Multi-Dimensional Accounting Information Systems and Continuous Assurance

1. Multi-Dimensional Accounting Information Systems and Continuous Assurance Richard B. Dull Clemson University David P. Tegarden Virginia Tech 10th WCARS - Rutgers

2. “Not a great many substantive problems, however, are exclusively two dimensional. Indeed, the world is generally multivariate.” -Edward Tufte from Visual Explanations (1997) 10th WCARS - Rutgers

3. Purpose of AIS Accumulate data Support decision-makers 10th WCARS - Rutgers

4. Today’s Environment • Timely information • Decision-relevant information (Meaning • Timeliness of complete, valid and correct information capture • Timeliness of reporting what users want) 10th WCARS - Rutgers

5. 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 10th WCARS - Rutgers

6. 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 10th WCARS - Rutgers

7. Moving from double entry • Triple entry (Ijiri) • REA (McCarthy, and extensions) 10th WCARS - Rutgers

8. Adding dimensionality • Benefits • Decisions are typically multidimensional • Easier to map from data to decision • Difficult to express multidimensional problems in two dimensional terms 10th WCARS - Rutgers

9. 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) 10th WCARS - Rutgers

10. 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) 10th WCARS - Rutgers

11. Recognition issues • Not simple, but not impossible to address • Current examples • Fixed asset lives • External confirmation • Historical cost/pricing • Attorney rep letters • Stock options • . . . 10th WCARS - Rutgers

12. Prototypes in literature • Ijiri (1989) • Olders (1995) • Additional information increases earnings prediction accuracy 10th WCARS - Rutgers

13. Organizational relevance • Single-entry • Agriculture era • Labor principle technology • Double-entry • Industrial era • Professional management • Income information needed for owners and creditors 10th WCARS - Rutgers

14. Organizational relevance (cont.) • Triple-entry • Information era • Computer dominant tool • Product life-cycles reduced • Rate of change is relevant • Organizations are not static 10th WCARS - Rutgers

15. Simple example • Asset purchase for $12,000 cash (10 year life) DebitCredit 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. 10th WCARS - Rutgers

16. 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. 10th WCARS - Rutgers

17. 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. 10th WCARS - Rutgers

18. 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 10th WCARS - Rutgers

19. Analytical Procedures • Traditional • Changes from prior year balances • Relative percentages • How will these work in a continuous environment? Adaptation? 10th WCARS - Rutgers

20. 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. 10th WCARS - Rutgers

21. 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) 10th WCARS - Rutgers

22. 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 10th WCARS - Rutgers

23. Chart with non-random pattern 10th WCARS - Rutgers

24. 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? 10th WCARS - Rutgers

25. 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. 10th WCARS - Rutgers

26. 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. 10th WCARS - Rutgers

27. Contact Information Rick Dull rdull@clemson.edu Or David Tegarden dtegarde@vt.edu 10th WCARS - Rutgers