222 ACCOUNTING FOR MANAGERS
performance. Collier and Berry found that little risk modelling may be used in
practice, and that the consideration of risk during the budgeting process influenced
the content of budgets thatwere largely risk excluded.
Case study: Svenska Handelsbanken – is budgeting necessary?
Jan Wallander is an executive director of Handelsbanken. He was appointed to
the role when the bank, the largest commercial bank in Sweden, faced a crisis.
Although at the time Swedish banks did not use budgets, Handelsbanken had
started to install a sophisticated budgeting system.
Wallander (1999) was very critical of budgeting. For example:
You can make forecasts very complicated by putting a lot of variables into
them and using sophisticated techniques for evaluating the time series you
have observed and used in your work. However, if you see through all this
technical paraphernalia you will find that there are a few basic assumptions
which determine the outcome of the forecast. (p. 408)The accuracy of the budget therefore depends on how accurate the assumptions
are. Wallander argued that there are two reasons to abandon budgeting:
1 If there is economic stability and the business will continue as usual, we use
previous experience in order to budget. Wallander argued that we do not need
an intricate budgeting system in this case, because people will continue working
as they presently are. Even when conditions are not normal, the expectation is
that they will return to normal.
2 If events arise that challenge economic stability then budgets will not reflect
this, because, Wallander says, ‘we have no ability to foresee something of which
we have no previous experience’ (p. 411).
He concluded that traditional budgeting is ‘an outmoded way of controlling
and steering a company. It is a cumbersome way of reaching conclusions which
are either commonplace or wrong’ (p. 419).
However, Wallander did not reject planning outright. He argued that it is
important to have an ‘economic model’ that establishes the basic relationships in
the company, such as the ability to plan production. He commented, ‘This type of
planning is something that is going on all the year round and has nothing to do
with the annual budget’ (p. 416).
Handelsbanken has an information system that is focused on the information
needed to influence actual behaviour. It incorporates both financial and ‘Balanced
Scorecard’ measures at the profit centre level, and performance is benchmarked
externally and internally. The bank rewards its staff through a profit-sharing
scheme.