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However, when a shock happens that changes that pattern, the information is no longer relevant. In periods of turmoil, only the most up-to-date information is relevant. The usefulness of the information wanes quickly as the behavior of the company becomes more erratic. After a period of erratic behavior and change, the company may be forced to make internal changes that affect the way they do business. They may make changes that affect their inventory management, sales cycle, stock levels, supply chain, distribution network or other fundamental business functions. New patterns may emerge and the old information no longer applies.
The term "relevancy" can have many different meanings depending on what is happening with the company. A new accounting regime may need to be instituted when a change takes place. Looking at the most recent historical information is one way to determine the relevancy of the accounting information. The analyst needs to look for patterns and cycles, as long as the cycles appear to be consistent, the information could still e considered relevant. Another source of information to help determine the relevancy of the accounting statement is company news. One could monitor the company news to determine if there have been any stories about events that could affect the relevancy of the information in the financial statements.
Like the task of accounting itself, determining the relevancy of the accounting statement itself is an art. Many beginning investors skip the question of relevancy and timeliness. This leads to dangerous assumptions. It is easy to focus on historical patterns and the statements contained in the forward-looking statement, but in order to make the best decisions, investors need to ask themselves, not only what the information says, but how relevant it is to the current financial situation of the company. Information that was relevant to stocks in GM and Chrysler ten years ago, are no longer relevant considering the most recent news regarding those companies.
Accounting for Intellectual Property
One of the more recent topics that could affect the relevancy of the accounting statement is the problem of how to account for intellectual property. The introduction of the concept of intellectual property is relatively new to the accounting profession. Accounting systems typically address the problems and activities associated with the production and distribution of tangible products and services. Modern accounting systems were first developed at the beginning of the industrial era, in response to the needs of mass manufacturing facilities (Giroud n.d.). However, the information age has heralded a new need in the accounting profession.
Intellectual property represents and intangible asset. It can include things such as a brand name, ideal, concept, or software. These items are real business assets. Without them, the business would not be the same. However, placing a monetary value on them can be difficult. The modern accountant must devise a way to place a value on such intangible assets as these (Schweihs 2002). Setting guidelines for the valuation of intellectual property is the focus of a new set of accounting guidelines. Financial Accounting Standards Board Statement of Financial Accounting Standards No. 141 and 142 (SFAS 141 and SFAS 142) requires business to disclose the value of intangible assets and goodwill (Schweihs 2002).
The methods chosen for the valuation of intangible assets are quickly become necessary in order for the accounting information to be considered relevant and accurate. This new addition to already rigid guidelines places an additional strain on accountants. They must not only place a value on the assets, but they must decide how to present the material so that it makes sense to the average person reading the report.
Do We Need New Guidelines?
In the face of the Enron and WorldCom scandals, the public began demanding increasing transparency in the accounting industry. The world of accounting becomes increasingly complex as time goes on. The accountant now must meet increasing governmental regulation, increasing demands for public transparency, and increasing demands to make the information easily understood by investors that may not have a strong accounting background. In addition, recent trends consider accounting and auditing activities separate from one another (the American Assembly 2003).
At the current time, the GAAP remains the gold standard in the accounting industry. However, recent concerns indicate that these standards may need to be updated to reflect changes in business practices and new business models. Many accountants find it difficult to make their business fit into the GAAP standards (Wallison 2004). Because the new business models do not fit neatly into the GAAP, there are concerns that they may not represent the accounting information accurately, or in a way that represents a good snapshot. Information may be easily misinterpreted by those that are not familiar with these new business models. This may create a misunderstanding of future projections as well.
Concerns over the ability of the GAAP standards to accurately represent the climate of a changing business world have not only raised the question of if new standards are needed, and also which direction these new standards should take. Originally, accounting reports were intended for accountants and mangers with extensive training as to how to interpret them. Now we are seeing a new audience, one that has varying degrees of accounting knowledge. In addition to this new audience, the trend towards globalization also raises the question of the need to meet international standards so that everyone can read the financial statement of businesses abroad. The GAAP was developed in a closed environment with a select audience in mind, Now, the financial statement is accessible to a wider range of people.
One solution to the problem may be to require two different versions of the accounting statement, one for managers and technical people and the other for the layperson and the international investor. One of the key problems with this is that it places an even greater burden on an already bogged down accounting profession. It appears that the accounting profession is in need of simplification, not greater complication. Currently, the debate is still out on this topic.
The accounting industry has changed dramatically over the past several years. New standards from the government, coupled with new standards from the public are changing the accounting industry. There is pressure for the industry to become more "user friendly" for the non-accounting professional. In the future, the accounting profession is likely to experience even greater levels of demands for transparency. The accounting profession is under scrutiny by those that do not have the proper background to understand what they are reading. The accountant must answer to nonprofessionals, as well as professionals. They must attempt to meet the needs of all of these groups, while continuing to develop new techniques to meet new business challenges.
New standards are in order. However, these new standards must also meet the needs of a changing audience. The average investor relies on narratives and forward-looking statements as their key tools for making financial decisions. They often do not realize that they must consider the relevancy of historical patterns to the company's current position.
The need for relevancy, transparency, and user friendliness are the drivers of new accounting standards. Perhaps all that is needed are extra sections added to the current reporting standard. Sections need to explain in everyday language, what the numbers mean and how they were derived. Statements regarding the relevancy of the information, similar to the forward-looking statements would make the lay investor aware of these issues. If the accountant made modifications to standard practices, they need to explain these methodology changes so that everyone can easily follow what they did and what they mean.
The GAAP was meant as a set of guidelines, not hard and fast rules. They were designed to unify reports so that everyone understood them. Instead of writing a new set of standards, some simple additions to the GAAP would help to fulfill the changing needs of a changing audience. The accounting audience has changed forever and no longer is limited to the accounting professional. A new report format is suggested that meets the needs of the new audience.
The future of the accounting profession depends on its ability to continually meet increasingly harsh demands from a larger number of people. Accountants need to accommodate many different audiences. Just as the fields of accounting and auditing have evolved into two separate profession, the accountant may one day hire writers that are versed in accounting to deliver a financial statement that is relevant, accurate, and easy to understand by all.
Cadwalader, Wickersham, & Tact LLP. 1999. Application of the Safe Harbor for Forward-
Looking Statements. Findlaw. Accessed April 23, 2009
Giroux, G. (n.d.). American Big Business and Cost Accounting. In a Short History of Accounting and Business. Accessed April 23, 2009
Harris v. Ivax Corporation 182 F.3d 799, 807-08 (11th Cir. 1999). Findlaw. Accessed April 23,
Schweihs, R. 2002. Valuation of Intellectual Property…[continue]
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