The June issue of Strategic Finance Magazine has an interesting article called, “Provide Insight or Face Extinction,” by Noah P. Barsky and Anthony H. Catanach Jr. The main theory is the traditional accounting equation, and how it should be changed to provide information for decision making. For five centuries its focus has been on accumulating, processing and reporting the results of economic activity for many types of organizations. Recently, due to increased competition and advances in industry, it has been suggested that we reconsider the usefulness of this equation.
Managers have always recognized that in order to make good business decisions they need proficient information. Information however, can only be gathered by assessing collected data, and adding personal insight, if it is to assist the decision making process. Raw data is of little help to managers, so this thinking leads us to a new equation, which is more suited to today’s competitive workplace: Data + Insight = Information If firms consider using this updated accounting equation they must understand that it is most effective when data processing technologies and creative thinking are used together.
This supports the reasoning behind firms beginning to seek financial consultants rather than accountants because they can provide added insight to the data. Data that hasn’t been evaluated has much less value to management because it can’t be utilized as effectively in decision making. Computer software packages can now perform a broad range of traditional accounting functions making it easier for businesses to generate financial statements or leases using very little human involvement. Still, those programs can only produce data and are not able to create information because they cannot provide any insight.
Insight requires value-adding human qualities to deliver analysis and interpretation and can’t be found in any computer program. If they don’t want to be made redundant by computers, accountants should realize that they are no longer expected to just prepare financial statements that simply comply with the minimum standards and requirements of the past. Companies and clients are now expecting reports to be dealt with strategically to provide them with insight into how the data effects their business processes. Senior executives should therefore seek individuals who can provide them with information, and not just routine data-creation.
Decision-making is perhaps the most important role of management, and without useful information provided by accountants, it would be difficult to make a choice among alternative business strategies. We have learnt that providing information for decision making is the first objective of managerial accounting activity and stresses that accountant’s work together with management to formulate plans based on their data. As long as this is the case, the new accounting equation is more suitable because it encourages employers to draw on their vast employee knowledge base, to provide insight for any business problem.