THE ROLE OF MANAGEMENT AS A USER OF ACCOUNTING INFORMATION: IMPLICATIONS FOR STANDARD SETTING

Transcription

1 Accouning and Managemen Informaion Sysems Vol. 2, No. 2, pp.55 89, 203 H ROL OF MANAGMN AS A USR OF ACCOUNING INFORMAION: IMPLICAIONS FOR SANDARD SING Brigie IRL Universiy of Bamberg, Germany Wolfgang SCHULZ Universiy of Augsburg, Germany ABSRAC he aim of his paper is o analyze he quesion of wheher he sole focus of sandard seers developing accouning sandards ha are useful o exernal users for making decisions abou providing resources o he eniy resul in useful accouning informaion. o answer his quesion, we analyzed he relaionship beween he sewardship funcion of financial accouning and he demand for informaion useful in making economic decisions on resource allocaion (decision -making demand; decision-useful informaion) by exernal invesors. We firs analyse informaion wihin an efficiencybased framework of financial economics absracing from agency conflics. We demonsrae ha decisions on resource allocaion no only require forward-looking, bu also backward-looking performance measures which indicae he necessiy as well as he direcion of correcive acion. Nex, we inroduce informaion asymmeries and incenive problems. In his seing, he sewardship funcion of accouning gains relevance. xernal users now need no only informaion for heir invesmen decisions bu also informaion o use in assessing managemen performance and o gain insigh ino how managemen used he eniy s resources. Since however, managers anicipae he way hey are evaluaed, any accouning informaion used o conrol managemen has an incenive effec and alers managemen s inernal decision-making. herefore, sandard seers canno ignore he incenive effec (sewardship funcion) of financial accouning informaion and he consequence i has for decision- Correspondence address: Universiy of Augsburg, el. +49 (82) ; fax +49 (82) ; address: [email protected].

2 Accouning and Managemen Informaion Sysems making. If sandard seers consider decision-usefulness and sewardship as compaible funcions of accouning, accouning rules need o serve boh funcions simulaneously, ha is, provide informaion ha is useful for invesors for making economic decisions and a he same ime provide incenives for managers o ac in he owners bes ineress. Or, if in fac he wo funcions are considered disinc and incompaible, hen hey mus be separaed and considered explicily. ha is, managers should hen no be held accounable for heir acions based on accouning informaion. INRODUCION Decision-Usefulness, Qualiaive Characerisics, Sewardship, Sandard Seing JL codes: G4, M4, M44, M45, D82 Why do we measure speed when driving a car? We do no need he speedomeer once we have reached our desinaion. We can deermine he ime i ook us o drive a cerain disance by looking a he clock. However, we do need he speedomeer while driving, in order o conrol our driving, no o lose conrol of he car in a curve or exceed a speed-limi. We also wan o evaluae he progress of our journey and compare he disance ravelled o our expecaions. We derive esimaes of he arrival ime from he progress we have made so far by aking ino accoun road condiions and oher facors. his informaion is helpful in making driving decisions. For example decisions relaing o acceleraing or slowing down, overaking, aking an alernaive roue or urning back. In essence, we coninuously measure curren performance which we evaluae agains he background of our experiences and expecaions in order o derive correcive acions. When designing he informaion sysems in a car, neglecing he drivers informaion needs would be derimenal o road safey. Research focusing on hese needs has resuled in imporan innovaions such as he GPS presening he esimaed arrival ime. I is no eviden, however, wheher he same informaion would also be useful for he informaion needs of oher sakeholders (e.g. police, oher road users). his is paricularly rue if he driver serves as an agen (e.g. forwarder, axi) for anoher pary and has conflicing ineress. he principal may wan o insall an informaion sysem ha keeps him informed abou he performance of he agen and which makes he agen ac in he bes ineres of he principal. Can his be done wih he same insrumens? Assume he principal wans o provide incenives for no speeding. He could adjus he speedomeer o show a speed 20% higher han accurae. he driver reads 20 when acually driving 00 km/h and drives slower, as was inended. Bu is his biased measure sill useful for his decision-making? 56 Vol. 2, No. 2

3 he role of managemen as a user of accouning informaion: implicaions for sandard seing In his paper, we analyze he relaionship beween he sewardship funcion of accouning and he decision-usefulness objecive. We argue ha, in pracice, he accouning informaion used for managemen purposes is largely based on financial accouning. Firsly, mos firms avoid keeping separae accouns for managerial and financial accouning due o he coss involved. For example only 5% of German companies deviae from he rules for accouning of inernally generaed inangible asses for purposes of managerial accouning (Rüe & Hoenes, 995). Accordingly, a major argumen in favour of he volunary adopion of inernaional accouning sandards from he perspecive of he preparers of accouning informaion has been is usefulness for managerial purposes (Wagenhofer, 2008). Secondly, even more imporanly, exernal invesors use accouning informaion o assess managemen s performance. Decisions by shareholders in he general assembly abou exoneraing managemen of heir responsibiliies for he pas financial year are based on financial reporing. A manager s success and repuaion are largely based on he firm s performance as measured by financial reporing. Considering exernally repored performance measures for inernal purposes is finally he consequence of a rigorous shareholder value focus (Coenenberg, 995; Haller, 997; Wagenhofer, 2006; Hemmer & Labro, 2008). In addiion, managers variable remuneraion is ofen based on performance as measured by financial accouning. Since managers anicipae he way hey are evaluaed, heir decisionmaking is oriened owards achieving opimal performance as measured by he figures for which hey are held accounable, as suggesed by he famous line Wha you measure is wha you ge!. Hence, any accouning informaion used o assess and conrol managemen has an incenive effec and will be considered by managemen in is inernal decision-making. herefore, using accouning informaion o assess managemen s sewardship will have an impac on managemen s decisions. However, he incenive effec of financial accouning and is implicaions for informaion ha is useful for economic decision-making by exernal invesors has no ye been given special consideraion by accouning sandard seers. Boh, he IASB and FASB regard in heir frameworks he sewardship funcion of accouning o be par of he overall objecive of providing informaion ha is useful in making decisions o devoe resources o he eniy (IASB, 200: F -BC.27; FASB, 200: BC.27). Accordingly, boh boards consider he sewardship funcion and economic decision-making o be compaible accouning objecives, bu do no give he incenive effecs of accouning special consideraion. In his paper we discuss he role of accouning informaion for managerial users. We firs analyze he informaion requiremens of managers for heir decisionmaking in he absence of agency conflics. his approach akes ino accoun ha wih few excepions, he informaion imporan o managemen in managing he business is he same informaion ha is imporan o invesors in assessing performance and fuure prospecs (IASB, 2006b: noe 48; similar Guenag, 2004: Vol. 2, No. 2 57

4 Accouning and Managemen Informaion Sysems 69-72). Hence, he informaion managemen has available for is inernal purposes may be highly relevan for exernal financial saemen users as well. As suggesed by he purpored managemen approach (e.g. in IFRS 8 or ASC 280) an abiliy o see an enerprise hrough he eyes of managemen enhances a user s abiliy o predic acions or reacions of managemen ha can significanly affec he enerprise s prospecs for fuure cash flows (FASB, 997: Appendix A, noe 60). ven hough he IASB and FASB o dae do no explicily consider managemen s informaion requiremens in is sandard seing (IASB, 200: OB9; FASB, 200: SFAC 8, OB9), in laer phases of he framework projec he IASB will consider wheher managemen s perspecive or inenions should influence recogniion and measuremen of financial saemen elemens or wheher informaion in financial repors should be presened in a way ha is consisen wih managemen views of he business (IASB, 2008: BC.34). We argue ha, in he absence of agency conflics, accouning largely serves he informaion needs of managerial owners. his perspecive allows us o concenrae on wo cenral qualiaive characerisics of useful accouning informaion: predicive abiliy and feedback value. Our analysis shows ha he usefulness of accouning informaion in his seing is largely derived from he feedback value of informaion. Performance is measured on an ongoing basis in order o provide imely informaion for managemen as he basis for correcive acion. We hen inroduce informaion asymmeries and incenive problems. Firs, we consider inernal agency conflics and second, we discuss he separaion of ownership and conrol as a facor of influence on he characerisics of informaion. he lieraure on principal-agen conflics provides rigorous findings on he characerisics of incenive compaible accouning sandards (e.g. Dua & Reichelsein, 2005) as well as decision-useful accouning rules (Rogerson, 2008; Rajan & Reichelsein, 2009). Boh ses of accouning rules are differen from each oher and differen from he properies defined by he IASB and FASB for decision-useful accouning informaion. Accordingly, informaion ha is useful for economic decision-making may no necessarily be useful for sewardship purposes in a way ha i simulaneously ses he righ incenives for managemen o ac in he bes ineres of he owners and vice versa. Consequenly, sandard seers need o be clear on he objecives of financial accouning. Boh decision-usefulness and sewardship are regarded as compaible funcions of accouning. Consequenly, accouning rules need o serve boh funcions simulaneously: provide informaion ha is useful for invesors for making economic decisions and a he same ime provide incenives for managers o ac in he bes ineres of owners. If however, he wo funcions are disinc and incompaible, hen hey mus be separaed and considered independenly. ha is, managers should hen no be held accounable for heir acions based on accouning informaion and accounabiliy would need o be assured by oher means han accouning in order o avoid derimenal incenive impac. 58 Vol. 2, No. 2

5 he role of managemen as a user of accouning informaion: implicaions for sandard seing he paper is organized as follows: Secion provides a lieraure review on he usefulness of accouning informaion. he following secion analyses he IASB s and FASB s concepual frameworks wih respec o saed accouning objecives and he users of financial informaion. In secion 3, we discuss he differen funcions of accouning from a heoreical poin of view o derive he resuling properies of useful informaion. We presen a hree-sep-approach o analyzing accouning informaion wihin a framework based on financial economics and agency heory. he las secion provides a summary of he findings and conclusions are drawn for use in sandard seing.. H USFULNSS OF ACCOUNING INFORMAION: RVIW OF H LIRAUR ven hough general agreemen exiss among accouning heoriss ha he cenral purpose of financial accouning is he sysemaic provision of economic daa abou reporing eniies, a single, comprehensive, universally acceped accouning heory does no exis a he presen ime (AAA, 977: ; Riahi-Belkaoui, 2004: 83). Due o differences in he way heoriss specify users as well as he preparer-user environmens, a variey of heories of exernal reporing have been developed (AAA, 977: ). Wih respec o he decision-usefulness heory, generally wo principal heoreical approaches are of major relevance: () he classical rue income approach and (2) he informa ional perspecive explicily recognizing he usefulness objecive... Classical rue Income approach Based on economic heory of he firm, rue income accouning heoriss aemped o deermine economic income which is defined as he change in he wealh of he firm over a cerain period of ime (Beaver, 989: 4; Riahi -Belkaoui, 2004: 0). Under condiions of perfec and complee markes, economic income no only reflecs he effecs of managemen s decisions in he curren year, bu also incorporaes fuure effecs ino his year s measure of performance (Beaver, 989: 4). his has appealing properies from a sewardship perspecive. hese heoriss aemp o formulae generally accepable policy recommendaions assuming similar needs for all ypes of users (AAA, 977: 8; Serling, 970: 54) or, respecively, general properies relaed o every course of acion (Chambers, 966: 55). In mos cases curren (marke) values are considered o be he mos adequae measures of economic wealh/income among hese economic income heoriss (Chambers, 966: 50; dwards & Bell, 967: 90-09; Serling, 970: 89). Vol. 2, No. 2 59

