The Interaction of Accountability and Post-Completion Audits on Capital Budgeting Decisions

Article excerpt


Capital budgeting decisions are among the most important decisions facing business entities. An important aspect of the capital budgeting process is the relationship and impact of post completion audits (PCAs) on the capital budgeting decision process. Feedback environment is an inherent aspect of a PCA. Behavioral researchers have conducted no studies we are aware of on the effect of feedback environment, as incorporated in PCAs, on capital budgeting decisions. The use of PCAs in practice is controversial since they can have both beneficial and deleterious effects on decision makers (Neale, 1993). This is not surprising since the use of different feedback environments, in general, can be either beneficial or deleterious. (Kluger and DeNisi, 1996) The effect of PCAs on the decision maker could depend on the type of feedback environment that exists for the decision maker.

We can apply the concept of accountability to the capital expenditure decision process. Unlike a PCA, which is an external monitoring source, accountability is a psychological concept influencing an individual's behavior. Simonson and Nye (1992) state that if decision makers perceive they know the desired preferences of someone to whom they are accountable, they will make a decision that is consistent with their perception. Birnberg and Heiman-Hoffman (1993) suggest the need to address accountability explicitly when managers make decisions "where the ability to ascertain the outcomes is limited" (p.57). Birnberg and Heiman-Hoffman (1993, p. 51) cite Ouchi (1979) to show that accountability is a means by which other organizational members are made aware of an individual's performance, in the real world, to enforce or reinforce organizational values. Accountability research affords an opportunity to see how "various control mechanisms are currently balanced in the natural environment." (Birnberg and Heiman-Hoffman (1993), p. 59)

As Birnberg and Heiman-Hoffman (1993) recommend, this paper examines the impact of multidimensional control mechanisms on decision-maker behavior. McDaniel (1990) suggests the necessity to examine the interactive effects of control mechanisms as well. The use of PCAs is an exogenous process control mechanism to the individual proposing a capital budgeting project, and accountability is an endogenous psychological control mechanism. Therefore, both the use of PCAs and the presence of accountability can independently or interactively influence how capital budgeting decisions are made. Our research questions concern how PCAs and accountability, alone or interactively, affect capital budgeting decision makers and their decisions.

The next section of this paper contains a discussion of post-completion audits, accountability and development of our hypotheses. We present the experimental design and procedures in section three followed by the results and conclusions in section four.


Post-Completion Audits

The capital budgeting decision is one part of the capital budgeting process. Haka (2006) provides a comprehensive review of the capital budgeting and investment appraisal literature. Horngren, Datar, and Foster (2006) list six stages in the process. The stages are identification, search, information acquisition, selection, financing, and implementation and control. The PCA is part of the implementation and control stage and is included to decrease the likelihood that a firm will "fund and forget." Soares, Coutinho, and Martins (2007) state that we do not know enough about the benefits of the post audit because: (1) firms protect the confidentiality of their practices and (2) the practices, where investigated, tend to be deficient. For these reasons, they see the area of post completion audits as a fruitful area for research.

We can loosely group the literature on PCAs into three categories. The first category is surveys on the extent of usage of PCAs such as Scapens and Sale (1981), Neale and Buckley (1992), and Klammer, Wilner, and Smolarski (KWS) (2002). …