November 2005 10th WCARS - Rutgers

Multi-Dimensional Accounting Information Systems and Continuous Assurance

Richard B. DullClemson University

David P. TegardenVirginia Tech

November 2005 10th WCARS - Rutgers

“Not a great many substantive problems, however, are exclusively two dimensional. Indeed, the world is generally multivariate.”

-Edward Tuftefrom Visual Explanations (1997)

November 2005 10th WCARS - Rutgers

Purpose of AIS

Accumulate data

Support decision-makers

November 2005 10th WCARS - Rutgers

Today’s Environment

• Timely information

• Decision-relevant information

(Meaning– Timeliness of complete, valid and correct

information capture– Timeliness of reporting what users want)

November 2005 10th WCARS - Rutgers

Two Dimensional Accounting

• Double Entry– Excellent system for the technology available

15th century . . .– Historically based– Difficult to accumulate and summarize as

organizations have expanded– Usefulness of information provided has not

kept pace with demands of decision-makers

November 2005 10th WCARS - Rutgers

Today’s Technology

• Ubiquitous networks– Interconnected organizations

• Enterprise systems– Capturing events– Movement from transaction entry

• XBRL– Potentially: easy to use information instances

on-demand

• Emerging interest in continuous assurance

November 2005 10th WCARS - Rutgers

Moving from double entry

• Triple entry (Ijiri)

• REA (McCarthy, and extensions)

November 2005 10th WCARS - Rutgers

Adding dimensionality

• Benefits– Decisions are typically multidimensional

• Easier to map from data to decision– Difficult to express multidimensional problems in two

dimensional terms

November 2005 10th WCARS - Rutgers

Triple Entry/Momentum Accounting

• Progression of dimensions:– One dimension

stock accounts (assets and liabilities)

– Two dimensions flow = change in stock accounts (revenues and

expenses)

– Three dimensions change in flows (rate of flow changes)

November 2005 10th WCARS - Rutgers

Momentum Accounting

• Basic component Wealth (net value of stock accounts)

• Momentum = W/t– Rate of wealth change

• Force = 2W/t2

– Rate of momentum change (impulse)

November 2005 10th WCARS - Rutgers

Recognition issues

• Not simple, but not impossible to address

• Current examples– Fixed asset lives– External confirmation– Historical cost/pricing– Attorney rep letters– Stock options – . . .

November 2005 10th WCARS - Rutgers

Prototypes in literature

• Ijiri (1989)

• Olders (1995)– Additional information increases earnings

prediction accuracy

November 2005 10th WCARS - Rutgers

Organizational relevance

• Single-entry– Agriculture era– Labor principle technology

• Double-entry– Industrial era– Professional management– Income information needed for owners and

creditors

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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

November 2005 10th WCARS - Rutgers

Simple example

• Asset purchase for $12,000 cash (10 year life)Debit Credit

Fixed Assets 12,000

Cash 12,000

If no incremental income is generated, the purchase would reflect a reduction of earnings momentum by $100/month for 10 years.

November 2005 10th WCARS - Rutgers

If the organization is “alive”. . .

. . .or operating in a continuous state, then the monitoring to support assurance should operate continuously.

Annual assurance is not enough.

November 2005 10th WCARS - Rutgers

Medical Example

• Medical monitoring may vary from infrequent, to annual, to constant monitoring, depending on the risk associated with an issue.

• Organizational monitoring should vary, depending on the risk associated with the process.

November 2005 10th WCARS - Rutgers

Continuous Assurance

“An uninterrupted declaration intended to give confidence”

• Research must address two aspects– Risk of problems with a process– Objectives of assurance to be provided– How assurance can be uninterrupted

November 2005 10th WCARS - Rutgers

Analytical Procedures

• Traditional– Changes from prior year balances– Relative percentages

• How will these work in a continuous environment? Adaptation?

November 2005 10th WCARS - Rutgers

• New procedures must be developed based on expectations– Continuity equations

• Improved expectations– Random walk? Yes, but . . .– Trends can be estimated/projected– To improve analytical procedures the quality

of estimates need to be improved beyond historical, double-entry accounting.

November 2005 10th WCARS - Rutgers

Increasing expectation accuracy . .

• Momentum accounting provides a way to improve on trend estimation, by detecting directional changes of “impulses” and “forces” on the organization’s wealth.

(Dull and Tegarden, 1999)

November 2005 10th WCARS - Rutgers

An example of interpreting MA Information

• Control charts– At the impulse level– As impulses are detected control chart rules

are applied– If significant (non-explained) patterns exist

(data are non-random), investigation is warranted

November 2005 10th WCARS - Rutgers

Chart with non-random pattern

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39

November 2005 10th WCARS - Rutgers

The next step . . .

• Simulate outcomes from MA system• Test vs traditional tools

• Develop analytical equations to determine if results are improved in a multi-dimensional environment

• Move on to address non-financial data, e.g., REA?

November 2005 10th WCARS - Rutgers

Conclusion

• It is time to look at the foundation on which financial accounting stands, and determine if double-entry accounting is relevant in today’s environment.

• Financial reporting and assurance is not two-dimensional – it is time to consider increasing the dimensionality of accounting.

November 2005 10th WCARS - Rutgers

Conclusion (cont)

• 15th and 16th centuries, double-entry accounting spread because of 1) the need for a method of accounting for merchants, 2) the printing press, and 3) the increasing literacy of business people.

• Today, ubiquitous networks and technological literacy can enable the spread of concepts, such as Momentum Accounting, that can provide the information needed to make decisions about today’s organizations.

November 2005 10th WCARS - Rutgers

Contact Information

Rick Dull

rdull@clemson.edu

Or

David Tegarden

dtegarde@vt.edu