Accounting relevance to management

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The importance of accounting relatively to decision making

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The importance of accounting in society plays a major role in making decisions as the

information provided from accounting department allows managers to conduct a higher quality

in making decisions. Accounting information helps managers to understand company’s

positioning at one point in time. Especially with the current financial crisis as managers needs to

have an extensive information to be able to plan and develop strategies that can adapt the

economic situation which we live in for its survival. Accountants have the ability to influence

management decision with their information provided to the organization by using qualitative

and quantitive techniques. Accounting is beyond scorekeeping and financial reports as the

information provided has to have a context of quality by evaluating and analyzing organization

data and performance. Accountant role after implementing the scorekeeping function is also to

embrace the opportunities and problems that senior managers need to pay attention, and clarify

the best decision available that helps the organization to reach their primary goal.

Historically, business owners were mostly interested in measuring the price of outputs relatively

to the cost of inputs. However, in recent years, accounting has been a controversy for academic

who are seeking to develop an efficient management system. The controversy was on whether

accounting management is relevant to the decision-making, and is accounting management

practices realistic enough to be reliable? Especially in time with new innovations and technology.

Gary M. Entwistle and Fred phillips (2003, PP 81) argue that one of the flaws facing

accounting is the framework of collecting information which is free from error and bias, got

accounting into be less reliable as accounting has not yet been able to measure intangible assets.

Such as brands, patents, and investment in human capital are extremely difficult to evaluate

because measuring these unphysical assets can be bias. Apple, a technological manufacturing

company ranked as the most valuable brand in the world, is valued roughly $241.2B in 2019

( Forbes, 2020). Apple’s brand value is growing dramatically because of the consistency of their

development and the uniqueness of their product. As a result, Apple has gained investors and

costumers trust and loyalty that considered to be an intangible asset. In addition, Apple intend to

invest over $16 billion on research and development in 2019( CNBC, 2019). As this investment

considered to be an expense to the company in accounting perspective. However, some critics

believe that R&D is a future economic benefit that should be included to the balance sheet as I

quote from Robert S. Kaplan and Johnson (1987, PP 22) explains that “The financial system

treats many cash outlays as expense of the period in which they are made even though these

outlays will benefit future period.” These critics appeared because the quick dramatic changes in

behavior from the old traditional manufacturing to the new modern manufacturing economy

resulted a gap between real world valuation and accounting quantitive practice which has raised

the debate between whether accounting is practical or not.

Furthermore, Critics refer to accounting management information as basic, broad, and takes time

until managers can be able to act based on the information. Kaplan and Johnson (1987, p. 22)

states that “management accounting is produced too late, too aggregated, and too distorted to be

relevant for managers’ planning and control decision.” Traditionally, Accountant uses simple

cost system that is not helpful for management to evaluate each product line performance.

Traditional costing system sums up all the actives instead of allocating the actual expense which

makes managers job much harder to improve each product line and eliminate any extra expenses

by reason of its simplicity. Therefore, Accounting needed a new method of allocating costs that

can clear managers vision on the actual expense for each line which was the Activity based

costing developed by Cooper and Kaplan. ABC system revolutionized accounting management

into be more effective tool for decision-making. ABC system provide management with the

extensive data that guid management to pay attention on the resources consumed by each product

line. It is more accurate and reliable than simple costing system. The benefits of using ABC

system draws managers attention to any neglected aspects in the organization as it enhance

managers quality of making-decision.

A second method improves decision making is cost of quality. Cost of quality helps to

assure better quality performance in every activity. It helps to improve productivity as well as

reduction in waste. organizations use COQ to increase their competitive advantage. COQ

provides managers an analyzed data which is relevant to the decision-making of developing

process.

On the other hand , the information provided from the accounting department is incomplete

as the information context is required to have a full picture before making decision. The

importance of knowing and understanding the challenges faces an organization is crucial to have

an effective decisions making, as simple relevant cost system is incomplete and inconsistent with

the organization’s strategic goals ( Blocher, 2009). A real world example is the firm that I work

for, have a temporary limited production due to some maintenance as the company faces a high

demand over firm’s capacity of production. The firm has two product line activity bag Cement

and bulk cement as bag cement has 15% over cost than bulk cement because of the packing

process, electricity and material cost ( paper bag ). Because of the high demand, the company

needs to reduce one of the product sales. Obviously, bulk cement is much profitable using

accounting quantitive perspective. In contrast, the sales department states that the market share

of bag cement is stable and growth steadily, as decreasing company’s sales for bag cement might

result a bad reputation for the company which will result difficulty in rebuilding business

reputation and regaining our market share. Although, bulk sales is much profitable and generate

less cost, bulk sales fluctuate from week to another which also depends on credit sales. Our bulk

costumers can understand our temporary issue as we have been their suppliers ages ago. The

accounting department and sales department are still discussing on the temporary issue as well as

the financial department who is concerned in the cash flow matter. This issue shows the

importance of qualitative and quantitive perspective to have a complete ground in making better

management decision.

conclusion

Quality-Access to Success, Vol.17, S2
May 2016

IMPORTANCE, ROLE AND QUALITATIVE CHARACTERISTICS OF

ACCOUNTING INFORMATION IN THE DECISION MAKING

PROCESS

Delia Beatrice OPREAN¹, Lucia PODOABĂ²

¹Associate professor, PhD, Faculty of Economic Sciences, Department of Management-

Finance-Accounting, “Bogdan Vodă”University of Cluj-Napoca, Cluj-Napoca, România,

e-mail: [email protected]

²Associate professor, PhD, Faculty of Economics and Business Administration, “Babeș

Bolyai” University of Cluj-Napoca, Cluj-Napoca, România,

e-mail: [email protected]

Abstract: In this paper, our goal is to study the importance, role and qualitative characteristics

of accounting information in the decision making process in each company. This process is

supported by the accountancy. Because the quality of the managerial process had an important

role in human community activities in general, in enterprises development in particular, we

believe that there is a relationship between accounting and decision process. In order to take

decisions by the management and to achieve the objectives of the companies it is necessary to

know exactly the economic and financial evolution of enterprises, this thing being possible

through the accounting information. An accounting information system is important for

preparing quality accounting information for the users, whatever their type is. The information

regarding the financial situation and the companies performances define their qualitative

characteristics and helping the users in taking decisions.

Key words: accounting information, accounting system, management process, decision making

process, quality

JEL Classification: M41, M40, J59, M49, L15

1. Introduction

The most important resource of information in actual society in generally, in economics in

particular, is the accounting, which can support the decision making process and management

activity. Accounting information are vital in communication on national, european and international

levels for the efficiency of local or/and global market. In order to make investments, to integrate on

the global market of services and goods, each enterprise must have access and understand the

financial information of partners, included in their financial statements. The managers ability in

understanding and applying the modern management principles, methods and techniques is a vital

condition for companies to obtain the higher quality of their decisions, which will help in the future

business market. The most representative function of management is decision – making. This process

represents a social, deliberately and rational act of a person or of a group of person which settled the

objectives and directions of theirs actions in order to use human, material and financial resources in

a real context of the firm’s economic life. So, decision – making function formulated information

system which provides the objectives contained in corporate governance strategy and operational

management decisions. A great and important role for business decision making process and

management has the accounting information. The best quality accounting information urgently

requires the best organization of its system.

mailto:[email protected]

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As the American Institute of Certified Public Accountants (AICPA) established in 1996

„accounting actually is information system and we be more precise, accounting is the practice of

general theories of information in the field of effective economic activities and consists of a major

part of the information which is presented in a quantitative form”. The accounting information defines

the ranking position of each firm at one point in time, the evolution or involution of their economic

activities and provides for managers and stakeholders an overview of accounting entities.

In order to understand the role and the importance of accounting information in the decisions

process we present in our paper a literature review which emphasizes the specialists and their

problems regarding this item.

2. Literature review

In the context of the current financial crisis which generated an economic recession,

companies should pay more attention to the accounting information and explore all the possibilities

to assure their survival and economic stability on the business market. According to Bodnar &

Hopwood (2013) the accounting information system is a collection of used human and equipment

resources, converted in information, which can be communicated to managers. In order to help the

managers and the accountants, Scorte et. all (2009) develop a study. Through their paper, these

specialists presenting the role of accounting in financial and economic crisis in general, the

importance of accounting services in particular. The same conclusion is emphasized by Baba (2009),

in her paper. This specialist believes that, in the processes of planning, coordination and development

of the management policies of the economic entities, the role of the accounting services is well to be

considered, regardless of the factors that influence them. In the process of organization of each

company’s accounting, were identified a series of factors which are responsible for the quality of the

accounting process and for the efficiency of the accountant’s activity. Regardless of direct or indirect

action of these factors, accounting provides efficiently information. This is the reason why, Vătășoiu

et all (2010) show the importance of accounting information in making management decisions and

investments. All accounting information are collected by accounting information system (AIS). The

main objective of an accounting information system (AIS) is the recording of events that have an

economic impact upon organizations and to internal and external stakeholders. Salehi et all (2010)

develop a study to show that although AIS is very useful to Iranian corporation, it is a gap between

what AIS is and what should be.

Regarding to AIS, O’Brien & Marakas (2012) believes that accounting information system

is an integration of human and material resources, which helps to obtain better information. On the

other hand, Gwangwava et all (2012) investigated factors that influence non adoption of

computerized accounting information system by small to medium enterprises. Furthermore, Dinca et

all (2012) emphasized that accounting information provided by accounting accounts serve in the

development of company’s diagnostic and in the process of establishing the entity’s tax obligations.

Though, Petroianu (2012) shows on her paper that the accountancy represents an important support

of organization management, providing information meant to reasonably support the decision made.

But, Toth (2012) present the actual role of accounting information systems through software

packages and modern system of management.

The use of the accounting information system’s impact on the quality of financial statements

is demonstrated in the Abdallah’s study (2013), which recommends to focus on the development of

the devices used in the Income Tax and sales department.

An accounting information system has a great importance for preparing quality accounting

information for users. This is the reason why Saċer & Olouiċ (2013) elaborate the paper through

which it is analyzed the perception of the quality of accounting information systems by accountants

in medium and large companies in Croatia. Bukenya (2014) discovered that relevance, reliability,

understandability, accuracy and timeliness were true measures of the quality of accounting

information through factor analysis.

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May 2016

The role of the accounting research in economic development is explained by Okab et all

(2014). Through their study, they demonstrated that the accounting information plays a positive role

in the integrity of these decisions as well as the success of the development plans. Timely

implementation of the plans depends on strategic decisions taken by managers. These types of

decisions are based on analysis of accounting information. That’s why, Ullah et all (2014) developed

a significant relationship between accounting information and strategic decisions. On the other hand,

Rapina (2014) determine the influence of organizational factors (management commitment,

organizational culture and organizational structure) to the quality of the accounting information

system and its implications on the quality of accounting information. Chiriac (2014) develop a

qualitative approach, by a theoretical point of view, regarding the importance of accounting

information in decisional process.

Qualitative characteristics of financial/accounting information are important in the context of

the choice and change of accounting policies by firms. Nobes & Stadler (2014) made the first

empirical study that uses publicly available data to provide direct evidence about the role of the

qualitative characteristics (QCs) of financial information in managements’ accounting decisions. The

accounting is done according to the current legislation.

Caraiman (2015) shows in his paper that the accounting information and accounting rules are

heavily influenced by the political system. Thus, in countries where accounting is connected to

taxation are satisfied with priority to the interests of the state and its institutions, and in countries

where he managed accounts tax disconnection are serviced with priority to the interests of investors.

