP ¼ budgetary participation; JS ¼ job satisfaction; PF ¼ procedural fairness; OC ¼ organizational commitment.

Procedural fairness

0.404**

0.396**

0.305** Budgetary participation

Job satisfaction

0.197**

0.545** Organizational commitment

** p< 0.01 (2-tailed)

Fig. 2.

Structural Model with Standardized Path Coefficients.

Finally, Table 3 indicates that the relationship between budgetary participation and organizational commitment has a total effect of 0.333, which is composed entirely of indirect effect. Based on the values of the path coefficients in Table 4 and Fig. 2, the decomposition of the indirect effect of 0.333 by the various paths in Fig. 2 are computed as follows: Path (1) Path (2) Path (3)

BP-PF-OC BP-JS-OC BP-PF-JS-OC

Total indirect effect

0.404
0.197 0.305
0.545 0.404
0.396
0.545

0.080 0.166 0.087 0.333

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Table 4. Dependent Variables PF JS OC

Standardized Solutions.

Independent Variables

Path Coefficients

R2

BP PF BP PF JS

0.404 0.396 0.305 0.197 0.545

0.163 0.347 0.447

BP ¼ budgetary participation; JS ¼ job satisfaction; PF ¼ procedural fairness; OC ¼ organizational commitment.

Baron and Kenny (1986) suggested that a full mediation occurs if a significant relationship between two variables becomes insignificant after controlling for the indirect effects. Since a significant correlation exists between budgetary participation and organizational commitment (see Table 2), but this significant relationship is reduced to zero after controlling for the indirect effects through procedural fairness and job satisfaction, a full mediation is deemed to have occurred. Based on these results, Hypothesis H8, which states that the effect of budgetary participation on organizational commitment is indirect through procedural fairness and job satisfaction, is therefore supported.

CONCLUSION Since budgetary participation, procedural fairness, job satisfaction and organizational commitment are some of the most important variables in budgeting, there is an expectation that the relationships among them would have already been studied by management accounting researchers. Yet this is not the case. The fundamental questions of (1) whether budgetary participation, by itself, has any effect on job satisfaction, and ultimately on organizational commitment, and (2) if so, the process by which this occurs, have generally been overlooked by prior management accounting studies. This study therefore seeks to address these important unexplained issues. Specifically, it investigates if the effects of budgetary participation on employee organizational commitment are indirect through procedural fairness and job satisfaction. It also considers the relative importance of procedural fairness in explaining the relationships between (1) budgetary participation

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and job satisfaction, and (2) budgetary participation and organizational commitment. The results support the hypotheses and the expectation of this study that procedural fairness plays an important role in influencing subordinates’ attitudes and behaviors in participative budgeting. Procedural fairness was found to affect subordinates’ attitudes in three ways. First, our results indicate that budgetary participation significantly affected job satisfaction. However, a substantial proportion of these effects was indirect through procedural fairness (0.160 in Table 3) (see Hypothesis H6). This means that budgetary participation significantly affected procedural fairness, which then affected job satisfaction. Second, the results indicate that apart from its direct effect on organizational commitment (0.197 in Table 3), procedural fairness also affected organizational commitment indirectly through job satisfaction (0.215 in Table 3) (see Hypothesis H7). Finally, the results indicate that procedural fairness, together with job satisfaction, were able to explain almost all the effects of budgetary participation on subordinates’ organizational commitment. They indicate that procedural fairness and job satisfaction mediated fully the relationship between budgetary participation and organizational commitment (see Hypothesis H8). These results are important as they help to explain the process by which budgetary participation affects employee job satisfaction and organizational commitment. They are generally consistent with the theories developed in other disciplines which have highlighted the importance of procedural fairness in influencing employee attitudes and behaviors. Lind and Tyler (1988, p. 141) suggested that ‘‘wherever research has examined procedural justice, it has been found that peoples care about the fairness of procedures. People may give different weight to various concerns as they decide in different situations what constitutes procedural justice, but they appear always to make procedural justice judgments and these judgments are always important to them.’’ Management accounting researchers should therefore pay more attention to role of fairness in the study of management accounting issues. From a theoretical perspective, the results provide the empirical support for management accounting researchers to place greater reliance on organizational justice theory as it may be important in explaining and resolving many management accounting issues (Hopwood, 1972; Otley, 1978). Considering the myriad of management accounting procedures in most organizations, there are many opportunities for management accounting researchers to not only play an important role in the further development of theories on fairness, but also provide fresh insights into many fairness

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issues which are not discernible by research in other disciplines. As noted by Lindquist (1995, p. 143), ‘‘through a recognition of the desire for fairness in the workplace as an antecedent of participative budgeting, we can gain new knowledge and move forward toward a better understanding of the entire budgetary process.’’ From a practical perspective, our study suggests that consideration of fairness issues in the design of management accounting procedures may be far more important than previously thought. Lind and Tyler (1988, pp. 200–201) suggested that: yorganizational designers look to procedural justice research for effective means to enhance and maintain the quality of work life and the internal cohesiveness of organizations. The researchyshows that when procedures are fair, the organization can expect to see greater employee satisfaction, less conflict and more obedience to procedures and decisions. These benefits can be realized at very little cost to the organization - in fact, it is quite likely that the investment of organizational resources in the achievement of procedural justice would produce much greater benefit on these dimensions at less cost than would most other changes in organizational policy or practice. (Emphasis added).

Practicing management accountants can therefore enhance employee satisfaction and organizational commitment not necessarily by increasing compensations or rewards, but by designing and implementing procedures that are perceived as fair. As indicated by the results of this study, the employment of procedures which involve the subordinates’ participation in the budget setting process is likely to enhance employee job satisfaction and organizational commitment without having to increase the amount of compensation and rewards the subordinates received. Lind and Tyler (1988, p. 75) summed this up as follows: The enhancement of satisfaction by procedural fairness is a remarkable phenomenon that suggests a host of potential beneficial applications y.in essence, the existence of the effect means that we can increase the net satisfaction of all those who come in contact with the law by designing procedures so that they can lead to judgments of greater procedural fairness. Because we now know that it is possible to produce a net gain in satisfaction by proper procedural design, we have more reason than ever to study the relationship between the characteristics of a procedure and the judgment that the procedure is fair. (Emphasis added).

As with most research, our study has some limitations. First, our study is based on survey data which are subject to the usual limitations associated with cross-sectional survey method. Second, our sample was selected from manufacturing organizations and from senior management level. Hence, caution should be exercised in generalizing the results to other sectors and other levels of management. Third, although our study has incorporated the

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mediating effects of procedural fairness and job satisfaction, other potential mediating variables, such as goal commitment, role ambiguity and job relevant information, may also be important. Notwithstanding the aforementioned limitations, our study provides important empirical evidence pertaining to the role and importance of procedural fairness in management accounting control systems in general, and in explaining the process by which budgetary participation affects important employee attitudes including job satisfaction and organizational commitment. These findings may assist in the development of richer theoretical models and in the enhancement of more positive employee attitudes and behaviors in the workplace. They may also help to promote a greater interest and more research on the importance of perceptions of fairness in the design and implementation of management accounting control systems.

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