Question

discuss issues relating to ethical considerations for budgetary forecasting and projections. Expand your answer to explain measures of how you would give strength to your budgetary assumptions and provide reliable forecasts

Answer 1

Budgeting is used for preparing budgets and other procedures for planning, co-ordination and control of business enterprise. A budget is a financial and /or quantitative statement prepared prior to a defined period of time, of the policy to be pursued during that period for the purpose of attaining a given objective. Forecasting provides a logical basis for preparing the budgets. The actual performance of the past, the present situation and likely trends in the future are considered while preparing budgets.

Ethical considerations for budgetary forecasting and projections

Honesty is an ethical principle at the heart of the budgeting process. If the financial processes are clear, accurate and transparent, they will provide you with the tools and information necessary to determine the best way to allocate your resources in ways that are consistent with the company's values. In contrast, fudged numbers are usually the basis for dishonesty and fraud.

Ethical budgeting is built on the assumption that treating people well is worth the money that it costs and ultimately pays for itself by earning the loyalty of employees and customers.

Ethical business budgeting steers clear of situations that involve conflicts of interest that can lead to dishonest accounting and improper allocation of resources. A manager who is also a stakeholder with a major vendor may opt to skew the budgeting process to direct a disproportionate share of the company's purchasing revenue toward his own endeavor. Similarly, corporate officers who earn tremendous bonuses based on company profits may prioritize profit over ethical considerations. Ethical budgeting involves giving decision-making power primarily to people whose financial priorities are honest and clear.

Many companies employ ethics and compliance officers to keep their operations honest. Hiring these professionals and creating departments in charge of keeping your budget and financial procedures honest sends a message to employees, managers and stockholders that ethical budgetary operations are how the company does business. Establishing this sort of ethical corporate culture and enforcing it can prevent fraud, dishonest accounting and other instances of financial malfeasance.

While many cases of unethical budgetary behavior result from greed or ill intent, some occur because of a lack of education. Employees may be performing actions with the company's money that they don't even know are unethical or illegal. so make ethics training for employees mandatory.

Measures to give strength to budgetary assumptions and provide reliable forecast

1. Proper Communication System:

An effective communication system is required for effective budgetary assumptions. The flow of information regarding preparing of budget should be quick so that it can be better assumed and prepared. The upward communication will help in knowing the difficulties in the preparation of budget.

2. Participation of all employees:

Budgeting is done for every segment of the business. It will also require participation and involvement of all employees. In practice budgets are to be executed at lower levels of management. Those for whom budgets are prepared should be actively associated with their preparation and execution. The employees on the basis of their past experience may give more practical and useful suggestions.

3. Clarifying Objectives:

The budgets are used to realize objectives of the business. The objectives must be clearly spelt out so that budgets are properly prepared. In the absence of clear objective the budget preparation will be unrealistic.

4. Budget Education:

The employees should be properly educated about the benefits of budgeting. Proper budget education should be given to apply assumption properly at the time of preparation of budget and it will help to provide reliable forecast for the budget preparation.

5. Gather Information:

              To support the forecasting process, use statistical data as well as the accumulated judgment and expertise of individuals inside and perhaps also outside the organization. For instance, department heads may have an insight into activities within their own section. This step is designed to increase the forecaster’s expert knowledge about the forces impacting revenues and expenditures. This would also include events that could cause a disruption in the operating environment and in prevailing trends. Both are important for forecasting because they allow the forecaster to more intelligently build quantitative models and to make a forecast using his or her own judgment. Assumptions should be documented for future reference, so the financial forecasting process has some basis to start from at the beginning of each cycle. Also, become familiar with other longer-term planning efforts of the organization or other organizations that impact financial decisions and the fiscal environment. Such plans might include comprehensive development and/or capital improvement programs.

6.Preliminary/Exploratory Analysis:

The analysis should include an examination of historical data and relevant economic conditions. This improves the quality of the forecast both by giving the forecaster better insight into when and what quantitative techniques might be appropriate and also is useful for supplementing forecasting methods. The forecaster is looking for consistent patterns or trends. In particular, the forecaster should look for evidence related to:

(a)Business cycles. Does the revenue (or expenditure) tend to vary with the level of economic activity in the community or are they independent of cycles? How do broader market forces impact key expenditures, such as pension contributions affected by investment returns?

(b)Demographic trends. Are population changes affecting service demands and/or revenues?

(c)Outliers and historical anomalies. Does the data contain any extreme values that need to be explained? It could be that these represent highly anomalous events that dont add to the predictive power of the data set.

(d)Relationships between variables. Are there important relationships between variables that could aid in forecasting?