Accounting information system is a system that collects, records, stores and processes data to produce

information for decision makers (Romney & Steinbart, 2015). Some specialists – such as Fitriati &

Mulyani (2015) – demonstrated through their study that organizational commitment and culture have

positive and significant affect on accounting information success. Furthermore, the success of

accounting information system is related to accounting information quality. The same authors

explained (in 2015) the influence of leadership style on accounting information systems success and

accounting information quality.

Another specialist, Yenni (2015) shows in her study that the success of AIS application

cannot be separated from the effectiveness of existing organizational structure in the organization.

Likewise, Susanto (2015) believe that the quality of accounting information is influenced by the

quality of accounting information systems.

Alamin et all (2015) investigates the factors (perceived technology fit, effort expectancy,

facilitating conditions, self-efficacy and coercive pressure) that influence accounting information

systems (AIS) adoption among accountants. Also, Iskandar (2015) demonstrated through his study

that the quality of accounting information systems can be improved through management

commitment and user competence.

3. Decision making process

A decision is a selection made from many possibilities in order to stimulate different actions.

The decisions adopted by the manager in the company compose the decision-making system. Always

the decision system is preserved by the information system. This decision making process requires a

study of information limited or unlimited, depending on the intended purpose. Those decisions

through which the company is surviving are named strategic decisions. These types of decisions

involve a total analysis of the firm and its environment in order to reduce all the risks. So, in this case,

the decision – making process is very long, using all different techniques and performing studies. The

strategic decisions promote the realization of fundamental objectives included into strategies, plans,

medium or long term programmers. A logical sequence of strategic decisions is represented by the

tactical decisions. These type of decisions ask limited information, but permit the achievement of

derivate objectives incorporated into annual and semestrial programs. On the other hand, the most

numerous decisions are operational one, which requiring a very small number of information. So, for

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Quality-Access to Success, Vol.17, S2
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operational decisions, the manager needs information regarding the operations developed in the

company, but for tactical decision the manager need to know the evolution of business market in

order to decide the financial actions day by day. Whatever the type of decision, a good decision

making count on the quality of external or/and internal information available to the firm, but on the

base of each rational human action exist the cycle information – decision – action. So, if the objective

of this activity is define by the administering of the evolution of economic or social system, these it

will become a directed system where the manager and the board of directors will designed the

management system. The responsible for decision process at strategically and operational level is the

manager, which has at his disposal many information. So, using these information, the manager use

the available resources and take actions in order to obtain the most positive results from economic

point of view. This results are reflected in the financial statements, where the economic events are

registered by accounting system. This is the reason why the accounting information system is closely

connected to decision making process. In order to understand this connection is better to emphasize

some aspects regarding the concept of accounting information system.

4. Theoretical aspects regarding accounting information system

Accounting information system is a tool used by the management’s company in order to

provide value which generates a competitive advantages for the company. Thus, accounting

information in a company is classified into financial accounting information (designed by the

summarized financial statements, is intended for external users such as: investors, employers,

creditors, government or general public) and management accounting information (designed for

internal users named management and includes information on unit cost of products, cost behaviour

related to profitability of the product). So, financial accounting information are presented in the

financial statements, which have the same qualitative characteristics (understandability, relevance,

reliability and comparability). Instead, the managerial accounting information are presented in

Scoreboard/Dashboard of income and expenses. In order to serve to the company’s needs, the

accounting information must be delivered in time. This is the reason why the best organisation of

accounting information system is very important. Usefulness of accounting information system is

determined by the following reasons:

 to establish the business ability to generate cash, all the sources and uses of the cash;

 to define the business capability to pay back its debts from the relationship with the

state, to employees, banks;

 to pursue financial results on an evolution line in order to resolve all the profitability

and liquidity issues;

 to obtain financial ratios from the accounting statements, that can indicate the

financial and economic stability of the business;

 to search for the details of certain business transactions with national or foreign

partners, as outlined in the disclosures that accompany the statements.

So, there are many possibilities of using accounting information inside of economic entity (as we see

in the figure below – Figure no.1).

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Quality-Access to Success, Vol.17, S2
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Figure1: Possibilities of using accounting information inside of economic entity

(Source: http://connection.ebscohost.com/c/articles/97635611/importance-accounting-information-

decisional-process and http://steconomiceuoradea.ro/anale/volume/2014/n1/063.pdf)

Because the accounting information system offers the necessary’s data for the users (internal

or external parties), is better to emphasizes the interactions between them in the decision – making

process (as we see in the figure below – Figure no2).

Figure 2: Interactions between accounting information system (AIS) and internal and

external parties

(Source: http://www.downloadslide.com/2015/12/slides-accounting-information-systems_97.html)

The accounting information system is a subpart of the information system of the enterprise

and within it is a subpart of the information system of the management. So, the task of the accounting

information system is to meet the data demands of the management information system, in order to

provide information to the managers of the enterprise. The accounting information system is in close

http://connection.ebscohost.com/c/articles/97635611/importance-accounting-information-decisional-process

http://steconomiceuoradea.ro/anale/volume/2014/n1/063.pdf

http://www.downloadslide.com/2015/12/slides-accounting-information-systems_97.html

Quality-Access to Success, Vol.17, S2
May 2016

connection with the management information department the accounting and administration

department, the inner control and the information technology team. This system is revealed in the

figure below (Figure no3).

Figure 3: Information system of the enterprise

(Source: http://webcache.googleusercontent.com/search?q=cache: 8fIFH6Lx7UcJ:tmp.gtk.uni-

miskolc.hu/volumes/2012/01/TMP_2012_01_13_Toth

_Zsuzsanna.pdf+&cd=1&hl=en&ct=clnk&gl=ro)

So, the information works within the enterprise and includes two related sub-systems: a data-

processing sub-system (responsible for acquiring, storing, processing and forwarding information

needed for all operations) and a decision making subsystem. The last subsystem is conducted by the

manager, but always the accountant must be “the right hand” or “the brain” which delivered the most

important information at the right place and at the proper time. So, accounting has the decisive role

in processing and supplying information for managers. In order to be useful to the users, accounting

information should have the following characteristics (http://www.accountingtools.com/

questions-and-answers/what-are-the-characteristics-of-useful-accounting-informatio.html):

prepared objectively, consistency of recordation and presentation, in support of decisions, matches

reader knowledge, reliability and completeness of information. Also, there are four qualitative

characteristics of accounting information that serve as the foundation for decision (http://

simplestudies.com/what-are-the-qualities-of-accounting-information.html) in a company:

 relevance (makes a difference in a decision making process because the accounting
information is predictive, it provides feedback and it is timely) is related to the

concept of materiality;

 timeliness (requires both recording the financial transaction in the appropriate
accounting period and generating accounting reports as soon as all data are posted so

that issues with business operations are discovered before the problem grows);

 reliability (accounting information is faithfully presented because is verifiable, it is
factual and complete and it is neutral);

 comparability (accounting information allows comparison between or among
different entities, that’s why the companies are required to disclose their accounting

methods/policies);

 consistency is related to comparability, when the entity uses the same accounting
principles and methods from one accounting period to the next.

http://webcache.googleusercontent.com/search?q=cache:%208fIFH6Lx7UcJ:tmp.gtk.uni-miskolc.hu/volumes/2012/01/TMP_2012_01_13_Toth%20_Zsuzsanna.pdf+&cd=1&hl=en&ct=clnk&gl=ro

http://www.accountingtools.com/%20questions-and-answers/what-are-the-characteristics-of-useful-accounting-informatio.html

Quality-Access to Success, Vol.17, S2
May 2016

In addition to the aforementioned characteristics, the following qualities of accounting

information affects its usefulness: understandability (allows the users to understand accounting

information given they spend the necessary time), materiality (refers to a relative significance or

importance of an item to the overall financial condition of a company) and conservatism (i.e.

accounting practice of prudence when there is business uncertainty).

The Financial Accounting Standards Advisory Board (FASB) establishes and maintains

generally accepted accounting principles (GAAP) that set forth the qualities (timeliness is a quality

subset of relevance) and standards of accounting information. Unless a company’s accounting

records meet GAAP standards, an auditor cannot certify the company’s records. At European level,

the qualitative characteristics of financial/accounting information, as set out in the conceptual

framework of the International Accounting Standard Board (IASB), are fundamental for standard –

settings and are used by the firms when they make certain accounting decisions, in particular policy

choices and policy changes (IASB 2010). These features are shown in the figure below (Figure no.4)

Figure 4: Qualitative characteristics of the Framework
(Source: http://www.ifrs.org/Meetings/MeetingDocs/Other% 20Meeting/2014/October/ABR-

2014-0103-Qualitative-characteristics.pdf)

So, according to FASB, the accounting information must be intelligible, relevant, reliable and

comparable. In the same time, at European level IASB (International Accounting Standard Board)

considered that the utility of the information included in the synthesis documents is determined by

intelligibility (emphasizes that accounting information can be easily understood by the users),

relevance (means that the information has the capacity to influence the decision making process),

reliability (relieved that the information offering elements useful for decision making process) and

comparability (means that the information can be compared in time and space and reported to other

values). Some information used in decision making process comes from managerial accounting. This

information is taken from financial accounting, except those related to extraordinary events.

However, the financial accounting supplies all the useful information (related to stocks, to

tangible and intangible assets, to rights and obligations, to the evolution of bank loans or leasing

contracts, etc.) for managers in adopting the best decisions. Throughout the entire process, some

problems can be observed and solved, because the accounting is offering an indispensable control on

operations. Also, the accounting information permit the present or perspective investors to formulate

a valuable judgment regarding all the events recorded in a company. On the other hand, based on

financial accounting the manager can obtain economic and financial diagnostics. Using Cash-flow

obtained based on accounting data, he can be estimated the payments on the company’s tax or other

obligations (such as: employee wages, loan or lease rates).

To achieve its desired goals, the accounting information should have the basic properties:

appropriateness (is an important requirement for the information to be used in assessing the

http://www.ifrs.org/Meetings/MeetingDocs/Other%25%2020Meeting/2014/October/ABR-2014-0103-Qualitative-characteristics.pdf

Quality-Access to Success, Vol.17, S2
May 2016

company’s administrative policies and develop planning control over it), credibility (must contain a

degree of possibility of verification or objectivity based on sufficient evidence prove), accuracy

(prevent the appearance of mistakes resulted by the discrepancy between the information processed

by administrative team), timing (accounting information must give benefit, if the manager doesn’t

have the right time or delay in delivering information), understanding and absorption (accounting

information are understandable, simplified and meaningful in order to extend the absorption of

management decisions), importance (accounting information achieves its role as a source for

intervention in decision-making process) and fulfilment (the quantity and the quality of information

satisfy the manager’s needs in the decision making process). So, accounting information must

achieve their quality, which depends on various internal or external factors, among which we

mention: manner of organization for accounting in the firm (ability of the accounting system to

provide professional services in order to reflect the reality in the company), material and technical

endowment of accounting (accounting informatics system permit modifications according to the

regular chances in the laws and ensure the confidentiality of the information), the way to putting into

practice the norms ensuring easy verification for accounting by control bodies, competence and

independence of the accounting professionals.

Also, the quality of the accounting information is affected by some elements or factors, such

as: incorrect application of accounting principles, manipulation practices of the results (the so-called

“creative accounting”), legislative instability, exercising the incompatibilities in the accounting

profession, inflation, recession, the unfavorable exchange rate, lack of financial and trade discounts,

issuing documents by so-called “phantom companies” (which does not exist in reality), etc..

