May 14, 2003	Volume 3, Issue 20
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Budget Shenanigans: Swaps

by Rick Brenner

When projects run over budget, managers face a temptation to use creative accounting to address the problem. The budget swap is one technique for making ends meet. It distorts organizational data, and it's just plain unethical.

The meeting ended. Will picked up his pad, stood up, tossed his paper cup into the wastebasket, and stepped through the doorway right behind Janet. But before he could get her attention, Ed got his.

"Will, just one thing to button up — can you stop by my office a minute?" Ed asked.

"Sure," Will replied.

It was a short walk to Ed's office. They stepped in. Ed closed the door quietly. "Just want to give you the charge numbers for this week and next," he began. He handed Will a slip of paper that had two account numbers on it.

"Here they are. Top one's for this week, the other's for next."

"OK," said Will. "That it?"

"Yep. See you."

Will opened the door, went around the corner to his own office, set his pad and the slip of paper on his desk and sat. Odd, he thought. Why the secrecy? And why split the work across two accounts, when it was exactly the same work? He wondered what was going on.

Knowing budgetary
deception techniques
helps you stay out of
the gray areaWill never did find out. Perhaps it was legitimate, but it might have been a "budget swap."

In organizations that track expended effort, people charge their time to various accounts, represented by charge numbers. When "actuals" deviate too far from projections, the manager is often considered to have erred. Managers of overspent (or underspent) accounts are tempted to move charges across accounts to compensate.

In effect, they "swap" money across accounts. Here are just a few forms swaps can take.

Altering time sheets

This approach is less common today, because so many organizations now use electronic time reporting systems. Systems that still use hardcopy are the most vulnerable.

Directed or conspiratorial misreporting

Ed and Will might be a case of directed misreporting. Typically, this requires a level of naiveté or fear on the part of the person who's being directed. Conspiratorial misreporting occurs when all parties are aware that they're reporting false data.

Parking

In Parking, team members are temporarily detached from Project A, and then attached to Project B, which has adequate funding. Once parked, they may continue to do "just a little" work on A — a meeting, or a quick phone call, or more — but they charge all their time to B.

Out and in

When two budgets use the same external vendor for labor, equipment, or materials, the vendor can overcharge one of the budgets, and undercharge the other to compensate. Usually, this requires collaboration between the vendor and the managers. It's much easier to arrange when both budgets are controlled by the same manager.

Managers who use budget swaps to conceal problems do real harm to their organizations. But they harm themselves, too, because of another, less visible swap — their budgets for their integrity.  Top    Next Issue

For more about budgetary deception in the wider context, check out M. Jensen, "Paying People to Lie: The Truth About the Budgeting Process," European Financial Management, Vol. 9, pp. 379-406, September 2003. Available at SSRN.

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