Working Paper 310
June 24, 2000 Draft
Computers in Accounting: Past, Present,
and Future
Bob Jensen at Trinity University
http://www.trinity.edu/rjensen/
This paper, in revised form,
will be delivered at the Year 2000 Annual
Conference of the Taiwan Accounting Association, Nov. 11-12, in
Table of Contents
The Chaotic Present State of Decline in Accounting
Relevance
The
Chaotic Future of Computers in Accounting
Laurent Gauthier, Real Options: Applications of Exotic Options in Real Option Theory
The Steam
Engine and the Computer: What Makes
Technology Revolutionary
Appendix
on Bob Jensen's Threads on Invisible
Computing, Ubiquitous Computing, and Microsoft.Net
Introduction
With the dawn of the computing age in the 20th Century, the world of accounting turned chaotic as firms invested more and more money in computing machines that, with increasing frequency, became obsolete piles of technology junk and magnified melt down risks in information systems. Obsolescence and melt down risks were, and still are, the dark sides of accounting for more and more information at faster rates of time using increasingly efficient computing machines.
For example, consider a saga of the IBM 4381 mainframes
across less than one decade at
There are bright and dark sides of technology in computing apart from computing speed, obsolescence risk, and security issues.
- The
bright side, aside from greatly increased information output and
processing speeds, was that computing machines enabled the paradigm shift
to relational databases over the past 30 years. This paradigm shift eventually extended
to Enterprise Resource Planning (ERP) comprehensive information systems. [i]
- The
dark side, apart from buying machines with shrinking economic lives due to
technological obsolescence and security melt down risks, is that
information systems integration (e.g., ERP systems) requires rigid
structures that stifle creativity and innovation in information input and
analyses.
Networking and meta-level tagging (termed in this paper as information DNA) of objects of data make it possible for a paradigm shift to object-oriented processing over the next 30 years.
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The History of IBM Corporation and Early Origins of Relational Databases
The chaotic history of tabulating machines and computers in
accounting runs parallel to the history of IBM Corporation. IBM
was incorporated in the State of
In 1937, IBM took on the “biggest accounting operation of all time.” [iii] This was the punch card system to account for each of 26 million employees in the newly formed U.S. Social Security retirement accounts.
In 1945, the Watson
Scientific Computing Laboratory opened in IBM.
This was followed in 1952 by the introduction of the IBM 701 and the
1956 RAMAC 301 series of larger-scale computers for punch cards. The popular FORTRAN programming language
commenced in 1957. Mainframe computing
took a “giant leap” when the IBM System/360 for punch cards and magnetic tape
became available in 1964. These
computers were housed in central computing centers and batch processed
everything from accounting transactions to scientific research and development.
Prior to relational databases, tabulating machines and computers mainly automated what bookkeepers wearing green eyeshades and shirt sleeve garters recorded with pen and ink in journals and ledgers. Transactions were recorded multiple times in multiple systems. For example, at the time of a sales transaction, separate entries might be made in the receivables system and the inventory inventory system. The technology for recording key transactional elements only once commenced with relational database theory. The theory of relational database computing originated in 1970 from the seminal work of IBM’s by E.F. Codd. Because of its simplicity, the relational model eventually displaced the hierarchical and network models as the model of choice for database oriented information systems.
In the 1970s, IBM made great strides in improving magnetic
disk storage devices, including the introduction of the IBM 3340 (
Although IBM did not invent the Internet, IBM was a
key player in networked computing developments.
IBM devised token-ring technology in 1985 to control local area network
(LAN) traffic more efficiently and reliably. A token controls access of
individual computers to the network, or ring. Token-ring architecture became an
industry standard for LANs.
In the 1990s, IBM research labs moved into development of storage devices at the atomic level. One day the entire recorded knowledge of the world may fit on a device smaller than a sheet of paper.
In the 1992, IBM joined the portable multimedia computer competitors by introducing the popular ThinkPad laptop computer. When combined with 1995 acquiring of Lotus Corporation, IBM combined the ThinkPad with Lotus Notes to become the dominant computing network for business communications, auditing, and accounting. Following the 1996 acquisition of Tivoli Systems, Inc., IBM became the world leader in systems management software. [iv]
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COBOL Becomes the Programming Language of Business and Accounting
Although COBOL (Common Business Oriented Language) is fading in importance in recent years, COBOL was the first widely used high-level programming language for business applications on mainframe computers. Many accounting, and business application programs written in COBOL over the past 35 years are still in use, and it is possible that there are still more existing lines of programming code in COBOL than in any other programming language. In fact, COBOL is the main reasons why industry had to invest so heavily in dealing with the infamous Y2K problem of storing dates in two-digit rather than four-digit codes for years.
COBOL was designed so that computer commands could be written in a language similar to sentences in English rather than mathematical formulas. In addition, COBOL had utilities specially designed for accounting and control. Since most industrial applications of COBOL recorded and stored data in multiple databases, the systems were very robust and secure. However, subsequent programming languages such as C++ were more efficient in terms of coding time, computer processing speeds, and adaptability to networked relational database systems.
