ColinClubb/TheBlackwellEncyclopediaofManagement:Accounting FinalProof 30.11.2004 5:27pm page i THE BLACKWELL ENCYCLOPEDIA OF MANAGEMENT ACCOUNTING ColinClubb/TheBlackwellEncyclopediaofManagement:Accounting FinalProof 30.11.2004 5:27pm page ii THE BLACKWELL ENCYCLOPEDIA OF MANAGEMENT SECOND EDITION EncyclopediaEditor:CaryL.Cooper AdvisoryEditors:ChrisArgyrisandWilliamH.Starbuck VolumeI:Accounting EditedbyColinClubb(andA.RashadAbdel-Khalik) VolumeII:BusinessEthics EditedbyPatriciaH.WerhaneandR.EdwardFreeman VolumeIII:Entrepreneurship EditedbyMichaelA.HittandR.DuaneIreland VolumeIV:Finance EditedbyIanGarrett(andDeanPaxsonandDouglasWood) VolumeV:HumanResourceManagement EditedbySusanCartwright(andLawrenceH.Peters,CharlesR.Greer,andStuartA. Youngblood) VolumeVI:InternationalManagement EditedbyJeanneMcNett,HenryW.Lane,MarthaL.Maznevski,MarkE.Mendenhall, andJohnO’Connell VolumeVII:ManagementInformationSystems EditedbyGordonB.Davis VolumeVIII:ManagerialEconomics EditedbyRobertE.McAuliffe VolumeIX:Marketing EditedbyDaleLittler VolumeX:OperationsManagement EditedbyNigelSlackandMichaelLewis VolumeXI:OrganizationalBehavior EditedbyNigelNicholson,PinoG.Audia,andMadanM.Pillutla VolumeXII:StrategicManagement EditedbyJohnMcGee(andDerekF.Channon) Index ColinClubb/TheBlackwellEncyclopediaofManagement:Accounting FinalProof 30.11.2004 5:27pm page iii T H E B L A C K W E L L E N C Y C L O P E D I A O F M A N A G E M E N T S E C O N D E D I T I O N ACCOUNTING Edited by Colin Clubb Warwick Business School, University of Warwick First edition edited by A. Rashad Abdel-Khalik ColinClubb/TheBlackwellEncyclopediaofManagement:Accounting FinalProof 30.11.2004 5:27pm page iv #1997,1999,2005byBlackwellPublishingLtd exceptforeditorialmaterialandorganization#2005byColinClubb BLACKWELLPUBLISHING 350MainStreet,Malden,MA02148-5020,USA 108CowleyRoad,OxfordOX41JF,UK 550SwanstonStreet,Carlton,Victoria3053,Australia TherightofColinClubbtobeidentifiedastheAuthoroftheEditorialMaterialinthisWorkhasbeenassertedin accordancewiththeUKCopyright,Designs,andPatentsAct1988. Allrightsreserved.Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmitted, inanyformorbyanymeans,electronic,mechanical,photocopying,recordingorotherwise,exceptaspermitted bytheUKCopyright,Designs,andPatentsAct1988,withoutthepriorpermissionofthepublisher. Firstpublished1997byBlackwellPublishersLtd Publishedinpaperbackin1999byBlackwellPublishersLtd Secondeditionpublished2005byBlackwellPublishingLtd LibraryofCongressCataloging-in-PublicationData TheBlackwellencyclopediaofmanagement.Accounting/editedby ColinClubb. p.cm.—(TheBlackwellencyclopediaofmanagement;v.1) Rev.ed.of:TheBlackwellencyclopedicdictionaryofaccounting /editedbyRashadAbdel-Khalik.1998. Includesbibliographicalreferencesandindex. ISBN1-4051-1827-X(hardcover:alk.paper) 1.Accounting—Dictionaries. I.Clubb,Colin. II.Blackwell encyclopedicdictionaryofaccounting.III.Series. 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Forfurtherinformationon BlackwellPublishing,visitourwebsite: www.blackwellpublishing.com ColinClubb/TheBlackwellEncyclopediaofManagement:Accounting FinalProof 26.11.2004 10:54pm page v Contents Preface vi AbouttheEditors viii ListofContributors ix DictionaryEntriesA–Z 1 Index 423 ColinClubb/TheBlackwellEncyclopediaofManagement:Accounting FinalProof 26.11.2004 10:58pm page vi Preface Accounting practice encompasses a wide variety of organizational activities which include the recording of financial transactions and events in the firm’s books, the use of financial information for management decision-making and control purposes, and the preparation and audit of financial statementspreparedforexternaluserssuchasinvestors,customers,andemployees.Therearemany