[This article provides a link between two conflicting approaches to accounting theory. One approach focuses on "proper" income measurement or asset valuation. Under this approach, income is often viewed as economic income plus error, where the error arises from institutional constraints. The other approach focuses on information disclosure. According to this other approach, income is generally viewed as an informative random variable that assists in deriving, say, an economic valuation of the entity. The former approach tends to view the economic norm as a desideratum, thereby leaving the demand for accounting services outside of the formal theory. The latter approach tends to view the information content as a desideratum, thereby leaving most accounting structure outside of the formal theory. These two approaches are linked in this article by treating income measurement as a process by which useful information is conveyed, using the language of proper income measurement or asset valuation. Why this particular language is adopted is not addressed. Thus, the question of why one might select a particular measurement scale (e.g., Celsius) over some other scale (e.g., Fahrenheit) is not examined. Rather, the question asked is whether there is any loss of generality by confining the accounting system to income measurement techniques. The answer is no. The argument runs as follows. First, an exogenous stream of net cash flows and realizations of some (informative) random variable are postulated. Then, an accounting system is introduced. At periodic intervals, this system must compute the expected present value of the future net cash flows from (only) the realized net cash flow and random variable. The accounting system then reports the net cash flow and income (defined to be the sum of net cash flow and the change in expected present value) in each period. Finally, it is determined whether reporting net cash flows and income in this manner discloses fully the information contained in the original stream of net cash flows and realizations of the random variable. This may be the case. If not, a conservative accounting treatment can always be constructed that does disclose the information fully. Hence, the accounting apparatus, coupled with conservatism, provides the link between the two approaches to accounting theory. The information content of the accounting measure is ensured even when the measure is computed in a classical manner. A key feature of the argument is that "accounting value" and "economic value" may diverge. Paradoxically, this divergence may be essential to conveying the information. Therefore, it may not be correct to claim that inability to value particular resources or transactions is the important feature in defining the accounting domain.]

This article focuses on a study which demonstrated how similar types of standard cost variance analysis may be applied to the control of the application and performance of formal decision models. Previous efforts to improve the usefulness of standard cost variance analysis have tended to focus on one of two related problems. Proposals have been offered that had as their objective either an improvement in the types of variances the accountant should calculate or in his methods for analyzing the significance of observed variances. The essential difference between process control and model control lies in the type of response management should make to an observed variance. The appropriate response by management depends upon the expected source of the deviation. Traditionally, standard cost systems have concentrated on the analysis of type 1 and type 2-a deviations. These systems have not been designed to indicate when and if type 2-b deviations are critical to the decision process.

Joel S. Demski, Hans Frimor, Performance Measure Garbling Under Renegotiation in Multi-Period Agencies, Journal of Accounting Research, Vol. 37, Studies on Credible Financial Reporting (1999), pp. 187-214

Profit allocation, Ancillary Trade, Decentralization, Coordination

Private information, Moral Hazard, Contracting, Risk

Joel S. Demski, David M. Kreps, Models in Managerial Accounting, Journal of Accounting Research, Vol. 20, Supplement: Studies on Current Research Methodologies in Accounting: A Critical Evaluation (1982), pp. 117-148

William H. Beaver, Joel S. Demski, The Nature of Financial Accounting Objectives: A Summary and Synthesis, Journal of Accounting Research, Vol. 12, Studies on Financial Accounting Objectives: 1974 (1974), pp. 170-187

The purpose of this paper is to examine controllability: the notion a manager should be evaluated based on that which she or he controls. We embed the managerial evaluation problem in a principal-agent setting and ask whether the optimal agency solution bears any logical relation to a casual definition of controllability. It does not. More to the point, the agency framework compels us to look at information content. This information content perspective, upon reflection, agrees with our intuition, with our anecdotal Impressions of practice, and with the dictates of the principal-agent model. Moreover, there is a well-defined relation between information content and a notion of control. Thus, the Information content perspective may be thought of as offering a precise definition of controllability.

Sourcing, Make-or-Buy decisions, Product quality, Unverifiable information