Jul 3, 2002 - Every ten years or so an accounting book is written that is truly important and eye openingâto businesspeople, to scholars, and to ...
THE ACCOUNTING REVIEW Vol. 77, No. 3 July 2002 pp. 695–697
BOOK REVIEWS Jane L. Reimers, Editor Editor’s Note: The first book review in this issue introduces (or re-introduces) us to a special book selected by Bill McCarthy, a groundbreaking researcher and wellknown scholar in the area of accounting information systems. His review gives us insights into the rich scholarly foundation of this exciting area of teaching and research. The second review addresses a very current topic in accounting, intangible assets. An outstanding accounting scholar, John Hand, has provided insights useful for both teaching and research. Thanks to both of these exceptional scholars for challenging us to expand our horizons in these important areas.
SOWA, JOHN F., Knowledge Representation: Logical, Philosophical, and Computational Foundations (Pacific Grove, CA: Brooks/Cole, 1999, pp. 512). This is a splendid book for those academic accountants who want to expand their computer science and information systems horizons. For most readers of The Accounting Review, the topic of knowledge representation exists only at the periphery of their teaching and research interests, especially as defined by Sowa (xii) as ‘‘the application of logic and ontology to the task of constructing computable models for some domain.’’ However, Sowa’s mindset portends the way in which the principles of accounting information systems (AIS) will be taught in the five- to ten-year future, so if you are thinking of branching out to that part of accounting, you should start here. Moreover, the impending arrival of new business technologies like strongly typed enterprise systems (with business object components), e-commerce and e-reporting ontologies, and the semantic web makes some expertise in knowledge representation appealing for all accountants in the near term. For an overview of all of these trends, this book is an unparalleled source. As I (and other semantic modeling instructors in AIS) rediscover every term in interactions with students, the most fundamental principles of knowledge representation come from the field of philosophy, followed in turn by those emanating from the fields of linguistics and behavioral science. Computer science and its semantic subsets (database theory, object-oriented analysis and programming, and artificial intelligence) are the Johnny-come-latelies of the field, and Sowa makes this intellectual progression and heritage obvious in every chapter. His dedication sets the tone: ‘‘To the spirits of the great knowledge engineers, Aristotle, Leibnitz, Kant, Peirce, and Whitehead.’’ I have been using Sowa’s ideas since the publication of his first book, Conceptual Structures: Information Processing in Mind and Machine, in 1984, and I would guess that many accounting readers will find his present book a difficult first read. My advice is to skim it on the first time through—a strategy that the author seemingly encourages when he recommends that any chapter can be surveyed by reading just the first section and the first paragraph of each remaining section. In my opinion, it is Chapter 1 (Logic), Chapter 2 (Ontology), and Chapter 7 (Knowledge Acquisition and Sharing) that constitute the strongest message for accounting scholars. The intervening chapters—3 (Knowledge Representation), 4 (Processes), 4 (Purposes, Contexts, and Agents), and 6 (Knowledge Soup)—add more computational, logical, and notational detail. Although Sowa might not recommend it fully, I am convinced that a noncomputer-scientist can glean many valuable lessons here without incurring the additional overhead of learning his twin notations of predicate calculus and conceptual graphs. I have only a passable knowledge of both, yet I find the reference material here eminently usable. As a liberal arts undergraduate in economics at Boston College, I was required to take four years of philosophy. (By contrast, I was only allowed to take two courses in accounting, and I had to sleep in a campus corridor overnight to get those precious slots.) In retrospect however, my logical, epistemological, and ethical training is a
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debt I will owe forever to the Jesuits there. I became a semantic modeler long before people like Ted Codd, Peter Chen, John and Diane Smith, and the Unified Modeling Language triplets (Rumbaugh, Jacobson, and Booch) invented ways for me to use that modeling. I often tell my students that my modeling mentor was my demanding metaphysics teacher: Father ‘‘D-minus’’ Murphy, S.J. It was he, following Plato, who first ingrained in me that the concept of ‘‘a horse’’ (which can describe an occurrence like Traveler or Secretariat) was vividly different from the concept of ‘‘horseness’’ (which can describe classes like nonexistent unicorns). This is a knowledge representation lesson I remember every time I have a student denote the difference between a ‘‘course’’ and a ‘‘course offering,’’ or between ‘‘the actual time it took to install an Oldsmobile windshield’’ and ‘‘the engineered time it was supposed to take.’’ I mention my personal history in this review because I think Sowa’s book offers a similar opportunity for those prospective conceptual modelers who missed people like Father Murphy while they were students. Sowa is one of the world’s acknowledged experts in logic, ontology, and modeling. His book takes some effort, but the exertion is well worthwhile. I remembered how worthwhile just a few short weeks ago, when I had a protracted debate in class with an Executive M.B.A. student who insisted that a piece of inventory that had undergone an expensive restoration process must be given a new ‘‘item#’’ for database purposes. She said that her large automobile company handled its inventory that way, so it had to be correct. This is an ‘‘identity’’ problem that is impossible to solve out of context, but she was unwilling to accept that solution. I finally resolved matters when I able to expound philosophically on the ‘‘ship of Theseus’’ problem from the Greeks (Sowa, 270). The fact that philosophers had been debating a similar paradox for centuries made it easier for her (and the class) to accept an imprecise solution. The person who put that example at the tip of my tongue was John Sowa, and maybe he can do the same for you in your work. WILLIAM E. McCARTHY Michigan State University