textbooksavailablewhichprovideintroductory,intermediate,andadvancedtreatmentsofthetech- nicalandmanagerialissuesraisedbysuchaccountingactivities.Thecurrentvolumecannotpossibly aimtoprovideindepthcoverageofthevastrangeofactivitieswhichcomprisemodernaccounting practice.Instead,itaimstoprovideawayintotheexpandingaccountingresearchliteraturewhichin recent years hascometoprovide avariety ofperspectiveson thebig issues confronting accounting practice.Ibrieflyconsidersomeoftheseperspectiveshere. Some of the contributions to the volume focus on particular financial reporting, auditing, or management accounting topics and outline alternative possible approaches or treatments within (andperhapsbeyond)existingconventionsorrules.Theinformationcontainedinthemainfinancial statements(thebalancesheet,theprofitandlossaccount,andthecashflowstatement)isdiscussed; important aspects of financial reporting such as the treatment of employee stock options, pensions accounting,andthetreatmentoftaxationareanalyzed;comparativeanalysisoftheuseofstatisticaland judgmentalmethodsinauditingisprovided:andthenatureofcostingsystemsrequiredtogenerate productcostinformationinmodernproductionenvironments aredescribed.Whilethesecontribu- tionstothevolumethrowimportantlightonimportanttechnicaldevelopmentsinthebroadaccount- ingarena,theyalsodrawattentiontothechoicesthatmustbemadebyaccountingregulators,auditors, and managers in determining what is an appropriate treatment of a particular item in a company’s financialstatements,aneffectiveauditprocedureorthe‘‘optimal’’approachtoproductcosting.The factthatthesechoicescanhaveprofoundeffectsonmanagementdecision-makingandonthefortunes (and decisions) of important corporate stakeholders or constituencies indicates the fundamental managerial,economic,andsocialimportanceofdevelopingunderstandingsofthebroaderimplications ofaccountingpractice. Theneedtounderstandtheimplicationsofaccountingpracticesforthedecisionstakenbymanagers and investors, and the implications of these decisions for broader economic and social well-being, provides important motivation for accounting research with economic, organizational, social, and historical focus. Severalofthevolumecontributions considertheusefulness ofaccounting froman economicperspective,forexample,byreviewingthelargeliteratureontherelationshipbetweenshare priceperformanceandfinancialstatementinformationsuchasreportedprofit,dividends,cashflow, and R&D spending. Much of the empirical work in this area draws on valuation theory, providing interesting evidence on the extent to which accounting provides (or at least reflects) fundamental informationusedbythecapitalmarketstovaluecorporatesecurities.Inadditiontovaluationtheory, economicperspectivesbasedonagencytheoryandinformationeconomicshavebeenusedtoprovide insightsintotheproblemsofdesigningperformanceevaluationsystemswhichencourage‘‘optimal’’ managerialdecision-makingandtheproblemsofstructuringofauditcontractstoprovideahighlevel of audit quality from an investor viewpoint. The volume provides a range of contributions that ColinClubb/TheBlackwellEncyclopediaofManagement:Accounting FinalProof 26.11.2004 10:58pm page vii Preface vii demonstratetheimportanceandpracticalrelevanceofinsightsfromapplyingeconomicanalysistothe analysisofaccountingissues. Whilethefinancialfocusofmuchofwhatisusuallyregardedasaccountingpracticeleadsnaturally totheapplicationofeconomicperspectivesintheanalysisofsuchpractice,therehasbeenagrowing appreciation in the research literature that accounting is implicated in organizational and social processes which affect the distribution of resources between stakeholders in the organization and which affect the impact of an organization on society. A number of entries therefore focus on the problemsofimplementingprofitdrivendecisiontools,suchasdiscountedcashflow,inthecontextof