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					  Multi-Dimensional Accounting
   Information Systems and
     Continuous Assurance

                  Richard B. Dull
                Clemson University

                David P. Tegarden
                  Virginia Tech



November 2005    10th WCARS - Rutgers
“Not a great many substantive problems,
  however, are exclusively two dimensional.
  Indeed, the world is generally multivariate.”

                -Edward Tufte
                    from 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

November 2005       10th WCARS - Rutgers
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
       1   3   5   7   9   11   13   15   17   19   21   23   25   27   29   31   33   35   37   39


-0.5



 -1



-1.5



 -2




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


November 2005        10th WCARS - Rutgers

				
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