Ranking of Accounting Information Systems for Management Control

Abstract

Analysis of the stewardship role of accounting information involves both choosing an accounting system and designing a compensation contract under the chosen system. Accounting issues related to the first of these include the choice between cash and accrual accounting methods and direct versus absorption costing. A given accounting system yields an income number according to its valuation process where accounting income could be viewed as an estimator of some unknown variable such as management performance. Taking this perspective, the choice of accounting methods could be interpreted, ceteris paribus, as an attempt to enhance the accuracy of accounting earnings as estimators of management performance. In this paper, our objective is to provide a simple criterion to determine the value of the accounting information system for management control. The choice of accounting information system has been a fundamental issue in accounting research. Feltham [1968] introduced a formalized approach based on information economics for measuring the value of changes in a management accounting system. Earlier research basically applied Blackwell's theorem to obtain the result that costless accounting information systems can be ranked by and only by the fineness criterion in a single-person setting. Results on the value of an information system in a principal-agent framework are found in Holmstrom [1979; 1982],