6 .2. Informaional perspecive Accouning and Managemen Informaion Sysems In he lae 960s heoreical approaches shifed from measuring economic income o an informaional perspecive emphasizing ha financial saemens should provide decision-useful informaion (Beaver, 989: 4-5). Nowadays decisionusefulness is he well esablished, cenral objecive of financial accouning, in heory as well as in sandard seing (Beaver e al., 968: 678; Saubus, 2004; Saubus, 2000: 33) and is he subjec of many research sudies..3. Normaive qualiies of useful accouning informaion Normaive qualiies necessary for accouning informaion o be useful are a cenral issue in he academic lieraure on decision-usefulness. ven before he decisionusefulness objecive was officially adoped by he FASB or IASB, and before i was explicily recognized by accouning heoriss, several normaive qualiies of financial informaion were discussed in he lieraure (see for example AAA, 955; Mooniz, 96; Sanders e al., 938; Sprouse & Mooniz, 962; Vaer, 963: 88-94). Discussions on he crieria of useful informaion achieved prominence in accouning heory in he mid-960s (s ee for example Ijiri & Jaedicke, 966; Snavely, 967) when a commiee of he American Accouning Associaion sared o work on a saemen of basic accouning heory (AAA, 977: 5). Various facors ha presumably generae good accouning informaion have been idenified, for example: imeliness, accuracy, relevance, reliabiliy (verifiabiliy), maerialiy, undersandabiliy, significance, pracicaliy, comparabiliy ec. (see for example AAA, 955; Hampon & Karadbil, 968: 20-23; Ijiri & Jaedicke 966: 475; Snavely, 967). Some auhors ried o develop a hierarchy of qualiies (as for example Snavely, 967), an approach also finally aken by he FASB and he IASB when developing heir (concepual) frameworks. According o he IASB s and FASB s frameworks useful financial informaion is made up of wo primary qualiaive characerisics: relevance and faihful represenaion (IASB, 200: F-QC5; FASB, 200: SFAC 8, QC5). hus, according o he FASB s and IASB s presen frameworks one primary qualiaive characerisic of informaion needed o be decision-useful is relevance. From an economic perspecive, an informaion sysem is useful if i affecs he economic decisions of users (Saubus, 970: 07, Wagenhofer & wer, 2003: 56). his is also he definiion applied by he IASB and he FASB: Relevan financial informaion is capable of making a difference in he decisions made by users (IASB, 200: F-QC6-7; FASB, 200: SFAC 8, QC6-7). herefore financial informaion is considered o make a difference in decisions if i has predicive value, confirmaory value, or boh (IASB, 200: F-QC6-7; FASB, 200: SFAC 8, QC6-7). hus, he definiion indicaes he predicive and confirmaory role (i.e. predicive and/or feedback value) of relevan accouning informaion. According o he IASB and FASB he predicive and confirmaory value of accouning 60 Vol. 2, No. 2

7 he role of managemen as a user of accouning informaion: implicaions for sandard seing informaion are inerrelaed since rerospecive informaion can be used o derive forecass and o correc and improve he forecas process (IASB, 200: F -QC0; FASB, 200: SFAC 8, QC0). he predicive role of accouning informaion is also sressed by Beaver e al. (968) who recommended he use of predicive abiliy as a crierion for evaluaing alernaive accouning mehods. According o he IASB s and FASB s frameworks, relevance is only one crieria for decision-usefulness. Useful informaion also requires a faihful represenaion of he phenomena ha i purpors o represen (IASB, 200: F-QC2; FASB, 200: SFAC 8, QC2). According o he IASB and he FASB informaion is faihfully represened if i is complee, neural and free from error (IASB, 200: F-QC2; FASB, 200: SFAC 8, QC2). he verifiabiliy of informaion is no explicily required for a faihful represenaion, since many forward-looking esimaes are ofen no direcly verifiable bu are neverheless regarded as very useful (IASB, 200: BC3.36; FASB, 200: BC3.36). herefore, he sandard seers define verifiabiliy only as an enhancing qualiaive characerisic in heir frameworks (IASB, 200: F-QC26; FASB, 200: SFAC 8, QC26). Faihful represenaion and relevance ofen impinge on each oher and herefore can have conradicory effecs on he usefulness of informaion. he IASB and he FASB herefore sugges following a decision process for applying he fundamenal qualiaive characerisics: Firs, idenify a relevan economic phenomenon ha is regarded as useful for he users of he eniy s financial informaion. Second, idenify he ype of informaion ha is considered as mos relevan and hird, specify wheher his informaion is available and can be faihfully represened. If he informaion is no available and/or canno be represened faihfully he process needs o be reproduced wih he nex mos relevan ype of informaion (IASB, 200: F-QC8; FASB, 200: SFAC 8, QC8). As various consiuencies have differen decision-making conexs and uiliy funcions regarding he relevance and faihful represenaion of accouning informaion, he benefis from repored accouning informaion will differ for differen users (Holhausen & Was, 200: 26). From an informaion economics perspecive i is herefore generally no possible o se normaive accouning sandards, i.e. o esablish an accouning sysem ha is regarded as opimal by all individuals or paries affeced (Demski, 973). hus, any evaluaion of accouning alernaives is no possible wihou specifying he decision-seings and he decision maker s preferences (Liang, 200: 23; Ohlson, 975: 267). Consequenly, choices beween financial reporing mehods usually involve value judgemens and are herefore quie ofen poliical (Beaver, 989: 53). he IASB and FASB herefore limi heir focus on decisions abou providing resources o he eniy, including decisions o buy, sell or hold equiy and deb insrumens and graning or seling loans and oher forms of credi (IASB, 200: F-OB2; FASB, 200: SFAC 8, OB2). xising and poenial invesors, lenders, and oher crediors are regarded as primary users of general purpose financial saemens (IASB, 200: F-OB5 and F- Vol. 2, No. 2 6

8 Accouning and Managemen Informaion Sysems BC.6; FASB, 200: SFAC 8, OB5 and BC.6). However, because invesors, lenders and oher crediors are no a homogenous group wih idenical decisionmaking seings and preferences, i is impossible o derive an opimal accouning sysem. herefore, i is necessary o make resricive assumpions on decisionseings and user s preferences in order o be able o asser differen financial accouning alernaives wih respec o heir decision-usefulness. Boh boards herefore, coninue explaining ha in developing financial reporing sandards hey will aemp o provide he informaion se ha will mee he requiremens of he maximum number of exising and poenial invesors, lenders, and oher crediors aking cos and benefis ino accoun (IASB, 200: F-OB8 and F-BC.8; FASB, 200: SFAC 8, OB8 and BC.8). A large porion of empirical research devoed o idenifying he ype of accouning informaion ha fulfills he decision-usefulness crierion invesigaes he associaion beween capial marke figures and financial accouning daa. he lieraure on conracing heory and accouning also applies agency heory o accouning issues. I deals primarily wih wo issues. he use of accouning based performance measures in compensaion conracs (e.g. Bushman e al., 2006; Bushaman & Indjejikian, 993; Indjejikian, 999; Lamber, 200: 4-47; Lamber & Larcker, 987; Merchan, 2006; Paul, 992) and necessary modificaions of accouning sandards from an incenive perspecive. In his conex, accouning rules are se o provide incenives for managemen o ac in he bes ineress of he owners. For example, depreciaion schedules, invenory accouning and consrucion conracs, have been sudied o idenify rules producing performance measures ha will induce managemen o make invesmen decisions ha creae shareholder value (Dua & Reichelsein, 2005; Rogerson, 997, Reichelsein, 997, 2000; Wagenhofer, 2003). I is no clear, however, if such (so-called goalcongruen) accouning rules wih sewardship value are useful for oher purposes of accouning as well, i.e. wheher hey provide equally relevan informaion for decision purposes of exernal users. Gjesdal (98), for example, demonsraes ha informaion required for decision purposes may no be compaible wih informaion required for sewardship purposes. he lieraure primarily akes a number of differen perspecives in examining he usefulness of accouning informaion: he usefulness of accouning informaion for economic decision purposes wih papers analyzing he normaive qualiies of decision-useful informaion, empirical papers invesigaing he relaion beween marke figures and accouning figures and he usefulness of accouning informaion from an incenive perspecive explicily aking ino accoun principal-agen conflics. By focusing mainly on qualiaive characerisics of decision-useful informaion on capial markes on he one hand and agency conflics on he oher, he connecion beween he wo has been largely negleced in research. In he following discussion we consider he inerrelaionship of he wo funcions and he implicaions for sandard seing. 62 Vol. 2, No. 2

9 he role of managemen as a user of accouning informaion: implicaions for sandard seing 2. OBJCIVS OF FINANCIAL RPORING IN H IASB S AND FASB S FRAMWORK AND IMPLICAIONS FOR H ACCOUNING SYSM 2.. he uses and users of financial accouning informaion According o he IASB s and FASB s framework he major objecive of financial reporing is o provide informaion ha is useful o exising and poenial invesors, lenders, and oher crediors in making decisions abou providing resources o he eniy (IASB, 200: F -OB2; FASB, 200: SFAC 8, OB2). By defining he objecives of financial reporing, he FASB and IASB sress ha financial reporing should assis users in evaluaing he amouns, iming, and cerainy of fuure cash flows (IASB, 200: F-OB3; FASB, 200: SFAC 8, OB3). For ha purpose users need informaion abou an enerprise s economic resources, claims, and informaion on how he managemen and governing board have fulfilled heir responsibiliies o efficienly and effecively use he eniy s resources (IASB, 200: F -OB4; FASB, 200: SFAC 8, OB4). hus, he boards acknowledge ha decisions on providing resources o an eniy encompass decisions on resource allocaion as well as on managemen s sewardship (IASB, 200: F-OB4 and F-BC.27-28; FASB, 200: SFAC 8, OB4 and BC.27-28). However, due o ranslaion problems resuling from differing views on he meaning and implicaions of sewardship he boards decided no o refer o he erm sewardship in heir frameworks and insead describe wha sewardship embraces according o heir view (IASB, 200: F-BC.28; FASB, 200: BC.28). From he responses received in he due process i became clear ha differing views exis on he sewardship funcion of accouning informaion. While some consiuencies argued ha informaion required o evaluae how managemen has discharged is sewardship responsibiliies is no necessarily useful for economic decision-making ohers considered he sewardship objecive o be par of he decision-usefulness objecive (IASB, 2006a: BC.32-BC.35). he IASB and FASB finally agreed in heir discussion paper (IASB, 2006a: BC.36) w ih he laer view regarding he sewardship objecive o be included in he overall objecive of providing useful informaion for resource allocaion decisions. However, in his regard he boards also clarified ha financial reporing is neiher conceived o direcly provide informaion abou he performance of he managemen nor o provide informaion ha is specifically designed o be useful for conracual agreemens (IASB, 2006a: BC.37-.4). I seems from he discussion above ha he IASB and FASB generally consider decision-making and sewardship as compaible objecives. By defining invesors, lenders and oher crediors as he primary user group he FASB and IASB follow a sakeholder perspecive regarding no only invesors bu also employees, lenders, suppliers and oher rade crediors as major users of financial informaion (IASB, 200: F -BC.0; FASB, 200: SFAC 8, BC.0). Alhough he boards also recognize managemen s general ineres in using Vol. 2, No. 2 63

