Bozen – Good accounting systems should provide information on firm activities to managers (inside the company) and other stakeholders (outside the company) to aid them in making rational economic decisions (see figure below). Financial reports become obsolete every time a firm’s business model or/and the corporate objective function change. When reports are no longer informative, decision processes are hurt, and firms are likely to destroy value.
From the latter part of the 20th century to the outset of the 21st century, the economy has moved from being industrial to becoming knowledge and services based. Consequently, the demand for informational products and services has replaced the demand for many physical products. Firms, for example, are constantly increasing their level of capital investment in intangible assets, but current reporting systems cannot identify and measure most of these knowledge-based assets (e.g., the value of customers, the value of brands, sustainable-development value creation).
At the same time, society is requiring more from firms than simply the production of goods and services. Hence, companies around the world have had to focus more attention on integrating financial value creation with social and environmental issues (i.e., corporate social responsibility). In a world where stakeholders are not simply means to corporate ends but are engaged in an on-going way with the firm, there is a need to measure stakeholder satisfaction.
Despite the above-mentioned changes, accounting-based financial information is produced and disseminated using reports, which have not evolved much over the years in either form or content. This is why accounting-based financial information is losing relevance both inside (for managers) and outside (for stakeholders) the firm.
Two trends, in particular, characterize modern economies and should affect the structure of accounting reports:
1) New business models have emerged with significant implications on how firms create and preserve value. Examples of new business models are pervasive across industries. Big box retail, online banking, on-demand media are emerging trends in services. Social networking is another example. Advances in information and communication technology (ICT), in both life and other sciences, and the proliferation of innovative products, from the newest electronic devices to the latest drugs and treatments, provide even more examples of this trend.
2) The traditional corporate objective function (the only responsibility of businesses is to make as much profit as possible, Friedman, 1970) has been replaced by a new corporate objective function (sustainable business is about the creation of value for stakeholders, Freeman, 1984). In other words, each group of stakeholders merits consideration for its own sake and not merely because of its ability to further the interest of some other group, such as shareholders.
These trends require information that is not provided by the mandatory financial statements. To deal with this information gap, my main research project at Free University of Bozen aims at complementing and partially supplementing traditional accounting reports in three emerging areas:
1. Accounting for Customers: Faced with growing competition, scarce resources, and increasingly demanding customers, managers strive to increase profitability by becoming more customer-centric. Customer analytics such as customer lifetime value (CLV) unlock the predictive potential of data analysis to improve operational efficiency and ultimately financial performance. My previous research with various co-authors shows that CLV enhances decision-making both by identifying which customers to attract and retain and by predicting future earnings and stock prices. Despite the potential of customer analytics, it is not clear how CFOs and financial controllers use it to enhance the firm’s management accounting and financial reporting systems.
2. Accounting for Innovation: Innovation is one of the main sources of competitive advantage for firms and their investors in competitive global markets. Outdated accounting and control systems can inhibit innovation and creativity – or at least understate the benefits that flow from them. Managers and investors need for a new framework better measures and reports on the performance of innovative firms. Accounting for innovation matters not only for firm decision-making but also for communicating with outsiders about investments and the results of the innovative process.
3. Accounting for Sustainability: Demands for sustainability and corporate social responsibility (CSR) are growing. Stakeholders are pressuring firms to be more transparent about their social and environmental impacts and have convinced many of them that the traditional reporting is no longer sufficient. Traditional measurement systems usually do nothing to evaluate corporate performance at a level beyond the interests of the shareholders. New accounting frameworks, such as the integrated reporting, connect financial performance to sustainability/CSR performance. However, we still need in-depth, descriptive research that can inform us on accounting practices that link sustainable value creation with internal performance measurement and external reporting.
The research’s findings will provide information regarding firm practices that, to this point, have not been extensively investigated. These practices should affect the information environment inside and outside of firms and could help managers identify best practices and other stakeholders identify industry leaders.
The final objective, however, is to have an impact on South Tyrolean firms, and the Faculty of Economics and Management. In particular:
a. South Tyrolean firms would improve their reporting and decision-making by being exposed to new measurement and reporting methods;
b. the Faculty of Economics would increase its accounting expertise (especially managerial accounting), with the possibility of partnering with other universities to attract more funds and high quality PhD candidates interested in this topic.