THE FEEDBACK CHARACTERISTICS OF ACCOUNTING DYNAMICS
Saburo Kameyama Department of Commerce, Chuo University
742 Higashinakano Hachioji, Tokyo, Japan
Takahiro Kojima Senshu University
Akira Uchino Senshu University
Kinya Machida Surugadai University
ABSTRACT
Just as the feedback concept is the single most essential
characteristic of the system dynamics approach, so accounting
feedback is the most crucial basis of Accounting Dynamics (AD),
a methodology for modeling and simulating accounting using
system dynamics. In this presentation, we focus on accounting
feedback.
We should like to emphasize that accounting information
has essentially feedback characteristics and that its origin can
be traced back to the laws of Hammurabi. Since that time, the
concepts of stewardship and accountability, for which accounting
measurements are exclusively addressed, have formed the feedback
nature of accounting information and effectively controlled
resource allocation in social systems.
Conceptually, accounting feedback has three aspects; which corre-
spond to the stages of AD model development. They are the
formal requirements of double entry bookkeeping, institutional
regulations in financial statements and the real functions
of accounting information performing feedback control over the
economic resources. Formal feedback is the intrinsic nature of
account system. Based on double entry bookkeeping, the
account system of an économic entity constitutes a constant-
ly balanced closed system. Data entry into the account system
must automatically occur twice so that the system is always
balanced. This account system with debtor and creditor sides
provides the formal requirements of accounting feedback.
Institutional regulations reflect generally accepted accounting
principles. From the viewpoint of society as a whole, they
introduce an approach of total optimization into individual
accounting feedback. From the feedback viewpoint, one of the most
typical accounting principles is the principle of continui-
ty, which forces continuous observance of the same
accounting | rule over consecutive accounting periods. Once
one uses the straight line method of depreciation, for exam-
ple, one must use it in the next period. Institutional
accounting feedback substantially constrains business income.
Finally, the resource allocation feedback aspect of account-
Page 738
System Dynamics ‘91 Page 739
ing information implies -the real function of accounting in
social systems. Investigating the actual. conditions of resource
allocation in social systems through accounting feedback control
is the very core of Accounting Dynamics. How is resource
allocation in our society effected by accounting information?
The answer to this question is the ultimate objective of our
research.
STEWARDSHIP AND ACCOUNTABILITY
Accounting is an information system used to measure and communi-
cate the social consequences of accountabilities. Here it .should
be noted that the concept of accountability implies human feed-
back, a splendid device produced over our long history. The
charge and discharge relationship of accountability constitutes a
feedback loop between two persons (or parties) and becomes the
basic unit of feedback control to the exploitation of economic
resources in social systems (Figure 1). The accountability infor-
mation hetwork as a whole controls resource allocation in the
entire social system.
According to Peter Bird (1973), accountability has a close con-
nection with stewardship. Stewardship means the position of a
steward who keeps others' resources for them. In our advanced
society, almost all important transactions are carried out by
stewards represented by business management and public. officials.
Every steward must account for his profitable use of resources to
the person who entrusted with him those resources. This social
obligation of stewards is called accountability. ‘
Stewardship and accountability might be one of the earliest
feedback relationships found in. human interactions. Bird points
out that the laws. of Hammurabi (about 1800 BC) included a sur-
prisingly extensive consideration of obligations arising when men
have possession of property owned by others. He says that about
one eighth of the whole code of the laws of Hammurabi was devoted
to such issues as the relationships between cultivators and land
owners, problems connected with loans, agency problems.
Present day stewardship and accountability have three notable
characteristics according to Bird. First is the characteristic of
"Big Stewardship,’ as he called it. Today the scale of the corpo-
rate operations and consequently the amount of the funds commit-
ted into the hands of business management and public officials
are far greater than ever before. Certainly this is the age of
big business and of big government. In other words, it is the age
of big stewardship. This means that the accountability network
almost exhaustively governs all the economic resources of the
social system.