10 Accouning and Managemen Informaion Sysems informaion provided by financial accouning (IASB, 200: F-OB9; FASB, 200: SFAC 8, OB9) hey conclude ha financial reporing is likely o only parly mee managemen s requiremens (IASB, 200: F -BC.9; FASB, 200: SFAC 8, BC.9). In addiion, since managers are able o obain he financial informaion hey need inernally, general purpose financial reporing need no explicily be direced o managemen s requiremens (IASB, 200: F -BC.9; FASB, 200: SFAC 8, BC.9). Hence, he IASB and FASB do no specifically address he incenive effecs resuling from he sewardship funcion of accouning on inernal decision-making and is implicaions for decision-useful accouning sandards. As can be seen from he analysis above, he IASB and FASB () regard informaion for assessing managemen s sewardship o be par of he overall objecive of providing decision-useful informaion, and (2) do no give special consideraion o how he sewardship funcion of accouning may resul in incenive effecs for managemen o aler managemen s inernal decision-making and he resulan consequences on wha consiues decision-useful informaion for exernal invesors. his has far reaching consequences. he sewardship objecive and he decision objecive migh no be compaible and hence imply differen requiremens. By focusing only on exernal users and heir informaion requiremens he developed accouning sandards lose heir relevance for inernal managemen purposes. As a consequence, financial reporing has diverged from managemen accouning, even hough boh sysems generally derive heir informaion from he same daabase he organizaion s bookkeeping sysem (Hansen & Mowen, 994: 5) and managemen accouning is in pracice largely based on financial accouning. In addiion, by ignoring managemen s informaion needs as a saring poin for developing accouning sandards, he IASB and FASB disregard he fac ha informaion considered useful for managemen decisions may be highly relevan for exernal financial saemens users o assess fuure cash flows he divergence of accouning from a hisorical perspecive he beginnings of basic modern managemen accouning can be raced back o he 4 h and 5 h cenuries when in Ialy he double-enry bookkeeping emerged (Hampon & Karadbil, 968: 2). Wih he growh in naional and inernaional business aciviies and diversificaion, cash managemen proved ineffecive and merchan raders (as for example he Fugger in Germany) experienced an increasing demand for a more elaborae accouning sysem providing accouning informaion on heir economic affairs. hus, in he beginning, accouning was exclusively developed for he inernal needs of he managemen and he sole funcion for keeping accouns was o generae financial informaion on he financial performance of he business for he owner-manager (Hampon & Karadbil, 968: 3; Coenenberg, 995: 2077; Vhen, 929: 69; Lileon & 64 Vol. 2, No. 2

11 he role of managemen as a user of accouning informaion: implicaions for sandard seing Zimmerman, 962: 49-50) o assis inernal decision-making and conrol (performance evaluaion). However, as businesses developed from family-owned enerprises o large and complex corporae eniies wih ouside invesors, he role of accouning changed. he developmen of verically inegraed and diversified businesses, ofen wih foreign branches, resuled in inernal principal-agen conflics which creaed a demand for planning and evaluaing he performance on differen organizaional levels respecively for differen branches (Kaplan, 984: ; Lileon & Zimmerman, 962: 5-52). A similar process occurred a he boundaries of he firm: owners were increasingly removed from managemen aciviies and professional managers were appoined insead (Hampon & Karadbil, 968: 3). Since managemen and owners became separae groups, principal-agen conflics emerged and he funcion of reporing accouning informaion o ouside invesors was added o ha of recording and reporing daa for he owner-manager use (Paon & Lileon, 967: ). 2 Finally, financial accouning (reporing) regulaion evolved o proec ouside invesors such as shareholders and crediors (as well as oher sakeholders) (Hampon & Karadbil, 968: 3). Wih he increasing developmen of financial reporing regulaion direced owards he proecion of ousiders, financial reporing and managemen accouning evolved o become wo separae sysems due o assumed differences in he users and uses of financial accouning informaion. Major argumens for disinguishing beween financial reporing and managemen accouning as illusraed in he lieraure are summarized below. A cenral difference beween he wo accouning sysems of financial and managerial accouning relae o verifiabiliy. he usefulness of informaion o users ouside he business will be increased if he informaion is verifiable. herefore, an enhancing qualiaive characerisic of financial accouning informaion is verifiabiliy (IASB, 200: F-QC26; FASB, 200: SFAC 8, QC26; for furher discussion see e.g. Benson e al., 2006: 20-22). Verifiabiliy helps o ensure ha financial informaion faihfully represens wha i purpors o depic (IASB, 200: F-QC26; FASB, 200: SFAC 8, QC26). Accordingly, informaion is verifiable if differen knowledgeable and independen persons can reach consensus ha a specific depicion is a faihful represenaion. For inernal managemen purposes, in conras, i is assumed ha a lower degree of verifiabiliy is sufficien and ha accouning informaion can herefore be more subjecive and judgmenal (Akinson e al., 2004: 5). his argumen however neglecs inernal agency conflics e.g. beween op managemen and divisional managers resuling from decenralizaion. For example, for planning and conrol purposes op managemen is relian on he informaion repored by is divisional managers. Furher differences are assumed o exis regarding he imeliness of he provided informaion. Depending on he legislaion in place, financial saemens are Vol. 2, No. 2 65

12 Accouning and Managemen Informaion Sysems provided annually, half yearly or quarerly. herefore, resuls are generally repored wih a delay (Akinson e al., 2004: 5; Hansen & Mowen, 994: 5). o be useful as a ool for effecive decision-making, accouning daa mus be imely. his does no however preclude financial and managemen accouning being based on he same accouning sysem and daa repored less ofen o ousiders. A furher disadvanage of financial accouning informaion is ha i is in mos insances hisorical. 3 Managerial accouning informaion in conras mus be fuure orienaed raher han merely measuring pas performance (Akinson e al., 2004: 5; Hampon & Karadbil, 968: 364; Hansen & Mowen, 994: 5). However, he same scenario holds for exernal users of accouning informaion. As shown by he research, exernal users find forward-looking informaion, especially forecased financial and operaing daa, equally relevan for making economic decisions (AICPA, 994: 29-30). Reporing such forward-looking informaion does however raise concerns regarding is verifiabiliy (AICPA, 994: 30; AICPA, 973: 46). hus, he focus of financial reporing on hisorical informaion seems primarily o be a quesion of verifiabiliy raher han of relevance. Addiional differences purporedly exis wih respec o he naure of he informaion required. For inernal planning and conrolling purposes frequenly non-financial, physical measuremens are used in addiion o financial informaion. xernal financial reporing in conras is primarily based on financial measures (Akinson e al., 2004: 5). Ijiri (995: 6) disinguishes beween resource managers, having he ask of ensuring efficien operaions and maximizing individual projec reurns, and capial managers, who have he responsibiliy of raising capial and deciding on capial allocaion among projecs o maximize oal reurn. Differen informaion requiremens are assumed as capial is absrac, aggregaed and homogenous, while resources are concree, disaggregaed, and heerogeneous (Ijiri, 995: 6). However, since he double -enry bookkeeping sysem records resources and capial in andem, i is able o provide informaion for boh capial managers and resource managers (Ijiri, 995: 6). Addiionally, curren developmens indicae ha non-financial informaion is also regarded highly relevan for exernal users (AICPA, 994: 26-27; Rees & Sucliffe, 994; Lev & Zambon, 2003; for conradicing resuls see Riley e al., 2003). Finally, he scope of he generaed informaion is differen beween managemen accouning and financial reporing. xernal users are ineresed in evaluaing he organizaion s managemen performance as a whole for purposes of decisionmaking. he informaion provided in financial repors herefore is highly aggregaed (Hansen & Mowen, 994: 5; Akinson e al., 2004: 5). For managemen purposes hese aggregaed daa are no sufficien. he subjec of managerial decisions, planning and conrol processes does no only relae o he enire organizaion, bu also smaller unis such as producs, produc lines, cusomers, deparmens, or divisions. herefore, more deailed accouning daa are generally required for managerial accouning purposes (Ijiri, 995: 62). In addiion, inernal 66 Vol. 2, No. 2

13 he role of managemen as a user of accouning informaion: implicaions for sandard seing decision-making and analysis of cause-and-effec relaionships can require very specific models and accouning informaion. I can be useful (especially in he shor run) o disinguish beween fixed and variable coss and also ake opporuniy coss ino accoun, o make sure ha all relevan effecs are adequaely capured (Coenenberg, 995: ). For inernal decision-making purposes herefore, financial accouning informaion is regarded as no being adequae. However, when comparing he informaion needs of board members and op execuives wih ouside invesors similar requiremens can be assumed since boh are considered as capial managers ineresed in a firm s oal reurn (Guenag, 2004: 76; Ijiri, 995: 6). herefore, he exen o which managemen accouning differs from financial accouning iner alia, srongly depends on he financial reporing regulaion in force. More specifically, he underlying assumpions of he objecives and users of financial accouning informaion influence significanly he conen of sandards and hus he compaibiliy wih inernal informaion needs. he objecives of financial reporing as well as he principal users ha are defined in accouning regulaion, impac he developmen of accouning principles and hence he usefulness of he generaed financial accouning informaion for inernal decisionmaking and conrol purposes. In Germany, for example, financial accouning serves no only informaion purposes bu is also used as a basis for deermining dividend paymens and axable profis. o ensure credior proecion, accouning regulaion pus significan emphasis on he prudence principle, resuling in accouning informaion ha does no always adequaely reflec economic realiy. his srongly impairs he usefulness of financial reporing informaion for managemen accouning purposes. In Germany, managemen accouning has herefore, evolved o become somewha separae from financial reporing. In he USA in conras, where financial reporing has radiionally had he purpose of providing decision-useful informaion for he invesors, financial accouning is more complian wih managemen accouning requiremens (Haller, 997: ). In Germany, he applicaion of US-GAAP and IFRS is herefore regarded as an opporuniy o reduce he separaion beween managemen and financial accouning and reach convergence beween he wo accouning sysems (see e.g. Haller, 997). In addiion, he exen o which managemen accouning differs from financial accouning is no only subjec o he regulaions in force bu is also subjec o quesions relaing o cos-benefi facors. I can be cosly o mainain wo differen accouning sysems. For his reason, smaller eniies in paricular frequenly use financial accouning informaion, produced for exernal users as required by legislaion, for inernal managerial purposes (Barker & Noonan, 996: 9; Carsberg, e al., 985: 6; Collis & Jarvis, 2000: 56-62). Vol. 2, No. 2 67