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A Paradigm Shift in Accounting Occurs With Relational Databases and ERPs on LANs, MANs, WANs, and the Global Internet
Bob Jensen defines Relational Database Management as follows in an online Technology Glossary:
Relational database management = A database system that
stores data in two-dimensional data tables at the same time such that the
program can work with two tables at the same time. It is "relational"
if one table defines the relation between entries in rows (data records) and
columns (fields). Not all database software claiming to be relational meet the "true"
relational database mathematical theory developed by Edgar Codd
in 1970. For example, dBASE and FoxPro can link two
databases through a common field but are not true relational database programs.
One of the most widely selling relational database management systems is the
Unix-based system from Oracle Corporation. Microsoft introduced two very
popular systems called Microsoft Access and Visual Fox Pro. Most traditional
database packages such as Paradox and dBase also upgraded to relational
database systems. Also see http://www.trinity.edu/rjensen/260wp/260wp.htm#ODBC
.
A language which provides a user interface to relational database
management systems, developed by IBM in the 1970s, is called a Structured Query
Language (SQL). Development is still underway to enhance SQL into a
computationally complete language for the definition and management of
persistent, complex objects. This includes user defined data types, support for
knowledge based systems, recursive query expressions, and additional database
query tools. It also includes the specification of abstract data types (ADTs), object identifiers, methods, inheritance, encapsulation,
and all of the other utilities associated with object data management.
The November 1997 issue of the Journal
of Accountancy beginning of p. 52 reports the results of an interesting
survey called "A Journal Survey of The Software CPAs Use.” In particular,
"Total" Database Applications reported on Page 57 are as follows:
56% MS Access
07% dBase
04% FoxPro
09% Paradox
01% R-base
16% Other
07% Two or more of the above
Prior to relational databases and network computing, computers in accounting mostly emulated what bookkeepers previously recorded and processed by hand. A paradigm shift transpired when networked computing linked relational databases within local area systems (LANs), metropolitan area systems (MANs), wide area systems (WANs), and the entire planet via the Internet. General configurations of networks include the bus, star, and ring topologies. The Internet commenced in 1969, but did not become popular for networked accounting systems until after the World Wide Web (WWW) was invented in 1990. The Internet is collection of millions of computer networks having a small number of protocols (e.g., FTP, HTTP, Mailto, and Telnet protocols) that allow disparate hardware and software systems to communicate with one another. Business firms quickly established password schemes that allow the Internet to be used for internal networked communications (Intranets) and controlled external communications (Extranets). Information packets can be carried efficiently via linked copper wire and fiber optic transmission lines as well as newer wireless devices.
EDP auditing
was relatively simple prior to networked computing systems and relational
databases. During the long period of
paper trails (invoices, vouchers, cancelled checks, and punched cards), there
was a hard copy audit trail that could be “detail tested” during audits. The paradigm shift to networked computing and
relational databasess is quickly eliminating hard
copy audit trails. Orders, purchases,
sales, and payments commenced transpiring without ever putting pen and ink or
even printer toner to paper. Bills can
be paid with direct deposits. Orders can
be recorded in
This paradigm shift to relational databases eventually extended to Enterprise Resource Planning (ERP) comprehensive information systems. Bob Jensen maintains a threaded web document on ERP technologies in accounting and accounting education. [v] Murthy and Groomer [vi] state the following:
An ERP system like SAP R/3 provides a number of advantages
and effectively overcomes the drawbacks inherent in manual and even many
automated systems. First, there is no data redundancy--data relating to a
particular resource, agent, or event entity is stored only once. So there
will be only one record for customer number 1348764 in the database. This
is a primary benefit of the database approach.
The older file-oriented approach, and obviously manual systems, often
contain multiple instances of the very same data. Apart from the extra
storage space occupied, which is less of a concern today when a 10 gigabyte
hard disk costs about $120, the existence of multiple instances can very easily
lead to inconsistencies if all instances are not updated in a consistent
manner.
A second advantage of ERP systems is
that online validation of input ensures that the data in the system is
error-free. Although most automated systems also support online data
validation, the integrated database-driven approach inherent in an ERP system
allows for more comprehensive data validation by immediately accessing all
affected tables at the time of data input.
In this manner, an ERP system can ensure a high degree of accuracy in
the data in the system.
As discussed extensively in this
chapter, a key advantage of ERP systems is cross-functional integration.
The integration of related subsystems provides numerous benefits including (1)
more streamlined ("reengineered") procedures, (2) data does not have
to periodically "ported" between subsystems, as is often necessary for
older automated systems, and (3) the use of "triggered procedures"
(e.g., when reorder point is reached as a result of a sale, then a purchase
order can automatically be generated for that item). Cross-functional integration in an ERP is a
recognition that individual functional areas or departments do not operate in a
vacuum--they must coordinate their processes with those occurring in other
related departments to effectively achieve business objectives.
