Accounting Profit vs. Economic Profit. the Necessity of a Management Performance System to Boost Organization’s Performance

2285 Words Nov 28th, 2012 10 Pages
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
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According to S. David Young and Stephen F. O’Byrne (2000), the economic pressures that organizations are facing nowadays induce managers, in some cases, to use bad practices in order to deceive shareholders by inflated earnings or not sustainable growth. EVA alone cannot solve this issue. A very clear management system has to be set up with guidelines and accountability for executives. Corporations cannot become economic machines. Responsibility for stakeholders (employees, society, environment, customers) has to play a central role as well. Economic earnings should be the main target, but corporations should be able to provide the needed environment to create the expected value based on ownership, clear economic and financial information, moral recognition, personal growth, empowerment and training.
The first paper is a very interesting approach to EVA and to accounting practices. It sheds light on the issue that accounting is not what is used to be and cannot account anymore for what it has to account. Accounting standards lack the ability to control and guide executive behavior.
On the other hand, the paper tends to fully disqualify accounting. Conventional accounting has played and will play its role in the society. It is hard to say that accounting is completely responsible for all bad practices and mismanagement cases (Enron, Worldcom, etc). Accounting has its weak points and these weaknesses have been used by irrational managers to inflate value in

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