14 Accouning and Managemen Informaion Sysems In summarizing we conclude ha he IASB as well as he FASB largely ignore managerial informaion requiremens in he process of sandard seing. his may lead o financial accouning informaion ha is of minor relevance for managemen purposes. he consequence is ha managerial and financial accouning become and remain separae sysems, as hisory has already shown. he quesion hus arises, wheher his separaion beween managemen accouning and financial accouning is ineviable, or wheher i is he resul of an inappropriae sandard seing focus. Is i possible o achieve convergence beween managemen accouning and financial reporing by giving managemen s informaion requiremens greaer consideraion in he sandard seing process? Will his lead o accouning informaion ha is also useful for exernals? o address hese quesions, we discuss he usefulness of accouning informaion for boh exernal users and an enerprise s managemen. 3. QUALIAIV CHARACRISICS OF USFUL INFORMAION o be able o provide useful informaion, i is necessary o deermine he meaning of useful in his conex. In general, informaion can only be considered useful if i serves is inended purpose. In he following discussion we examine he funcions of accouning and he resuling properies of useful informaion. We presen a hree-sep-approach o analyzing accouning informaion wihin a framework based on financial economics and agency heory. 3.. Objecives of accouning As discussed in secion 2. of his paper, according o he FASB s and IASB s frameworks he primary purpose of exernal financial reporing is o provide informaion useful in making decisions abou providing resources o an eniy. his is achieved by providing informaion ha assiss users in evaluaing he amoun, iming, and uncerainy of he firm s fuure cash flows. o assess an eniy s cash flow prospecs users are assumed o need no only informaion abou he resources and claims of an eniy bu also informaion on managemen s and he governing body s performance o use he eniy s resources in an efficien and effecive manner (sewardship funcion) (IASB, 200: F-OB4; FASB, 200: SFAC 8, OB4). he discussion on he differen funcions of accouning and he use of financial accouning for managemen accouning purposes has a long radiion. heoreical research has examined he sewardship versus valuaion role of accouning informaion from he perspecive of informaion economics. Paricularly, he quesion analyzed is wheher informaion needed for invesors o value firms coincides wih informaion required for performance measuremen. Wihin an agency framework, Gjesdal (98) shows ha decision-usefulness and sewardship are disinc funcions of accouning. Consequenly, he lieraure is criical abou 68 Vol. 2, No. 2

15 he role of managemen as a user of accouning informaion: implicaions for sandard seing he use of informaion relevan for decision-making in performance measuremen sysems used for sewardship purposes (e.g. Lamber, 200). Alhough heoreical research recommends he use of disinc accouning informaion for differen purposes, his resul is no empirically valid in pracise. Bushman e al. (2006) find ha valuaion earnings coefficiens and compensaion earnings coefficiens are relaed empirically. ha is, he informaion conen of earnings from boh a value relevance and a performance evaluaion perspecive is posiively relaed. Addiionally, based on he agency framework provided by Gjesdal (98), Bushman e al. (2006) shows ha simple adjusmens o he model assumpions leads o a siuaion in which informaion requiremens of shareholders and managers coincide. Hence, hey conclude ha accouning informaion used by invesors o value he firm can also be opimal from he perspecive of sewardship. Consequenly, researchers have sared o analyze he links of financial reporing regimes wih he informaional properies of opimal managerial accouning sysems (Hemmer & Labro, 2008; Scholze & Wielenberg, 2007). Wheher informaion is of value for decision-making purposes depends on he presumpion of how he users of he informaion make hese decisions. From wha we know abou his process, accouning informaion is used as an inpu o decision models. In financial economics valuaion models are ofen used for his purpose, yielding he inrinsic value of an asse. Ideally, capial allocaion decisions are aken by comparing he asse s inrinsic value wih is curren marke price (Sowe e al. 2002). Applying valuaion models requires he derivaion of forecass from accouning daa which is done based on is pas performance. he firm s pas abiliy o achieve is economic objecives is analyzed and is used o draw conclusions abou is fuure. As such, he analysis is boh rerospecive and prospecive, in ha i uses pas experience o derive forecass. A a laer poin in ime, afer he invesmen, decisions o reain he invesmen are based on he expecaions of fuure performance which are influenced by laer acual realizaions of he expeced figures. herefore, forecass need o be compared wih he acual figures and be analyzed for deviaions in order o draw conclusions on he furher developmen. Conrol herefore is an imporan elemen in decision-making. Keeping his in mind, accouning figures are no only used in he derivaion of forecass bu are also needed in order o review earlier predicions. A he same ime hey are a necessary basis for furher predicions. he sewardship demand for accouning informaion resuls from delegaing decision-making o managers (Gjesdal, 98: 208). In such delegaion seings, informaion asymmery and conflics of ineres lead o principal-agen conflics. Since he acions of he agen are no direcly observable, he principal canno expec he agen o ac in he principal s bes ineres. his creaes a demand for informaion o help in evaluaing managemen s economic behavior. From a sewardship perspecive, herefore, accouning informaion is primarily regarded as Vol. 2, No. 2 69

16 Accouning and Managemen Informaion Sysems a conrol and conracing device (O Connell, 2007: 28). As such, he reporing of informaion can direcly eliminae informaion asymmeries by removing he superior informaion posiion of managemen and hus alleviaing agency conflics (Beaver, 989: 39). Reporing all relevan informaion o he principal would hus allow him o exer perfec conrol, ulimaely enabling him o ake all relevan decisions by himself by prescribing o managemen which decisions o ake and conrolling his acions hereafer. his, however, ignores he reasons why he decision was delegaed in he firs place. In addiion, considering conflics of ineres, i canno be assured ha he agen will repor ruhfully. As financial repors are expeced o reflec managemen s performance reporing requiremens and will influence managemens decisions (Bruns, 968: ), hey may provide incenives o manipulae financial accouning daa ha needs o be repored (Zeff, 978: 62; Pfaff & Bärl, 998). his esablishes e.g. requiremens for an audi, which in urn may lead o furher principal-agen conflics (Gjesdal, 98: 28). herefore, anoher response o principal-agen conflic is o align managemen s ineress o hose of he owners via an incenive conrac. In his seing accouning measures are used o provide performance measures ha are incenive useful, moivaing he managemen o ac in he bes ineres of owners. If he agen is o maximize his own uiliy, he will anicipae he consequences of his decisions on hese measures and will make his decision accordingly. If he measures are se in accordance wih he owners ineres, he agen will ake he decisions ha are in line wih he principals. Hence, from his conracing perspecive, he usefulness of accouning informaion depends on is incenive qualiies. Wheher a managerial performance measure is considered o be incenive compaible depends in urn on is esimaion properies wih respec o he acual acions of he managemen. hus performance measures need o provide incenives o make managemen ac in he bes ineress of he principals. A he same ime, he performance of managemen needs o be observable. he reporing of cerain informaion is necessary in order for he agen o know in advance, a he ime of making he decision ha he will be evaluaed based on he oucome. From he poin of view of an exernal shareholder, he reporing of cerain informaion may no be relevan in he sense ha i influences fuure predicions of performance, bu in he sense ha is reporing is necessary o preven he agen from aking derimenal decisions. For example, exraordinary iems, may no necessarily have direc implicaions for fuure performance he posiion however ells a sory on managemen s abiliies and failures. On similar lines one may argue ha he individualized disclosure of managemen bonuses is no relevan informaion, as i has no influenced he firm s fuure earnings. However his informaion may seem imporan from he sewardship perspecive, especially in order o preven managerial consumpion (Jensen & Meckling, 976). Anoher example is unehical business pracice which may lead o improved fuure performance bu may no be accepable o he owners. 70 Vol. 2, No. 2

17 he role of managemen as a user of accouning informaion: implicaions for sandard seing Such behavior may no influence he invesor s decisions regarding holding he invesmen, bu insead influence he decision on reappoinmen of managemen. Anoher imporan qualiy of performance measures o be incenive useful, is heir accuracy. If he agen is evaluaed based on his repored performance he has an incenive o repor he message which gives him he highes reward (Prakash & Rappapor, 975: 73; Prakash & Rappapor, 977:29). Lacking verifiabiliy, he informaion is useless for solving he sewardship problem (Gjesdal, 98: 28). herefore, he sewardship objecive esablishes he demand for performance measures ha allow reliable conclusions o be made on managemen s acions. I follows from he discussion above ha he sewardship funcion of accouning akes a differen perspecive han he decision-making objecive. While he decision-making role of financial reporing requires accouning sandards o provide relevan informaion for use in he decisions of exernal sakeholders (exernal decision-makers) he sewardship funcion requires accouning rules ha ensure managemen (he inernal decision-maker) ac in he bes ineres of owners by providing he correc incenives. hus, from his perspecive he sewardship funcion does no focus on decision-making of exernals bu on he economic behavior of managemen explicily recognizing incenive problems. Accordingly, from a sewardship perspecive accouning serves as a basis for moivaing agens o ac in he ineres of he principals. o provide he correc incenives and o make managemen ac in he ineres of owners, he concep of sewardship esablishes he need for informaion repored on expeced performance as well as measures of progress along he iniially defined pah. herefore prospecive as well as rerospecive informaion is required. Prospecive informaion is necessary for principals o form expecaions abou managemen s performance while rerospecive informaion is necessary o conrol/evaluae managemen s decisions laer on. Anicipaing he economic consequences of is decisions on he performance measures o be repored, managemen receives incenives o ake is decisions accordingly. o ensure, however, ha he correc incenives will be provided, i is crucial ha he performance measures repored allow reliable conclusions on managemen s behavior. One way o reduce disorions, for example, is o require an audi, leading however o addiional principal-agen problems (Gjesdal, 98: 28). Managerial accouning can be described as he process of ensuring ha resources are obained and used efficienly and effecively o achieve he business s objecives ( Anhony, 965). In his process, accouning sysems serve boh he purposes of decision-making and sewardship due o inernal principal-agen conflics (Pfaff, 995; Prakash & Rappapor, 975: ; Zimmerman, 2000, 200). In he las en years he focus of managerial accouning has expanded o include planning and conrol sysems ha encompass a more sraegic emphasis on he creaion of firm value hrough he idenificaion, measuremen, and managemen of he drivers of cusomer value, organizaional innovaion, and Vol. 2, No. 2 7