A related advantage of ERP systems is
the ability to provide answers to cross-functional and ad hoc queries. By
virtue of the integration of related subsystems, and because the data are
stored in a relational database system, users can obtain answers to almost any
question they might have regarding the operation of the business. Furthermore, these reports can be run online
with the results being generated in real-time.
Thus, a sales report can show an up-to-the-minute picture of sales for a
product or in a region. Related to this
ability to generate real-time reports is the ability to "drill down"
to the details underlying the summary numbers in reports. So if a manager
wanted to see the details behind a summary number in a sales report in R/3, she
can simply double-click on the number to view the detailed line items that comprise
the summary sales figure. Note that the
most reports that can be generated in the R/3 system are accessible in two
ways: (1) within each functional module (financial, logistics, human
resources), and (2) using the "Information systems" menu option from
the main R/3 menu.
The advantages of an ERP system,
which are essentially the advantages of the database approach we have discussed
throughout the book, are summarized in the table below:
|
Advantages of ERP Systems |
|
1. No
data redundancy, which virtually eliminates inconsistencies in data |
|
2.
Online data validation, which results in data being relatively error-free |
|
3.
Cross-functional integration, which facilitates streamlined and automated procedures
that span functional areas |
|
4.
Ability to perform cross-functional queries to answer enterprise wide
questions |
|
5.
Ability to generate real-time reports |
|
6.
Ability to "drill down" to view details of summary reports |
The
dark side is that information systems integration (e.g., ERP systems such as
SAP) requires rigid structures that stifle creativity and innovation in
information input and analyses. ERP
systems are also difficult to adapt to the Internet. The
following is from InformationWeek Newsletter on
SAP Faces More
Internet Skepticism
SAP is under
fire for being an Internet laggard, and its assertions this week that mySAP.com
has evolved from a marketing concept to a viable product line didn't change
matters much. Overall, the conference has underwhelmed
some attendees, who lament SAP's lack of marketing
prowess and its defensive posture as it struggles to become an e-commerce
player. [vii]
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The First Generation Versus the Second Generation of Network Computing
The First Generation of network computing entailed uniformity of networked computer systems for computing and relational databases. However, a business firm often had seemingly incompatible systems housed within the same building (e.g., the purchasing department system might be quite different than the payroll department system). Problems were even more immense for firms having multiple divisions or subsidiary companies scattered about the nation or the world. Pressures mounted for “middleware” that allowed disparate systems to communicate with one another and allow relational databases to be maintained across those disparate systems.
The First, Second, and Third
Generations of network computing are reviewed in greater detail in an online
document called Network Databases: Past, Present, and Future, by Bob
Jensen. [viii] Please refer to
that document for greater details regarding middleware, CGI scripting, NSAPI,
ISAPI, etc.
By
way of illustration of Second Generation network computing and relational
database accounting, click on http://www.dell.com/store/index.htm
and note how any person in the world can choose different combinations of
attributes for a computer and signal Dell Corporation to give you a
price quotation. After choosing a given combination of hardware and software
features of a particular computer, a user may click on the "Update
Price" button. The signal goes to the Dell server-side computer that
re-computes the price and then transmits that price back to the client machine.
In addition users may fill a shopping cart with hardware and software, compute
the price of the entire invoice, and place the order from a client machine.
Federal
Express, UPS, and various other package
delivery services have put up web sites that allow customers to access parts of
their internal database system. These companies have invested a great deal of
money and time over the past several years to make their database systems
valuable tools to track packages. Previously, customers would have to call the
company on the phone or make an office visit to track a package. A customer
service representative would have to log into the database and do tracking on
the package. Customer direct access reduces the need to have customer service
agents and other employees servicing customers.
Another
example is the virtual Ernie
web consultant of Ernst and Young. Ernie resides on
a server-side computer and dynamically interacts with paying customers to give
advice on financial reporting, taxes, financial planning, real estate,
information systems, computers, and other areas. [ix]
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The Third Generation of Network Computing: Distributed Computing and (Slowly) Emerging XML, XHTML, XBRL, and RDF Standards
The
Third Generation of network computing is
reviewed in greater detail in an online document called Network
Databases: Past, Present, and Future, by Bob Jensen. [x] This has only a very recent history and is best termed the
era of “Distributed Network Computing” with client computer and server
interactions. You will find the following definition at http://www.whatis.com/
Front-end and back-end are terms used to characterize program
interfaces and services relative to the initial user of these interfaces and
services. (The "user" may be a human being or a program.) A
"front-end" application is one that application users interact with
directly. A "back-end" application or program serves indirectly in
support of the front-end services, usually by being closer to the required
resource or having the capability to communicate with the required resource.
The back-end application may interact directly with the front-end or, perhaps
more typically, is a program called from an intermediate program that mediates
front-end and back-end activities.
