Agency Assurance - Universität St.Gallen

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2.2.3 The Classification Axis
There certainly is a limit to the depth and breadth of qualifications and time
commitment to be expected of committee members, as with any directors. The
effectiveness of their rights of access to information could also be compromised if the
information is not effectively summarized and presented due to sheer volume of pages
of reports. Therefore, the classification scheme for financial reporting should hold as
its highest aim the relevance of reporting to board members in performing their duties.
Standards for summarization and presentation should be measured by the extent of
their transparency, i.e. their ability to be understood. 10 Financial (accounting and
planning) and risk management reports especially should not be overly complex in
language and structure.
Proper principles of accounting and risk classification should assist in a more
straightforward evaluation of both firm and management performance. Financial
reporting standards in most western countries requiring accrual accounting instead of
cash accounting were established in the first half of the 20 th century. Despite the
transition from a predominantly goods (products) based economy to a clearly service
based economy, accountants still are not recognizing as assets most of the activities
performed within the worlds’ corporations by scientists, engineers, marketers, and
other professionals. The output of these resources are basically being expensed as
incurred, which in most cases is quite close to when paid, i.e. cash basis accounting.
Over the decades, the proliferation of digital computing and revolutionary advances in
communications, relational databases, accounting software and other related
technologies have removed any technical barriers to the accurate accumulation and
categorization of the costs incurred and the liabilities acquired to produce the revenues
and assets of today’s service economy. Well-accepted financial valuation methods,
like Stern Stewart’s trademarked Economic Value Added® (EVA®) formula,
regularly attempt to adjust the figures in published financial statements to account for
investments in internally developed intangible assets. As a European Union study
published in 2003 points out, “there is a growing body of evidence that links
inadequate reporting of intangibles to the declining usefulness of external financial
10 OECD (2004-1), p. 21.