The second characteristic is the "Stewardship Standard’. What
the steward is expected to do with the resources is also very
much more complex and risky than ever before. The stewardship
standard of today is quite different from that of an age when
this year's. events were expected to be the same as those of
Page 740 System Dynamics '91
previous year. Today's stewards must perform their accountabili-
ties in a highly competitive and fast changing environment.
Uncertainty heavily reigns over all stewards and equity owners.
Performance evaluation of the steward, which is the same thing as
the measurement of accountability, is one of the most signifi-
cant tasks of today’s information network society. The failure of
the steward to utilize resources optimally and biased measure-
ments of his accountability have direct repercussions on social
resource allocation control.
The third feature of present day stewardship and accountability
relates to ‘Delayed Consequences.’ Most consequences of a stew-
ard's current decisions and actions are effected gradually over a
long time period, some times far beyond his tenure. Under situa-
tions such as going concern in most organizations today, ac-
countability can only be reviewed periodically (usually
annually). So it may safely be said that modern accounting theo-
ry, concentrating on the determination of periodical income, also
has inevitable limits. We have to predict with validity all
prolonged consequences of the steward's current decision for
measuring his accountability. This is the reason why the system
dynamics approach to accounting is needed.
FORMAL REQUIREMENTS OF ACCOUNTING FEEDBACK
We have noted that accountability is a excellent human feedback
device which has been used throughout our long history. We also
should note that this continuity has been possible because the
art of double entry bookkeeping has coincided with it.
Osker Becker (1959) describes that in ancient Babylonian (includ-
ing the age of Hammurabi) advanced mathematics, algebra and even
geometry already existed and that they were produced to train the
officials who managed large state or private properties, namely
stewards. We think these facts are sufficient to assume the use
at that time of double entry bookkeeping, which is in a sense a
branch of algebra. Furthermore we can conjecture that double
entry bookkeeping, which has no notion of subtraction and add at
opposite side of the same account when subtraction is needed,
existed far back in time when man possessed only a natural
number, a set of closing under only addition and multiplication.
Bird stresses to perform accountability, stewards, had an obliga-
tion to render an ‘account’. Figure 1 shows the relationship
between accounting feedback and setting up an account. It should
be noted that setting up an account is not only setting up a mere
format on the books, but a mapping of a social relationship
between two persons (parties), steward and owner. The amount of
property entrusted to the steward is entered (charged) on the
debtor side of the account and the amount of equity belonging to
the owner is entered (discharged) on the creditor side.
In a large organization, the steward himself entrusts part of his
stewardship resources to a subordinate steward and the latter
further to a lower level steward. For example, a company director
System Dynamics '91 Page 741
delegates part of his resources to a division manager and a divi-
sion manager delegates part of his entrusted resources to a de-
partment manager and so on down the ranks.
Charge $
wv B/S
Steward | Accountability ‘i i) 5
: $ $
Discharge $
Figure 1 Formal Requirement of Accounting Feedback zi
Yuji Ijiri (1976), who thinks that the nature of accounting de-
rives from accountability, names the steward as the accountor or
the person who. perform accountability and the owner as the ac-
countee or the person.who is the beneficiary of accountability.
We think that the accountor becomes the budgetor when he delegate
part of his resources to subordinates, and those subordinates
become budgetees. Thus, the accountor-accountee relationship
becomes a budgetor-budgetee relationship at the lower levels of
accountability. These delegations of authority for managing en-
trusted resources form an accountability network. Figure 2 shows
such an accountability network in an organization.
Accountabili
Cen “ihe Corporate
level
es
| Division
level
fran +" kesaaatabilitg”""""] Keooantabt tty
veeneceeneeeee | __ Sub-subcenter Sub-subcenter Department
— : <! Budgetee | Budgetor Budgetee | Budgetor Level
Sub-Dept.