Likewise, it is important to emphasize that there are factors that influence the activity of accountants,

which can be put into two categories: quantifiable factors (such as: the number and the structure of

the employed personnel –especially accountants, needs of informational resources, computers,

informatics programs, financial necessities and availability) and unquantifiable factors (such as:

professional knowledge and skills of accountants, the quality of management, the objectivity,

competence and integrity of the accountants, the trust granted to accountants). Accountants take

accounting information as raw material and turns into another type of information which reflects their

ability of understanding, synthetize and interpret information as its feedstock. So, accounting

information is an input for accountants in their analyses and a competitive product on the market or

banking reports, at any level.

The services of specialized accountants (chartered accountants, auditors, tax consultants) are

closely followed by professional bodies in each country (in the case of Romania, we have: The Body

of Expert and Licensed Accountants of Romania, The Chamber of Auditors of Romania, The

Chamber of Tax Consultants of Romania) and their responsibilities are enormous, up to

imprisonment and expulsion from the profession. That’s why, the accountants’ seriousness in

applying legislation guarantees the quality of accounting information in the financial statements,

provided to all decision makers, in any company.

5. Conclusions

The achieving of right decisions, which contribute to solving problems arising in the firm’s

financial and economic activities is dependent of the quality of accounting information. So,

accounting information has a vital role, offering an accurate representation of processes and economic

phenomena, having the greatest degree of certainty, which emphasize the size and the value of

streams by the social reproduction process at micro or/and macro level. So, the quality of accounting

information is very important to all their users. Also, this high value is related to the performance of

investments, because current and potential investors always evaluate publicly traded companies in

order to make their best decisions which satisfied their present and future interests. All the analysis

of capital market are based on accounting information, so the users can act, operate and make

decisions using accounting information like a friend that you …

NAŠE GOSPODARSTVO
OUR ECONOMY

pp. 11–20

ORIGINAL SCIENTIFIC PAPER

Citation: Horvat, T., & Mojzer, J.
(2019). Influence of Company Size
on Accounting Information for
Decision-Making of Management
Naše gospodarstvo/Our Economy, 65(2),
11–20. DOI: 10.2478/ngoe-2019-0007

DOI: 10.2478/ngoe-2019-0007

UDK: 657.6:334.012.61-022.55

JEL: M41, M29

RECEIVED: MAY 2019

REVISED: MAY 2019

ACCEPTED: MAY 2019

Vol. 65 No. 2 2019

Influence of Company Size on
Accounting Information for
Decision-Making of Management

Tatjana Horvat
University of Primorska, Faculty of Management, Slovenia
[email protected]

Jožica Mojzer
Cvetkova 2E, 9000 Murska Sobota, Slovenia
[email protected]

Abstract

The aim of this paper is to show the importance of accounting information for
management, especially in medium-sized companies. Sampling was carried out
according to the accidental principle, after which we selected 300 medium-sized
and large companies. We used the questionnaire, which was standardized and
implemented online. Two hypothesis were tested with a chi-square test and
contingency table. In this study of Slovenian large and medium companies, we
want to find out whether the size of the company has an impact on organizing
a specific controlling service in a company and whether, in large companies,
heads of accounting are more often members of management than in medium-
sized enterprises. We discovered a bias between organizing a specific controlling
department and the size of a company, and that large companies have more often
organized a special controlling service than medium-sized enterprises. We also
discovered the accounting officer’s membership in a company’s management team
is not related to the size of a company. The results of the research could be used
in controlling in medium-sized companies, where we suggest that management
accounting in these companies is part of management decisions.

Keywords: management accounting, controlling, medium-sized companies,
accounting information.

Introduction

Management of a company must establish a good as business process structure
in order to achieve its business objectives. Inter alia, it should be supported with
accounting information. The central theme of our paper is management account-
ing or controlling. The part of the accounting system providing information for
management decisions is called “management accounting” or “controlling.” We
focus on the so-called European controlling and supporting decisive accounting.
The purpose of this paper is to explore and increase awareness of managerial
accounting and controlling among medium-sized enterprises. We investigate
whether there is a difference between large and medium-sized enterprises ac-
cording to whether they have a person in the field of managerial accounting in
the top management team. We also investigate whether there is any difference

mailto:[email protected]

adil muqaibal

NAŠE GOSPODARSTVO / OUR ECONOMY Vol. 65 No. 2 / June 2019

in the fact that large and medium-sized enterprises exercise
any control. In this research, we want to show the impor-
tance and usefulness of accounting information for the
needs of decision-making in company management.

At the beginning, we present theoretical starting points on
the importance of managerial accounting and controlling
in a company and their presence in medium-sized compa-
nies. In the following chapters, they will be presented with
results of the survey, where we will check whether there is
an accounting manager and whether there is controlling in
large and medium-sized enterprises.

With this paper, we aim to further reduce the research gap in
management accounting and controlling in medium-sized
enterprises, especially in regard to an accountant position
in top management as well as in the controlling part of
accounting as an independent area in a medium-sized
company.

In the study, therefore, we want to find out whether
company size has an impact on organizing a specific con-
trolling service in a company and whether, in large com-
panies, heads of accounting are more often members of
management than in medium-sized enterprises.

Accounting Information for Management
Decision-Making

Information and related systems are closely linked to the
decision-making process of a company. It is important to
know what information managers need in decision-mak-
ing and how managers develop systems that allow them to
obtain relevant information. Increasing complexity in com-
panies causes managers increasingly depending on various
internal and external sources of information (Dimovski,
Penger, & Škerlavaj, 2007, p. 64). Hence, company in-
formation systems, especially accounting information
systems, are gaining in importance. However, we should
not neglect the information systems dealing with the col-
lection and management of information coming from a
company’s environment.

Accounting systems form the main part of an informa-
tion system in a company because it provides the only
worthwhile information. This enables external users to
learn about the success of a company’s business, while
the internal information provides a good information
basis for management decision-making. The better the
knowledge of users of accounting information about their
design, their weaknesses and constraints and the appropri-
ateness of decision-making, the better their efficiency in

managerial decision-making (Hočevar, Zaman, & Petrovič,
2008, p. 37–38).

The objective of accounting information is to provide
insight into a financial position of a company so that it is
useful to users of information in their decision-making.
For this reason, the information must be comprehensible,
essential, reliable, and comparable. It must be prepared in
such a way that their users will be able to read all the in-
formation they need when making decisions. It should also
enable them to make information-based decisions on the
future (Odar et al., 2011, p. 45).

Accounting information plays two roles in decision-mak-
ing (Baiman, 1982; summarized by Kavčič, Koželj, &
Odar, 2014, p. 119):
• Affecting quality of the decision;
• Facilitating the decision.

Operational management dealing with routine problems in
a company requires precise and specific information on a
narrow scale, usually transmitted by the company’s formal
information system at regular intervals. Strategic manage-
ment, however, mainly deals with one-off decisions and
therefore requires a wide range of information, which, in
addition to financial and internal information, also includes
nonfinancial information and environmental information.
For such information, a formal information system is
usually not established; therefore, strategic decisions are
often based on intuition, creativity, and personal judgment
(Čadež, 2013, p. 38).

The literature often reveals that accounting information
from financial statements is primarily intended for external
users of accounting information. However, such a claim is
wrong because the informing process of internal users in a
company is just as important. For internal users of account-
ing information, financial statements provide basic infor-
mation on company performance (Bergant, 2013, p. 77).
It should also be known, however, that the content of the
accounting process is not decision-making but the provi-
sion of such information, so that decision-making in the
company is facilitated and successful. Management must
be aware of being responsible for decision-making. At the
same time, it must consider accounting as a professional
service that helps to perform the management function
(Hočevar, 2007, p. 230).

For the top levels of management, information from finan-
cial statements is important at least from two perspectives
(Bergant, 2013, p. 77):
• Top management should know what information the

company has provided to external users and what infor-
mation the latter could obtain from additional analysis

Tatjana Horvat, Jožica Mojzer: Influence of Company Size on Accounting Information for Decision-Making of Management

of the financial statements. A company’s image in the
environment is based on such information.

• Financial statements represent a basis for further
detailed analysis of company’s operations. Such an
analysis is mainly based on the findings from the fol-
lowing areas:

– situation and causes of changes in the fixed capital
– efficiency of business
– operation of business, financial, and all leverage
– performance
– situation and causes of changes in net short- and

long-term indebtedness
– the company’s response to changes in indebtedness
– situation and causes of changes in working capital
– company’s response to changes in working capital
– situation and causes of changes in company capital

adequacy
– on the causes of changes in net cash flow from

operations
– situation and causes of changes in cash
– ability of short-term and long-term borrowing
– ability to invest

It is important to have good knowledge and control over
techniques and models of the analysis of financial state-
ments because only this allows for the full exploitation of
their expressive power and the creation of information that
could meet the needs of different users of accounting in-
formation in a company. By analyzing financial statements,
we can obtain a lot of information about possible first signs
of crisis, which is of utmost importance for timely action
(Bergant, 2013, p. 78). It is also known that decisions are
of higher quality if the decision-maker decides on the basis
of relevant information than if he decides on common
sense (Kavčič, Koželj, & Odar, 2014, p.119).

Accounting information also has certain limitations
(Hočevar, Zaman, & Petrovič, 2008, p. 35-38):
• The first limitation of accounting information is that it

constitutes only a part of the necessary information for
the decision-making needs of the company. Often, infor-
mation from other sources (nonfinancial information) is
even more important than accounting. Accounting in-
formation only shows the value of a company’s business
and, for example, often matters about the situation in
the company’s business environment, how strong com-
petition is, how quickly the industry develops, personal
contact with a business partner, and the like.

• Another limitation of accounting information lies in
the fact that accounting is not an exact science, i.e., sci-
entifically precise, because information is often based
on estimates, judgments, and the like. Some categories
that are, for example, essential to a particular company,
are difficult to qualify. Additionally, the true value of

certain assets presented by financial statements could
only be determined via subjective assessment.

• The third limitation of accounting information is in its
essential characteristics, namely, it is expressed in terms
of a monetary unit. For this reason, accounting informa-
tion should also be adjusted for the impact of inflation
on the value of data.

• The fourth limitation of accounting information is that
it could serve as a basis for decisions adversely affect-
ing a company as a whole. These are decisions that are
good for a certain part of the company and not for the
company as a whole. For this reason, good intracompa-
ny collaboration among units is important.

From all of the above, it follows that quality accounting
information, with certain disclosures, is indispensable in
managerial decision-making, irrespective of the level of
management in a company (Mojzer, 2015).

Information is a kind of fuel that drives a company, while
the main purpose of a manager is to transform information
into action through decision-making processes. When man-
agement changes the information into action, the success
of the campaign depends on the completeness, relevance,
and reliability of the information; further, the success of a
company is often dependent on the availability of informa-
tion to decision-makers in a company (Dimovski, Penger
and Škerlavaj, 2007, p. 66-67).

Walker, Fleischman, and Johnson (2012, p. 2) claim that
management accountants in a company should play the
role of a partner in a company, as they provide value-added
services through work in the company and thus should also
actively participate in the company’s decision-making.
Of course, this means that a company’s management ac-
counting must provide a quality base for decision-making,
for which there must be a certain quality control system.
Panchenko (2018) revealed that management accounting
is an integral part of management because it contributes
to the enterprise development and to the approval of its
competitive market position.

Modern theory of accounting management is focused on
the diagnosis of the internal environment for making man-
agement decisions, while negative factors of the external
environment are beyond the scope of accounting and
analysis (Bobryshev et al., 2015). Management accounting
could also engage the budget to examine entire operations
of the company with the goal of improving efficiency
(Steffan, 2008, p. 58).