18 Accouning and Managemen Informaion Sysems shareholder reurns (Iner & Larcker, 200: 352). I is now well esablished ha he cenral business objecive is he creaion of shareholder value. Modern performance measuremen echniques inend o measure he value generaed in a paricular accouning period (O Hanlon & Peasnell, 998, 2002). his is inended o give incenives for managemen o ake acions ha generae value (Wagenhofer, 2003). Decisions wihin he firm, be hey sraegic or operaing in naure, shall be aken in order o increase shareholder wealh, i.e. he presen value of cash flows. Invesmen decisions are made based on he ne presen value rule. Any decision will have is implicaions for fuure cash flows and needs o ake hese ino consideraion. he decision canno be made based on pas cos informaion (Brealey & Meyers, 2004). An R&D-projec, say, canno be abandoned based on pas coss, no even based on fuure cos projecions, bu only based on he expeced excess of fuure cash inflows over ouflows (Hauschild, 2004: 528). Once he projec has been iniiaed, cash flows of he pas are sunk and do no influence decisions. here is hus no immediae relevance of profi or cos informaion for decision-making. One explanaion for he usefulness of accrual accouning informaion is ha i provides a beer basis for deriving forecass. Anoher is ha i serves as an indicaor for he projec s, produc s or business uni s pas abiliy o mee is objecives, ha is, for purposes of conrol. hrough he use of performance figures based on accrual accouning, accrual accouning achieves an influence on decision-making via he incenives i provides o managers (Reichelsein, 2000). Rerospecive informaion from a sewardship perspecive conribues indirecly o decision-making by providing he basis for forecass and hrough he anicipaion of he crieria applied in he laer evaluaion of performance, similar o he decision-making perspecive (Pfaff, 2004: 9, 22). In summarizing we conclude ha boh managerial and financial accouning have wo main funcions: decision-making and sewardship. As such heir perspecives are boh rerospecive and prospecive (see able ). Accouning informaion is prospecively used as he basis for deriving expecaions and is rerospecively used o evaluae he progress made relaive o expecaions in order o make decisions for correcive acions. he difference lies mainly in he user group. Under he decision-making perspecive, he focus is on he person who makes he decision. Under he sewardship perspecive, he focus is on influencing oher people s decisions. Accrual accouning is designed o fulfill boh funcions, he rerospecive and he prospecive role of accouning. Paymens made wih he inenion o creae fuure reurns are mached wih hose reurns. he charges derived from paymens deferred o oher periods, such as depreciaion and amorizaion charges, serve boh purposes. heir rerospecive funcion is cos allocaion, i.e. maching he iniial invesmen oulay wih he receips derived from i, which shows he difference as 72 Vol. 2, No. 2

19 he role of managemen as a user of accouning informaion: implicaions for sandard seing profi. heir prospecive funcion is o show he reinvesmen necessary for replenishing he firm s capial sock (capial mainenance) in order o mainain he curren earnings in he fuure. As such hey provide an esimae of fuure cash ouflows. able. Funcions of accouning Decision-Making Sewardship (influencing decision-making of agens) Rerospecive conrol conrol conrol Prospecive planning/ forecasing planning/ forecasing User group managemen owners and oher sakeholders planning/forecasing Shareholders o conrol managers; Cenral managemen o conrol divisional managers he accouning for goodwill is a suiable example o highligh he difference beween hese wo perspecives: he amorizaion charge o acquired goodwill is differen from oher amorizaion charges in ha i only fulfills he rerospecive funcion, no he prospecive. Copeland e al. (2000: 76) find ha unlike oher asses goodwill is no replaced. No reinvesmens in goodwill can be derived from goodwill amorizaion and i is herefore considered irrelevan for valuaion purposes. Mos analyss eliminae goodwill charges from heir analysis of fuure earnings (Whie e al., 2003: 528). his was one of he main reasons why he FASB decided o change he rules for he accouning of goodwill, inroducing he impairmen-only-approach (FAS 42.B77). However, while charges o goodwill seem o have no prospecive funcion, hey do have a conrol funcion (Schulze, 2005): if managemen paid premia in acquiring oher firms, he profis acquired are no he same as he profis generaed from he original businesses. A dollar of addiional profi ha was acquired a a price of a dollar is no profi a all. Goodwill amorizaion herefore is an imporan aspec of cos allocaion and in he measuremen and evaluaion of pas performance, i.e. for managemen conrol. In recen years, he IASB has largely denied he accrual principle and focused on he balance shee approach and he use of fair values (Dichev, 2008). By so doing i largely neglecs he role of he conrol funcion of accouning informaion. In an ideal world, all managers would ac as if hey were hemselves he owners. If accouning inends o serve he objecive o make managers ac as if hey were he owners, he firs sep in he process of defining accouning rules needs o be he definiion of he ype of informaion which an owner-manager would need for wealh maximizaion. A framework for he analysis of such informaion is provided by financial economics. Oher, non-financial objecives which an owner migh also pursue, such as he sense of presige, power ec. can be considered as consrains of Vol. 2, No. 2 73

20 Accouning and Managemen Informaion Sysems he overall objecive of maximizing wealh and are hus negleced in mos analyses. Only in a second sep he quesion arises, wha addiional aspecs o consider in he conex of agency relaionships? In he following discussion we consider hese wo seps Characerisics of accouning for managerial owners wihou agency relaionships In he following discussion we analyze he role of conrol informaion for decisionmaking of managerial owners, absracing from agency relaionships. he objecive of accouning hen is o provide informaion for he effecive and efficien allocaion of resources. he framework used is found in financial economics. For he following analysis, we make assumpions similar o a perfec marke, i.e. a perfecly compeiive capial marke. We assume a firm, where he owner is in possession of 00% of he shares and is he only decision-maker. he owner is assumed o behave raionally and o maximize uiliy. He can borrow and lend money wih no resricions in a perfec capial marke. Under hese assumpions, maximizaion of uiliy, i.e. welfare, is idenical o wealh maximizaion (Fisher, 930; Miller & Modigliani, 96) and invesmen decisions can be aken independenly of oher decisions, such as financing or dividend policy. here is no inernal informaion asymmery, as he owner is able o oversee all inernal processes. he firm has no deb and owes no axes, requiring no exernal users o be considered when seing accouning rules. he firm is assumed o have a finie ime horizon denoed by. ven in such a seing, he owner-manager will need an accouning sysem, even if no exernally imposed reporing requiremens exis. Wihin such a framework, informaion is needed o allow efficien decisions abou resource allocaion. hus, wihou any agency conflics he only purpose of accouning is o assis in economic decision-making. his requires forward-looking informaion as well as conrol informaion (Pfaff, 995: 439). Deci sions need o be re-evaluaed periodically. he decision-maker wans o decide wheher o coninue wihou changes or wheher o abandon or aler he course of acion in quesion. For his purpose performance in he sense of he progress along he lines of he original plans needs o be deermined. Decisions are based on a comparison of projecions as well as wih he alernaives. he owner s decisions will be based on cash flow projecions, and he will accep all projecs ha have a posiive ne presen value. A he ouse, he holds funds in he amoun of F 0. he iniial invesmen requires paymens in he amoun of I 0. he invesmen yields uncerain fuure cash ouflows (COF ) and inflows (CIF ). he ime subscrip is used o denoe iming of fuure values. he symbol k represens he opporuniy cos of equiy capial which is assumed o be idenical for all 74 Vol. 2, No. 2

21 he role of managemen as a user of accouning informaion: implicaions for sandard seing mauriies and o remain consan over ime. Afer he invesmen decision, his wealh (W) is given by (where denoes he expeced value): [CIF ] [COF ] W 0 F0 I0. (.) ( k) His change in wealh and hus he decision rule can be saed in erms of he NPVrule: [CIF ] [COF ] W0 I0 0. (2.) ( k) In period he will have earned (CIF COF ). he funds ha were no invesed in he projec were invesed in financial asses o earn he rae k. So his wealh now is: [CIF ] [COF ] W (F0 I0)( k) CIF COF. (3.) 2 ( k) he same is rue for he subsequen periods. j [CIF i ] [COF i ] W (F0 I0)( k) (CIFj COF j)( k).(4.) i ( k) j In he final period he will have accumulaed: i j (F0 I0)( k) (CIFj COF j)( k) j W. (5.) he invesmen is beneficial, if W exceeds he amoun of wealh he could have accumulaed if he had invesed F 0 a he rae k: j 0 I0 )( k) (CIFj COFj )( k) F0 ( k) j ( F j 0 ( k) (CIFj COF j)( k) j I. (6.) he oal surplus from he ransacion can only be deermined a he very end of he life of he projec. o conrol he projec and change is course in case expecaions canno be me, we need o evaluae is progress. o do so we compare he iniial projecions wih acual performance. In period he owner compares W wih he wealh he had iniially expeced o have in period ( 0 [W ]): 0[CIF] 0[COF] 0[W] (F0 I0)( k) 0[CIF] 0[COF]. (7.) 2 ( k) In he following we ake ino accoun ha as ime passes, we learn abou he oucomes and can aler expecaions. Le D [CF ] denoe he difference beween expecaions of cash flows (CF) in period ( [CF ]) and expecaions in period 0 ( 0 [CF ]), i. e. D [CF ] = [CF ] 0 [CF ], we can wrie he oal deviaion as follows: Vol. 2, No. 2 75

22 Accouning and Managemen Informaion Sysems W 0[ W ] CIF 0[ CIF ] COF 0[ COF ] D CIF [ ] D[ COF ]. (8.) 2 ( k) Differences beween acual and expeced values are denoed by e: 0 [CF ] = CF + e. Wih CF = CIF COF his yields a oal deviaion of: D [CF ] W 0[W ] e. (9.) 2 ( k) he oal deviaion is a combinaion of differences in performance of he period (e) and changes in expecaions, beween hese an obvious radeoff exiss. I is herefore impossible o evaluae inerim performance wihou a simulaneous evaluaion of fuure performance. Correcive acion will only be necessary, if he oal deviaion is negaive and can be alered. An equivalen evaluaion of he correcive acion is herefore necessary, for which we deermine he amoun of wealh (W C ) which resuls from aking he correcive acion (e.g. abandoning he projec, making addiional invesmens, reorganizing processes) a an immediae oulay of C: C C C [CIF ] [COF ] W (F0 I0)( k) CIF COF C. (0.) 2 ( k) Correcive acion is advisable only, if W C > W, i.e. C W W 0 or C C [CIF ] [COF ] [CIF ] [COF ] C 0. (.) 2 ( k) 2 ( k) Any decision abou aking correcive acion can only be based on he ne presen value of he incremenal cash flows resuling from his acion: C C D [CF ] W W C. (2.) 2 ( k) he oal deviaion for period 2 as compared o he iniial plan in = 0 is: D2[CF ] W 2 0[W 2] (CF 0[CF ])( k) (CF2 0[CF2 ]).(3.) 2 3 ( k) Wih 0 [CF ] = CF + e we have: D2[CF ] W 2 0[W 2] e( k) e2. (4.) 2 3 ( k) Coninuing his process unil ime we ge: j 0[W ] e j( k) j W. (5.) 76 Vol. 2, No. 2