LEV, BARUCH, Intangibles: Management, Measurement, and Reporting (Washington, D.C.: Brookings Institution Press, 2001, pp. 150). Every ten years or so an accounting book is written that is truly important and eye opening—to businesspeople, to scholars, and to policymakers. This is such a book, and I strongly recommend it. It is crisply written, expansive, and challenging. It will educate and inform M.B.A. students, executives, Ph.D. students, and faculty alike. If there is only one book that you read in 2002, I urge that it be this one. Intangibles: Management, Measurement, and Reporting by Baruch Lev is a fine blend of positive and normative economics. Over a decade ago, Lev realized that accounting scholarship had completely missed the boat on intangibles, viewing them as either irrelevant (e.g., recognized goodwill), impossibly hard to quantify (e.g., R&D), or suspiciously fuzzy (e.g., organizational capital). Drawing on both his own extensive research and that of other scholars in accounting, economics, finance, organization, and strategy, Lev convincingly demonstrates that none of those views is correct. In doing so, he greatly advances the literature on intangibles along four dimensions: the economics of intangibles; the empirical record of intangibles; the problems resulting from the lack of information about intangibles; and the set of available solutions to fix the problems arising from the currently poor financial reporting for intangibles. The book is organized into six chapters. Chapter 1 addresses three questions: What are intangible assets? Why is there such a strong interest in intangibles today? Who should be concerned? Lev persuasively argues that the central thread in the answer to these questions is the realization that globalization, deregulation, and technological changes have forced firms to rely increasingly more on innovation in their bid to create and sustain abnormal profitability. Since intangibles are the primary driver of the supply of innovation, this has brought intangibles to center stage in the real world of business. Chapter 2 presents an economic framework for analyzing both the value drivers and value detractors of intangibles. This is a vital chapter because it puts front and center the ‘‘nonstandard’’ economic features of intangibles—the benefits of scalability (nonrivalry), increasing returns, network effects, the costs or limitations of high risk, lack of full control over the benefits, and the absence of well-organized markets. Chapter 3 presents the evidence bearing on the economic framework laid out in Chapter 2. Lev surveys and synthesizes the empirical record on the contribution of intangibles to corporate value and growth along what he argues to be the three major nexuses of intangibles: discovery (e.g., R&D), organizational capital (e.g., branding), and human resources. The vast majority of the evidence marshaled by Lev is strongly consistent with his economic framework.
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Chapter 4 neatly starts the transition to normative economics by documenting and then tracing the measurement and reporting problems of intangibles to their peculiar downsides—from Chapter 2, these are partial excludability, inherent risk, and nontradability. Lev argues that these economic features of intangibles create information failures that combine with a lack of incentives facing corporate executives and auditors to yield serious private and social harms. Among the more persuasive of these are the excessive insider gains to officers of R&D-intensive firms, the ‘‘lemons discount’’ to the prices of intangible-intensive small firms, and the high cost of capital facing knowledge-intensive companies. From this impressive springboard, Lev devotes Chapter 5 to providing his answer to ‘‘the Tolstoyan question: What then must we do?’’ In terms of disclosure, Lev advocates that the FASB and SEC develop a comprehensive information system that he terms the ‘‘Value Chain Scoreboard.’’ The goal of the Value Chain Scoreboard is to provide standardized information to capital markets about a firm’s value chain or business model—that is, the fundamental economic processes through which the firm creates and converts innovation into shareholder value. In terms of recognition, Lev urges that the recognition of intangible assets in financial reports be significantly broadened. The book concludes in Chapter 6 with a personal call to action on the part of scholars, businesspeople, and policymakers to comprehensively integrate intangible assets into the formulation and execution of management strategy and security analysis. In summary, I believe that Intangibles: Management, Measurement, and Reporting by Baruch Lev deserves an active place on the desk and in the classroom of every financial accountant and financial economist. It has certainly significantly impacted the ways I teach and research financial accounting, business economics, and valuation. It is intellectually rigorous but at the same time readily accessible to M.B.A.s, Masters of Accounting, and Ph.D. students. As such, it also deserves an active place on the desk of every major decision maker and policy setter in corporate America. JOHN R. M. HAND The University of North Carolina at Chapel Hill