Creation of accounting information for business deci-
sion-making within an enterprise requires in-depth ana-
lytical processing of data and involves large costs, which

NAŠE GOSPODARSTVO / OUR ECONOMY Vol. 65 No. 2 / June 2019

makes it more difficult for entrepreneurs to decide on the
creation of necessary records. The quality of decisions
stands for the capability of managers to make decisions,
which comply with the strategic business goals. In this
respect, the essential factor determining the quality of the
decisions is the mindshare paid to the strategic efficien-
cy indices while evaluating the accounting information
(Kuznetsova, 2017). It happens that, in companies, ac-
counting is often organized only to the fullest extent and
is limited to the treatment of past data to the extent that it
allows companies to report to external users of accounting
information (Mayr, 2006a, p. 9).

Every business decision should be based on quality deci-
sion-making. If a decision-maker in a company has relevant
information, it must be a prerequisite for making good
business decisions (Mayr, 2006b, p. 37). Relevant informa-
tion for decision-making purposes in an enterprise can only
be provided by a company with properly organized account-
ing, which depends on a company’s information needs. Data
and information of financial and cost accounting are thus
not satisfactory because they deal with past events, based on
actual business events and are designed in accordance with
the prescribed accounting system. In order to create manage-
rial information or information for business decision-mak-
ing within a company, information on financial and cost
accounting may not be sufficient; thus, other nonfinancial
information is needed (Mayr, 2006b, p. 39–40).

Controlling

“Controlling” has many different definitions. It could be a
company’s business philosophy, a special leadership style,
a decision-based (especially accounting information), or a
strictly targeted business (Mayr, 2007, p. 26).

In theory, two views on controlling are known, namely,
the Anglo-American view and the German view, i.e., An-
glo-American school and the German school.

The American school argues that a controller is a deci-
sion-making manager dealing with managerial accounting
and serves as an administrator for decision-makers with
reports on guidance and decision-making (Koletnik, 2001,
p. 7).

The American controller is in some way equal with an ac-
countant, as he performs similar tasks; thus, the question
arises if it is appropriate to introduce a new term for an
existing one (accountant). On the other hand, the German
controller does not equate with an accountant; he performs
different tasks, as noted in the following.

Mayr (2007, p. 27) writes about a controller in German
companies and says that “a controller of a sort is a flight
controller or a controller – a cybernetics for internal billing,
which with information and information helps” captains
“in sales, production, development and purchase safely
navigate the troubled business sea.” The controller must
warn in a timely manner when there is danger of a collision
and when there are links among revenue, costs, and profits.

The difference between the two schools is therefore the
focus of the individual controller. In the case of internal
information, the American controller is also responsible
for external information and can be compared with the ac-
countant, as he performs all the tasks that fall within the
field of accounting. The German controller is more focused
on internal information, that is, the preparation of informa-
tion for internal users. Controlling in American companies
is usually also organized as a service within the accounting
service, while controlling in German companies is usually
organized as an independent service in a special department
(Bergant, 2004, p. 4-5).

Controlling in today’s sense of the word comes from the
United States, where it was created in the second half of the
nineteenth century. Its role was to solve economic financial
tasks. The emergence of controlling has been a consequence
of the economic situation since the 1970s, which demanded
a new mentality (Mayr, 2007, pp. 27–28). The businessmen
concluded that the then-existing system of double-entry
book-keeping provided only information on the profits of
the company’s operations, which was not enough for corpo-
rate governance. Information was needed to clearly indicate
the reasons for good or bad performance of a company to
the management. The real boom in controlling in the US
came after 1920, as the economic conditions at that time
were overwhelmed with high business risks, and companies
felt the need for economic experts to help management to
direct operations (Hočevar, 2007, p. 18).

In Europe, controlling began to take effect only in the
second half of the 1950s, mainly at the expense of American
companies introducing it to their subsidiaries in Germany.
The function of a controller was introduced into companies
mainly in order to meet information needs (Hočevar, 2007,
p. 18).

The controlling philosophy has led to changes in the style
of leadership and the composition of decision levels. The
overall goals set by a company’s management are now
becoming increasingly demanding to all those who care
for their realization. All this represents a completely new
view on accounting and other information activities in a
company. From them, it is expected more, not just monitor-
ing past processes and states but also providing information

for calibrating and coordinating business processes that, in
the first place, apply to accounting. Controlling is therefore
an information activity that corresponds to decision-mak-
ing-oriented accounting (Mayr, 2007, p. 29–30).

Most Slovenian accounting theoreticians believe that there
is no difference between an accounting officer and control-
ler because, in Slovenia, the professional standards have
always demanded that, in addition to external reporting, it
also ensures adequate internal reporting. This also follows
from the theoretical definition of accounting in Slovenia,
which consists of all four functions (book-keeping,
planning, analysis, and supervision) (Hočevar, 2007, p. 19).

Research also shows an increasing number of compa-
nies that have reorganized their information systems and
decided to set up a special controlling service that is sub-
ordinate directly to the company’s management. In these
companies, accounting is regarded as a backward-looking
job and is a task for book-keeping (Kavčič, Koželj, & Odar,
2010, p. 36). This view of accounting is incorrect because
accounting records most information about a company’s
business. For example, Kaligaro (2006, p. 15) says it is
important for companies, in particular large companies,
that controlling is excluded from the domain of financial
and cost accounting, in both an organizational and content
aspect because the scope of the content of controlling
operation is process-oriented, more interdisciplinary, and
exclusively located as management function of different
levels.

Nevertheless, research shows that, in Slovenia, the number
of companies having a special controlling department has
increased. Many companies decide to set up a special con-
trolling department that is subordinate directly to the man-
agement as the headquarter service. The reason for such a
decision is probably due to the fact that companies need
more and more information for decision-making. In these
companies, accounting is viewed as a past-oriented service
with the main task of book-keeping. However, accounting
should not be looked at in such a way; it should be adapted
to modern requirements (Kavčič, Koželj, & Odar, 2010,
p. 36).

Opinions on how to organize controlling are shared among
authors, with the majority of authors supporting the con-
trolling department, advocating for organizing it within the
accounting department.

For example, Kaligaro (2006, p. 15) claimed that it is
important to exclude controlling from the domain of ac-
counting and advocated for the organization of a special
controlling service, subordinated directly to the manage-
ment of a company. Other authors (Kavčič, Koželj, & Odar,

2010, p. 36) criticize the reorganization of the information
system by setting up a special controlling department in
such a way and proposing an adjustment of accounting to
modern requirements. The accountant typically possesses
the most information and helps a company to monitor the
implementation of business plans and enable determination
of the deviations between the planned and the realized
(Mayr, 2007, p. 32).

Bergant (2011, p. 20) agrees with authors who do not
approve organizing a special controlling service outside of
accounting and say that the introduction of the term “con-
trolling” has contributed to the popularization of the idea
of the importance of information for decision-making as
well as the importance of information producers. From the
organizational point of view, confusion has arisen, as many
companies introduced a new post of controller outside the
accounting department, making the accounting limited to
accounting. A special post of controller outside of account-
ing can be a source of disagreement in the organizational
setting of a company, as it becomes unclear who in this case
performs accounting, accounting analysis, and account-
ing supervision—all of which are accounting functions.
Hočevar (2007, p. 19) has a similar opinion and says that
controlling cannot be a management function because the
content of controlling is not a decision but only support to
decision-making.

Hypotheses, Methodology, and Data

As we have seen in previous chapters, many researchers
have shown interest in understanding management ac-
counting. Here, we want to analyze literature that is close
to the purpose of our research. Little is known about the
extent to which SMEs use contemporary management ac-
counting (Armitage, Web, & Glynn, 2016). Management
accounting research has previously focused mostly on
large firms rather than SMEs despite the significance of
SMEs in the UK economy (Tripathy, 2016).

Lopez and Hiebl (2005) showed that usage of management
accounting is not only lower but also different in SMEs
compared with larger entities. Wiedemann (2014) stated
that, due to specific characteristics of SMEs, they general-
ly use management accounting to a smaller extent than do
large companies and that management accounting instru-
ments are not as well developed.

Based on the above-mentioned literature as well as the
findings here, with the aim of reducing the research gap
regarding controlling in medium-sized enterprises, two
hypotheses have been introduced:

Tatjana Horvat, Jožica Mojzer: Influence of Company Size on Accounting Information for Decision-Making of Management

NAŠE GOSPODARSTVO / OUR ECONOMY Vol. 65 No. 2 / June 2019

H1: Organizing a specific controlling department in a
company depends on the size of the company, where in
larger companies controlling service is more frequent
than in medium-sized enterprises.

Different opinions exist among different authors on the
specific controlling department in companies. Kaligaro
(2006, p. 15) says that it is important to eliminate con-
trolling from the domain of accounting, while other authors
(Kavčič, Koželj, & Odar, 2010, p. 36) criticize the reorgan-
ization of the information system by setting up a special
controlling department subordinate directly to the compa-
ny’s management. They foresee that the reason for such an
organization is the fact that businesses require increasingly
more information for decision-making. In these compa-
nies, accounting is usually seen as a service that is geared
toward the past. For this reason, Kavčič, Koželj, and Odar
(2010, p. 36) consider that it would be better for companies
to adapt the accounting according to modern information
requirements, thus meeting all of a company’s information
needs. It could be concluded that, in particular, large com-
panies, due to the large volume of operations, have organ-
ized a special controlling department; thus, we wanted to
determine whether the company size affects the organiza-
tion of a special controlling department. In relation to H1,
the following questions were asked in the questionnaire:
– Is the manager of the accounting department also a

member of your company’s management team? The
answer could be yes or no.

– How many employees does your company have? The
answer could be “from 50 to 250” or “over 250.”

H2: In large companies, the accounting officer is more
often a member of a management team than in medi-
um-sized enterprises.

Considering the increasing importance of accounting
in companies, we conclude that the role of accounting
managers in companies is also increasing. The head of ac-
counting should therefore be involved in the decision-mak-
ing process as a member of company’s management team.
The results in the 2006 survey conducted by the Slove-
nian Institute of Auditors show that, in management, the
number of heads of organizational units providing data and
information for decision-making decreases from year to
year. Namely, in 2011 only 10 managers of the accounting
unit were also members of the management team (Odar,
Kavčič, & Koželj, 2014, p. 90).

We believe that an accounting officer is also a member
of a management team more often in large companies,
mainly due to increased volume of accounting information
and also because managers in large companies are more
numerous than managers in medium-sized enterprises. In

the context of Hypothesis 4, we examined if it is true that,
in large companies, accountants are more often members
of the management team than in medium-sized enterprises.

In relation to H2, the following questions were asked in the
questionnaire:
– In the case you have a special controlling service organ-

ized, how is it organized? The answer could be “in the
context of accounting” or “outside of accounting.”

– How many employees does your company have? The
answer could be “from 50 to 250” or “over 250.”

Description of the Sample

The population in the survey was represented by medi-
um-sized and large companies from a business register
accessible online. According to the Slovenian statistical
office in 2015, and according to the number of employees,
1138 medium-sized companies and 238 large companies
were registered in Slovenia. As a measure of company
size, the 2013/34/EU European directive has been taken
into account, according to which the number of employees
is one among several criteria for the size of the company.
Companies between 50 and 250 employees are defined as
medium-sized companies, whereas companies with over
250 employees are considered large companies

Sampling was carried out according to the accidental prin-
ciple, after which we selected 300 companies. Due to the
low responsiveness of companies to fill in the survey ques-
tionnaire (out of the 300 invited companies, it was filled by
only 46 companies), we sent an application to fill it up with
an additional 150 randomly selected companies.