Level
Figure 2. Accountability Network in an Organization
Page 742 System Dynamics '91
Each accountability center represented by an account form repre-
sents a level of entrusted resources and the accountability
network as a whole constitutes the structure of the Accounting
Dynamics model.
INSTITUTIONAL REGULATIONS IN ACCOUNTING FEEDBACK
Modern accounting theory has three competing paradigms. A commit-
tee of American Accounting Association (1977) has discerned three
basic theoretical approaches to accounting; (1) classical ("true
income" and inductive) models; (2) decision usefulness; and (3)
information economics.
Classical models of accounting take a serious view of account-
ability and think measurement of "true income" for reporting
accountability is the essence of accounting. We primarily advo-
cate this school. Decision usefulness models emphasize accounting
as an information system, which was advocated by another commit-
tee of American Accounting Association (1966). This school is
very prosperous today. So far, the information economics school
has had no fruitful outcome.
Ijiri, who is seen to belong to the classical school, claims that
whereas the decision usefulness approach views accounting from
the two dimensions of the decision maker (user of accounting
information) and the accountant (preparer of accounting informa-
tion), he himself views accounting from the three dimensions of
the accountor, the accountee and the accountant. He defines ac-
countant as reporter of accountability. His definitions of ac-
countor and accountee are as cited above. The relationships among
Ijiri's three dimensions will be shown on the account form in
Figure 3.
Accountant
Accountor | Accountee
i i ion of Ijjri’s three di i
Figure 3 to jnterpptation of Lis © te dinensionl
Ijiri's three dimensional relationship theory is very thought
provoking from the viewpoint of accounting feedback. We think
even though the accountant supplies maximum satisfactory informa-
tion to the specific decision maker, a two dimensional relation-
ship ensures only partial optimization in the social context. On
the contrary, the three dimensional relationship establishes the
accountant as the third position separate from the accountor and
accountee. The accountant can play the role of coordinator
against the other two parties from the view point of total opti-
mization in the social context. It should be noted that adding
the accountant as the third party extends the relationship from
System Dynamics '91 Page 743
that of two interested parties into one involving the whole
society ,as_ a whole.
Because of the weaker position of the owner, the law has been
closely involved with problems of accountability, as Bird points
out. But today this involvement should try to control resource
allocation to realize total optimization of the social system
rather than try to protect the weaker party from the stronger.
This means that we must, as Forrester (1968) notes, recognize a
hierarchy of accounting feedback. Generally accepted accounting
principles (GAAP) were formulated as a social institution in the
USA during the 1930s and the in Japan during the 1940s. The ac-
countant's intervention in the accountor-accountee relationship,
as per GAAP guidelines, implies accounting feedback. from the
upper level of the social system.
CONCLUSION
We have explained that the charge and discharge of accountability
form the basic unit of accounting feedback. Institutional regula-
tions in the measurement of accountability lead us to recognize
the hierarchy of accounting feedback. But so far we have no
accounting models that include GAAP, on which institutional
regulations are based, as endogenous variables. Yet, it is in
such macro-accounting models that we can really talk about the
control of resource allocation in social systems.
References
Becker, 0., 1959, Grésse und Grenze der Mathematischen Denkweise,
Freiburg/Minchen: Verlag Karl Alber.
Bird, P., 1973, Accountability: Standards in Financial Reporting,
London: Haymarket Publishing Limited.
Committee on Concepts and Standards for External Financial Re-
ports, American Accounting Association, 1977, Statement on Ac-
counting Theory and Theory Acceptance, USA.
Committee to Prepare a Statement of Basic Accounting Theory,
American Accounting Association, 1966, A Statement of. Basic
Accounting Theory [ASOBAT], USA.
Forrester, J.W., 1968, Principles of Systems, Cambridge Massachu-
setts: Wright-Allen Press, Inc.
Ijiri, Y., 1976, Kaikeisokutei no riron ( Theory of Accounting
Measurement: ) ,Tokyo: Toyo-Keizaishinposha.
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