View
218
Download
2
Category
Tags:
Preview:
Citation preview
November 2005 10th WCARS - Rutgers
Multi-Dimensional Accounting Information Systems and Continuous Assurance
Richard B. DullClemson University
David P. TegardenVirginia Tech
November 2005 10th WCARS - Rutgers
“Not a great many substantive problems, however, are exclusively two dimensional. Indeed, the world is generally multivariate.”
-Edward Tuftefrom Visual Explanations (1997)
November 2005 10th WCARS - Rutgers
Purpose of AIS
Accumulate data
Support decision-makers
November 2005 10th WCARS - Rutgers
Today’s Environment
• Timely information
• Decision-relevant information
(Meaning– Timeliness of complete, valid and correct
information capture– Timeliness of reporting what users want)
November 2005 10th WCARS - Rutgers
Two Dimensional Accounting
• Double Entry– Excellent system for the technology available
15th century . . .– Historically based– Difficult to accumulate and summarize as
organizations have expanded– Usefulness of information provided has not
kept pace with demands of decision-makers
November 2005 10th WCARS - Rutgers
Today’s Technology
• Ubiquitous networks– Interconnected organizations
• Enterprise systems– Capturing events– Movement from transaction entry
• XBRL– Potentially: easy to use information instances
on-demand
• Emerging interest in continuous assurance
November 2005 10th WCARS - Rutgers
Moving from double entry
• Triple entry (Ijiri)
• REA (McCarthy, and extensions)
November 2005 10th WCARS - Rutgers
Adding dimensionality
• Benefits– Decisions are typically multidimensional
• Easier to map from data to decision– Difficult to express multidimensional problems in two
dimensional terms
November 2005 10th WCARS - Rutgers
Triple Entry/Momentum Accounting
• Progression of dimensions:– One dimension
stock accounts (assets and liabilities)
– Two dimensions flow = change in stock accounts (revenues and
expenses)
– Three dimensions change in flows (rate of flow changes)
November 2005 10th WCARS - Rutgers
Momentum Accounting
• Basic component Wealth (net value of stock accounts)
• Momentum = W/t– Rate of wealth change
• Force = 2W/t2
– Rate of momentum change (impulse)
November 2005 10th WCARS - Rutgers
Recognition issues
• Not simple, but not impossible to address
• Current examples– Fixed asset lives– External confirmation– Historical cost/pricing– Attorney rep letters– Stock options – . . .
November 2005 10th WCARS - Rutgers
Prototypes in literature
• Ijiri (1989)
• Olders (1995)– Additional information increases earnings
prediction accuracy
November 2005 10th WCARS - Rutgers
Organizational relevance
• Single-entry– Agriculture era– Labor principle technology
• Double-entry– Industrial era– Professional management– Income information needed for owners and
creditors
November 2005 10th WCARS - Rutgers
Organizational relevance (cont.)
• Triple-entry– Information era– Computer dominant tool– Product life-cycles reduced– Rate of change is relevant– Organizations are not static
November 2005 10th WCARS - Rutgers
Simple example
• Asset purchase for $12,000 cash (10 year life)Debit Credit
Fixed Assets 12,000
Cash 12,000
If no incremental income is generated, the purchase would reflect a reduction of earnings momentum by $100/month for 10 years.
November 2005 10th WCARS - Rutgers
If the organization is “alive”. . .
. . .or operating in a continuous state, then the monitoring to support assurance should operate continuously.
Annual assurance is not enough.
November 2005 10th WCARS - Rutgers
Medical Example
• Medical monitoring may vary from infrequent, to annual, to constant monitoring, depending on the risk associated with an issue.
• Organizational monitoring should vary, depending on the risk associated with the process.
November 2005 10th WCARS - Rutgers
Continuous Assurance
“An uninterrupted declaration intended to give confidence”
• Research must address two aspects– Risk of problems with a process– Objectives of assurance to be provided– How assurance can be uninterrupted
November 2005 10th WCARS - Rutgers
Analytical Procedures
• Traditional– Changes from prior year balances– Relative percentages
• How will these work in a continuous environment? Adaptation?
November 2005 10th WCARS - Rutgers
• New procedures must be developed based on expectations– Continuity equations
• Improved expectations– Random walk? Yes, but . . .– Trends can be estimated/projected– To improve analytical procedures the quality
of estimates need to be improved beyond historical, double-entry accounting.
November 2005 10th WCARS - Rutgers
Increasing expectation accuracy . .
• Momentum accounting provides a way to improve on trend estimation, by detecting directional changes of “impulses” and “forces” on the organization’s wealth.
(Dull and Tegarden, 1999)
November 2005 10th WCARS - Rutgers
An example of interpreting MA Information
• Control charts– At the impulse level– As impulses are detected control chart rules
are applied– If significant (non-explained) patterns exist
(data are non-random), investigation is warranted
November 2005 10th WCARS - Rutgers
Chart with non-random pattern
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39
November 2005 10th WCARS - Rutgers
The next step . . .
• Simulate outcomes from MA system• Test vs traditional tools
• Develop analytical equations to determine if results are improved in a multi-dimensional environment
• Move on to address non-financial data, e.g., REA?
November 2005 10th WCARS - Rutgers
Conclusion
• It is time to look at the foundation on which financial accounting stands, and determine if double-entry accounting is relevant in today’s environment.
• Financial reporting and assurance is not two-dimensional – it is time to consider increasing the dimensionality of accounting.
November 2005 10th WCARS - Rutgers
Conclusion (cont)
• 15th and 16th centuries, double-entry accounting spread because of 1) the need for a method of accounting for merchants, 2) the printing press, and 3) the increasing literacy of business people.
• Today, ubiquitous networks and technological literacy can enable the spread of concepts, such as Momentum Accounting, that can provide the information needed to make decisions about today’s organizations.
November 2005 10th WCARS - Rutgers
Contact Information
Rick Dull
rdull@clemson.edu
Or
David Tegarden
dtegarde@vt.edu
Recommended