The questionnaire was standardized and implemented
online, using the 1KA website. It contained 17 questions
that were answered by employees in the accounting of me-
dium-sized and large companies in Slovenia, from April
18, 2015, until May 22, 2015.

The final sample of the companies involved in the survey
consisted of 100 companies. Out …

Issues in Accounting Education
Vol. 18, No. 1
February 2003

Relevance, Reliability, and
the Earnings Quality Debate

Gary M. Entwistle and Fred Phillips

ABSTRACT: These instructional materials are designed to elicit debate about the
primary accounting qualities of relevance and reliability, and to encourage you to
consider how these qualities are linked to the debate over earnings quality. The
case material comprises two narrative essays, which elicit divergent views about
relevance and reliability, and several discussion questions. You will use these es-
says and discussion questions as the foundation for a discussion and building a
deeper understanding of earnings quality, through extensive inquiry of fundamental
financial accounting concepts.

ACCOUNTING LOSES FOCUS ON REALITY
The Future of Accounting and Disclosure in an Evolving World:

The Need for Dramatic Change
—Wallman (1995)

The Day Has Come to Put Brand Equities on Our Balance Sheets
—Ambler (1999)

Is the Balance Sheet Outdated?
—Batchelor (1999)

Have Financial Statements Lost Their Relevance?
—Francis and Schipper (1999)

Brainpower on the Balance Sheet
—Aston (2002)

These are ominous titles to be sure. But what are their underlying messages?That the world has changed, but accounting has stood still! That it’s hightime to wake up and smell the intangibles!
There is little doubt the accounting profession is under constant fire, from all

quarters, business and academic alike, for its seeming inability to remove its historical

Gary M. Entwistle and Fred Phillips are Associate Professors at the University of
Saskatchewan. Professor Phillips is currently on leave at The University of Texas
at Austin.
We appreciate the research assistance of Michael Scott, the comments of Dennis Beresford,
Glenn Feltham, Eric Hirst, Lisa Koonce, and Doug Winslow on previous versions of the
essays in this paper, and the comments of Roger Martin, the editor (Tom Howard) and
special editor (Walter Teets), two anonymous reviewers, and workshop participants at the
University of Connecticut on previous versions of this paper.

80 Issues in Accounting Education

cost cloak and become relevant in a world where intangibles rule, where creating
brand value is the business strategy of choice, where cutting back on R&D spend-
ing is not an option, and where human capital, and the need to invest in it, is
patently obvious to all enlightened managers.

Who can argue? These are the characteristics of the business world in which
we live. Coke and Nike are building brand equity, Microsoft and Cisco are spend-
ing billions of dollars on R&D, and Citigroup and McDonalds do see their employ-
ees as their most valuable assets. These things are quite clear. The question is
whether accounting, at least in its present form, is of use in this business world.
The answer, seemingly, is no—and the evidence is overwhelming.

Take for example a recent Interbrand survey,1 which was released with great
fanfare. According to Interbrand, Coke, the world’s most valuable brand, is val-
ued at approximately $72.5 billion; a value representing 51 percent of that
company’s market capitalization. Nike meanwhile has its brand value estimated
at $8 billion; representing 71 percent of its market capitalization. Two other “Bil-
lion Dollar Brands,” Hertz and Adidas, have brand values estimated at 110 per-
cent and 151 percent of their respective market capitalizations. Meanwhile, a quick
look at the accounting for these values. Nothing. The brand assets—invisible!
And to be clear, neither a $100 billion valuation nor 200 percent of market capi-
talization will get the brand any closer to the balance sheet.

Next stop—R&D. In a recent year, Microsoft recorded approximately $3.8 bil-
lion as an R&D expense.2 Cisco meanwhile showed a $2.7 billion R&D expense.3 An
expense—surely not! Their R&D is top shelf, and the resulting products are market
leaders. These firms are the future for high tech. Surely if any two companies
shouldn’t be expensing their R&D, it would be these two. Clearly, their R&D expen-
ditures are investments that create “future economic benefits.” Sorry—rules are
rules—accounting spares no one. There’s just no room on the balance sheet for R&D.

Investing (or planning to invest) in human capital? What smarter way is there
to ensure the success of a business? Indeed, people are the business. Take
Citigroup, where the message from the Chairman’s Office is that “Citigroup at its
core is the people who work here every day,” and that “We are investing in our
employees’ training, their potential and their futures.”4 Likewise, at McDonalds,
the “People Promise”5 remains strong, and the Chairman reminds us “Our
people…are the foundation of our global success.”6 Indeed, the whole economy
seems to have heard the message, as reports tell us that “creative workers” (e.g.,
engineers, computer scientists, entertainers) comprise an increasing proportion
of all employees in the economy (Lev 2001). Enter Accounting—Stage Right.
Expense those people costs! Keep those entertainers off the balance sheet!

1 This survey can be found at: http://www.brandchannel.com/interbrand/test/html/events/
mvb_99_and_00.pdf.

2 Microsoft’s financial statements can be found at: http://www.microsoft.com.
3 Cisco’s financial statements can be found at: http://www.cisco.com.
4 These comments are contained in the Message from the Office of the Chairman in Citigroup’s 1999 Annual

Report.
5 This discussion can be found at: http://www.mcdonalds.com/corporate/promise/people/people.html.
6 These comments are contained in the Chairman’s letter to the shareholders in McDonalds’ 1999 Annual

Report, available at: http://www.mcdonalds.com/corporate/investor/financialinfo/annual/archive/1999/
index.html.

adil muqaibal

Entwistle and Phillips 81

The underlying theme is that accountants have lost their way; that is, as firms
invest, accountants expense. And the saddest part of all is that it didn’t have to be
this way. In accounting we define assets as “future economic benefits,” a definition
that brands, investments in R&D, and human capital surely fit. Interbrand tells us
that by simply being true to our own definitions, we could instantly add $912 bil-
lion to the balance sheets of 75 brand-conscious firms. One can’t even begin to
envision the billions (or trillions) of dollars more we could add for R&D and hu-
man capital. And these three items represent only the tip of the intangible ice-
berg. Imagine if the whole iceberg were placed on the balance sheet—such things
as pricing power, distribution channels, political connections, strategic locations,
community involvement, and a reputation for quality. The outcome would be a
set of financial statements, rich in intangible assets and true to accounting’s own
definitions, which contribute to improved investment decisions and to a full and
healthy recovery for the accounting profession.

Well, what about it? Why not a quick Marlboro brand on accounting’s backside?
Why not the line item “Dr. Smith’s genome insights”? Why not Dr. Smith himself?
Surely accounting isn’t that hung up on reliability. It’s this obsession with ensuring
that “information is reasonably free from error and bias and faithfully represents
what it purports to represent” (FASB 1980) that got accounting into this mess in the
first place, and that is keeping real assets off the balance sheet. Come on people, it’s
time to show a little faith! It’s a new world out there. Just a few minutes of web
surfing will inform you that the Boston Consulting Group has “developed a robust
system for measuring the value of a brand,”7 that Interbrand’s “Brand Valuation” is
“a unique tool that quantifies the economic value of a brand,”8 and that KPMG val-
ues intangibles. Further, these measurement tools can incorporate “everything that
contributes to the purchasing decision and shapes the ownership experience”9
(emphasis added). Sure, some subjectivity is involved, but accountants already have
plenty of experience with estimation. Besides, desperate times call for desperate
actions. Let’s do accounting a huge favor and get rid of this reliability obsession.

ESSAY REFERENCES
Ambler, T. 1999. The day has come to put brand equity on our balance sheets.

Marketing (August 12): 14.
Aston, A. 2002. Brainpower on the balance sheet. BusinessWeek (August 26):

110–111.
Batchelor, A. 1999. Is the balance sheet outdated? Accountancy (February): 82.
Financial Accounting Standards Board (FASB). 1980. Qualitative Characteris-

tics of Accounting Information. Statement of Financial Accounting Con-
cepts No. 2. Stamford, CT: FASB.

Francis, J., and K. Schipper. 1999. Have financial statements lost their rel-
evance? Journal of Accounting Research 37 (Autumn): 319–352.

Lev, B. 2001. Intangibles: Measurement, Management, and Reporting. Wash-
ington, D.C.: Brookings Institution Press.

Wallman, S. 1995. The future of accounting and disclosure in an evolving world:
The need for dramatic change. Accounting Horizons (September): 81–91.

7 See http://www.bcg.com.
8 See http://www.interbrand.com.
9 See http://www.bcg.com.

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82 Issues in Accounting Education

ACCOUNTING REMAINS PATIENT
No one can reasonably argue against the business case for developing brand

value, investing in R&D, and training employees, or that these, and myriad other
intangibles, will likely result in “future economic benefits” for the firm. Hence,
according to our current definitions, it appears these intangibles may be “assets.”
The critical questions for accounting, however, are when should these “assets” be
recorded on the balance sheet? And, has accounting truly lost its way?

Let’s deal with the second question first. It is becoming increasingly common
to hear that the market-to-book value ratios of companies have been steadily grow-
ing, indicating increasingly incomplete and uninformative financial statements
(e.g., Lev 2001). Outdated accounting is the primary suspect; in particular, the
finger points to balance sheets void of increasingly important intangible assets.
Such evidence, however, seems to suggest that the holy grail of accounting would
be a set of financial statements that at all times mirrors the stock price, and where
zero discrepancy exists between accounting reports and market values. Does evi-
dence that suggests accounting is moving farther from this grail imply that ac-
counting has lost its way? Panic stations everyone? We say no, for two reasons.

First, as pointed out in the conceptual framework, “Financial accounting is
not designed to measure directly the value of a business enterprise” (FASB 1978)
(emphasis added). In other words, a market-to-book-value ratio of 1, or a record-
ing on the balance sheet of all “assets” the market deems to have value for the
firm, neither is, nor should be, the goal of accounting. To think otherwise, to deem
accounting and valuation as synonymous, would surely set accounting adrift in a
sea of hopeful guesstimates of borderless and potentially volatile assets, completely
unable to attest as to whether a firm’s financial statement is “reasonably free
from error and bias and faithfully represents what it purports to represent” (FASB
1980).

Second, any attempt to use the stock market to judge accounting’s usefulness
rests on accepting the unswerving accuracy and sanctity of stock prices—and at
all times! As Warren Buffett noted, “When the price of a stock can be influenced
by a ‘herd’ on Wall Street with prices set at the margin by the most emotional
person, or the greediest person, or the most depressed person, it is hard to argue
that the market always prices rationally. In fact, market prices are frequently
nonsensical” (Hagstrom 1999). Accounting, we suggest, would be wise to question
the calls for change emanating from this market value fixation.

What then, about the first question. When should these (intangible) assets be
recorded in the financial statements? The answer, not surprisingly, is when we
have a reliable measure of them—one “reasonably free from error and bias.” In-
terestingly, what this leads to is that we will never directly place the intangible
asset itself onto the balance sheet. Instead, only the resulting “economic benefits”
are recorded. And this is only logical. You see, Coke isn’t actually in the “busi-
ness” of building its brand equity; Microsoft isn’t in the “business” of building its
R&D infrastructure; and McDonalds isn’t in the “business” of enhancing its hu-
man capital. They are, respectively, in the business of selling soft drinks, selling
software solutions, and selling hamburgers, and their intangible assets simply
help them to do this. When, then, does accounting have a reliable measure of the
firm’s intangibles? When are they recorded as assets? When they are revealed in
the sale of a Coke, the sale of a Windows operating system, or in the sale of a Big

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Entwistle and Phillips 83

Mac. This is what accounting does, what reliability leads us to do. It requires,
indeed it demands, that we be patient and wait for the signal, the unequivocal
and unambiguous measure (Ijiri 1975), which reliably confirms the (intangible)
asset truly exists.