23 he role of managemen as a user of accouning informaion: implicaions for sandard seing Using conemporaneous accouning informaion, we inend o influence hese deviaions such ha he cumulaive difference is posiive: W [W ] 0 j e ( k) j j 0. (6.) We herefore wan o analyze he informaion a period, in order o derive forecass for furher developmens. he expeced wealh of period 2, aking he informaion of period ino consideraion is: 2 [CF ] [W 2] (F0 I0)( k) ([CF ])( k) ([CF2 ]) (7.) 2 3 ( k) he oal deviaion for period 2 as compared o he prospecs in = is: D2[CF ] W 2 [W 2] (CF [CF ])( k) (CF2 [CF2 ]) (8.) 2 3 ( k) Wih he change in expecaions being: D [CF ] = [CF ] 0 [CF ] we ge: [W ] [W ] D [CF ]( k) D [CF ]. (9.) herefore: W2 0[W 2] (W2 [W 2]) ([W 2] 0[W 2]) (CF [CF ])( k) D 2 (CF 2 [CF ]) 2 3 D 2 [CF ] ( k) [CF ]( k) D [CF ]. (20.) aking ino accoun ha 0 [CF ] = CF + e we have: Le CF D2[CF ] W 2 0[W 2] e( k) e2. (2.) 2 ( k) [CF ]. We receive: D2[CF ] W 2 0[W 2] ( k) 2 D [CF ]( k) D [CF2 ]. (22.) 2 3 ( k) Coninuing his process for all periods unil ime we can wrie: W 0[ W ] ( W [ W ]) ( [ W ] 2[ W ])... ( [ W ] 0[ W ]) j 3 2 j j j j j ( k) j( k) D j[cf i ]( k) j j i e. (23.) he oal deviaion from iniial projecions can hus be divided in wo pars: he acual deviaions from adjused expecaions and he correcions of expecaions from period o period. Using he accouning informaion o improve esimaes implies ha Vol. 2, No. 2 77

24 Accouning and Managemen Informaion Sysems Vol. 2, No [CF ] CF [CF ] CF 2. (24.) his in urn implies [CF ] [CF ] [CF ] CF [CF ] CF 2 2 ] [CF ] [CF ] [CF CF ] [CF CF 2 [CF ] [CF ] 0 2, i. e. D [CF ] = [CF ] - [CF ] > 0. (25.) We receive: j i j j i j j j j ) k D [CF ]( k) ( (26.) he resuls show ha by acively conrolling he projec and analyzing deviaions from period o period, a beer performance can be achieved compared o only observing he final resul. he resuls also reveal he informaion necessary for his process. In accrual accouning, profi is used as an indicaor of performance. We conrol for he quesion of wheher he projec is moving saisfacorily owards he specified arge. In economic heory, economic income or profi (P) i s defined as he change in wealh from period o period, which can be wrien as: 4 0 W W W k COF CIF k COF CIF COF CIF I F k ) ( ] [ ] [ ) ( ] [ ] [ ) ( k) ( [CF ] k k k) ( D [CF ] k [CF ] CF ) I (F k. (27.) Wih CIF COF = CF, and [CF] = CF + e we can wrie: k) ( [CF ] k k k) ( D [CF ] k e k k CF ) I k(f P.(28.) In general, P can be defined as: W W W ] k) ( k) CF [( ] k) ( k) )[( I (F j j j j 0 0 i k) ( ] D [CF k) ( k) ( CF k i i i 0 k) ( [CF ] k k. (29.)

25 he role of managemen as a user of accouning informaion: implicaions for sandard seing Again, he performance measure P conains he deviaions from iniial projecions. he profi figure does no, however, ell he observer direcly wheher projecions have been me. he deviaion of he period is included in he figure and can be deermined from i, as above, by he following componen: D [CF ] (30.) ( k) ( k) i In accrual accouning, he naure of cash flows is evaluaed in order o measure performance for he period. Cash ouflows are used o acquire benefis which may or may no ye have been used up in he business process. If he benefis are used, an expense is recognized, oherwise he remaining benefi can be urned back o cash. Cash inflows can be considered earned and hus creae revenue or oherwise creae a liabiliy. Accrual accouning conribues o decision-making by inegraing some of he fuure ino he analysis of he presen. o dae, his process is, however, imperfec and could be improved by accouning heories and rules designed specifically for his purpose. So far, he profi of he period shows only o some degree, which porion of he expeced oal surplus has been earned. In oher words, i parly shows he progress he firm has made during he period owards firm goals. As such, profi can be regarded as an indicaor for he need for correcive acion, when projecions are no me, in he same vein as in he example of he speedomeer used in he inroducion. When designing accouning rules, i is herefore imporan o specify wheher he resuling figure is inended o measure curren performance (speed) or fuure performance (esimaed arrival ime). o be able o deermine periodic measures of progress owards enerprise goals (AICPA, 973) i is imporan ha hose reflec realized performance, no fuure performance (unrealized gains) Accouning rules considering inernal agency relaionships We now address he quesion of how he funcion of accouning is affeced by inernal agency conflics. We discuss he consequences of an owner delegaing decision righs o divisional managers. In his case, he will no longer be able o oversee all funcions himself. While in he previous secion he owner s decisions were based on his own projecions, he now needs o rus he projecions ha are made by he divisional managers. Assuming informaion asymmeries and conflics of ineres, he owner canno assume ha he divisional managers will ac in he bes ineres of he owner. 5 herefore, afer having delegaed decisions o divisional mangers, he main purpose of accouning from he perspecive of he owner is no longer his own decision-making, bu o provide a basis for managerial decisionmaking. Wihou agency conflics, he informaion needs of managers would remain unchanged relaive o he owner-manager. Inroducing agency conflics resul in a need for inroducing mechanisms ha align managerial decision-making wih he owners ineress he so-called sewardship funcion of managemen Vol. 2, No. 2 79

26 Accouning and Managemen Informaion Sysems accouning (Gjesdal, 98; Pfaff, 995: 449). Now, he incenive properies of differen performance measures need o be aken ino accoun (Oley, 2008: 235; Merchan, 2006: 893). herefore, as discussed in 3.., he sewardship demand may aler he informaional properies of an accouning sysem (Pfaff, 995). A large amoun of heoreical lieraure analyzes he incenives provided by differen measures of performance as he basis for managerial compensaion. One example of a conflic of ineres beween he principal and he agen are differen ime horizons. Managers are ofen criicized for acing myopically. he lieraure analyzes rules of accouning which resul in performance measures ha provide incenives o align managerial decisions wih he principal s objecives. his lieraure surrounding he so-called impaien manager (Reichelsein, 997; Rogerson, 997) develops accouning rules which resul in a posiive residual income in any period for all projecs wih posiive ne presen value. A manager who is evaluaed and compensaed based on such a (so -called srong goal congruen) performance measure will expec a posiive bonus for all projecs wih posiive ne presen value and has a srong incenive o accep hese projecs, in line wih he principal s objecives. A special cos allocaion schedule based on he expeced cash flow profile ( relaive marginal benefi (RMB) alloca ion rule ) is necessary (Rogerson, 997). Dua & Reichelsein (2005) exend his analysis o various specific accouning cases, for example invenories, inangibles, and leasing. Specific rules for he ineremporal cos allocaion are deermined in order o provide srong goal congruence, which requires he maching of coss and revenues while considering he ime value of money. For example, coss and revenues of projecs exending over several periods are mached based on he presen value percenage of compleion mehod. Overall, hese rules are very differen from curren accouning rules implying ha curren accouning sandards fail o provide incenives for managers o ac for he long-erm healh of he firm. his lieraure does no however answer he quesion wheher such informaion is also useful in he subsequen decision-making by managers. In paricular, i is only concerned wih he decision-making from an ex-ane perspecive before he projec is acceped. I is no concerned wih informaion relevan o manage he projec aferwards, as discussed in he previous subsecion and illusraed in he inroducory example of he speedomeer being biased upward o induce he driver o slow down. Such informaion may provide he righ incenives bu no provide useful informaion. In he hird sep we analyze informaion asymmeries arising from he separaion of ownership and conrol Accouning rules considering exernal agency relaionships When he manager of an enerprise is himself he owner, he has immediae access o all informaion prepared inernally o run he business. A shareholder in a public firm does no have access o such sources of informaion. ven if his informaion 80 Vol. 2, No. 2

27 he role of managemen as a user of accouning informaion: implicaions for sandard seing needs are no as deailed as he owner-manager s, hey are no differen in naure (Saubus, 2004: 277). Compared o inernal projecions of cash flows, he may no need he same degree of deail (Ijiri, 995: 62), bu he level of aggregaion will be dependen on he inheren diversiy of risks and rewards o enable him o make separae evaluaions. herefore, he level of useful aggregaion ulimaely depends on assumpions made regarding he user s individual decision-seings and preferences. We can, hence, conclude ha in he absence of agency conflics, aggregaed inernal projecions and informaion on pas performance enabling exernal invesors o improve decision-making would provide he bes basis for his decision-making purposes. 6 When managers ac as agens, heir objecives may no be he same as hose of shareholders. When hey have an informaion advanage over shareholders, agency conflics may arise. Accouning is used o provide informaion abou managemens sewardship. However, he behaviour of managemen is influenced by he informaion hey are required o repor and he informaion hey expec o be used by he recipiens for evaluaing heir performance (Prakash & Rappapor, 975: 73; Prakash & Rappapor, 977: 29; Dopuch & Sundner, 980: 5). o align managers behaviour wih shareholders ineress, he lieraure proposes adjusing he accouning rules which deermine performance measures used o evaluae and compensae managers, as discussed in he previous secion. his lieraure does no, however, answer he quesion of wheher such informaion is also useful for decision-making of invesors. In fac, he consideraions for decision-making from he perspecives of inernal managers and shareholders differ. he manager maximizes his uiliy based on he sream of variable remuneraion received. Incenive sysems can be pu in place which induce he manager o ac in he owner s bes ineres and make use of his privae informaion o he benefi of he firm. An invesor can base his decision-making only on he informaion he receives from managemen. In addiion, while he manager needs ongoing conrol informaion o keep rack of he operaions, he shareholder needs ongoing informaion o value his share in he firm o make decisions abou selling, holding or buying on he capial marke. While he rules for srong goal congruen accouning are sufficien o induce managers o accep projecs wih posiive ne presen value, his approach does no provide he informaion necessary for he subsequen valuaion problem for invesors. In making he decision o accep a projec, srong goal congruence resuls in he performance measure being posiive for every period if he projec is expeced o have posiive ne presen value. As such, from an ex ane perspecive, he sign of he performance measure immediaely indicaes ha new value is generaed and could hus also be informaive for invesors. his provides he righ incenives for managers as hey can expec o receive a posiive bonus whenever a projec wih posiive NPV is generaed. In he special case of robus goal congruence (Mohnen & Bareke 2007), he measure will be an annuiy of he expeced value creaion, hus yielding an immediae esimae of he expeced value creaion. However, invesors receive his informaion in subsequen periods only, when he projec has already sared. In Vol. 2, No. 2 8