For example, the Telephony Application Program Interface (TAPI)
is sometimes referred to as a front-end interface for telephone services. A
program's TAPI requests are mapped by Microsoft's TAPI Dynamic Link Library
programs (an intermediate set of programs) to a "back-end" program or
driver that makes the more detailed series of requests to the telephone
hardware in the computer.
As another example, a front-end application might interface
directly with users and forward requests to a remotely-located back-end program
in another computer to get requested data or perform a requested service.
Relative to the client/server computing model, a front-end is likely to be a
client and a back-end to be a server.
One
of the best illustrations of the Third Generation distributed network computing
is NC computing. The new network (NC) computers rely upon servers for operating
systems and software that in other computers are normally kept on resident hard
drives. This is Third Generation interaction in its purest sense between
servers housing the "guts" of software and data networked long
distances to remote "gutless" client machines.
CBS
News had a Third Generation JavaScript distributed network application during
the 1996 elections in the
Leading firms are presently centralizing massive enterprise-wide data into a database connected to the Internet. Oracle Corporation claims that doing so (shutting down nearly many databases in 38 global data centers) worldwide saved the firm over $1 billion in the initial year.
We thought the Internet
was the most astonishing transformation, as far as business was concerned,
since James Watt, with the steam powered engine, ushered in the industrial
age,: said Larry Ellison, Oracle’s outspoken and flamboyant chairman.
The
idea is simple: put Oracle’s business
software for everything from sales management to inventory tracking on a few
powerful computer servers running its database software.
By centralizing and organizing masses of data, all employees can get the same information through a Web browser from anywhere at any time. [xi]
This enabled 43,000 Oracle employees from all divisions in over 100 countries to collaborate efficiently and effectively. Tracking and accounting for operations became much less costly as well as providing more timely information.
Probably nothing worries Microsoft Corporation more than the
emerging Third Generation of distributed network computing. Under distributed computing networks,
computing is less dependent upon operating systems such as Microsoft’s Windows
2000 and Linux. Different systems
communicate with one another through network standards such as HTML, XHTML,
XML, XBRL, XFORM, and RDF. Readers not
familiar with these acronyms are referred to an online document entitled XML, XHTML, XFRML XBRL, XForm, and RDF Watch by Bob Jensen. [xii] I prefer to classify these concepts as
“Information DNA.” They depict
meta-level DNA codes that are tagged to each piece of information. Readers do not see the DNA in the same sense
that plant and animals to not carry a visible biological DNA tag that describes
many aspects of what they are and will eventually become with the passage of
time. Fore example, DNA in genes
determines eye coloring, skin pigmentation, sex, etc. We know the DNA codes exist even though
natures DNA codes have not been fully cracked.
Information DNA such as XML describes invoice elements in a purchase or
sales transaction even though the XML codes do not appear on the invoice
itself.
Nature sets the biological DNA codes. However, it is up to humans to set the information DNA codes. Due to frustrations with the slowness of international standard setting bodies, large companies have developed some standards that are now in place and are being used in spite of being officially sanctioned as such. Corporations around the world are using their own versions of XML to process business-to-business networked transactions prior to the setting of officially sanctioned global XML standards.
You
can read the following in “XML is Not Yet a Cornerstone Technology," Application
Development Trends, April, 2000, pp. 55-60.
[xiii]
Despite the promises, corporate developers need to make smart
decisions about how to apply the technology as it is today to specific
integration problems and challenges. Perhaps just as important, developers have
to disregard some of the growing myths that surround the eXtensible
Markup Language (XML). This article will show that while XML is not the
cornerstone of EAI, it is an important enabler that, when used correctly, can
be a key weapon in any corporation's IT arsenal.
Nevertheless, the Web as a delivery mechanism and XML as the
delivery format is already a very powerful combination that can enable
integration across the board for business-to-business (B2B),
business-to-consumer (B2C) and application-to-application (A2A) connectivity.
As
we narrow in on Financial Reporting DNA (as a subset of XML), we can read the
following at ComputerWorld,
Big names back new XML-based financial standard
By Maria Trombly
Some of the world's top financial institutions have formed a consortium to
promote a new, XML-based standard for exchanging financial data over the
Internet.
The group, the XBRL Project Committee, expects to launch the
standard by July 1, the American Institute of Certified Public Accountants
(AICPA) announced yesterday.
The standard, Extensible Business Reporting Language (XBRL), is
also backed by big-name financial service companies such as Standard &
Poor's, Arthur Andersen LLP, Deloitte & Touche
LLP, Morgan Stanley Dean Witter, Ernst & Young LLP and
PricewaterhouseCoopers.
In addition, some of the biggest names in the computer industry
have lined up behind XBRL, including IBM, SAP AG, Microsoft Corp. and Oracle
Corp. Financial reporting companies such as EDGAR Online Inc. and Reuters Group
LP, as well as the International Accounting Standards Committee, are also
backing the proposed standard.
