The purpose of external reporting is often assumed to be the aiding of stockholders in their resource allocation. William A. Peterson recommended that realized income be reported, so that it represents prospective net income plus or minus favorable or unfavorable deviations from expectations. In this way it can represent a meaningful index of the current performance of management in its endeavor to make a profit. The rational manager would make his investment decision on the basis of present value calculations. His aim would be to maximize the present value of expected income. For efficient allocation of resources, attention should be focused on assets and on the rate of return to the undepreciated resources employed. In order for the users of external reports to evaluate management performance, the prospective income computations must accurately reflect the decision model. The value of prospective income data remains in doubt. It cannot be an improvement unless it will discourage irrational decisions and reduce the manipulation of external reports.
This article focuses on the basic ways in which the Generally Accepted Accounting Principles (GAAP) fail to assist in the economic resolution of social conflict. As a focal point in economic theory, the market mechanism is a cultural control device for allocating economic resources. It has been viewed as a grand harmonizer of conflict among economic actors. Little internal entrepreneurial coordinating would be possible without internal administrative accounting. In the extreme case, all costs of using the price mechanism could be avoided by establishing a single conglomerate firm for an entire economy. However, those avoided costs might be exceeded by both costs of internal administration and costs of transition from private competition to state capitalism. The fundamental way in which GAAP fails to assist in the economic resolution of conflict is their lack of relevance to the decision problems of economic actors. This would be so even though GAAP reports were timely and public enough to eliminate the conflict over "insider" information.