28 Accouning and Managemen Informaion Sysems addiion, he performance measure only hen capures he acual realizaions and no he original projecions. o provide a soluion o he valuaion problem of invesors, he performance measure would need o indicae he necessiy or direcion of correcive acion. he lieraure has o dae no provided resuls for his. If shareholders had he same deail of informaion as managemen, hey could develop heir own esimaes of fuure performance. As saed above, his will no usually be he case. Hence, he quesion arises how can aggregaed informaion provide a basis for invesors decision-making. As accouning informaion is ypically designed o repor on one single period, he quesion arises of how decisions can be made based on a periodic measure of performance. Consequenly he lieraure analyzes saic decision rules such as Price = Marginal Coss from microeconomic heory (Rogerson, 2008; Rajan & Reichelsein, 2009) in order o derive decision-useful informaion. his approach is based on a similar logic o he one discussed above o derive goal congruence. he lieraure derives a depreciaion mehod ha aligns hisorical wih marginal coss, ermed relaive pracical capaciy (RPC) rule. he RPC-rule for cos allocaion is used o derive a saic performance measure ha can be used o make invesmen decisions consisen wih he NPV-rule by comparing price and marginal coss. he RPC-rule is similar o he RMB rule discussed above and can be used o analyze he decision-usefulness of accouning rules. I requires a special maching of all relaed expenses and revenues requiring consideraion of he ime value of money and resuling in a special depreciaion schedule. Curren accouning sandards for depreciaion and on recogniion and measuremen of he coss of acquisiion of angible asses, inangible asses and provisions do no comply wih he requiremens of he RPC rule. However, he RPC rule akes he perspecive of a managerial owner, no an exernal shareholder. he accouning rules derived o serve he RPC rule are similar, bu no idenical o he RMB rule. More research in his area is required o furher deermine accouning rules which may serve boh he decision-usefulness and he sewardship funcion. Our resuls highligh he following cavea. If sandard seers consider sewardship and decision-usefulness as compaible funcions of accouning, hen accouning rules need o serve boh funcions simulaneously i.e., hey need o provide informaion ha is useful for invesors for making economic decisions and a he same ime providing incenives for managers o ac in he owners bes ineres. However, if in fac he wo funcions are considered disinc and incompaible, hen hey mus be separaed and considered explicily. ha is, managers should no hen be held accounable for heir acions based on accouning informaion. 82 Vol. 2, No. 2

29 CONCLUSION he role of managemen as a user of accouning informaion: implicaions for sandard seing Sandard seers neglec he informaion needs of managemen when seing accouning sandards. In pracice, he accouning informaion used for managemen accouning is largely based on financial accouning. Mos firms avoid keeping separae accouns because of he coss involved. More imporanly, firms inenionally use he same informaion se as hey are evaluaed agains based on managerial decision-making. he raionale is ha he numbers hey are evaluaed on provide he benchmark for heir performance. Managers have incenives o maximize he performance measures hey are held accounable for, very much in accordance wih he saying wha you measure is wha you ge. In addiion, heir variable remuneraion ofen depends on accouning based measures of performance. If managers are evaluaed and held accounable based on financial accouning figures, hey will make decisions ha maximize hese numbers. he recen global financial crisis provides a useful example of he derimenal incenives provided by accouning sandards focusing on fair values and resuling in performance measures involving unrealized shor-erm gains. he lieraure provides a wealh of research ino he rules of accouning ha resul in measures of performance ha are incenive compaible, ha is, provide managers wih incenives o ac in he bes ineres of he principals. hese rules are, however, very differen from curren accouning sandards. If sandard seers inend o consider he sewardship demand for accouning informaion, hey would need o horoughly consider hese resuls and he incenive properies of he sandards hey se. However, i is unclear wheher such incenive compaible accouning rules resul in informaion which is simulaneously useful for he decision-making of invesors. Research ino his quesion is scarce and highly desirable. If on he oher hand, sandard seers consider sewardship and decision-usefulness as wo separae and disinc funcions, he wo funcions need o be compleely separaed. Mangers who are evaluaed and held accounable based on financial reporing will always have incenives o base heir decision-making on he consequences of heir acions on hese numbers. If financial accouning is o only serve he purpose of decision-making of invesors, managers could no longer be held accounable for he financial resuls. Providing financial accouning informaion is used o hold managers accounable, he rules of accouning provide incenives for managerial decision-making. he consequences of accouning rules for managerial decision-making, hence, need o be carefully considered. Vol. 2, No. 2 83

30 RFRNCS Accouning and Managemen Informaion Sysems AAA Commiee on Conceps and Sandards for xernal Financial Repors (977) Saemen on Accouning heory and heory Accepance AAA Commiee on Conceps and Sandards Underlying Corporae Financial Saemens (955) Sandards of Disclosure for Published Financial Repors, Supplemenary Saemen No. 8, he Accouning Review, vol. 30: AICPA Accouning Objecives Sudy Group (973) Objecives of Financial Saemens, New York: American Insiue of Cerified Public Accounans AICPA Special Commiee on Financial Reporing (994) Improving Business Reporing A Cusomer Focus, New York: American Insiue of Cerified Public Accounans Anhony, R. (965) Planning and Conrol Sysems: A Framework for analysis, Boson: Harvard Business School Akinson, A.A., Kaplan, R.S. & Young S.M. (2004) Managemen Accouning, 4 h ed., New Jersey: Pearson Prenice Hall Barker, R. (998) How analyss use accouns, Accounancy, vol. 22, no. 263: 52 Barker, P.C. & Noonan, C. (996) Small Company Compliance wih Accouning Sandards, Dublin: Dublin Ciy Universiy Beaver, W.H. (989) Financial Reporing: An Accouning Revoluion, nglewood Cliffs: Prenice-Hall Beaver, W.H., Kennelly, J.W. & Voss, W.M. (968) Predicive Abiliy as a Crierion for he valuaion of Accouning Daa, he Accouning Review, vol. 43, no. 4: Benson, G., Bromwich, M., Lian, R. & Wagenhofer, A. (2006) Worldwide Financial Reporing: he Developmen and Fuure of Accouning Sandards, Oxford e al.: Oxford Universiy Press Brealey, R.A. & Myers, S.C. (2004) Principles of Corporae Finance, 7 h ed., New York e al. Bruns, W. (968) Accouning Informaion and Decision-Making: Some Behavioral Hypoheses, he Accouning Review, vol. 43, no. 3: Bushman, R. & Indjejikian, R. (993) Accouning income, sock price, and managerial compensaion, Journal of Accouning and conomics, vol. 6, no. -3: 3-23 Bushman, R., ngel,. & Smih, A. (2006) An analysis of he relaion beween he sewardship and valuaion roles of earnings, Journal of Accouning Research, vol. 44, no. : Carsberg, B.V., Page, M.J., Sindall, A.J. & Waring, I.D. (985) Small Company Financial Reporing, nglewood Cliffs: Prenice-Hall Chambers, R. (966) Accouning, valuaion and conomic Behavior, nglewood Cliffs: Prenice-Hall 84 Vol. 2, No. 2

31 he role of managemen as a user of accouning informaion: implicaions for sandard seing Coenenberg, A. G. (995) inheilichkei oder Differenzierung von inernem und exernem Rechnungswesen: Die Anforderungen der inernen Seuerung, Der Berieb, vol. 48, no. 42: Collis, J. & Jarvis, R. (2000) How owner-managers use accouns, London: he Insiue of Charered Accounans in ngland & Wales Copeland,.., Koller,. & Murrin, J. (2000) Valuaion: Measuring and Managing he Value of Companies, 3 rd ed., New York: Wiley Demski, J. (973) he general impossibiliy of normaive accouning sandards, he Accouning Review, vol. 48, Ocober: Dopuch, N. & Sunder S. (980) FASB s Saemens on Objecives and lemens of Financial Accouning: A Review, he Accouning Review, vol. 55, no. : -2 Dichev, I. (2008) On he Balance Shee-Based Model of Financial Reporing, Accouning Horizons, vol. 22, no. 4: Dua, S. & Reichelsein, S. ( 2005) Accrual Accouning for Performance valuaion, Review of Accouning Sudies, vol. 0, no. 4: dwards,., & Bell, P. (967) he heory and Measuremen of Business Income, 4 h ediion, Berkeley and Los Angeles: Universiy of California Press FASB (997) Saemen of Financial Accouning Sandards No. 3, Norwalk, Connecicu: Financial Accouning Foundaion FASB (200) Saemen of Financial Accouning Conceps No. 8, Concepual Framework for Financial Reporing, Chaper, he Objecive of General Purpose Financial Reporing, and Chaper 3, qualiaive Characerisics of Useful Financial Informaion, Norwalk, Connecicu: Financial Accouning Foundaion Fisher, I. (906) he Naure of Capial and Income, New York: Macmillan Fisher, I. (930) he heory of Ineres, New York: Macmillan Gjesdal, F. (98) Accouning for Sewardship, Journal of Accouning Research, vol. 9, no. : Guenag, M. (2004) An Argumen for Imposing Disclosure Requiremens on Public Companies, Florida Sae Universiy Law Review, vol. 32, no. : 2-93 Haller, A. (997) Zur ignung der US-GAAP für Zwecke des inernen Rechnungswesens, Conrolling, vol. 9, no. 4: Hampon, J.. & Karadbil, L.L. (968) Accouning: Is Naure and uses, American Universiy, School of Business Adminisraion Hansen, D.R., & Mowen, M.M. (994) Managemen accouning, 3 rd ed., Cincinnai: Souh-Wesern Publishing Co Hauschild, J. (2004) Innovaionsmanagemen, München: Vahlen Hemmer,. & Labro,. (2008) On he Opimal Relaion beween he Properies of Managerial and Financial Reporing Sysems, Journal of Accouning Research, vol. 46, no. 5: Vol. 2, No. 2 85

