Accounting relevance to management

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Attachment 1

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



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


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 .


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

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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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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.

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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


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


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 …

Attachment 4



pp. 11–20


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




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]


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.


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

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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



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” 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



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 …

Attachment 5

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





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.

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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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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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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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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

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-



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/


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


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

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-


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

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 …

Attachment 6

The importance of accounting relatively to decision making

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


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.