The standard will be released in stages. The first release,
scheduled for July, will cover specifications for publishing companies'
financial statements in XBRL, said Mike Willis, chairman of the XBRL steering
committee and a partner at PricewaterhouseCoopers. Other specifications, which
will cover additional types of business reports — such as regulatory reports
including Securities and Exchange Commission EDGAR files, tax filings and
business event reports such as press releases — will be issued within the next
18 to 24 months, he said.
Willis said that because these specifications are simply
electronic dictionaries for the XML standards that are already used in a great
number of software applications, they will be simple to install and use.
"We have vendors such as SAP who are already working to
integrate XBRL directly into their software, so when their customers want to
run their financial statements, XBRL is an option," said Christy Reichhelm, an enterprise resource planning industry manager
at Microsoft and co-chair of the public relations and communications working
group for XBRL.
"This will be a new feature in these software packages, so
some type of software upgrade will be gone through," she added. "But
it would be minor."
XBRL will be a free specification that uses accepted financial
reporting standards and practices to exchange financial statements across all
software and technologies, including the Internet, the AICPA said.
"XBRL . . . greatly benefits all users of financial
information," said Robert Elliot, chairman of the AICPA, in the statement
released yesterday. "XBRL solves two significant problems for users and
preparers of financial statements by providing efficient preparation and
reliable extraction of financial data across all technology formats, including
the Internet."
The Chaotic Present
State
The Present World of Chaos in the Accounting Profession
The present state of accounting can best be described as chaotic. Major causes for such chaos include the following:
- Traditional
accounting information is shrinking in value to internal and external
decision makers. For example,
Baruch Lev estimates that items presently included in the balance sheets under
U.S. GAAP account for only 1/6 of the estimated value of U.S.
Corporations. [xv] Reasons are largely due to the
exponential rise of value of intellectual capital, human resources,
in-process R&D, reputation, customer loyalty, and other intangibles
that are not assigned values in the balance sheet except under special
circumstances. The accounting
profession is in a mad scramble to increase the relevance of accounting
information and the accounting process.
- Internal
managers and external investors are unhappy with their ignorance about
risk. One of the complicating
factor is that intangible assets, unlike most tangible assets, fluctuate
wildly in value and can zoom up or down in value in a matter of days. For example, a competitor may introduce
software that eliminates more the half of the value of a company. Another source of risk is dependence
upon key employees with unique skills.
Such employees might resign without notice. In the age of technology, dependence
upon key employees increased dramatically.
- Present
accounting standards are a concoction of national (e.g., FASB) and
international (e.g., IASC) standards that are inconsistent and conflicting
in an era of exploding globalization of commerce, investment, and
financial reporting. Most standard
setting bodies favor requiring more fair value accounting, but resistance
from the corporate world, especially from banks, is a serious stumbling
block to efforts to improve reporting of value and risk. [xvi]
- Global
financing of enterprise has become enormously complex. For example, corporations and banks now
manage value and risks with thousands of customized derivative financial
instruments combinations that are exceedingly difficult to account for
under existing standards and accounting knowledge. Managers and investors are clamoring for
accountants to do a better job of accounting for value and risk quagmire
of contracting complexity.
- Enrollments
in higher education accounting programs are falling rather dramatically. The AICPA announced a 23 percent decline
from 192,330 accounting majors in 1995 to 147,880 students in 1999. [xvii] Reasons are many and varied, but the
accounting profession is losing a high proportion of the top young talent
to other professions. Career
opportunities in managerial accounting are shrinking. Germain Boer
calls management accountants “confused.”
Right now management accountants seem confused about who or what they are or what the field of management accounting is or should be about. [xviii]
Michael Maher writes that accounting functions are being downsized in corporations. He writes the following:
Whereas management accounting in business schools appears to be alive and well, management accounting in paractice faces problems. These difficulties may reduce the future demand for management accounting courses because students might not see good job opportunities in management accounting. [xix]
- The
public accounting profession is under attack by government agencies and
the courts to divest itself of its most profitable lines of business
(e.g., information systems consulting) that are growing much faster than
traditional services such as auditing and tax return preparation. The SEC in the
Robert K. Elliott, Chairman of the Board of Directors of the AICPA and an executive partner of the AICPA has long contended that the auditing side has diminishing profitability as it becomes priced more like a commodity with little, if any, distinction in value to shareholders with respect to what major public accounting firm performs the audit. Also he contends that traditional financial statement auditing is not a growth market relative to assurance services and consulting. He further adds that computers will be performing more and more of the audit tasks. Bob Elliott was the Chair of the AICPA Special Committee on Assurance Services. The AICPA has a major website on this topic at http://www.aicpa.org/assurance/sitemap/index.htm. One of the key documents is at
The market for traditional CPA accounting and auditing services will become more competitive. Revenues have been flat for the past 7 years on an inflation-adjusted basis. Price competition among CPAs will continue to hold down revenues.
Sources:
Accounting Today and U.S. Department of Labor
(The data shown are for the 60 largest firms.)
The above AICPA report has another section that reads as follows:
The traditional output of accounting and auditing and tax work has lost market share for decision information. Users look to many other sources for information on which to base their decisions. As they turn to other sources, they are less likely to insist on traditional CPA services.