So, in accounting, two things happen. First, we typically expense the invest-
ments firms make in brands, R&D, human capital, and numerous other “intan-
gible” areas of the business. Second, we wait for a reliable signal to emerge before
we record the value of these expenditures (i.e., these assets) into the financial
statements. In other words, the asset is guilty (does not exist) until proven inno-
cent (it exists) beyond reasonable doubt, until, to use Littleton (1953), a “transac-
tional experience” takes place. Will all the firm’s (real) “intangible assets”
eventually find their way into the financial statements? Will all the firm’s (real)
“future economic benefits” eventually be recorded? Will accounting ever truly por-
tray the (real) “value” of the firm? Yes, when accounting has proof.

So, can accounting continue to remain patient? Can it live with market-to-
book-value ratios of 6, or 10, or 200? Should it continue supporting the primacy of
reliability? We would suggest this remains our best option for external financial
reporting. The price of losing patience would be far too high, and accounting should
not risk divorcing itself from that quality of information that “permits users of
data to depend upon it with confidence as representative of what it purports to
represent” (AAA 1977, 16). We believe that accounting has not lost its way.

Information is all around us; it is given to us for free; it is sometimes even
forced upon us. “Reliable” information, however, is a rare commodity. It is worth
waiting for.

ESSAY REFERENCES
American Accounting Association (AAA), Committee on Concepts and Standards

for External Financial Reports. 1977. Statement on Accounting Theory and
Theory Acceptance. Sarasota, FL: AAA.

Financial Accounting Standards Board (FASB). 1978. Objectives of Financial
Reporting by Business Enterprises. Statement of Financial Accounting
Concepts No. 1. Stamford, CT: FASB.

———. 1980. Qualitative Characteristics of Accounting Information. Statement
of Financial Accounting Concepts No. 2. Stamford, CT: FASB.

Hagstrom, R. 1999. The Warren Buffett Portfolio: Mastering the Power of the
Focus Investment Strategy. New York, NY: John Wiley & Sons, Inc.

Ijiri, Y. 1975. Theory of accounting measurement. In Studies in Accounting Re-
search #10, by American Accounting Association Studies in Accounting
Research. Sarasota, FL: AAA.

Lev, B. 2001. Intangibles: Measurement, Management, and Reporting. Brookings
Institution Press.

Littleton, A. 1953. Structure of accounting theory. In American Accounting As-
sociation Monograph No. 3, by American Accounting Association. Iowa City,
IA: AAA.

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84 Issues in Accounting Education

DISCUSSION QUESTIONS
Prepare to discuss the assigned essay(s) within the context of the following

discussion questions and the arguments expressed in the Statement of Financial
Accounting Concepts (SFACs) referenced below in parentheses.
1. What are the objectives of financial reporting? (SFAC No. 1, FASB 1978)
2. What are the primary qualities of useful information? (SFAC No. 2, FASB 1980)
3. What constitutes the resources (and claims on resources) of an enterprise?

(SFAC No. 6, FASB 1985)
4. When should these resources (and claims on resources) be recognized? (SFAC

No. 5, FASB 1984)
5. How do the preceding questions relate to earnings and earnings quality? (SFAC

No. 6, FASB 1985)

DISCUSSION QUESTION REFERENCES
Financial Accounting Standards Board (FASB). 1978. Objectives of Financial

Reporting by Business Enterprises. Statement of Financial Accounting
Concepts No. 1. Stamford, CT: FASB.

———. 1980. Qualitative Characteristics of Accounting Information. Statement
of Financial Accounting Concepts No. 2. Stamford, CT: FASB.

———. 1984. Recognition and Measurement in Financial Statements of Busi-
ness Enterprises. Statement of Financial Accounting Concepts No. 5. Stam-
ford, CT: FASB.

———. 1985. Elements of Financial Statements. Statement of Financial Account-
ing Concepts No. 6. Stamford, CT: FASB.

Entwistle and Phillips 85

CASE LEARNING OBJECTIVES AND
IMPLEMENTATION GUIDANCE

Objectives
The primary objective of these instructional materials is to illustrate how the

debate over earnings quality is fundamentally a debate between the primary ac-
counting qualities of relevance and reliability. A second and related objective is to
weave this debate within the context of FASB’s conceptual framework, thereby
providing instructors an alternate means for discussing critical accounting con-
cepts.10 We believe the writing style used in the essays and the basic discussion
questions posed make these materials appropriate for any financial accounting
class in which the qualitative characteristics of accounting information are
discussed.
Earnings Quality

A quarter of a century ago, Siegel (1977, 315) noted that “[i]t is evident…that
the term ‘quality of earnings’ does not admit to simple definition.” Today, there
continues to be a number of definitions of earnings quality (Beneish 2001). In this
paper we define earnings quality as the ability of earnings to meet the primary
objective of financial reporting, which is to provide to investors and creditors, and
other users, information that is useful for evaluating the cash flow prospects of
an enterprise. This perspective is consistent with Siegel’s (1977, 277) original ob-
servations that any appraisal of quality can only “be formed in terms of favorable
or unfavorable characteristics in earnings” (emphasis added), and with more re-
cent writings (e.g., AICPA 2000; Jonas and Blanchet 2000; McDaniel et al. 2002;
SEC 1999; Turner 2000) emphasizing the critical trade-off between relevance and
reliability when assessing earnings quality.
Narrative Essays

The case materials comprise two purposely provocative and contrasting nar-
rative essays about the relevance and reliability of accounting information where
firms possess significant internally generated intangible assets. In this setting,
critics suggest (e.g., Lev 2000, 2001) the existing financial accounting model11
most dramatically degrades the quality of such information. The first essay, en-
titled “Accounting Loses Focus on Reality,” criticizes financial accounting for fail-
ing to produce relevant information, while the second essay, entitled “Accounting
Remains Patient,” argues the merits of producing reliable information. The es-
says are framed in terms of relevance and reliability because these characteris-
tics are ultimately at the heart of discussions of earnings quality.

Instructors will note that although the topic of earnings quality is an impor-
tant part of these instructional materials, the essays make no specific mention of

10 The objective of weaving the earnings quality debate within FASB’s conceptual framework responds to
calls made by Michael Crooch, FASB Board Member, and Lynn Turner, former SEC Chief Accountant, for
finding new ways of centering discussions of contemporary accounting issues on the conceptual frame-
work (Crooch 2002; Turner 2002).

11 The existing model of financial accounting referred to is represented by the U.S. accounting standards
currently being used in practice. This multiattribute model, which uses transaction-based historical cost
as the predominant measure for intangible assets, essentially represents the decisions that have been
made when operationalizing the SFACs.

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86 Issues in Accounting Education

earnings or earnings quality. This is deliberate for two reasons. First, much of
the criticism of accounting, at least within the popular press (e.g., Aston 2002;
Gross 2001; Stewart 2001), takes place at the “asset” level—in questioning whether
recording or not recording nontraditional assets in a firm’s financial statements
makes accounting more or less relevant or reliable. To be consistent, the essays
are written at this same level. Second, and more importantly, by excluding earn-
ings and earnings quality, the essays set the stage for the series of conceptual
questions that encourage students to discover for themselves how a firm’s earn-
ings, and the quality of its earnings, flow from the same decision whether to record
a firm’s assets in its financial statements. This approach requires that instruc-
tors be patient when discussing the essays, in the sense that the discussion ques-
tions do not rush to the topic of earnings quality. Instead, the questions unfold in
a logical and cascading progression, with each question building on the previous
one, never mentioning earnings quality until the final question. It is at this cul-
minating point that students should experience the “a-ha,” when they realize that
the topic of earnings quality is inextricably linked to the fundamental relevance/
reliability trade-off.

Instructors will also note that the essays take certain liberties, such as ignor-
ing that some firms’ R&D expenditures can be recorded as assets, that the defini-
tion of assets goes beyond “future economic benefits,” or that the terms “historical
cost” and “value” are not clearly defined or contrasted. These liberties also are
taken for two reasons. First, they provide instructors with opportunities to deepen
students’ understanding of the pertinent issues through subsequent discussion
(more fully described in the Teaching Notes). Second, we believe these liberties
heighten the contrast between the positions advocated in the two essays, thereby
increasing the likelihood the essays will elicit divergent views that will engage
students and spark discussion.
Implementation Guidance

Our recommended approach for using the case materials involves three steps:
(1) spark an initial classroom discussion, (2) require a written critique of the nar-
rative essays, and (3) engage in a subsequent classroom discussion. This approach
requires approximately 25 minutes of classroom time in each of two successive
class meetings. An alternative approach, upon which we do not elaborate, is to
combine the initial and subsequent discussions into a single 50-minute class meet-
ing and to assign the written critique as a post-class exercise.
Initial Classroom Discussion

We suggest instructors begin by splitting the class into two groups. One group
is assigned to read, prior to class, the relevance essay entitled “Accounting Loses
Focus on Reality,” and the other group is assigned to read the reliability essay
entitled “Accounting Remains Patient.” Both groups are assigned the five discus-
sion questions to consider in advance of class.12 To encourage comprehension of
the arguments in the assigned essay, we also advise assigning students the task
of preparing a bullet-point summary of the main arguments embedded in the nar-
rative essay that they have been asked to read. When these tasks are assigned,

12 Because most students require just ten minutes to read one of the essays, the readings and questions
could be distributed at the beginning of class.

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Entwistle and Phillips 87

students should be reminded that “financial accounting”—a term used through-
out the essays—often is used as an abbreviation for “general purpose external
financial reporting by business enterprises” (FASB 1978).

To encourage the initial classroom discussion, we suggest asking students:
“Should financial accounting favor the relevance or reliability of information for
decision making, and why?” We have found that this normative question elicits
many of the divergent views expressed in the essays, and results in a spirited
debate.13 If the trade-off between relevance and reliability is not explicitly raised
during the discussion, instructors should ask the question: “Is there an ideal level
of relevance and reliability for financial information to be useful?” This question
presents opportunities to acknowledge specifically that a trade-off exists and to
recognize that the relative importance attached to relevance and reliability will
likely differ for different kinds of decisions and for different groups of users.
Whereas the earlier normative question sparks divergence in opinions, this trade-
off question moves student opinions toward convergence.

After the main arguments from the essays have been raised and the relevance/
reliability trade-off has been highlighted, instructors should then pair each stu-
dent who was assigned the relevance essay with a student who was assigned the
reliability essay. The pairs should be asked to share their bullet-point summaries
with one another, to again highlight the pertinent arguments, and to further re-
inforce the inevitability of a relevance/reliability trade-off.
Written Critique

The pairs should then be assigned a task of preparing, for the following class,
a written critique of the two narrative essays. The main objective in the critique
is to critically evaluate the arguments contained in the two essays. To aid in pre-
paring the critique, we advise students to reread the essay assigned to them in
class, along with the essay assigned to their partner. We also recommend provid-
ing each pair with the five discussion questions. Finally, in considering the dis-
cussion questions, we recommend that instructors encourage their students to
reference the FASB Concepts Statements. This latter recommendation should
enable students to prepare more informed written critiques.
Subsequent Classroom Discussion

In the following classroom meeting, the organizing framework in Figure 1
should be presented to students. When presenting this framework, instructors
should acknowledge that it is constructed from the SFACs. The framework be-
gins (in Box 1) with identifying the objectives of financial reporting (Discussion
Question 1), which SFAC No. 1 (FASB 1978, paragraph 32) defines as presenting
useful information, broadly defined. The second discussion question (Box 2) then
introduces the primary qualities of useful information of relevance and reliability
that are discussed in SFAC No. 2 (FASB 1980, paragraph 33). We use triangles in
Figure 1 to depict: (1) the inevitable trade-off between relevance and reliability,
and (2) the varying weight given to relevance and reliability as one focuses on
each subsequent stage of the financial reporting decision process. Relevance
appears to be weighted more heavily when SFAC No. 6 (FASB 1985, para. 25)

13 As an alternative approach, instructors might wish to create a formal debate of the resolution that “finan-
cial accounting should favor relevance over the reliability of information for decision making.”

