The June issue of Strategic Finance Magazine has an interesting article called,
“Provide Insight or Face Extinction,” by Noah P. Barsky and Anthony H. Catanach
Jr. The main theory is the traditional accounting equation, and how it should be
changed to provide information for decision making. For five centuries its focus
has been on accumulating, processing and reporting the results of economic
activity for many types of organizations. Recently, due to increased competition
and advances in industry, it has been suggested that we reconsider the
usefulness of this equation.
Managers have always recognized that in order to make good business decisions
they need proficient information. Information however, can only be gathered by
assessing collected data, and adding personal insight, if it is to assist the
decision making process. Raw data is of little help to managers, so this
thinking leads us to a new equation, which is more suited to today’s competitive
workplace:
Data + Insight = Information
If firms consider using this updated accounting equation they must understand
that it is most effective when data processing technologies and creative
thinking are used together. This supports the reasoning behind firms beginning
to seek financial consultants rather than accountants because they can provide
added insight to the data. Data that hasn’t been evaluated has much less value
to management because it can’t be utilized as effectively in decision making.
Computer software packages can now perform a broad range of traditional
accounting functions making it easier for businesses to generate financial
statements or leases using very little human involvement. Still, those programs
can only produce data and are not able to create information because they cannot
provide any insight. Insight requires value-adding human qualities to deliver
analysis and interpretation and can’t be found in any computer program.
If they don’t want to be made redundant by computers, accountants should realize
that they are no longer expected to just prepare financial statements that
simply comply with the minimum standards and requirements of the past. Companies
and clients are now expecting reports to be dealt with strategically to provide
them with insight into how the data effects their business processes. Senior
executives should therefore seek individuals who can provide them with
information, and not just routine data-creation.
Decision-making is perhaps the most important role of management, and without
useful information provided by accountants, it would be difficult to make a
choice among alternative business strategies. We have learnt that providing
information for decision making is the first objective of managerial accounting
activity and stresses that accountant’s work together with management to
formulate plans based on their data. As long as this is the case, the new
accounting equation is more suitable because it encourages employers to draw on
their vast employee knowledge base, to provide insight for any business problem.
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