Most finance leaders treat a control as either sound or not. Put a leaderboard on cost performance, set a funding hurdle, and each does its job. New research from Ghent University and the Institute of Management Accountants suggests it is not that simple. Two sensible controls, working side by side, can quietly cancel each other out - and invite the very behaviour they were meant to stop.
The behaviour in question is misreporting. When managers submit cost estimates for projects, those numbers do double duty: they decide which projects get funded and they set the bar each manager is later judged against. Padding a cost estimate builds in slack, which makes the target easier to beat and the manager easier to mistake for a star. Done alone, that is one person gaming a number. Done together - two managers agreeing to inflate in tandem - it becomes collusive misreporting, and that is a far bigger problem. Citing the Association of Certified Fraud Examiners, the researchers note collusion is both harder to catch and roughly four times as damaging as fraud by a lone actor.
The study looked at two everyday budgeting practices. The first is ranking managers on relative cost-target attainment - judging them against peers rather than in isolation, the way large firms run internal leaderboards. The second is resource competition: whether the business funds every project that clears a basic profitability threshold, or only the cheapest few.
On their own, rankings look like a healthy discipline. They level the field and sharpen accountability. But they also turn performance into a race, where getting ahead of a colleague matters as much as hitting your own number - and that is exactly the pressure that tempts people to fiddle the figures.
The interesting part is how the two controls behave together. When funding is plentiful and any viable project gets backed, an honest report is a perfectly good option: report your real cost, get funded, compete fairly. Both managers hold that card equally, neither has much to gain from colluding, and neither can strong-arm the other. The ranking does its job. Tighten the purse strings so only the lowest-cost project wins, and the picture flips. A manager saddled with a genuinely expensive project may not get funded no matter how honestly they report. For them, colluding with a cheaper-project peer becomes the only route to approval - so the ranking stops deterring bad behaviour and starts feeding it.
To test this, the team ran an online budgeting game with 614 participants paired as competing managers, able to chat, negotiate, and choose whether to honour any deal they struck. Overall, about 30% tried to collude, one in five pairs reached an agreement, and 13% pulled off successful collusion. Tellingly, once a pair shook hands, 78% honoured it.
The headline result is in the combination. Collusion was lowest at 7.5% precisely where rankings were present and competition for funding was low. Remove the ranking, or crank up the competition, and it roughly doubled, to between 13.9% and 15.9%. The same ranking that halved dishonesty under loose funding did nothing under tight funding.
The takeaway is not ‘scrap rankings’ or ‘loosen budgets.’ It is that controls have to be designed as a set, not bolted on one at a time. A metric that rewards honesty in one funding regime can reward gaming in another, and you will not see it by inspecting either rule alone.
That is worth remembering as a growing company hardens its budgeting, evaluation and capital-allocation processes - often at the point where informal trust gives way to formal incentives. Getting those pieces to pull in the same direction is precisely the kind of finance-process work we help founders and finance teams get right before a well-meant control starts working against them.
Rules shape behaviour. The trick is making sure they shape the behaviour you actually want.
Source: When Budget Controls Backfire - Sophie Hoozée and co-authors, IMA (Institute of Management Accountants), 2025.