88
Issues in Accounting E

ducation

FIGURE 1
Organizing Framework

This figure illustrates that relevance and reliability are the primary qualities of earnings and other accounting information that aims to meet the objectives of
financial reporting. Presenting relevant accounting information is the primary concern when identifying what constitutes the enterprise resources (and claims on
those resources). However, before these resources (and claims on resources) are recognized in the financial statements, there is a need to cycle-back and evaluate
more …

Critical Perspectives on Accounting (1996) 7 , 533 – 561

RELEVANCE LOST AND FOUND : CRITICAL
PERSPECTIVES ON THE PROMISE OF

MANAGEMENT ACCOUNTING

R OBIN R OSLENDER
University of Sterling

Two major development programmes have been evident in management
accounting in recent times . A range of new techniques , generic approaches
and frameworks for accounting for strategic positioning have emerged in
response to doubts raised about the relevance of cost and management
accounting . In parallel , many of the most significant advances in the critical
accounting project have taken place in the context of accounting to
management . Where the two programmes have intersected , the outcome
has been to raise a series of reservations about the promise of the new
management accounting . This paper of fers a critical perspective on the
reception af forded recent developments in management accounting , and
attempts to identify evidence of positive opportunities where others have
discerned only further threats . ÷ 1996 Academic Press Limited

Introduction

In recent years management accounting has been fortunate in playing host to
two major development projects . Concerns about the relevance of manage-
ment accounting in the face of the demands of the global marketplace quickly
gave way to the making of a new project , that of accounting for strategic
positioning , resulting in a sea change in the meaning and mode of accounting
to management . At the same time management accounting has been the site
of many of the major developments in the critical accounting project ,
academic accounting’s attempt to heighten the accountancy profession’s
awareness of the conditions and consequences of accounting theory and
practice . Given the very dif ferent natures of these two projects , one essentially
hands on , the other decidedly scholarly , it is hardly surprising that there has
been little cross-fertilization to date . This is not to suggest that the exponents
of accounting for strategic positioning have abandoned any pretence of
scholarly rigour . In truth a significant part of the emergent literature evidences
a great extent of self-awareness , but only technical self-awareness . Nor has
the critical accounting project has completely overlooked these developments .
However , what characterizes the extant critique of accounting for strategic
positioning is its dismissive tone with the almost predictable conclusion that
there is little here that promises to contribute to a more attractive accounting
praxis .

The founding assertion of this paper is that the emergence of accounting for
strategic positioning is a project about which critical accountants should be

Address for correspondence : Professor Robin Roslender , Department of Accountancy and
Finance , University of Stirling , Stirling , FK9 4LA , UK .

Received 3 February 1995 ; revised and accepted 3 January 1996 .

533

1045 – 2354 / 96 / 050533 1 29 $12 . 00 / 0 ÷ 1996 Academic Press Limited

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R . Roslender 534

more positive . The critical theoretic , the underpinning of the critical account-
ing project , seeks understanding as a precursor to change . It is in the
enactment of change that the positive triumps over the present’s negativities .
Instead of rehearsing a range of indictments regarding the undesirability of
the evolving techniques , frameworks and generic approaches to accounting
for strategic positioning , there is a need to identify a more progressive
agenda . In this way critical accounting can extend the existing technical
critique of accounting for strategic positioning through its behavioural and
organizational dimensions to its (critical) social theoretic consummation . The
first section below provides a brief overview of the debates about the
relevance of management accounting . This is followed by a rather longer
review of the main developments in the accounting for strategic positioning
project as it has evolved in the past decade . The third section of the paper
provides a commentary on the development of the critical accounting project
to date . The existence of a divided project , between the Foucauldians who
seem content to generate sophisticated but uncommitted knowledges , and
the Marxists who seem to be increasingly aggrieved by the fact that few
people appear interested in the worrying insights they of fer , is argued to be a
fundamental constraint on thinking more positively about accounting for
strategic positioning . The extant literature is then reviewed in the light of
these observations . In the final section of the paper some of the more
potentially progresssive aspects of the new economic and commercial order ,
and the necessity of accounting for it , are identified and discussed . Among
these are the opportunities associated with empowerment ; downsizing ;
customer consciousness ; market sovereignty ; and ‘‘soft’’ accounting numbers .
Ultimately a critical accounting for strategic positioning promises to contrib-
ute to the broader critical theory of democratic societal transformation .

Questioning the Relevance of Management Accounting

The relevance debate is usually identified with Robert Kaplan who published a
series of polemical papers on the state of management accounting in the US
(Kaplan , 1983 , 1984 , 1985 , 1988) , and with Johnson wrote the seminal text :
Relevance Lost : The Rise and Fall of Management Accounting (1987) . Four
lines of criticism are evident in this literature . First , the limited evidence of
technical developments within management accounting practice in response
to the major changes in manufacturing technology in the previous 15 years .
These changes had resulted in greatly increased productivity , flexibility and
quality , together with reduced lead times and inventory , none of which
management accounting seemed interested in , nor able to report . Second , the
contention that management accounting was the captive of financial report-
ing . This had resulted in a damaging short-termism in business outlook ,
coupled with problematic cost allocation techniques underpinning stock
valuation , and an over-reliance on historical information for process control .
An infatuation with a single cost system was argued to provide information
too distorted , too aggregated and too late to be of much value to
management .

A third set of criticisms was directed at academic management accountants .
Too much recent research output had been in the form of simplistic ,

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Relevance lost and found 535

economics-based models of the outside world , e . g . agency theory , rather than
studies of ‘‘best practice’’ . The research literature , and in turn the textbook
tradition , had become sterile , divorced from the wider audience of manage-
ment accounting practitioners . Addressing the relevance issue would necessi-
tate closing the theory gap which had occured in the previous three decades .
The final criticism was the most general and the most contentious , being
concerned with the history of management accounting . Instead of viewing
management accounting as a recent development , it was necessary to
recognize its origins in the first half of the nineteenth century . A mature
management accounting tradition was well-established in the 1920s , provid-
ing the basis for ef fective cost management , management control and
performance measurement . Management accounting’s lost relevance is a
recent phenomenon , which has resulted in its progress being stalled , al-
though not yet beyond the point at which its promise has completely atrophied .

Kaplan’s motives , like those of Johnson and others who joined the
relevance debate in the later 1980s , e . g . Berliner and Brimson (1988) ,
Bromwich and Bhimani (1989) , Shank and Govindarajan (1989) , are complex .
His earliest papers were published in the aftermath of the wide-ranging
debate about the need to regenerate American industry in the context of the
emergent global economy (Hayes and Abernathy , 1980) , the lessons which
might be learned from the Japanese success story of the previous two
decades (Schonberger , 1982 ; Peters and Waterman , 1982) and the embryonic
competitive advantage theory of Porter (1980) . In this way the assertion of a
relevance problem in the sphere of management accounting is evidence of a
trickle-down ef fect , manifest in an altruistic attempt by a key spokesman for
the accountancy profession to evidence a measure of culpability , contrition
and commitment to the restoration of American economic (not to mention
political and ideological) dominance in the global marketplace . However ,
there is also the hint of a collective mobility project being formulated in the
relevance critique . Kaplan is critical of the failings of a financial reporting
oriented accountancy profession . The short-termism which it embodies also
applies to the corporate finance alternative which had become more influen-
tial in the financial management of business . The rejuvenation of manage-
ment accountancy was to be based on cost management rather than cost
accounting . If Kaplan’s initial forays into the new management accounting , i . e .
activity-based costing , were anticlimactic , his contemporaries evidenced
greater vision . Berliner and Brimson (1988) explored several new avenues for
accounting to management including a concern with the value-adding
process , life-cycle costing and the market-driven , target cost philosophy . Their
outward looking or ‘‘strategic’’ approach to management accounting was
shared by Bromwich and Bhimani (1989) . Their survey of UK management
accounting concluded that although Kaplan’s critique was overstated , there
was little doubt that the value of management accounting was limited by its
focus on the factory floor . In its place they commend the development of
strategic management accounting , integrating accounting and marketing
themes . Shank and Govindarajan (1989) af firm the necessity for developing a
management accounting project oriented towards the strategic planning
rather than the management control process , in ef fect a multidisciplinary
approach to the task of management itself .

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R . Roslender 536

The Emergence of Accounting for Strategic Positioning

It is misleading to imagine that in little over a decade management accounting
has been completely revolutionized . What has happened is that a new
sub-branch of accounting to management has been developed , one in tune
with the new business and commercial environment , the global marketplace ,
the postmodern economy , or whatever . Since the latter constitute the
principal sites for competition between the leading edge corporations , this
new sub-branch aims to structure best practice in accounting management . It
is useful to employ a new term to refer to those developments in manage-
ment accounting which to this point have been referred to above as the new
management accounting . The term accounting for strategic positioning is well
suited for this purpose . Accounting for strategic positioning entails the
generation of accounting information which supports attempts of senior
management to achieve , and sustain , a strategic , i . e . a commanding , position
in the marketplace relative to competitors . In this way accounting for strategic
positioning is closely associated with the determination and exploitation of
competitive advantage , the means to a corporation’s (continuing) strategic
presence in the marketplace (Porter , 1980 , 1985 ; Roslender , 1995) . Accounting
for strategic positioning is a development which extends the prospectus of
management accounting knowledges , admirably complementing the existing
sub-branches of accounting to management : cost accounting ; management
accounting ; and management control .

The development of accounting for strategic positioning can be viewed in
terms of a succession of phases . Initially a range of relevant techniques for
accounting to management was promoted . The most celebrated of these ,
activity – based costing (ABC) , was developed (as opposed to invented) by
Kaplan in association with his colleague , Robin Cooper (Cooper and Kaplan ,
1987 , 1988 , 1991a ; Cooper , 1988a , b , 1989a , b , 1990 ; Kaplan , 1992) . Initially ,
ABC was presented as a means of establishing product costs more accurately .
Based on the insight that since activities rather than products give rise to
costs , it is necessary to understand how dif ferent activities incur costs , and
using cost drivers , attach (or attribute) costs to products in a more dis-
criminating way . Drawing on case studies , Cooper and Kaplan demonstrated
the contribution which ABC could make to production and pricing decisions in
modern , hi-tech industries with their characteristic low volume production
runs of customized products . While ABC was firmly based in the traditions of
cost accounting , other new techniques could claim dif ferent lineages .
Backflush accounting provided a means of accounting in a just-in-time
environment (Foster and Horngren , 1988 ; Bhimani and Bromwich , 1991) .
Instead of the more conventional procedure of working forwards and
encountering the dif ficulties associated with large quantities of work in
progress , backflush accounting works backwards to allocate costs between
product sold and inventory . By contrast , throughput accounting focused on
the problems associated with manufacturing response times (Galloway and
Waldon , 1988a , 1988b ; Darlington , Innes , Mitchell and Woodward , 1992 ; see
also Goldratt and Cox , 1984) . Response times are af fected by a range of
factors which are dif ficult to eliminate entirely , e . g . production bottlenecks ,

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Relevance lost and found 537

organizational slack , rework levels , scheduling failures . The challenge is to
provide information which enables management to take fullest advantage
from the prevailing circumstances . The growing emphasis on the provision of
high quality products also resulted in renewed interest in determining the
costs of quality , identifying its various elements such as failure costs ,
appraisal costs and prevention costs (Pasewark , 1991) .

