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