organizationalandenvironmentaluncertaintyandtheissuesraisedbythedesignofinternalperform- anceevaluationsystemstofacilitatemanagerialdecisionsconsistentwithbroaderstakeholderobject- ivesinprivateandpublicsectororganizations.Theabilityofauditorstoactimpartiallyasguardiansof theinvestorinterestincompaniesandtherelationshipoffinancialreportingandauditingtothelawis criticallyexamined.Therelativeimportanceofprofitabilityandalternativeorganizationalobjectives hasbeenanimportantthemeinmuchrecentresearchandthisisreflectedinarticleswhichconsiderthe current and historical status of social and environmental reporting as a managerial practice. The organizational and social roles of accounting is a theme reflected in many entries, emphasizing the importance of a more explicit recognition by managers andstakeholders ofthe interaction between accounting practice and organizational decision-making. Diversity of theoretical perspective and emphasisamongresearchers,however,canmakecomparisonsofresearchinthisareaadifficultissue. To conclude, this volume aims to provide the reader with a range of articles that highlight importantissuesinaccounting practiceandthecontributionsthat researchcanmake totheunder- standing and development of practice. These articles can only provide a general indication of the varietyofperspectivesandanalysesconductedinthevariousareasanditisthereforehopedthatthey willencourage(andguide)furtherenquirybythereader.Byleadingtoagreaterappreciationofthe conceptual foundations of different accounting practices and the sometimes ambiguous economic, organizational, and social implications of these practices, it is hoped that this volume will help the readertodevelopadeeperviewoftheusefulnessofaccountingasamechanismforachievingeconomic andsocialgoals. ColinClubb ColinClubb/TheBlackwellEncyclopediaofManagement:Accounting FinalProof 26.11.2004 10:59pm page viii About the Editors EditorinChief CaryCooperisbasedatLancasterUniversityasProfessorofOrganizationalPsychology.Heisthe author of over 80 books, is past editor of the Journal of Organizational Behavior and Founding PresidentoftheBritishAcademyofManagement. AdvisoryEditors Chris Argyris is James Bryant Conant Professor of Education and Organizational Behavior at HarvardBusinessSchool. WilliamHaynesStarbuckisProfessorofManagementandOrganizationalBehaviorattheStern SchoolofBusiness,NewYorkUniversity. VolumeEditor ColinClubbisProfessorofAccountingatWarwickBusinessSchool.Heisaneditorialboardmember oftheJournalofBusinessFinanceandAccountingandhaspublishedresearcharticlesinawiderangeof majoraccountingandfinancejournals. ColinClubb/TheBlackwellEncyclopediaofManagement:Accounting FinalProof 26.11.2004 11:03pm page ix Contributors A.RashadAbdel-khalik KashiR.Balachandran FisherSchoolofAccounting,Universityof SternSchoolofBusiness, Florida NewYorkUniversity MohammadJ.Abdolmohammadi RichardBarker BentleyCollege JudgeInstituteofManagement, UniversityofCambridge WalterAerts UniversityofAntwerp LynnBarkess UniversityofNewSouthWales AnwerAhmed SyracuseUniversitySchoolofManagement SassonBarYosef TheHebrewUniversity,Jerusalem ThomasAhrens LondonSchoolofEconomics VivienBeattie UniversityofGlasgow BipinB.Ajinkya FisherSchoolofAccounting,Universityof MartinBenis Florida NewYorkUniversity MimiL.Alciatore AlnoorBhimani UniversityofHouston LondonSchoolofEconomics andPoliticalScience K.B.Ambanpola NanyangTechnologicalUniversity,Singapore AndrewP.Black Consultant SimonArcher UniversityofSurrey JaneBozewicz BabsonCollege A.J.(Tony)Arnold UniversityofExeter NiamhBrennan UniversityCollegeDublin StephenK.Asare FisherSchoolofAccounting,Universityof Gae´tanBreton Florida UQAM,Canada HollisAshbaugh JaneBroadbent formerlyofUniversityofWisconsin–Madison RoyalHolloway,UniversityofLondon FrancesL.Ayres PeterBrownell UniversityofOklahoma TheUniversityofMelbourne