A further group of techniques emerged which promised to furnish ‘‘softer’’
accounting information . For those advocating their development , these are no
less useful than the ‘‘hard’’ numbers on which accounting’s reputation had
been established . These techniques also embodied an acceptance of the
necessity of exploring the potential of a more outward looking approach to
accounting to management . Life – cycle costing focused on the pattern of costs
associated with the life-cycles of products , from their inception and develop-
ment through their growth and maturity phases and finally in their decline ,
providing guidance on how to account for these over time (Berliner and
Brimson , 1988) . Shank and Govindarajan’s (1989) strategic cost analysis
technique , a development of Porter’s earlier strategic marketing technique ,
entailed the analysis of product (or service) value chains . Bromwich (1990 ,
1991) advocated the adoption of a strategic management accounting
technique based on the contention that the benefits which products provide
constitute the ultimate cost drivers . Simply attributing costs to products ,
rather than to the benefits which they of fer , overlooks the fact that competitive
advantage is achieved in the marketplace . For Bromwich only products which
yield the maximum value for the amount which the consumer wishes to
spend , i . e . ef ficient products , will survive . The term strategic management
accounting was already in use , Simmonds (1981) having used it to name his
competitor data analysis technique which attracted renewed interest (Wilson ,
1991 ; see also Simmonds , 1982 , 1986 , 1992) . Bromwich’s conception of
strategic management accounting was also informed by the Japanese
technique known as target costing (Hiromoto , 1988 , 1991 ; Sakurai , 1989) . A
three step process , target costing begins with the identification of potentially
successful products . Once identified , allowable or target costs are then
determined , reflecting likely market prices together with desired profit mar-
gins . Invariably these target costs are below what can readily be achieved by
the business , necessitating value engineering exercises to bring actual costs
into line with target costs .

The second phase in the development of accounting for strategic position-
ing involved the emergence of generic approaches , or frameworks , for
enhancing accounting’s role in the (strategic) management process . Kaplan
and Cooper quickly recognized the limitations of ABC , moving to advocate a
more comprehensive activity-based theory of the management process
known initially as activity – based cost management (ABCM) and subsequently
as activity – based management (ABM) (Cooper and Kaplan , 1991b , 1992 ;
Kaplan , 1992 ; Cooper et al. , 1992) . As a guide to management action , ABM
provides a means of enhancing profitability , unlike ABC with its emphasis on
more accurate product costs . ABM is underpinned by a theory of resource
consumption with activities now being viewed as giving rise to costs , as in
ABC , while also involving the consumption of (scarce) resources . Increased

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R . Roslender 538

profitability is argued to be based on the ef fective management of resource
consumption .

A second generic approach to accounting for strategic positioning was
formulated by Shank and Govindarajan . They define strategic cost manage-
ment (SCM) as the managerial use of cost information explicitly directed at
one or more of the four stages of the strategic management cycle (Shank ,
1989 ; Shank and Govindarajan , 1992a , 1992b , 1993) . SCM integrates value
chain analysis , strategic positioning analysis and cost driver analysis . For
Shank and Govindarajan value chain analysis is central to the strategic
management process . Their concept of the value chain , and thus value-added
analyses , is more extensive than for other writers . The value chain stretches
from the basic raw material sources of a business through to the ultimate
end-use product delivered to the customer . Consequently firms are often only
involved in part of the overall chain of value-creating activities , and therefore
must endeavour to develop accounting information which permits internal
cost management performance . Strategic positioning analysis focuses on the
ways in which firms decide to compete , this too having implications for
internal cost management arrangements (Gupta and Govindarajan , 1984 ;
Govindarajan , 1986) . In the case of cost driver analysis , Shank and Govin-
darajan place great significance on those drivers associated with the pursuit
of quality , necessitating the development of an analytical framework for
establishing the cost of quality . Continuous performance improvement is at
the core of a third generic approach to accounting for strategic positioning
exemplified in Turney and Anderson’s (1989) Tektronix case study . Con-
tinuous improvement as ‘‘the relentless pursuit of improvement in the
delivery of value to the customer’’ is argued by Turney and Anderson to be
based on manufacturing , engineering and marketing excellence , comple-
mented by the development of an accounting philosophy which reflects the
environment of global competition , rapidly changing production technology
and shortening product life-cycles . The accounting function is challenged to
provide information on those aspects of performance associated with the
theme of continuous improvement , i . e . key performance indicators on quality ,
time and cost . Turney and Anderson also af firm that , to a very large extent ,
the new modes of accounting (for strategic positioning) have little relationship
with the needs of external financial reporting , hence their call to embrace a
new accounting philosophy .

The third phase in the development of accounting for strategic positioning
is presently underway . Although there are continuities with the two previous
phases , recent developments amount to a major reconstitution of the
management accounting discipline . Management accounting is now argued
to play a pivotal role in the regimes of management reporting necessary for
the pursuit of strategic positioning . An integrated strategic management
process demands integrated modes of performance measurement . While
many of these measurement metrics , taken in isolation , reflect a broad range
of functional bases , their collective character is clearly that of providing
account(ing)s . The latter , not surprisingly , are commonly some distance
removed from the hard numbers associated with conventional financial
reporting . The radical quality of this third phase can best be appreciated in

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Relevance lost and found 539

relation to critical success factors (CSF) . Financial accounting and reporting
practices have traditionally reflected the dominant role which profit assumes
in the marketplace . In this sense profit is , or more correctly was , the critical
success factor . However , in the vastly more competitive marketplace of the
1980s and 1990s , although sustained profitability remains the ultimate goal of
corporations , the means of its attainment are much more varied , and , more
significantly , increasingly important . Thus it is vital that corporations recog-
nize the prospectus of CSFs which is available to them , and are able to
measure , report and act on those selected . Consequently , as well as being
concerned with sales and margins , it is necessary to have information on
production times , component commonality , quality initiatives , customer
satisfaction , customer service activity , employee skill development , employee
involvement , employee turnover , in fact any element of performance which
might be related to success in the market place .

Even this short list of CSFs demonstrates their various disciplinary origins ,
together with their ‘‘softer’’ , i . e . predominantly qualitative , character . Their
integration , and the manner in which this reflects the dominance of an
accounting mode of management reporting , is well-exemplified by the
management reporting regime known as the balanced scorecard (Kaplan and
Norton , 1992 , 1993 , 1996 ; Atkinson et al. , 1995) . The term ‘‘balanced’’ reflects
the objective of reporting to stakeholders other than the owners of the
business , as well as in ways quite dif ferent to financial reporting . Kaplan and
Norton’s balanced scorecard includes a financial perspective together with
customer , internal business , and innovation and learning perspectives . The
customer perspective accounts for issues such as quality , lead times , re-
liability and customer service , particularly as these are reflected in customer
satisfaction , repeat business , referrals , etc . The internal business perspective
is also concerned with some of these issues as well as productivity and
component commonality . Crucially , there is a recognition that the wider
workforce is a vital stakeholding group whose skills and commitment to the
organization cannot be taken for granted . It must also be accounted for . In this
way the balanced scorecard literature refers enthusiastically to employee
empowerment strategies . The fourth perspective , that of innovation and
learning , is concerned with the dynamic aspects of strategic positioning , i . e .
continued performance improvements and the capacity to introduce success-
ful new products / services . This reflects the need to sustain a strategic position
in the marketplace , in order to create value for its shareholders , provide
challenging employment opportunities for its workforce and enjoy a sustained
partnership with customers , both corporate and consumers . It is therefore
imperative that an appropriate range of metrics exists to incorporate the
future into any mature reporting regime .

The Advent of Critical Accounting

Alongside the development of accounting for strategic positioning , manage-
ment accounting has played host to a second substantial project , the critical
accounting project . Although misleading to claim that management account-
ing has been the sole proving ground for this project , it has been its principal

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R . Roslender 540

one . In this way the coming of critical accounting might be viewed as the third
phase in the social scientization of the management accounting discipline .
The first phase occured in the 1950s with the adoption of a range of social and
industrial psychological insights , giving rise to the behavioural accounting
tradition . In the early 1970s a more widely focused organizational tradition
emerged , one heavily reliant on systems and contingency theories . The move
from an individual to an organizational perspective was underpinned by a
greater emphasis on sociological insights . Sociology continued to play a
major role in the third , critical accounting phase , reflecting a shift in emphasis
from an organizational to a more social theoretic perspective on accounting .
In this light it is possible to of fer a general definition of critical accounting as a
concern with the conditions and consequences of accountancy viewed as a
set of technical practices , and as a major societal institution .

Critical accounting does not provide a singular perspective on accountancy ,
however . As with the discipline of sociology which provides a major
underpinning , critical accounting embraces a (growing) range of ways of
seeing . At its inception , particularly in the case of management accounting ,
there was great interest in the value of an interpretive sociology . This was in
contrast to the essentially positivistic approach of fered by behavioural
accounting , one not seriously challenged by the organizational perspectives of
the 1970s . A concern with meaning rather than function , process rather than
structure , action rather than system , understanding rather than prediction ,
and with case studies rather than testing theories (or laws) characterized the
social constructionist perspective in accounting research . Like the other
variants of interpretive sociology , e . g . symbolic interactionism , eth-
nomethodology , phenomenological sociology , social constructionism chall-
enges positivistic social scientific approaches on epistemological grounds ,
claiming to of fer a genuinely social scientific alternative , one based in a
hermeneutic methodology (hence references to hermeneutic rather than
interpretive sociology) . Constructionism continues to serve many critical
accounting researchers well , either in its Weberian formulation , or in subse-
quent developments such as Giddens’ structuration theory or Callon and
Latour’s processual sociology .

A significant number of those interested in creating a critical accounting
project were attracted by the promise of a third sociology . In the mid 1960s ,
the Weberian interpretive alternative to the dominant positivistic structural
functionalism associated with Parsons was itself challenged by sociologists
who took Marx as their intellectual inspiration . Where Weberian sociology
sought only to address the epistemological limitations of structural functiona-
lism , a Marxist sociology focused on its politically conservative , i . e . regula-
tory , undertones . Marxist sociology openly sought to contribute to the
overthrow of the capitalist order , developing understanding for the purpose of
promoting social change . Marxist accounting scholars were the beneficiaries
of 20 years of theoretical development as they began to fashion their
contributions to the critical accounting project . At least three Marxist perspec-
tives have been employed by those associated with this tradition of research
and scholarship : political economy with its holistic and structural …

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The Rise and Fall of Management Accounting [2]
Johnson, H. Thomas; Kaplan, Robert S.
Management Accounting; Jan 1987; 68, 7; ABI/INFORM Global
pg. 22

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short term profit goals can be reach simpily by reducing expedutury. thus, it canlead to decrease in the long run investment. monthly statments using practice can increase profit at expense of long term economic health of the firm

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managment accounting play a role in masuering quality of cost

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Accounting relevance to management

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