32 Accouning and Managemen Informaion Sysems Hicks, J.R. (939) Value and Capial, An Inquiry ino Some Fundamenal Principles of conomic heory, Oxford: Clarendon Press Holhausen, R.W. & Was, R.L. (200) he Relevance of he Value-Relevance Lieraure for Financial Accouning Sandard Seing, Journal of Accouning and conomics, vol. 3, no. -3: 3-75 IASB (2006a) Discussion Paper, Preliminary Views on an improved Concepual Framework for Financial Reporing: he Objecive of Financial Reporing and Qualiaive Characerisics of Decision-useful Financial Reporing Informaion, London: Inernaional Accouning Sandards Commiee Foundaion IASB (2006b) Discussion Paper, Managemen Commenary, London: Inernaional Accouning Sandards Commiee Foundaion IASB (2008) xposure Draf of an improved Concepual Framework for Financial Reporing: Chaper : he Objecive of Financial Reporing, Chaper 2: Qualiaive Characerisics and Consrains of Decision-useful Financial Reporing Informaion, London: Inernaional Accouning Sandards Commiee Foundaion. IASB (200) he Concepual Framework for Financial Reporing, London: IFRS Foundaion Indjejikian, R. (999) Performance valuaion and Compensaion Research: An Agency Perspecive, Accouning Horizons, vol. 3, no. 2: Ijiri, Y., & Jaedicke, K. (966) Reliabiliy and Objeciviy of Accouning Measuremens, he Accouning Review, vol. 4, no. 3: Ijiri, Y. (995) Segmen Saemens and Informaiveness Measures: Managing Capial vs. Managing Resources, Accouning Horizons, vol. 9, no. 3: Iner, C.D. & Larcker, D.F. (200) Assessing empirical research in managerial accouning: a value-based managemen perspecive, Journal of Accouning and conomics, vol. 32, no. -3: Jensen, M.C. & Meckling, W.H. (976) heory of he firm: Managerial Behavior, Agency Coss and Ownership Srucure, Journal of Financial conomics, vol. 3, no. 4: Kaplan, R.S. (984) he evoluion of managemen accouning, he Accouning Review, vol. 59, no. 3: Lamber, R.A. (200) Conracing heory and accouning, Journal of Accouning and conomics, vol. 32, no. -3: 3-87 Lamber, R.A. & Larcker, D.F. (987) An Analysis of he use of Accouning and Marke Measures of Performance in xecuive Compensaion Conracs, Journal of Accouning Research, vol. 25, supplemen no. 3: Lev, B. & Zambon, S. (2003) Inangibles and inellecual capial: an inroducion o a special issue, uropean Accouning Review, vol. 2, no. 4: Liang, P.J. (200) Recogniion: An Informaion Conen Perspecive, Accouning Horizons, vol. 5, no. 3: Lileon, A. & Zimmerman, V. (962) Accouning heory: Coninuiy and Change, nglewood Cliffs: Prenice-Hall 86 Vol. 2, No. 2

33 he role of managemen as a user of accouning informaion: implicaions for sandard seing Merchan, K.A. (2006) Measuring general managers performances. Marke, accouning and combinaion-of-measures sysems, Accouning, Audiing & Accounabiliy, vol. 9, no. 6: Miller, M.H. & Modigliani, F. (96) Dividend Policy, Growh and he Valuaion of Shares, Journal of Business, vol. 34, no. 3: Mohnen, A. & Bareke, M. (2007) Performance measuremen for invesmen decisions under capial consrains, Review of Accouning Sudies, vol. 2, no., -22 Mooniz, M. (96) he Basic Posulaes of Accouning, Accouning Research Sudy No., New York: American Insiue of Cerified Public Accounans O Connell, V. (2007) Reflecions on Sewardship Reporing, Accouning Horizons, vol. 2, no. 2: O Hanlon, J. & Peasnell, K. (2002) Residual Income and Value-Creaion: he Missing Link, Review of Accouning Sudies, vol. 7, no. 2-3: O Hanlon, J. & Peasnell, K. (998) Wall Sree s conribuion o managemen accouning: he Sern Sewar VA financial managemen sysem, Managemen Accouning Research, vol. 9, no. 4: Ohlson, J.A. (975) he Complee Ordering of Informaion Alernaives for a Class of Porfolio-Selecion Models, Journal of Accouning Research, vol. 3, no. 2: Oley, D. (2008) Did Kaplan and Johnson ge i righ?, Accouning, Audiing & Accounabiliy Journal, vol. 2, no. 2: Paon, W.A. (940) Recen and Prospecive Developmens in Accouning heory, Business Research Sudies No. 25, Harvard Universiy Graduae School of Business Adminisraion Paon, W.A. & Lileon, A.C. (967) An Inroducion o Corporae Accouning Sandards, American Accouning Associaion, Monograph No. 3, Ann Arbor: dwards Brohers Paul, J. (992) On he fficiency of Sock-based Compensaion, he Review of Financial Sudies, vol. 5, no. 3: Prakash, P. & Rappapor, A. (975) Informaional Inerdependencies: Sysem Srucure Induced by Accouning Informaion, he Accouning Review, vol. 50, no. 4: Prakash, P. & Rappapor, A. ( 977) Informaion inducance and is significance for accouning, Accouning, Organizaions and Sociey, vol. 2, no. : Pfaff, D. (995) Kosenrechnung, Verhalensseuerung und Conrolling Die Unernehmung, vol. 49, no. 6: Pfaff, D. (2004) Performancemessung und Verragsfunkion zu Bedeuung und igenschafen von Performancemaßen bei vermögensbeschränken Managern, Zeischrif für beriebswirschafliche Forschung Sonderhef, 5/04: -25 Vol. 2, No. 2 87

34 Accouning and Managemen Informaion Sysems Pfaff, D. & Bärl, O. (998) xerne Rechnungslegung, inernes Rechnungswesen und Kapialmark, Zeischrif für beriebswirschafliche Forschung, vol. 50, no. 9: Rajan, M. & Reichelsein, S. (2009) Depreciaion Rules and he Relaion Beween Marginal and Hisorical Cos, Journal of Accouning Research, vol. 47, no. 3: Rees, W. & Sucliffe, C. (994) Quaniaive Non-Financial Informaion and Income Measures: he Case of Long erm Conracs, Journal of Business Finance & Accouning, vol. 2, no. 3: Reichelsein, S. (997) Invesmen Decisions and Managerial Performance valuaion, Review of Accouning Sudies, vol. 2, no. 2: Reichelsein, S. (2000) Providing Managerial Incenives: Cash Flows versus Accrual Accouning, Journal of Accouning Research, vol. 38, no. 2: Riahi-Belkaoui, A. (2004) Accouning heory, 5 h ediion, London e al. Riley, R., Pearson,. & rompeer, G. (2003) he value relevance of nonfinancial performance variables and accouning informaion: he case of he airline indusry, Journal of Accouning and Public Policy, vol. 22, no. 3: Rogerson, W.P. (997) Ineremporal Cos Allocaion and Managerial Invesmen Incenives: A heory xplaining he Use of conomic Value Added as a Performance Measure, Journal of Poliical conomy, vol. 05, no. 4: Rogerson, W.P. (2008) Ineremporal cos allocaion and invesmen decisions, Journal of poliical economy, vol. 6, no. 5: Rüe, M. & Hoenes, R. (995) Rechnungslegung immaerieller Were, S. Gallen Sanders,., Hafield, H. & Moore, U. (938) A Saemen of Accouning Principles, New York: American Insiue of Cerified Public Accounans Scholze, A. & Wielenberg, S. (2007) Depreciaion and Impairmen: A radeoff in a Sewardship Seing, available on-line a hp://ssrn.com/absrac= or hp://dx.doi.org/0.239/ssrn Schulze, W. (2005) he Informaion Conen of Goodwill-Impairmens under FAS 42: Implicaions for xernal Analysis and Inernal Conrol, Schmalenbach Business Review, vol. 57, no. 7: Snavely, H. (967) Accouning Informaion Crieria, he Accouning Review, vol. 42, no. 2: Sprouse, R.. & Mooniz, M. (962) A enaive Se of Broad Accouning Principles for Business nerprises, Accouning Research Sudy No. 3, New York: American Insiue of Cerified Public Accounans Saubus, G.J. (970) Deerminans of he Value of Accouning Procedures, Abacus, vol. 6, no. 2: 05-9 Saubus, G.J. (2000) he decision usefulness heory of accouning, New York: Garland Publishing Saubus, G.J. (2004) wo Views of Accouning Measuremen, Abacus, vol. 40, no. 3: Vol. 2, No. 2

35 he role of managemen as a user of accouning informaion: implicaions for sandard seing Serling, R. (970) heory of he Measuremen of nerprise Income, Lawrence e al.: Universiy Press of Kansas Sowe, J.D., Robinson,.R., Pino J.. & McLeavey, D.W. (2002) Analysis of quiy Invesmens: Valuaion, Charloesville: Associaion for Invesmen Managemen and Research (AIMR) Vaer, W.J. (963) Posulaes and principles, Journal of Accouning Research, vol., no. 2: Vhen, A. (929) Die nwicklung der Bilanzauffassungen bis zum AHGB, Zeischrif für Beriebswirschaf, vol. 6, Special Issue: 6-69 Wagenhofer, A. (2003) Accrual-based compensaion, depreciaion and invesmen decisions he uropean Accouning Review, vol. 2, no. 2: Wagenhofer, A. (2006) Zusammenwirken von Conrolling und Rechnungslegung nach IFRS. Conrolling und IFRS-Rechnungslegung, Wagenhofer, A. (ed.), Berlin: rich Schmid, -20 Wagenhofer, A. (2008) Konvergenz von inern und exern bericheen rgebnisgrößen am Beispiel von Segmenergebnissen Beriebswirschafliche Forschung und Praxis, vol. 60, no. 2: 6-76 Wagenhofer, A. & wer, R. (2003) xerne Unernehmensrechnung, Berlin e al.: Springer Whie, G.I., Sondhi, A.C. & Fried, D. (2003) he Analysis and Use of Financial Saemens, 3 rd ed., New York: Wiley Zeff, S. (978) he Rise of conomic Consequences, he Journal of Accounancy, vol. 46, no. 6: Zimmerman, J.L. (2000) Accouning for Decision Making and Conrol, Boson: Irwin McGraw-Hill Zimmerman, J.L. (200) Conjecures regarding empirical managerial accouning research, Journal of Accouning and conomics, vol. 32, no. -3: his view is also aken by many economic income heoriss emphasising he managemen funcion of accouning (see for example dwards & Bell, 967: 4; Serling, 970: 33). 2 arly decision-usefulness lieraure herefore ofen emphasizes boh: he managemen funcion of accouning and he provision of informaion o exernal users (e.g. Paon, 940: 2-4; Sprouse & Mooniz, 962: noe ). 3 he IASB and he FASB sae in heir frameworks ha informaion abou he pas performance can be used as basis for fuure predicions and comparisons wih prediced values can help o correc and improve he processes ha were used o derive forecass ( IASB, 200: F-QC0; FASB, 200: SFAC 8, QC0). 4 "Income earned [...] I.e. ha income which a given capial can yield wihou aleraion in is value" (Fisher, 906: 333). ".. we ough o define a man's income as he maximum amoun which he can consume during a week, and sill expec o be as well off a he end of he week as he was a he beginning" (Hicks, 939: 72). 5 I should be noed ha wihou any informaion asymmeries he owner has all relevan informaion and hus would be able o dicae he decisions o he managers and conrol heir aciviies aferwards. 6 Seeing an enerprise hrough he eyes of managemen enhances a user s abiliy o predic acions or reacions of managemen ha can significanly affec he enerprise s prospecs for fuure cash flows (FASB, 997: Appendix A, noe 60). Vol. 2, No. 2 89