Users are already demonstrating their willingness to make decisions on different types of information. For example, rather than insist on audited or even reviewed financial statements many lenders make loan decisions based on computerized "credit scoring" techniques.
I think that a whole new line of assurance services will arise from this Gnutella-style paradigm shift in distributed file sharing. Networked databases and analyses (e.g., from certified financial analysts or from teenage kids) will be networked on distributed network software such as Gnutella and FreeNet. I predict that networking in this manner will greatly enhance opportunities for assurance services to add legitimacy and selectivity to an overwhelming menu of custom reporting that will one day be available online. For example, public accounting firms may one day review assumptions and attach review watermarks to distributed network files. This is an extension of what the AICPA now allows for CPA reviews of forecast assumptions --- only now the analysis may apply to intangibles ("real" options, intellectual capital, human resources, R&D, reputation, synergy, etc.) value estimation and risk evaluation. One old-time reference on assumption analysis is Jensen, R. (1983). Review of Forecasts: Scaling and Analysis of Expert Judgments Regarding Cross-Impacts of Assumptions on Business Forecasts and Accounting Measures. Studies in Accounting Research No. 19, American Accounting Association, 1983. What is seemingly old stuff from 1983 may be rejuvenated as assumption legitimacy is "assured" for distributed financial analyses in Gnutella-type distributions on the Internet..
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The Present World of Chaos in Accounting Information Systems
The systems presently in place to perform the accounting tasks are in a state of disarray amidst constantly changing information system technologies. Some of the causes or such chaos are as follows:
- Accounting
information systems are patchwork quilts of older and newer
technologies. Legacy COBOL systems
remain in place in the rapid emergence of Third Generation distributed
network computing. Security risks
are exploding in an era where newer and older systems are communicating
tenuously and sometimes not at all.
Linux is soaring in popularity, and the future of Windows 2000 is
more in doubt. Third Generation
standards for XML, XHTML, and XBRL have not yet emerged or field
tested.
- Information
guerilla warfare is spreading like wildfire among corporate and government
information systems. Networked
systems are particularly vulnerable to attack.
- Networking
technologies are in a huge state of confusion and change. For example, DSL providers and cable TV
companies are in a slug fest to establish market shares. Whereas
- Just as accounting information systems are beginning to get a handle on relational database systems, the future of such systems is increasingly in doubt. Object-oriented databases, armed with new meta-data tags such as XML, are emerging as the database systems of the future. The controller who has just learned to drive a relational database car must know become a pilot for the lofty object-oriented jet airplane database systems of the future. [xxi]
The Chaotic Future of Computers in
Accounting
Electronic Commerce: The Chaotic Present and future
I will begin this section with a rather long quotation from Cohen and Jordan. Parts of that quotation, in turn, will be further analyzed in subsequent sections.
Given the coming
advancements in agents, directories, and databases, along with the rapid
increase in the capacity of both fiber optics and computation, we see four
structural changes accelerating:
- Business will be increasingly forced to move in real-time. As business-to-business interaction becomes more automated ("I'll have my database talk to your database"), the slowdowns incurred by the movement of paper will diminish. As "information float" is reduced, response times will need to drop.
- The normalization of online business processes will become both more and less important. As real-time market signaling obviates the need for standard operating procedures that were necessary when the customer/market was invisible inside a functional area, actual market signals will be felt deeper and deeper within the enterprise. At the same time, responding with ad hoc efforts to global market signals will be less tenable: "I'll get back to you" is already unacceptable to many customers.
- The lines of where "the enterprise" starts and ends will get fuzzy as extranets connect vendors into networks of capabilities. The trend toward web-based outsourcing of office supply and other MRO procurement (enabled by such vendors as Ariba) serves as an early indicator of the future shape of business. Major jurisdictional, cultural, and opera- Jakka Sairamesh, "Price-War Dynamics in a Free-Market Economy of Software Agents," available at an IBM website. [xxii]
- A corollary is that opportunities will exist for emerging roles in business-to-business space: as the environment changes, new entities emerge within an ecosystem. Nets Inc. and other big market integrators have failed in their attempt to link knowledge, transaction, and community after finding that execution of such grand plans was far more difficult than they proposed to their funders. Now, such startups as Fastparts and established players like American Express are dramatically reshaping corporate procurement.
The question is
not whether these structural changes are coming, but when. We believe that
within the next 18 months, most of these inhibitors will give way to advances
in technology and acceptance to changes in decades-old business processes.
Companies will miss these trends at their own peril: yet coordinating business
and technology change at unprecedented speed will test most corporations'
capability as never before. The winners in the new environment will have to
earn their mantle the hard way. [xxiii]
If you believe the paragraph above, then it is essential for the accounting profession to adapt to these enormous structural changes.
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Value Added From Real-Time Centralized Databases on the Internet: Quote 1 From Above
Business will be increasingly forced to move in real-time. As business-to-business interaction becomes more automated ("I'll have my database talk to your database"), the slowdowns incurred by the movement of paper will diminish. As "information float" is reduced, response times will need to drop.
