Why Accounting Measures of Performance Offer Flawed Measures of Value Creation - Coursework Example

Topic: Accounting Measurement Of Value Creation. Name: Institution: Course: Tutor: Date: The greatest purpose of many businesses that have been performing successfully is the establishment of value to their employees, customers and investors. Amit and Zott (2001) indicate that the emphasis lies within the inter linkage of the performance between these groups of people. With the primary focus being the customer, there is need to understand that they cannot perform without the right conditions for employees together with correct returns’ states of the investors. According to Walter et al (2001), value creation is the state when a business records higher revenue than the expenses applied. Value creation activities are primarily involved with production, vending and preservation of services and products. These activities include: Inbound logistics, operations, outbound logistics, marketing and sales and servicing. Meyronin (2004) denotes that with the introduction of information technology, value creation has been enhanced in terms of efficiency and speed especially with immediate outputs and inputs which has led to a decrease in the costs of interest. This paper addresses the challenges that face measurement of value creation activities using information technology. Though with advancement in technology, efforts to come up with conventional ways of adding value to assets have not yet been developed according to Vargo et al (2008). This is explained by the fact that the involved shareholders are being exposed to different standards of expertise. As a result, every individual judges the services and products offered according to their preferred terms. This makes it difficult to define the extents to which uniform measures of value creation can be achieved. Another challenge is that information technology has challenged management advancements as managers in well organized firms are lacking initial production structures. A study conducted by Gold et al (2001) found out that over the years white collar productivity has been affected by information technology in terms of labor substitution. But the challenge has been that white collar employment has been bloated principally in assets. This is merely explained by the increased levels of competition which calls for restructuring of services in order to match the ever changing international standards. Measurement of value creation is more pronounced in services as compared to manufacturing. This is explained by the fact that service transactions do not exist in aggregation but rather they occur distinctively. There are instances when data is abundantly found yet only arbitrary classifications are made. Jonsson et al (2008) in their example in research denote deposits of time in banking production as inputs while the outputs were the deposits of demand. The impact drawn from these deposit patterns is difficult and inappropriate to apply in measurements of value creation. According to Billsberry and Rollag (2010) the use of information technology on measuring value creation is challenged by the fact that technological advancements do not necessarily bear instant results. It may take several years. This suggests that for the investors to create pay- offs; there is need for acquisition of high levels of experience before reaching the required proficiency. Existence of such lags leads to remarkable complexity. Strategic optimum investment as defined in the models of learning by using, short term benefits of margin are greater than the short term costs. This causes the firms drive the reap reimbursement and learning curve to scales of economy. At the firm level, information technology is not productive ad denoted by Keeney and Keeney (2009). Interests of the firm aren’t based on the decisions made during investment. Rather, inefficient systems are built, there’s an increase in slack as well obsolete decision making. Managers are normally affected by issues of quantifying information technology benefits. This poses a challenge in the way work organisation, output targets and incentives are appropriated leading to a decrease in profits. This argument is supported by Van Ark (2003) who says that IT is better utilized in manufacturing sector due to its challenged from international markets. For accounting measures used in measuring value creation to be appropriate then they must be able achieve the organizations set goals. According to Ittner & Larcker (2001), when setting up the goals for an organization the firm should not only aim at profit making but should also have a goal to improve the shareholders value as one of it long term goals. The management should therefore be focused on ensuring that the management has in place the right systems and procedures for the measurement of value creation. Value creation measurement is done through the existing accounting performance measurement policies. However, these accounting measures offered at times are flawed and this makes the measurement not up to standards. Hillman & Keim (2001) asserts that, the flawed accounting measures for value creation often create problems to the organization and even bars the organization from the achievement of its set goals.When organizations use flawed accounting performance measurements for value addition then it may end up losing focus on ensuring the welfare of the shareholders. One of the reasons why there are flaw accounting measures for value creation in due to the lack of consistency in these measurement policies. Du Toit & De Wet (2007) point out that, most of the measurements are transactions based yet some of the activities are not put down in the balancesheet yet they contribute to increasing the value of the firm.Value creation is future oriented while most of the measures of performance in value creation are set on past performances this hinders consisteny of the accouting measures relied on in establishing the level of value creation in an organization. Accounting measures are highly dependent on the methods and ratios used in establishing the value creation in an organization. These dependency is what makes the accounting measures for performance to be flawed as they seek to be at par with the generally acccepted accounting standards for measuring performance for value creation.The flaws are created to provide space for multiple methods in the determination