In a forthcoming publication in Contemporary Accounting Research, recently appointed Professor of Accounting, Brian Gibson, and his coauthor Gavin Cassar, an accounting professor at Wharton Business School at the University of Pennsylvania, have identified a clear association between accounting activities and forecasting ability. In the study, titled Budgets, Financial Reports and Manager Forecast Accuracy, the authors examined a group of about 4,000 Australian firms, each with less than 200 employees. Data was available that indicated the presence of budgets and internal accounting reports, and, as the data was longitudinal, it was also possible to access revenue forecasts that could be matched with subsequent actual revenues.
While the association has been taken as a self evident truth for some time, this is one of the first studies to validate the improvement in decision making (represented by forecast accuracy) that comes from accounting activity. The results indicate the budget role might not be as critical as is often argued as the impact of budgeting alone was trivial, improving forecast accuracy by less than 2%. Internal reporting, however, made a real difference, improving accuracy by about 8.5% and used together, the two techniques improved forecast accuracy by about 12%. These findings are consistent with the notion that budgeting in itself may be of limited value because budgeting without internal reporting represents a meaningless formal control system.
Collectively these results suggest that an initial emphasis on developing a budgetary or planning system in firms is misguided. The emphasis needs to be on an internal accounting system that is then integrated with budgetary activities to provide an integrated control environment to enhance decision making.