Transparency and Intangible Assets: Accounting's Next Decade

Introduction: Transparency as a Defining Challenge

Transparency has emerged as a defining concern for the accounting profession. Many specialists — including professionals and organizations such as Tilley (2010) — regard transparency as the next major issue for the discipline over the coming decade, particularly as businesses continue to outsource, grow more complex, and accumulate greater power.

The Sarbanes-Oxley Act and Corporate Accountability

Among the key regulatory responses to this concern is the Sarbanes-Oxley Act (2002), which came into effect following a series of major accounting and corporate scandals, including those involving WorldCom, Tyco, Peregrine Systems, Adelphia, and Enron. Each of these scandals affected share prices across numerous companies and severely eroded public trust in security markets (Greer & Tonge, 2006).

The importance of the SOX lies in its role in restoring public confidence in American capital markets and corporate financial statements, as well as in making corporate accounting more accountable and strengthening its responsibilities. The Act altered the history of accounting by placing specific checks within the structure of the accounting system, fundamentally changing it from its original form. It achieved this by mandating accurate financial disclosure certified by signing officers (Section 302) and by requiring various other conditions, violation of which results in penalization (Section 1107).

Global Responses to Financial Scandals

A direct result of these reforms has been a more reliable form of financial reporting. However, the SOX was not the only response. Scandals such as that generated by Enron prompted much of the world to demand more trustworthy financial reporting. In Europe, for instance, the response was threefold: (a) a call for a greater infusion of ethics in corporate cultures; (b) the appointment of a "Chief Ethics Officer"; and (c) a push for the adoption of stricter ethical codes of conduct (Fombrun & Foss, 2004).

The Challenge of Measuring Intangible Assets

Despite these advances, there remains a significant aspect of business that has largely gone unnoticed and slips beneath the radar of standard oversight. Accountancy has managed to provide metrics for controlling tangible assets, but it has proven far more difficult to formulate comparable measures for intangible assets, such as intellectual property.

The UK government's "Accounting for People" initiative did introduce three new categories of intangible capital — human capital, customer or relational capital, and organizational or structural capital. These terms are borrowed from economics and reflect the productive cross-pollination between disciplines. The British government also required, for a time, that employers include information about their people management activities in their financial statements. This requirement was later scaled back, however, with UK companies only obliged to include information about their employees in their operating and financial reviews. Even now, significant difficulties persist in implementing metrics related to intangible assets, primarily because of the challenge of developing a methodology capable of generating reliable non-financial metrics. For a broader overview of how intellectual capital is defined and categorized, the academic literature offers a useful starting point.

Denmark offers another example of a government that attempted to introduce intellectual capital into its reporting framework. Given the limitations inherent in matching measurements to intangible, non-financial assets, the difficulties have been profound. Observers suggest that a workable methodology may eventually be developed (Roslender & Stevenson, 2009), but this remains one of the central challenges of the coming decade. Research on human capital reporting continues to grapple with the methodological barriers that make such measurement elusive.

Conclusion: Accountability Beyond Material Goods

Observers believe that a way to measure intangible non-financial assets may yet be found, but this remains the challenge of the next decade. Accounting, as the term implies, has to denote accountability to the people for the actions of the corporation. Accountability may therefore extend not only to material goods but also to intangible capital — including employees and the human dimension of organizational value. Incorporating such a step would push the ideal of transparency in accounting still further and represent a meaningful response to the profession's next great challenge.