Agency Assurance - Universität St.Gallen

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methods for dealing with a larger group of intangible assets, i.e. internally developed
intangibles, than the decisions already made over many decades for all tangible and
purchased intangible assets in the accrual accounting system. The proposed
classification scheme is also more consistent with well accepted and relevant
economic theories (identified later in the chapter) developed over the last decades to
describe better the contemporary knowledge-based, service-dominated economy.
Conservatism must be relegated a more balanced consideration in the overall set of
generally accepted accounting principles, in order to raise the public’s trust in the
usefulness of financial statements from today’s unacceptably low levels.
In addition, the knowledge management basis of classification should help to address
the concern that financial reporting is used to link management incentive performance
rewards more directly and reliably with firm operational performance measurements.
Because of the general dissatisfaction with financial reports prepared using current
accounting standards, it has been easier to choose stock price performance, which is
easily measured, as a performance indicator. This has also led to widespread
employment of stock price based executive incentive compensation systems, i.e. stock
options. However, stock price is influenced by both objective performance and
subjective perception. Bubbles and overcorrections have shown that equity prices can
be an inaccurate indicator. They can be potentially inflated or deflated, especially in
the short term, by collective financial market influences, including hype, scandal,
error, misrepresentation, and other information asymmetry related factors. An
additional advantage of a knowledge management basis could enhance the general
acceptance of the agency assurance classification scheme.
Issues of classification are evidenced in the current public debate and recent decision
of the Sarbanes-Oxley Act in the U.S., which introduced the Public Company
Accounting Oversight Board as a new federal regulatory body. Almost immediately
after its formation, the PCAOB called for further discussions on the harmonization of
International Accounting Standards (IAS) required by the European Union for
corporations in member countries within five years, and US Generally Accepted
Accounting Principles, the body of quasi-regulations that has been privately
administered by the American Institute of Certified Public Accountants through its
Financial Accounting Standards Board. The clear reason given for putting a priority
on these discussions was the criticism that, over the years, US GAAP has transformed