Third Generation computing increasingly makes it possible to get a better handle on customer and operational profitability. In the previous section, it was mentioned how Oracle saved $1 billion in the first year of closing down 38 global data centers in favor of massive centralization on only a few Internet databases. This trend will continue for virtually all business firms for many reasons, one of which is the value added by more detailed tracking customer profitability. Increasingly, companies will want to add value in a way that Continental Airlines added value in the manner described below:
Continental Airlines CFO Lawrence Kellner
sketched the impact of e-mail and voicemail networks on the company's financial
and operating results. Five years ago, Continental relied on cumbersome monthly
mailings and last-minute faxes to advise meal caterers of planned meal
requirements and last minute changes. The company only knew, on average and on
a monthly basis, its catering costs system wide. "Today it's all
online," Kellner said, "Caterers can check
in and be updated constantly. And we can track profitability flight by
flight."
Continental makes detailed information about flight profitability available to station managers so that they will know which customers and which flights make the most money for the company. The information helps managers decide which passengers deserve extra attention; helps them, in other words, make decisions that add value. [xxiv]
A Warning About the Limits of Technology in Accounting:
Managers always want profit measurements down to the finest level of detail
such as for each purchase or each customer.
However, it should be stressed that no advances in technology will
overcome all complications in providing such detailed measurements. The major obstacles are joint and common
costs. Such costs by their very nature
cannot be tracked down to each product sold without arbitrary cost
allocations. For example, the cost of
fuel on a flight affects the profit attributed to each passenger and each piece
of cargo carried on that flight. Fuel
cost is a joint cost of all passengers and cargo items on the flight. No computing advances and technologies can
overcome the inherent problems of measuring each product’s profit on any
flight. Any arbitrary allocation (such
as each product’s weight) of joint costs may be misleading to decision
makers. For example, if the allocation
of joint costs indicates that no profit is being made from heavier
economy-ticket passengers (including their luggage) on a flight, increasing
ticket prices may not be a good idea for the overall profitability of such
flights. Flying empty seats is even less
profitable.
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The Deconstruction of Traditional Ways of Doing Business: Quote 3 From Above
The lines of where "the enterprise" starts and ends will get fuzzy as extranets connect vendors into networks of capabilities. The trend toward web-based outsourcing of office supply and other MRO procurement (enabled by such vendors as Ariba) serves as an early indicator of the future shape of business. Major jurisdictional, cultural, and opera- Jakka Sairamesh, "Price-War Dynamics in a Free-Market Economy of Software Agents," available on an IBM website. [xxv]
Locke stresses the
deconstructionist power of the Internet.
On this I have to agree, only I would take it a step further. This power is growing stronger with respect
to politics, government controls, and democratization of the global community.
And Internet
technology has also threaded its way deep into the heart of Corporate Empire,
where once upon a time, lockstep loyalty to the chairman's latest attempt at
insight was no further away than the mimeograph machine. One memo from Mr. Big
and everyone believed (or so Mr. Big liked to think).
No more. The
same kind of seditious deconstruction that's being practiced on the Web today,
just for the hell of it, is also seeping onto the company intranet. How many
satires are floating around there, one wonders: of the latest hyperinflated restructuring plan, of the over-sincere
cultural-sensitivity training sessions Human Resources made mandatory last
week, of all the gibberish that passes for "management" — or has
passed up until now. [xxvi]
This begs the question of what “accounting entities” are to
be accounted for in the future? Instead
of accounting for Corporation XYZ as an entity, subsets of XYZ might be
accounted for as separate entities as corporate entities are deconstructed by
Internet technologies. The initial
public offering (IPO) and separate accounting
for the consulting division of the giant KPMG international accounting
firm may only be the tip of the iceberg.
In October 1996, the holding
company of Americna Airlines, AMR Corp., sold 18% of
its computer-reservations system, called SABRE, to the public. It held on to
the remaining 82%. In the future, giant
conglomerates will increasingly sell shares in subsets of its intangible
assets. Baruch Lev points out that the
SABRE system was an intangible asset valued at virtually nothing on the AMR
balance sheet but constituted over 50% of AMR value (a number that rose to
nearly 70%).
Economists
call physical assets "rival assets" -- meaning that users act as
rivals for the specific use of an asset. With an airplane, you've got to decide
which route it's going to take. But knowledge assets aren't rivals. Choosing
isn't necessary. You can apply them in more than one place at the same time. In
fact, with many knowledge assets, the more places in which you apply them, the
larger the return. With many knowledge assets, you get what economists call
"increasing returns to scale." That's one key to intangible assets:
The larger the network of users, the greater the benefit to everyone. [xxvii]
All invited participants at the May 18-19, 2000 conference on "Implementing e-Business in Your Curriculum" sponsored by Ernst & Young, LLP and the American Accounting Association, received a free copy of the book Future Wealth by Stan Davis and Christopher Meyer, both of whom are are affiliated with Ernst & Young. The basic theme of the book is that shares of intangible assets within a firm, including intellectual capital assets and even individual employees, will have their values traded in equity markets.