of value creation in an organization in relation to the level of innovation adpted in the organnization. Accounting measures for determining the level of perfomance in value creation are often biased in reflecting the level of losses and expences and not the level of gains and revenues this thus makes them to be presented with flaws so that they can meet the organizations goals of improving the wefare of the shareholders (Laux & Leuz 2009). As pointed out by Jensen (2010) accounting measures are offered with flaws because they focus much on the cost of debt and ignore the cost of equity in determining value creattion in an a firm. The cost of equity in an organization is however very important in determining the earnings to each shareholder which in turn determines the value created in an y firm through increasing the value of the shreholders. According to Koller (2010), accounting measures applied in the measurement of the performance of an organization in value creation are presented with flawed so that the risk and risk changes that may face an organization are ignored and thus the organization can enhance its economical value as well as strengthen its cashflow. This however affects the performance of the firm in its creation of value since change in value is not reflected in the level of profits made by an organization.On the other hand some measurments such as those set to value intangible assets ignore the economic value of an asset thus making them inappropriate in the determination of the value created in an organization. There are various ways that can be used in dealing with the problems created by flawed accounting measures in the determination of value creation in an orgatnization. Sharma & Kumar (2010) asserts that, to deal with problems related to the accounting for profits in an organization then firms need to adopt non-generally accepted accounting principles that are able to effectively account for all profits related to the value created in the organization.The management should adopt principle that will support accounting for profits related to goodwill and the economic value created in an organization. This means that these non-GAAPS when adopted should be implemented for internal use by the management.According to Jensen (2010) extending the period for determining the value created in a firm can also help in dealing with the problems created due to flawed accounting measures. This gives the organization time to monitor those factors that affect value creation and thus performance can be evaluated at long-term basis. Du Toit, & De Wet, (2007)further says that, the problems created by the accounting measures being flawed can also be dealt with through the adoption of combined measures in the determination of the value created in an organization. The organization can make use of both financial and non-financial indicators of value creation in the organization. This deals with the problem that is created due to the measurement of value creation being transactions based and thus can include non-financial indicators in the organization. In conclusion, effectiveness in IT measures does not appear openly due to reduced time for testing principles to be applied before their implementation. Also some software and system designs are difficult to operate. IT has evolved over the years which have made current institutions to feel outdated. In order to catch up with the pressure these institutions may fall into the temptation of using information without its keen analysis thus affecting the productivity of value creation. This leads to low productivity which is an indication of transitional economy. Flaw in accounting measures for the measurement of value creation are due to the differences in the accounting principles applied. These is dealt with through using measures that combine both financial and non-financial indicators of value creation. Refrences Amit, R., & Zott, C. 2001, Value creation in e‐business. Strategic management journal, 22(6‐7), 493-520. Billsberry, J., & Rollag, K. 2010, Special issue: New technological advances applied to management education. Journal of Management Education, 34(4), 634-636. Du Toit, E., & De Wet, J. 2007, Return on equity: A popular, but flawed measure of corporate financial performance. South African Journal of Business Management, 38(1), 59-69. Gold, A. H., Malhotra, A., & Segars, A. H. 2001, Knowledge management: an organizational capabilities perspective. J. of Management Information Systems, 18(1), 185-214. Hillman, A. J., & Keim, G. D. 2001, shareholder value, stakeholder management, and social issues: what's the bottom line? Strategic management journal, 22(2), 125-139. Ittner, C. D., & Larcker, D. F. 2001, assessing empirical research in managerial accounting: a value-based management perspective. Journal of accounting and economics, 32(1), 349-410. Jensen, M. C. 2010, Value maximization, stakeholder theory, and the corporate objective function. Journal of applied corporate finance, 22(1), 32-42. Jonsson, K., Westergren, U. H., & Holmström, J. 2008, Technologies for value creation: an exploration of remote diagnostics systems in the manufacturing industry. Information Systems Journal, 18(3), 227-245. Keeney, R. L., & Keeney, R. L. 2009, Value-focused thinking: A path to creative decisionmaking. Harvard University Press. Koller, T., Goedhart, M., & Wessels, D. 2010, Valuation: measuring and managing the value of companies (Vol. 499). Wiley. Com. Laux, C., & Leuz, C. 2009, did fair-value accounting contribute to the financial crisis? Meyronin, B. 2004, ICT: the creation of value and differentiation in services. Managing Service Quality, 14(2/3), 216-225. Sharma, A. K., & Kumar, S. 2010, Economic value added (EVA)-literature review and relevant issues. International Journal of Economics and Finance, 2(2), P200. Van Ark, B., Inklaar, R., & McGuckin, R. H. 2003, Changing Gear: Productivity, ICT and Service Industries: Europe and the United States. The Industrial Dynamics of the New Digital Economy, Edward Elgar, Cheltenham, 56-99. Vargo, S. L., Maglio, P. P., & Akaka, M. A. 2008, On value and value co-creation: A service systems and service logic perspective. European management journal, 26(3), 145-152. Walter, A., Ritter, T., & Gemünden, H. G. 2001, Value creation in buyer–seller relationships: Theoretical considerations and empirical results from a supplier's perspective. Industrial Marketing Management, 30(4), 365-377. Read More