Accounting Profit vs. Economic Profit. the Necessity of a Management Performance System to Boost Organization’s Performance
INTRODUCTION
Accurate information is a critical input in a decision making process that targets real value creation for shareholders. The objective of this paper is the analysis of two articles of Stern Steward Research, namely “Accounting is Broken. Here’s How to fix it. A Radical Manifiesto” and “The capitalism Manifesto. The Transformation of the Corporation - Employee Capitalism –“.
Both papers propose a roadmap to fix the conventional accounting shortness through the use of Value Based Management (VBM) as a real and effective management system of value creation and measurement. Economic Value Added (EVA) plays the main role in this management approach, as a very effective performance metric in the alignment of the organization with its ultimate goal of shareholder’s value creation.
VIEW OF THE READING
In the first paper “Accounting is Broken. Here’s How to fix it. A Radical Manifiesto”, the accounting related aspects of EVA are discussed, providing a comparison between accounting earnings and economic earnings. Weaknesses of accounting standards are exposed here. The authors suggest a serie of radical reforms for the conventional accounting in order to align conventional with economic accounting in order to provide managers with the information that really matters and avoid mispreactices to deceive shareholders.
The paper proposes EVA as a rock solid measure that provides a very clear picture of the organization’s performance. According to the paper accountants should start using economic profit (EVA) to better reflect the economic reality of the organization. Economic earnings underpin the decision making process, clarifying the economic objectives and setting up a target for value creation. The paper highlights the capability of EVA measure to fix some weaknesses of the accounting earnings perspective and proposes some reforms:
• Cost of equity must be brought into the light of day as a key element for the economic profit. Shareholders need and
Accurate information is a critical input in a decision making process that targets real value creation for shareholders. The objective of this paper is the analysis of two articles of Stern Steward Research, namely “Accounting is Broken. Here’s How to fix it. A Radical Manifiesto” and “The capitalism Manifesto. The Transformation of the Corporation - Employee Capitalism –“.
Both papers propose a roadmap to fix the conventional accounting shortness through the use of Value Based Management (VBM) as a real and effective management system of value creation and measurement. Economic Value Added (EVA) plays the main role in this management approach, as a very effective performance metric in the alignment of the organization with its ultimate goal of shareholder’s value creation.
VIEW OF THE READING
In the first paper “Accounting is Broken. Here’s How to fix it. A Radical Manifiesto”, the accounting related aspects of EVA are discussed, providing a comparison between accounting earnings and economic earnings. Weaknesses of accounting standards are exposed here. The authors suggest a serie of radical reforms for the conventional accounting in order to align conventional with economic accounting in order to provide managers with the information that really matters and avoid mispreactices to deceive shareholders.
The paper proposes EVA as a rock solid measure that provides a very clear picture of the organization’s performance. According to the paper accountants should start using economic profit (EVA) to better reflect the economic reality of the organization. Economic earnings underpin the decision making process, clarifying the economic objectives and setting up a target for value creation. The paper highlights the capability of EVA measure to fix some weaknesses of the accounting earnings perspective and proposes some reforms:
• Cost of equity must be brought into the light of day as a key element for the economic profit. Shareholders need and