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Accounting for environmental decision making:

Chapter 4

Accounting for decision making

4. ACCOUNTING FOR DECISION MAKING
WHAT IS ACCOUNTING?
THE CENTRALISING EFFECTS OF ACCOUNTING.
ACCOUNTABILITY
TYPES OF ACCOUNTING SYSTEM

4. Accounting for decision making

What is accounting?

What is the in society in general and in decision making in particular? Gray et al. (1996:73) distinguishes four main types of accounting theory: classical inductive theories, income theories, decision usefulness theories, and information economics / agency theories. These theories try to describe the rôle of accounting.

Classical inductive theories are attempts to find the principles on which current accounting processes are based. Gray et. al. (ibid.) criticise this approach as it needs an a priori definition of accounting to work with. This limits the range accounting systems that are considered and it gives no basis for normative suggestions for future accounting systems.
Income theories try to identify the real profit of an organisation. The problems here are that you need to define whose income you are measuring, and that limiting income measurements to things that can be given a price devalues goods and services that are difficult or impossible to price.
Decision usefulness theories attempt to describe accounting as a process of providing the relevant information to the relevant decision makers. However, just because it is useful for decision making does not mean it is the most useful tool for deciding. There is also little distinction between information needs and information wants. Arnold & Hope (1990) define the intention of a communication system as "that the message sent by the sender ... should influence in an appropriate manner the actions of the receiver." This seems to put accounting on the level of propaganda rather then reporting.
The information economics / agency theories of accounting see accounting information as a good to be traded between rational agents each acting in their own self-interest. This may be descriptive of the way some information is handled but it is not necessarily descriptive of society in general.

Gray et al. (1996) note that this is a simplifying classification and that in practice these categories overlap in many cases. I will look at accounting as a means of reducing information and quantifying the consequences of pass actions. This becomes necessary when we turn to look at environmental information where the degrees of uncertainty increase. There is a wide range of accounting systems each looking at different information, or measuring and reducing this information in different ways. Accountancy is part of an institutional structure that has to know which actions have worked well in the past and the reasons why they may not work in the future.

The centralising effects of accounting.

An accounting system needs to know two things, who it is producing information for, and for what purpose. This defines its main functions, data collection and data reduction.

The first function of an accounting system is to collect data, but obviously not all data is relevant to a particular report or decision. Knowing the purpose of the data allows an initial restriction on the types of data collected. It is seldom useful to know the price of tea-bags in the canteen if a firm wants to know which departments of a office are spending the most on printer paper (if this was a major expenditure within the company).

Hopefully there would be records of the quantities of different types of paper requisitioned by the departments, so that the accountant could then reduce this information to a more manageable form. Photocopying all the requisition forms and presenting them to the management would not be considered to be an appropriate form of data reduction. This means that the data has to reduced further splitting the information into departments and producing totals of expenditure for each paper type. Then this information could be used by managers to try to reduce needless expense. This is obviously a very simple example, the data is easy to measure and assign, given the proper organisation within the company.

But some information is harder to quantify or assign to a particular process. In these cases there are a number of techniques to quantify the information but each has its advantages and limitations. The affect of using a particular method is to give a subjective option on the problem not a true and accurate view. This cannot be helped, if you use too many different systems, you can end up with more information than you had in the first place. However, if you don't use a system, the problem can be more difficult to deal with. The important thing to note is that each accounting system reduces the information in a certain way, presents it from a certain viewpoint. This viewpoint should be taken into consideration when actions are made of {taken from?} this information. This can produce problems when the information is passed to different users who have limited knowledge of the systems used and their limitations.

Accountability

Gray et. al. (1996) see the primary function of accounting as accountability. They define accountability as "the duty to provide an account (by no means necessarily a financial account) or reckoning of those actions for which one is held responsible" (ibid. p.38). This, they say, involve two duties, responsibility to take actions, and responsibility to account for those actions. These duties are a communication between two parties, the accountee (or principle) and the accountor (or agent). The agent takes actions and provides information about these actions to the principle. The principle gives instructions about actions, provides rewards and power of resources to the agent. This takes place within the social context of the parties, ties of accountability may form complex webs in a real situation.

Types of accounting system

Accounting systems can be divided into four main sections, based on who they provide information to.

Financial accounting (Drury 1990) provides information to people outside the organisation, investors, and governments in particular. This provides investors with a means to check how their money is used, and relative information on where to invest.
Cost accounting (Drury 1990) provides the appropriate valuations of stocks and produced goods and {for} financial accounting. This is in some ways a sub-system of financial accounting.
Management accounting (Arnold & Hope 1990) provides information for managers for decision-making and control. It allows internal decisions within a company to be appraised.
National Accounts (van Dieren 1995) provide information for governments, international organisations and investors as to the state of the national economy.

Within these systems there are different ways of reducing information, and valuing goods and services.

[Chapter 5 - Environmental decision making]

Finished 13/9/96
Created 18/9/98