Financial markets already provide investors with a place for betting on the future performance of corporations through stocks and bonds. We now need to build comparable markets for packaging and trading human capital. The architects and erectors of this neew securities industry stand to reap huge rewards in the coming millennium. The operatives and the asset-rich also stand to gain by preparing themselves to trade both others’ and their own human capital, starting by posting resumes and surfing the Internet for talent. [xxviii]
This has tremendous implications for accounting. Human resources not presently valued at zero on the balance sheet will become recorded assets on the balance sheets of other companies. An employer may even buy shares in its employees. As shares of employees are bought and sold daily, it becomes possible to value comparable employees who have not yet gone to market.
Even risks might be purchased, sold, and managed like investments.
Companies must analyze their risks to determine not only which to take, but also how best to manage and trade the highest bidder. For example, should a company buy its key supplier or hedge against the loss of supply? Strategic risk units (SRUs) can measure and trade the risks that go with such situations. As equal partners of strategic business units (SBUs), they can help companies to trade risk actively. As such, they’d leverage core value and discover new value thay may cut across SBUs and the entire company. Risk presents opportunity as well as trouble. Companies should seek out and optimize it. [xxix]
The main point here is that corporations will deconstruct in a variety of ways, including the equity trading of subsets of human resources, SRUs, logo value, in-process R&D, etc. The entire concept of a “corporation” is being redefined.
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Value Added from Knowing More About Customers: Accounting for Marketing Programs
Internet users tend to despise it when personal data is being unknowingly collected and distributed. However, they will provide data for a price or a convenience. Newer technologies will enable firms to entice the public to provide data. This, in turn, will improve upon one of managerial accounting’s greatest failings --- accounting for marketing programs. For example, soon after a promotion is launched, it may be a huge advantage to monitor public behavior. Consider the example from Sprint described below:
Focus on leading indicators. For example, in order to measure the success of its marketing programs, Sprint measured the traffic moving through its digital switches. Focusing on this leading indicator rather than on the lagging indicator of billings allowed Sprint to increase or decrease spending on the programs within 48 hours instead of 60 days. Similarly, auto dealers found that foot traffic through dealerships is a leading indicator of sales and tracked to decide (well before P&L's came in) whether to back off from or boost advertising and promotion. [xxx]
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Question
What are fullerenes?
Answer
Fullerenes, those soccer ball–shaped carbon molecules also
known as “buckyballs,” have generated outsized expectations
ever since their discovery in 1985. Scientists think they could eventually be
used in chemical sensors, fuel cells, drug delivery, cancer medicines, and
smart materials. Yet while commercial demand for fullerenes is gradually
emerging, so are fears that these molecules, which measure only a few
billionths of a meter across, pose serious health and environmental hazards.
"Mitsubishi: Out Front in Nanotech," by Stephen Herrera, MIT's Technology
Review, January 2005 --- http://www.technologyreview.com/articles/05/01/issue/herrera0105.asp?trk=nl
To some, however, fullerenes’ potential is too great to ignore. Mitsubishi Corporation, which holds a number of key patents and licenses on fullerenes, began laying the groundwork for their commercialization in 1993, and company executives say they realized from the beginning that they would need to do voluntarily what many companies won’t do until forced: consider the concerns of stakeholders in academia, government, the environmental community, and the public.
In 2001, Mitsubishi Corporation and Mitsubishi Chemical, one of its sister firms in the Mitsubishi group, created Frontier Carbon to manufacture fullerenes. Today Frontier produces only a small amount of fullerenes for its 350 Japanese customers. But already it can make 40 metric tons of fullerenes a year and will eventually expand that capacity to 1,500 metric tons per year. No other producer comes close to these volumes. In fact, nanotechnology industry observers say the two Mitsubishis are taking a big risk by powering up fullerene capacity before there’s a market. They are, in one nanotechnology pundit’s words, “putting the cart, the barn, and the farm before the horse.”
And then there are the health concerns. It’s well known that fullerenes suck up loosely bound electrons from neighboring molecules. Inside the body, this phenomenon releases free radicals that can wreak havoc on cell chemistry. And in a possible confirmation that fullerenes produce this effect, a highly publicized study described at an American Chemical Society meeting last March found that bass fish exposed to the molecules developed brain damage.
Counteracting such fears won’t be easy, since Japan, along with most of the industrialized world, lacks a government-approved system for monitoring, testing, or certifying nanotechnology products. But thanks in part to the efforts of Mitsubishi Corporation, Mitsubishi Chemical, and Frontier, Japan is well on its way to becoming the first nation with such protections, which could help inoculate its companies against a nanotech backlash.
Bob Jensen's threads on nanotechnology and ubiquitous computing are at http://www.trinity.edu/rjensen/ubiquit.htm