U.S. accounting: a national emergency

The U.S. financial accounting model is important to the country's national competitiveness. The model, however, is broken and needs to be fixed. Its periodic, historical, cost-basis financial statements served the bygone industrial era well but are not sufficient for evaluating information-era companies. Worse, they discourage companies from departing from the obsolete industrial era while competitors (principally Japan and Germany) are not being held back. Unless the model is brought into the information era, U.S. industry will continue to be hampered by high capital costs, nasty financial surprises in the marketplace and deteriorating competitiveness. MOVING INTO THE INFORMATION TECHNOLOGY ERA Through the ages, manking has developed three fundamentally different methods of wealth creation: agriculture, industry and information technology (see exhibit 1, page) 57). As each new wealth-creation method supersedes the previous one, more sophisticated accounting information is required. Information technology permits leading companies to become more competitive by * Getting closer to their customers. * Improving the quality of goods and services supplied. * Providing a greater variety of product offerings. * Cutting their product design and production cycle times. * Downsizing and operating as truly global enterprises. All products and services--and the means to produce them--are becoming more information-intensive. An automobile, for example, may contain a dozen or more computers, and computers assisted in its design and construction. Training, research and development, market studies, planning, design, advertising, internal communications and other information activities constitute an increasing proportion of the value delivered to customers. The industrial-era manager operated within a hierarchical entity, typically with separate marketing, engineering, manufacturing, sales, accounting and finance functions. Hierarchical entities can grow very large, but tend to be slow moving because the separation of functions impedes fast action. Industrial-era managers figure the "optimum" way to perform manufacturing or processing tasks and build the entity's control system to "lock in" the optimum production process. In this system, there are standard productivity rates, and variations are systematically suppressed. Management's job in an information-era company is much different. It attempts to organize as a network instead of a functional hierarchy. It no longer focuses primarily on a fixed basket of assets bequeathed by prior management (such as raw materials, finished goods and plant and equipment) and on the relatively fixed goals of production and distribution. Instead, management must focus increasingly on information assets (such as human resources, R&D, information systems, data on customers' needs and capacity for innovation) and on the shifting goals of shorter product design and production cycles, improved quality and greater customer satisfaction. U.S. ACCOUNTING MODEL: FUNDAMENTALLY INDUSTRIAL Despite new managerial tasks, accountants continue to supply the same industrial-era financial statements--statements of resources (balance sheet) and changes in resources (income and cash flow statements). Cost accounting models continue to reinforce the fixed-production-processes model. The very account-coding structure followed reinforces the hierarchy: The digits in a general ledger account-coding structure represent the levels of hierarchy--the left digits are high in the hierarchy (divisional, for example), and the right digits are low (specific activities on the factory floor). New accounting models are needed to measure rates of change in resources and processes and to account for the off-balance-sheet assets so vital to the information-era enterprise. …